Based on the 300+ agencies that IA Valuations has advised on their value, here are 3 ways that accounting practices can affect the value of the agency:

Inefficiencies increase the amount of time it takes to transition ownership. On average, it takes 230 days to transition ownership of an agency. Once an agency principal decides they want to do a transaction, it takes time. Once the seller and buyer have entered into a Letter of Intent (LOI), the due diligence phase begins. Typically, the minimum expectation for due diligence is 90 days. As an agency leader trying to sell a business or a decision-maker trying to buy a business, the last thing you want to do is have bookkeeping that is confusing to the other party. This will almost guarantee that your due diligence phase will take longer, thus delaying your close date and the next phase of your life.
Abnormal accounting practices increase the perceived risk associated with your agency. The goal of due diligence is to create a level of understanding between the parties, where each feels confident that they know the other's business and feel comfortable with the value of the transaction. Confidence in a business strengthens value. Abnormal bookkeeping will decrease this confidence in the other party and thus have a monetary impact. If you are an agency owner selling, the offers likely will be lower than they could be otherwise. If you are considering merging, it may shake a prospective partner's confidence enough to back out of the deal.
The inability to answer simple P&L-related questions decreases your agency's credibility. The credibility of the agency leaders in the eyes of the party you are engaged with will decrease. If you are in the due diligence phase, it means you should have signed an NDA, which means that your public credibility will be unaffected. The deal that you are working on, however, will likely see a monetary or other tangible negative impact due to the decreased credibility they perceive.

The agency you have built or are building should not be devalued or questioned due to something as tedious as accounting. Your book of business, carrier relationships, and staff are certainly too valuable for that. So, how can you make sure this will not happen? We recommend implementing the following accounting practices to ensure you follow industry standards.

Automate your bookkeeping. If you are not already using an agency management software (AMS) integrated into your agency bookkeeping, strongly consider using one. They are not only very efficient, but they are also the industry standard. IA Valuations estimates that over 80% of independent agencies use an AMS to manage their books of business. If you are ever engaged in due diligence, there's a great likelihood that the other party has seen the format of your P&L, which will increase their comfort and confidence in learning your business.
Re-evaluate the current state of your bookkeeping. If you are already in a relationship with a CPA, re-evaluate them for familiarity with the independent agency system regularly. If you are a new owner of an agency and the accounting has been done the same way for 30 years, get a second opinion. What may have worked many decades ago, may not be the industry standard today. Having a CPA who is familiar with the current insurance agency accounting practices will ensure that your agency is filing accurate tax returns.
Choose your CPA partner selectively. Along the lines of the above, if you have not used a CPA or firm to do your taxes or bookkeeping before, make sure to vet their familiarity with insurance before entering into an agreement with them. Simply asking them if they have prior experience working with agencies will go a long way. See if you can get a reference list from the CPA or firm so you can ask other agents about their experience.

Accounting and bookkeeping are the blocking and tackling of running an insurance agency. The hard part is acquiring clients and markets. Do not let accounting practices detract from the value of your agency.

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3 Ways accounting practices impact your agency's value

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