Marketing Agency Valuation Multiples: How Much Is Your Business Worth?
The shift toward online commerce has made marketing agencies more valuable to businesses. Changing customer preferences and technical innovation require business owners to work with agencies to generate attention and interest.
This new reality also increases the value of your marketing agency, and profitable agencies can be sold at high valuation multiples. If you’re considering a sale of your marketing agency, a business broker can help you make informed decisions, and negotiate the sale price on your behalf.
This PwC research explains the growth case for online advertising:
This year, total internet advertising is nearly $100 billion, and is now a larger market than TV advertising ($71 billion).
Online advertising is expected to grow at a 7.7% compound annual growth rate through 2022.
Mobile advertising is projected to be 72% of online ad revenue by 2022.
Business owners need the expertise of a marketing agency to implement an online marketing plan.
Factors That Increase an Agency’s Value
Work with a business broker to identify the factors that make your business valuable. An experienced broker may be able to identify areas of value that you haven’t considered.
Connecting Results to Spending
Agency clients want to see how marketing costs generate attention and interest for the business. The best agencies provide metrics that measure the results of a marketing campaign.
There are dozens of tools that measure online marketing results. Software can track the number of people who read a piece of content or visit a webpage. Automation will track how long someone stays on a particular page and the percentage of viewers who click on a specific link.
Using Creativity to Reach Prospects
Creativity helps the client’s message get the attention of the target audience. The need for creativity grows as more consumers use ad blockers when they access the internet.
Traction, for example, is one of the top creative agencies, according to Influencer Marketing Hub. The agency explains that: “We believe in the power of the unusual” on the company webpage. To break through and reach consumers, an agency must use creativity.
Adapting to Change
Customer preferences and new technologies may completely change the landscape of an industry. Businesses need an agency that will respond to changes and design new strategies to market a company.
Once you assess your company’s value, discuss marketing agency valuation tools with your broker.
Reviewing Marketing Agency Valuation Multiples
There are several metrics that may be used to value your marketing agency. Every agency is unique, and these metrics list a range that is used for many agency sales:
Using Annual Sales
If the agency’s annual sales total is used, the valuation may be 60-90% of annual sales generated.
Applying EBITDA to a Valuation
The earnings before interest, taxes, depreciation, and amortization (EBITDA) formula is a commonly used metric to value businesses. As the name implies, this method adds back some expenses to the earnings total. Note that depreciation expense and amortization expense are non-cash expenses in the income statement.
Your firm may be valued at 2-4 times EBITDA. Larger agencies, however, may be assessed at a higher valuation multiple. A larger agency has more client relationships, and losing one particular client has a smaller financial impact.
Working With Seller’s Discretionary Earnings (SDE)
The seller’s discretionary earnings (SDE) balance assesses company value based on the earnings that an owner generates from the business. Here’s the formula:
(Pre-tax, pre-interest earnings) + (vehicles, travel, other transactions listed as business expenses)
SDE adds back business expenses that have some personal benefit to the owner. In addition to vehicles and company travel, you may add back charitable donations and your company salary. The goal is to calculate the total financial benefit earned by the owner.
A broker may negotiate a purchase price based on 2-3 times SDE.
Thinking About Other Revenue Factors
Your marketing agency may include other factors that a broker can use to increase the business valuation:
Client tenure: Revenue streams from long-term clients may be more attractive to a buyer.
Retention rate: If your agency has a high client retention rate, you’re doing quality work and providing great customer service.
Diversity of client base: When your customer base is spread out between many clients, the financial impact of losing a client is lessened.
Assess your business from the buyer’s point of view. A purchaser wants a stable, consistent revenue base that can be transitioned with a minimal loss of revenue.
It’s difficult to operate your marketing agency and take on the responsibility of selling your business. Find a broker who can guide you through the entire sale process.
How Raincatcher Serves Business Owners
The business brokers at Raincatcher have helped thousands of buyers and sellers complete successful business sales. They maintain a network of attorneys, accountants, and investors, and your broker can market the business to these contacts.
Contact the experts at Raincatcher today to find out how much your marketing agency is worth.