So you plan on selling your agency. Or maybe you’re just thinking about it. But even if you’re just tossing the idea around, knowing your agency valuation should be important to you right now. Otherwise, what exactly are you basing your rates on?
But listen, if you are planning on selling your agency at any point — it’s crucial to know your valuation. The alternative is letting your buyer determine it for you (yeah, not a good idea). So where do you even start? Honestly, you probably should’ve started yesterday. But it can be intimidating trying to figure out your own company’s value. This is exactly where tools like Metric.ai make tracking and understanding all your finances way easier, and a lot more accurate too. Feel free to check it out.
But in the meantime, there are a few key aspects you need to know when figuring out how much your agency is actually worth. So let’s dig in.
Determining your Agency Valuation
Value is driven by the expectation of future profit. What this means is that your buyer wants to know the amount of “Owner Benefit” they’ll get from your business in the future based on its past performance and current capabilities.
The most common way to figure this out is Profit x Multiple.
And the value you’ll typically use for calculating profit in this case is EBITDA.
EBITDA x Multiple
EBITDA stands for “Earnings before Interest, Tax, Depreciation and Amortisation,” which is basically how much money you’re bringing in vs. how much of it you’re spending (on salaries, insurance, rent, etc). But your buyer also wants to know about that Multiple. Because that number has the impact to change your Profit in a lot of ways — good and bad.
That Multiple is all the unique aspects of your business that may be valuable factors depending on how you decide to sell your company. If you’re just selling the core of your business, buyers may only care about your financial health, but if they’re acquiring your team and operations, there’s a lot more to consider. For example, perhaps you’re in a very niche market that brings in special clients who are only willing to work with you. In this case, your multiplier will be higher.
Here are some more examples of Multiples that will determine how much your marketing agency is worth…
- Current Clients & Contracts
Any long-standing or recurring contracts you have with clients can’t just be discontinued as soon as you decide to sell — unless you want to damage your reputation. So the clients that are in your pipeline have a big influence on the value of your agency. How long have you had these clients? How much does each client contribute to your overall revenue stream? These are important answers to have.
- Management Structure
Your buyers want a better view of what the next step looks like for them, and that involves how processes are managed within your business. Is your agency run entirely by you or do you have individual managers? If you have a solid management team in place that allows for a smooth transition without disruption, that could increase your company value. But this also will depend on the level of commitment of key employees — whether or not they’ll stick around once the sale is complete and how these changes will impact the company culture overall.
- Diversified Risk
No one likes making a risky investment with little chance of a big payout. That’s why your risk portfolio is key to any buyer moving forward. What is the churn rate of your current clients? Do you have significant overhead? Do you have any loans or lengthy contacts that could pose future issues for the buyer? There are a lot of factors that go into your diversified risk, and if any of them are potential problems down the road, you should be working on improving them now.
- Competitive Advantages
This one goes back to our niche market example. If there’s anything about your company that gives you a significant edge against other agencies, that’s a selling point you want to capitalize on. Whether you’re hyper-focused in one industry, using unique technology that others aren’t, or your developers are the very best at any specific service, this will definitely make you easier to sell.
- Growth Potential
The current value of your agency is largely about what your future looks like. If your industry is projected to skyrocket over the next 5-10 years, that’s a huge plus. Unfortunately, the same applies for a shrinking industry. But this also speaks to your business itself. Maybe the whole reason you’re selling is because you’ve plateaued over the past couple of years, and that’s ok. But it will require a specific buyer (maybe looking more for your employees or your clients). If your YOY growth continues to improve significantly, then you’re able to sell that future success.
All of these items require a deeper understanding of your finances when it comes time to sell. And the earlier you know them, the better you can position your business to get the best price possible.
But there are other important factors — not so much directly related to your finances — to consider too:
- Time in Business
This isn’t super important, but it could sway some buyers in the right direction. The longer you’ve been in business, the more you’ll be worth. It takes about 3 years for a business to establish itself and start growing financially, so anything less is more risky for buyers.
And what also comes with time is reputation. It’s pretty straightforward — if your business has a great reputation in your market, a solid list of testimonials, happy employees, and a positive/high ranking on Google, you’re covered here.
If you’re in a specific location, the growth of this area may be an important consideration for buyers — especially if they are also looking to acquire a physical office space. Mid-major markets are hot right now! So where you are and how much longer you have on your lease come into play too.
Knowing your competitors is not only a great business strategy, but it’s also one that your buyers expect from you. By having data regarding your primary competitors performance over the last 6 months, your buyers can get a better idea of where you stand and where your growth opportunities may be.
To give yourself the best chance at getting top dollar for your agency, you have to know your own value before your buyer does. All of this data can get complicated, which is why Metric.ai made a platform that makes it a lot easier. To learn more, schedule a demo today.