Marketing agency valuation metrics play a pivotal role in determining the worth of a company in the marketing sector.
Whether it’s investors, buyers, or sellers, understanding the value of a marketing agency is essential, and valuation metrics offer valuable insights into its financial well-being, growth potential, and standing in the market. In this article, we will plunge into the realm of marketing agency valuation metrics, investigating their definitions, categories, and the customary process of evaluating such businesses. We will scrutinize the elements influencing these metrics, analyze real-life case studies, and discuss industry-specific deviations.
Moreover, we will examine how the prevailing environment of changing market dynamics might affect marketing agency valuation metrics. This discussion will provide valuable perspectives and advice for investors and marketing agency proprietors as they navigate through this ever-evolving landscape.
How Valuation Multiples Work for Marketing Agencies
A valuation multiple serves as a method to establish a suitable valuation for a company, a principle that holds true for marketing agencies, particularly those operating in the lower middle market, as well as virtually every other sector. Nevertheless, there exist alternative valuation approaches for high-growth marketing agencies and those publicly traded.
In the context of marketing agency business value, the valuation multiple is gauged based on the attractiveness of the agency’s operations. This multiple is then applied to a trailing twelve-month (TTM) adjusted EBITDA value, resulting in the ultimate valuation of the agency. EBITDA, which stands for earnings/net profit before interest, taxes, depreciation, and amortization, is a metric that assesses a company’s capability to generate cash prior to covering its debt obligations and tax payments.
What is Adjusted EBITDA and How Does it Affect Business Valuation?
When determining adjusted EBITDA for a marketing agency, an M&A advisor or investment banker employs a similar approach. They identify the agency’s non-recurring expenditures (such as one-time legal fees or buying out a previous business partner) and add these back in to the EBITDA figure. Moreover, if the agency’s owner, who is also functioning as the business owner and CEO, draws a higher compensation than what the prospective owner would pay their own CEO, this excess compensation is also added back into the final net profit figure. This provides a more accurate representation of the actual earnings available to the agency’s owner.
It’s worth noting that the term “Seller’s discretionary earnings” is frequently used interchangeably with Adjusted EBITDA in the context of digital agency valuation.
Finding the Appropriate Multiple for a Digital Marketing Agency
As previously stated, the valuation multiple is employed in conjunction with TTM Adj. EBITDA to establish the value of the marketing agency and the probable acquisition cost. Nevertheless, calculating TTM EBITDA is a relatively uncomplicated process. Following a comprehensive examination of the agency’s financials, both prospective buyers and sellers can generally come to a consensus on the precise value of this metric. Conversely, determining an appropriate valuation multiple involves a level of subjectivity and interpretation, making it more of an art than a strictly scientific endeavor.
The More Desirable Your Business is to an Investor, the Higher Multiple They Will Pay
At a broad level, the concept remains quite straightforward. However, distinct buyers will discover various industries and characteristics of businesses to be attractive. Certain buyers might be drawn to a specialized sector with minimal competitors, seeking niche opportunities. Conversely, some may be inclined towards a marketing agency operating in a larger industry, offering potential for growth, even if it necessitates increased investments in technology to maintain a competitive edge within a crowded field. Nonetheless, certain factors are universally regarded as appealing irrespective of industry nuances. A more comprehensive exploration of these factors will be provided in the subsequent discussion.
The Valuation Factors That Make a Marketing Agency More/Less Valuable:
Below is a brief look at what many investors will look at when they are determining what an agency is worth to them.
Consistent Revenue Growth: Investors often seek agencies with a track record of consistent and sustainable revenue growth, demonstrating their ability to attract and retain clients.
Strong Client Relationships: Long-lasting and loyal client relationships showcase the agency’s reputation and ability to deliver value, making it more appealing to investors.
Diversified Client Base: Minimal client concentration reduces dependency on a few major clients, mitigating risks and increasing stability. Having a high client retention rate will also add value.
Innovative Services: Offering cutting-edge and unique marketing services positions the agency as an industry leader, attracting investors interested in innovation.
Talented Management Team: A skilled and motivated agency team, including creative professionals, strategists, leadership team, and technical experts, is an attractive asset for investors. This is especially true if the key employees have been in place for several years.
Solid Reputation: Positive brand reputation and word-of-mouth referrals can make an agency stand out as a reliable and trusted partner.
Efficient Operations: Well-optimized processes, streamlined workflows, and efficient resource utilization can enhance profitability and make the agency more appealing to investors.
Digital Capabilities: A strong online advertising presence for your own company, including expertise in marketing and data analytics, is crucial in today’s marketing landscape and can be a valuable asset.
Scalability: Investors are often interested in agencies with scalable business models that can expand operations without a proportional increase in costs.
Strategic Partnerships: Collaborations with complementary businesses, technology providers, or other agencies can broaden service offerings and attract investors seeking synergy.
Well-Represented. Working with a quality M&A advisor like Raincatcher that knows the market and can get the business in front of the most capable buyers to create a competitive bidding environment is key to driving business value and terms.
Hear What Some of Our Clients Have to Say About Selling Their Business With Us
Who Buys Marketing Agencies?
While potential buyers are aiming to acquire your marketing agency at the most favorable price, if your agency holds significant appeal for sale and you’re collaborating with a reputable business broker like Raincatcher, you’re likely to receive multiple offers from prospective buyers. This multiplicity of offers holds significance as it provides us (and our clients) with negotiating leverage against the buyer, ultimately resulting in securing the highest possible value for your agency.
In most cases, if your agency generates profits exceeding $2 million, we anticipate receiving five or more offers from various entities, including private equity groups and strategic buyers. Private equity groups encompass teams of investment experts responsible for managing funds for external investors, often comprising high net-worth individuals or pension funds. These groups explore opportunities to acquire your agency partially or in its entirety, acting on behalf of their investor base.
Strategic buyers, on the other hand, are companies that strategically align with your agency’s area of expertise. They might be agencies with similar specialties or even service-oriented enterprises targeting the same end markets that your agency caters to. Generally speaking, strategics are fewer in number, they often possess the capacity to offer a higher business valuation compared to private equity buyers, owing to their inherent synergies with your agency’s operations.
How To Increase the Valuation of Your Business
Apart from enhancing the attractiveness of your marketing agency through the factors outlined earlier, prospective buyers generally appreciate your continued involvement in the business during a reasonable transition phase after the sale concludes. This transitional period serves multiple purposes – it aids the buyers in becoming familiar with the post-sale operations of the agency and ensures the continuity of key departmental leadership for the buyer’s benefit.
Furthermore, if you can present a well-defined strategy to assist the buyer in boosting the agency’s future earnings, potential acquirers tend to respond positively to this proposition. Demonstrating a clear plan for future growth can ignite enthusiasm among potential buyers, possibly leading them to offer a more favorable valuation multiple as they recognize the potential for increased profitability.
Other Valuation Methodologies Occasionally Used When Selling a Marketing Business
While determining the valuation of a marketing agency can be as straightforward as calculating earnings before interest and taxes and then applying an appropriate valuation multiple, there are several other more analytical methodologies employed by professionals in the finance industry to evaluate the worth of a marketing agency.
Discounted Cash Flow Analysis Valuation
This is projecting the future earnings of a company, applying a discount rate to them (for time and perceived risk), and trying to come up with a company value based on the present value of the future cash flow.
Utilizing a DCF is most common for companies that are growing rapidly and that can paint a clear picture of future agency revenue. Oftentimes this comes with offering ongoing services for your agency clients which increases client retention rate and forward-looking recurring revenue.
Request a Consultation
If you are looking to sell your digital marketing agency we invite you to reach out to get introduced to a marketing agency business broker. We’d be happy to discuss our auction process, compile a professional valuation and how we help agency owners and other lower-middle market business owners achieve maximum value with our proprietary auction process.