Let me guess… You’re here because you want to know the valuation of your agency! There are many reasons as to why you should have this information to hand. Let us count the ways…
- Perhaps you’re considering selling – either now, or in the future
- Maybe you’re looking to use the business as an asset, and take out a loan against it, or even transition in (or indeed transition out) a partner
- You might even want to give your team members some equity, or form of employee stock option
- We could go on…
However, in actuality, it doesn’t really matter why you want to do it – let’s just figure out how to calculate the valuation of (in this case) your digital marketing agency.
How to Calculate Your Digital Marketing Agency’s Valuation
The first thing you need to do? Figure out your agency’s EBITDA. You might think ‘Net Profit’ would be the optimum determinant of value – and it is – but we use EBITDA for one specific reason, outlined below.
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a form of a ‘profit’ number, that creates a level playing field when valuing businesses’ across borders. As different countries have varying rules for taxation and depreciation, EBITDA leaves wiggle room for any over/underevaluation.
Taking this EBITDA number, we give it a multiple. A multiple is (you guessed it) a multiplier we add to the EBITDA number to get a sense of valuation. Typically, an agency doing $100,000 EBITDA will have a 3-5x multiple. This multiple will go up, or down, depending on the amount of risk associated with your agency.
There are many factors that influence risk in the business, but we’ve simplified risk assessment into four of these main contributors…
- How essential is the owner in operations?
- Are your processes well documented (SOPs)
- How fluid is revenue? Is it holding steady or is it varying?
- Is your client concentration healthy, or are all of your eggs in one proverbial basket?
Depending on how safe and padded your business is from risk, you’ll be able to find a multiple that makes optimum sense.
The final question you should ask yourself is this:
How much potential synergy exists with the acquirer? Your agency will be valued at a higher price based on how much of its existing client base, mailing list, and other assets synergize with its current offering. Often, this strategic lever can lead to substantially higher valuations. Why? Because the acquirer stands to make much more upside, simply by adding your business to their portfolio.
In a real agency M&A situation, there are several other factors that will need to be considered, such as the company’s balance sheet, plus any debts/assets the company is carrying. These include large expenses or investments, that should be added/removed from EBITDA, market conditions, competition, etc.
However, the below outline of terminology, alongside our simplified valuation formula, should provide a directional idea of where your business valuation conversation should begin.
EBITDA is defined as: Earnings Before Interest, Taxes, Depreciation and Amortization.
Multiple is defined as: The multiplier applied to the EBITDA number to get the valuation, that will increase or decrease depending on a number of factors listed above.
Documentation & SOPs are defined as: SOPs (Standard Operating Procedures) are documented processes that compile together to create a manual on how to run the business.
Client Concentration is defined as: The percentage of your total revenue that is tied up in one particular client (or a small group of clients). The larger this number, the more risk involved and therefore would grant you a lower multiple.
Marketing Agency Valuation Formula
EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization, and your multiple is 3-5x, depending on your risk factors as outlined above.
In this case:
• EBITDA * (your multiple) = $ Valuation
• $100,000 * 5 = $500,000 Valuation
In its simplest form, valuing a marketing agency is as simple as calculating your EBITDA and multiplying it by your multiple. The multiple will go up, or down, based on perceived risk.
This ignores other considerations, including strategic upside to the acquirer, plus balance sheet considerations such as debt, assets, or large investments and expenses made in recent years.
Typically, we’re seeing marketing agencies sell for 3-5x multiples these days. Therefore, in the region of approximately 4-5x sounds right. Any agency that has more than 1 million in EBITDA typically sees a higher multiplier, that being around 4-6x.
The range in the market is indeed quite broad. We’ve seen EBITDA multiples as low as 2x for a small agency with quite a bit of risk. Conversely, we’ve seen others as high as a 15-20x for extremely strategic acquisitions. This is mostly based on the strategic synergy between the marketing agency and its potential buyer.
Worth keeping in mind…
The other side of the valuation is the terms. Not all of these businesses are sold for cold hard cash! Often, higher multiples come with more conditions, such as the majority of the value being converted to stock, or equity, in the acquiring company. This also can include “earn-outs” that require the founder, or executive team, to stick around for several months – or even years – after the acquisition in order to fully earn their share of the proceeds from the sale.
Right now, we’re seeing that most advertising agencies are worth 3-5x their EBITDA.
If you’re looking to sell your agency, you first need to understand your four types of potential buyers, as outlined below…
– Brands that wants “acqui-hire” an agency team and bring them in-house
– Another agency, or a holding company, that wants to add new services to their offering – or acquire a list of clients to bolster their portfolio
– A private equity, or investment, fund that is interested in acquiring the agency for monetary reasons
– An individual that wants to come in and run the business
If you’re looking to sell your agency to a brand, or some form of other agency looking to expand their service offerings, you would (generally speaking) be networking your way to these sorts of opportunities.
On the other hand, if your goal is to sell privately to an investment firm, or individual investor, a broker can be very helpful in connecting you to a network of viable buyers. This will create a competitive environment around the deal, such that several acquirers are competing for the opportunity to buy from you. This leverage can often lead to better multiples, not to mention improved terms…
Irrespective of the reason for your inquiry about your agency’s valuation, consider it good practice to keep tabs on how you can maximize your valuation, in service of the freedom of choice long-term.
Your agency will be valued based on your EBITDA, which will then have a multiplier added to it based on the amount of risk in buying your business. Said risk depends on many factors, such as owner dependence, predictable revenue, documented processes, among others.
In short; the better run and more profitable your agency is, the higher your agency’s value is likely to be when it comes time to cash-out.
Good luck out there!