Digital marketing agencies have become integral to modern business innovation and growth. In this era of technological advancements, online business, and fierce global competition, the demand for top-notch digital marketing services has surged like never before.
Renowned as an industry leader in M&A within the digital marketing industry having sold agencies, content and media websites, affiliate businesses, social media management, and other businesses that require digital marketing expertise. we’ve earned the prestigious title of #1 business broker by Inc. magazine. Just like any significant undertaking, selling a digital marketing agency requires time and concerted effort to attract the right buyers. Although there’s no one-size-fits-all approach to the selling process, we tailor our strategies to each client’s unique business. This article aims to shed light on the process of selling a digital agency, from document gathering to the final closing stage.
Process of Selling a Digital Marketing Agency (at a glance)
- Build a strong deal team. Align yourself with a business brokerage firm (for deals under $10m) or M&A firm (for deals over $10m) that understands digital marketing and has proven success representing digital marketing agencies. Find a proven M&A attorney (we can introduce you to a number of groups that we’ve had success with), and a tax attorney.
- Compile your materials. Your M&A advisor (Raincatcher) will request a litany of documents from you. This includes financial statements, organization charts, supplier and customer contracts, employment agreements, etc.
- Market the deal. We create an expansive document and financial forecast for your company and then bring it to market. Most of this work falls on our shoulders as we have an expansive database of investors for companies of all industries.
- Receive IOIs. Depending on the size of your deal, your advisor may suggest that you market the deal and push for LOIs. Or, if your business is large enough, we look to secure IOIs ahead of time so that we can shortlist the most capable buyers and present them with more information and meetings ahead of receiving an LOI.
- Management Meetings. Should it be a fit for your business, your broker will join you in hosting investors for a week to share additional information about your manufacturing company.
- Receive LOIs. ‘best and final’ bids will be received after hosting the most capable buyers for meetings.
- Sign an Exclusive LOI. After negotiating the deal further, we help you select the most capable buyer based on their price, terms, overall fit, and likelihood of closing.
- Due Diligence. Another 60-90 day due diligence window commences with the buyer and their advisor’s diligence every aspect of the business.
- Close. Closing time. The deal is done and you’ll typically get 80% – 90% of the payment for your business at this time.
- Transition. After closing, the buyer will typically require the sellers to stay behind and assist in transitioning the business to them for an agreed-upon period of time.
If you have decided to sell all (or part) of your marketing agency, here is a glimpse at what the sales process will entail over the coming year.
Hear From Previous Clients Who Sold Their Company With Raincatcher
What Determines the Valuation of a Digital Marketing Agency?
Lower middle market digital marketing companies and agencies (sub $15m EBITDA) have picked up in interest from investors who are looking to execute roll-up strategies. A digital marketing company that is very desirable to investors and therefore trades at a high multiple is one that has many of these traits:
High CLTV. This can be accomplished by having sticky customers, by having a high bill rate, by offering an array of services to your clients, etc.
High bill rate. Having one client paying $10k/mo is much better than having 10 clients each paying $1k.
Scale. Potentially $5m EBITDA+ (the larger the business, the higher multiple)
A large total addressable market or the ability to expand into adjacent ones. If you’ve marketed yourself as the “SEO firm of choice for basement contractors in Dallas” that may be a good small business, but there is little room for growth.
High margin (indicative of a high level of automation, high bill rates, and a service that is differentiated from competitors)
Recurring customer base without concentration (ideally your largest customer is less than 20% of annual revenue)
Strong leadership team
Assignable client contracts
Well represented by a professional M&A firm such as Raincatcher
The fewer of these criteria your marketing agency meets, the lower the multiple will slide. Although it is uncommon of agencies doing over $1m in revenue, it’s true that some marketing agencies don’t sell at all. However, these are typically very small, owner reliant companies.
As discussed above and illustrated in this chart, the business valuation for digital marketing agencies can range greatly. We’ll dig into some of the more critical factors determining digital marketing agency valuations below.
More Digital Marketing Agency Resources
The historical and projected financial performance of your digital marketing agency plays a meaningful role in determining its final valuation. Buyers will require access to updated accounting records, tax returns, financial statements, and revenue records to assess factors like profitability, cash flow, and growth trends. These metrics will help them gauge the financial health and potential returns on investment for your agency.
In general, the size of the agency has a significant impact on its valuation. A digital marketing agency with an annual profit of $500k may be valued at half the multiple (or less) of a similar agency generating $3m in cash flow.
Moreover, investment groups prefer to see a margin exceeding 20%. High-margin digital marketing agencies with a high-level of recurring revenue signal a strong competitive advantage and differentiation from their rivals in the industry.
Industry Specialist Agencies or Industry Agnostic Agencies
Industries that have scaled to the point that they are sellable and desirable to investors typically either have a focus on one particular industry. Or, they focus on just one service to a broad array of industries. Some examples of this we have seen are having had strong buyer interest in an industry-agnostic SEO agency we sold. We have also had success in selling an agency that offered a broad array of digital marketing services solely to owners of automobile dealerships.
Digital Marketing Services Offered
There are investors who favor broad marketing agencies that offer a whole litany of services to their clients. Likewise, there are buyers who favor the opposite and only want to invest money in companies that have doubled-down on offering one or two specific services. It seems that there are more investors who favor this service specialization than who want a ‘do it all’ marketing agency.
Buyers assess the growth potential of the manufacturing business to determine its value. Factors such as product diversification, expansion opportunities, market penetration, innovation capabilities, and customer base contribute to the assessment of future growth prospects and impact on business valuation.
Even the niche manufacturing business we discussed in the above paragraph may have strong growth prospects if there is an adjacent market they can move into and product that they can produce.
The strength and stability of client relationships and the diversity of the customer base are considered in the valuation process. Having either long-term contracts in place with clients or proven long-term relationships with clients, and recurring revenue streams will positively impact the value of the business.
What is the Process of Selling a Digital Marketing Agency?
While it may not be a fit for all clients, most of the entrepreneurs we work with who run marketing agencies will see the most competitive price and terms for their business coming from a well-run auction process.
Auction processes typically take 7-9 months to complete. On certain occasions, we may recommend that our client hire an accounting firm to complete a quality of earnings analysis before we start the auction process. In our experience, this cost and time is justified and can manifest itself in 5% – 15% hire exit values.
We’ll go into each of the steps of an auction process at a high level below:
How we Maximize Exit Proceeds for our Marketing Agency Clients with our Auction Process
Sell-side due diligence
Due diligence is traditionally done by business buyers and not business brokers. However, our comprehensive sell-side process includes a diligence process before we bring a business to market.
Our comprehensive diligence and sale process is designed to drive the highest value for the business owner as buyers know that there won’t be any skeletons in the closet once they submit an offer and start spending money on legal and financial diligence.
Specially designed brokerage or M&A auction process
Depending on the size of your business and industry your company operates in, we may recommend a traditional brokerage process with a listing price. Or, a competitive auction process with buyers submitting the price and terms for negotiation.
Our buyer list is comprehensive and will be tailored to include (or exclude) and participants in your industry who may make great strategic buyers or who you want to avoid knowing the business is on the market for sale.
It isn’t uncommon for strong, sizable companies to get 5+ indications of interest (soft offers). We’ll then validate those buyer groups, attend dinners where they meet out clients, prepare further data on the business and negotiate the deal terms that the prospective buyers will propose in their final offer.
Negotiate LOI terms and facilitate diligence
Once LOI’s have been received from potential buyers we work with our clients to select the potential buyer with the most attractive offer before executing the exclusive LOI.
It’s common for diligence to take 60-90 days before closing. This requires a significant time commitment from all parties. Additionally, final deal points are negotiated and contested during this period.
Talk to the experts
Care to learn more about Raincatcher’s brokerage and M&A processes and what we can do for your business? Get in touch with us for a complimentary consultation.
What Affects the Market's Appetite for Business Service Companies Such as Agencies?
Business Service companies such as marketing agencies with an evergreen demand for their product/service and recurring customers are nearly always in high demand for acquisition from investors such as private equity firm, strategic buyers and search funds.
Generally speaking, business service companies are purchased using some equity from the buyer, some debt from a bank or debt investor and potentially some rollover equity or a seller note from the seller. Using debt in this fashion is called a leveraged buyout. A leveraged buyout typically utilizes debt to finance 40% or more of the purchase price. Because of this debt utilization, private equity groups can pay more for agencies with recurring revenue as they will be able to get more debt financing at a lower average cost (WACC).
More Marketing Agency Resources
If you’re a marketing agency owner that is interested in selling your business or taking on an investor, feel free to schedule a time to discuss your company with one of our marketing agency business brokers.
What Role Does Technology Play in Investors Analysis of the Manufacturing Industry
Both strategic buyers and private equity groups are keen on acquiring digital marketing agencies at a discount to the cash that they believe will be generated over the coming decade. There are a few approaches they take to achieve this:
Investing in agencies with significant, realizable growth potential.
Acquiring agencies that have a unique and differentiated service offering, resulting in a stable and predictable client base and defensible cash flow.
In both scenarios, having cutting-edge technology implemented in your digital marketing agency makes it highly attractive to investors. This technology can be utilized to fuel business growth or serve as a distinguishing factor to stand out from competitors, leading to higher margins and a more sustainable revenue stream.
Request a Consultation
At Raincatcher we represent sellers of exceptional lower middle-market companies. Generally speaking, these companies generate anywhere from $2m – $100m in annual revenue. We were even named the #1 business broker by Inc. magazine.
Our team is comprised of former business owners, public accountants and investment bankers. Two of our current M&A advisors build and sold e-commerce companies and built expertise and relationships in the digital marketing industry throughout that process.
request a consultation today to review your market value, discuss what type of exit process would make the most sense, and meet our team of advisors who have real-world experience selling marketing agencies.