2019 Best Practices Study

Current Ratio. The Current Ratio is a key indicator of an agency’s working capital health. The Current Ratio is the ratio between current assets and current liabilities. A 1:1 ratio or better between current assets and current liabilities is preferred. If your agency consistently has less than a 1:1 Current Ratio, meaning you don’t have enough near-term assets to satisfy near-term liabilities, you may have financial issues to address.

Current Ratio

2.50:1

2.10:1

2.00:1

1.82:1

1.82:1

2.00:1

1.57:1 1.51:1

1.50:1

1.00:1

0.50:1

0.00:1

< $1.25M $1.25M- $2.5M

$2.5M- $5.0M

$5.0M- $10.0M

$10.0M- $25.0M

> $25.0M

Tangible Net Worth. Tangible Net Worth (“TNW”) is total tangible assets (actual assets less any intangible assets such as goodwill, covenants-not-to-compete, etc.) less liabilities. An agency’s TNW represents the net value of its balance sheet if it were liquidated. A low or negative TNW impacts an agency’s ability to make growth investments and facilitate shareholder redemption obligations.

Tangible Net Worth (% of NR)

16%

13.6%

14%

11.4%

11.3% 10.7%

12%

9.4%

9.0%

10%

8%

6%

4%

2%

0%

< $1.25M $1.25M- $2.5M

$2.5M- $5.0M

$5.0M- $10.0M

$10.0M- $25.0M

> $25.0M

Rule of 20. The Rule of 20, which is partially a financial metric and partially a growth metric, is the best indication of an agency’s likely investment shareholder return. The Rule of 20 is calculated by adding organic growth to 50% of pro forma EBITDA. Agencies attempting to grow their values face a dilemma – focus on growth, at the expense of profitability, or focus on profitability, at the expense of growth? The Rule of 20 is a helpful metric to ensure that an agency’s balance of growth and profitability are healthy.

Rule of 20

27.6

30.0

26.3

22.4

25.0

20.5

19.3

17.0

20.0

15.0

10.0

5.0

0.0

< $1.25M $1.25M- $2.5M

$2.5M- $5.0M

$5.0M- $10.0M

$10.0M- $25.0M

> $25.0M

The Rule of 20 is a simple tool to determine if an agency is creating value for its shareholders. Generally speaking, an outcome of 20 or more, regardless of the different combinations of growth and profitability, indicates that the agency’s shareholders can expect to generate a very healthy investment return (15-17%).

 20