Continued soft pricing prevented the public brokers from achieving an outcome of 20, as shown in the table above.
"Rule of 20" Score
The Rule of 20 is a simple growth and profitability balancing equation that provides a quick way to determine whether or not an agency is creating value for its shareholders. It states that an agency will drive industry-standard shareholder returns if the sum of (a) its organic growth rate and (b) 1/2 of its EBITDA margin equals or exceeds 20.
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 earn 15% -17% per year through stock price appreciation and/or shareholder distributions.
Because organic growth is such a key input into the Rule of 20, the persisting soft market and the current depressed economic environment have made it harder to achieve a score of 20. A good rule of thumb is that an agency, while always striving for as high a Rule of 20 score as possible, will combine solid organic growth with an EBITDA margin that is at least twice as high as its growth rate.