Growing your Income vs Growing an Asset

Smaller agents (business owners) often increase their lifestyle as business income starts to grow.  That is fine, and part of the reason you went into business for yourself…to control your own destiny.  However, when it comes time to sell your business, many owners have not taken the opportunity to grow what is likely their biggest asset, the business.  It is possible to do both, let us show you how.

Income Producing Business

Example:  Business revenues grow by $100K over a 2-year period.  If your profit margin is 35%, then the owner can take an extra $35K in pretax income.  You decide to buy a bigger house, a newer car or take a couple of vacations.  The agency will continue to grow at that pace, but the owner did not utilize that opportunity to invest in the business and expedite the growth process. 

Imagine…instead of pulling the money out of the business, you delay the urge to increase your personal spending and pump that money into the business.  You could hire a producer, upgrade technology to streamline operations or start a marketing campaign.  All of those items will either increase your topline revenue or increase your bottom-line margin.

If you hire a producer, once he or she is up to speed, they start generating an extra $125K in commission revenue per year.  Using the original 35% margin, which means you just created an additional $43,750 in pretax earnings.  The producer is validated and paying for themselves.  Now the original $35,000 is freed up and you have got an additional $43,750 being generated from the newly hired producer (a total of $78,750). 

NOW is the time you can start taking a little additional out for yourself.  If the owner takes an additional $35,000 in salary going forward (the original amount of extra cash flow), there is still $43,750 of additional pretax cash flow available for expansion/growth efforts.  If you can replicate your original model of hiring a new producer, you can create an additional $43,750 of earnings.  Now you have increased your salary by $35,000 and created a situation where you have $87,500 of earning to reinvest in the business.  You decide to take an additional $17,500 out of the business and put it in your pocket…great…you have $70,000 to reinvest and continue your growth. 

You can see how this model continues to feed itself…reinvest in the business, grow your profit margins, increase your personal income…all while growing the size of your business.

Growing an Asset

While you have taken the discipline approach to great a business whose topline revenue and bottom-line profits continue to grow, there is an even bigger reward waiting down the line. 

Say your agency started at $1,000,000 in revenue and you had a pretax margin of 35% ($350K).  Using very basic valuation methods, let’s say that the business is worth $2.8M (8x EBITDA and just over 2.8x revenue).  Watch what happens to the value of the asset if you hire 5 producers over a 10-year period (as described earlier).

At the end of the 10-year period, your revenue has grown by $625K and the bottom line increased by $218K (35% of topline growth).  The business now has $1,625,000 in revenue and pretax earnings of $568,750.  That could increase the valuation to just over $4.8M (8.5x EBITDA and just under 3x revenue)….a $1.6M increase. 

Not only were you able to increase your personal income stream over the 10-year period, you’ve created an additional $2M in wealth in the form of an increased valuation for your company.  It’s likely higher than that, but we’re using a conservative approach.  The larger the agency, the larger the multiples buyers are willing to pay.  An agency that has a strong history of organic growth will demand an even higher multiple, not to mention your sales force, office technology and marketing efforts have proven effective in being able to generate new business…that will throw gasoline on the fire and create a bidding war between buyers.  The scenario above does not require you to grow by 50% each year, it was roughly 5% per year over a 10-year period.  That seems pretty attainable. 

This all started by the business owner deciding to delay pulling an extra $35,000 out of the business and reinvest it into the company.  It was not forever, they were able to pull that money out 24 months down the road…all the while creating a situation for their personal income to increase at a higher rate each year and at the same time, grow the value of their biggest asset.  That sounds like a reasonable plan.