We all know that nobody wants to work forever. At some point, you’ll either close your agency or ideally, sell it. Whether you plan to exit in 1 year, 5 years, or 20 years, it’s smart to start thinking about your agency’s health and how much it’s worth.
But how do you figure out the value of your marketing agency? And what steps can you take to boost its worth? Let’s break down the basics of marketing agency valuation and how you can prepare for a successful sale in the future.
Start with EBITDA
The first thing to determine is your profit before taxes, known as EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This financial metric is crucial for valuing your agency and serves as the base for calculating your agency’s value.
Why is EBITDA so important? It gives the clearest picture of your agency’s financial health. After all, the goal is to put more money in our pockets, not just make sales. For instance, your profit isn’t very appealing to a buyer if you make $1,000,000 in revenue but have $999,999 in costs.
It is important to account for a market wage for the seller in the EBITDA. Sometimes this needs to be adjusted up if the owner is being paid a below-market wage. Other times, it gets adjusted downwards if a market wage is lower than the owner is currently taking. Adjusting EBITDA in this way provides a more accurate and deeper valuation.
How do you calculate the EBITDA?
To calculate EBITDA, follow these simple steps:
- Find Your Net Profit: Take a look at last year’s P&L and find the profit your business makes after all expenses are deducted from revenues.
- Remove Interest Paid: Remove any interest expenses your business has paid.
- Remove Taxes Paid: Remove any taxes your business has paid.
- Remove Depreciation: Remove the depreciation of assets (like equipment) over time.
- Remove Amortization: Remove the amortization of intangible assets (like patents).
Even simpler? Try our quick valuation calculator here to do it for you!
Find Your Multiplier
Next, you need to determine your “multiplier” to apply to your EBITDA. The multiplier depends on several factors, some easier to calculate than others.
A common approach is to use revenue to determine your multiplier. Here’s how your agency’s valuation might look based on different revenue ranges:
- Under $1 million per year: 2-4 x EBITDA
- From $1 million to $2 million per year: 4-6 x EBITDA
- From $2 million to $5 million per year: 6-12 x EBITDA
- Over $5 million per year: 8-15 x EBITDA
This gives you an approximate valuation of your agency based on its revenue.
However, valuations are rarely as straightforward as this. Let’s dive into a few other factors that can affect your valuation.
Other Factors To Consider For Your Marketing Agency Valuation
When it comes to your agency valuation, there are plenty of factors that can increase or decrease your valuation.
Here are a few things to think about:
- Revenue streams: How does your agency make its money? Steady income often comes from retainer contracts, while project-based work can be more profitable but less predictable. When it comes to revenue streams, aim for stable and predictable.
- Portfolio: Is your revenue mostly from one client, or is it spread evenly among many? Do you frequently lose clients, or do they stick around for the long term? Agencies with a diverse client base, long-term contracts, and loyal customers are usually worth more.
- Reputation: Your online reputation is crucial when selling your agency. Positive client reviews, industry awards, and a history of successful campaigns show your credibility. Agencies with a great reputation often attract buyers who are willing to pay more.
- Specialization or niche: Agencies that focus on specific industries or services are often worth more because they are seen as experts. Check if your agency’s specialty matches what clients want. Being specialized helps you stand out and attract clients looking for that expertise.
- Growth potential: Is your agency ready for the future? Agencies with a solid growth plan and a history of expanding are more attractive to buyers. Check how your agency has grown and if it can keep growing. Consider new market trends, technologies, and business opportunities that can fuel growth.
- Documentation: How much of your processes are documented? Good documentation and streamlined workflows are crucial for any agency. They ensure everyone knows their roles, making operations smooth and efficient. When selling your agency, these organized processes make it more appealing to buyers.
- Financial Health: Don’t just look at EBITDA. Check other financial metrics too, like revenue growth and profit margins, to see how well your agency is doing. Are you too labor-heavy? How variable vs. fixed are your expenses? Do you rely too much on advertising? Strong financial health makes your agency more valuable and attractive to buyers.
What Can You Do To Increase Your Marketing Agency Valuation?
Depending on your agency’s current value and your timeline for selling, there are several steps you and your accountant can take to maximize your sale price.
Here’s a quick list of actions to start preparing now:
- Diversify Client Portfolio
- Ensure no single client accounts for more than 15-20% of revenue.
- Secure long-term contracts.
- Streamline Operations
- Document all business processes.
- Invest in technology to automate tasks.
- Strengthen Financial Records
- Keep all financial statements accurate and up-to-date.
- Hire an accountant to review or audit your finances.
- Increase Your Digital Presence
- Revamp your website and boost SEO.
- Increase your website traffic and # of email subscribers.
- Prepare for Due Diligence
- Organize all legal documents and assets.
- Address any potential liabilities in advance.
- Protect Intellectual Property
- Document and legally protect all IP.
Need More Help With Your Marketing Agency Valuation?
Valuing an agency can be complicated. That’s why it’s best to bring in outside experts who can help.
As a first step, try our quick valuation calculator to see what your agency is worth today.
If you’re planning to sell in the next 3-5 years, we’re here to help. At Agency CPAs, we specialize in preparing digital agencies for big exits, ranging from 7 to 9 figures. For years, we’ve been helping agencies get the most out of their sales through financial preparation and strategic planning.
Book a call on our Getting Started page or check out our Sell Your Agency page to learn more.
Until next time!
