How to Value Your Agency
Learn to properly value your digital agency while avoiding the biggest mistakes agency owners make.
The fruits of your labor are showing, and your agency is registering regular success. Customers are consistent and retainer-based. Revenue has been increasing, and your business model is in demand. It's the kind of success that means it's only natural to think of that next step – the exit. However, the only way to know if it's the right step is by attaching some numbers to it and understanding how to value your agency.
Indeed, you cannot manage what you do not measure. The same goes for the exit. Understanding the various ways to value your agency will help provide you with the clarity you need to make a level-headed decision on your acquisition options.
Common mistakes when trying to value your agency
There's no single template for valuing your business. The market you operate in – and the buyers it contains – is shifting. The factors that determine your agency's value are varied. The combination of your growth trajectory, your team, your business model, and the margins it delivers is unique to your agency. This is why leaning too heavily on the multiples of what may look like a comparable agency from the outside will get you a back-of-the-envelope approximation, at best.
For example, I've spoken to agency owners who have said they want to sell their agency for two times revenue because that's what they've known other agencies to sell for. But what if you have a more experienced team and a better management structure? What if you have a pipeline full of prospects in combination with the former? This outcome guarantees future growth, post-acquisition, independent of a current owner that may choose to leave once the buyout process and transition period are complete. That's an attractive prospect that not every agency will have.
Different factors that drive the value of your agency
So, it's clear that the performance of a variety of key metrics will determine the value of your agency. But there are some factors in particular worth taking a closer look at so you can get a better handle on honing in on what matters most when valuing your agency.
Undoubtedly, this is the metric that matters most. How much money has been coming in? How much more of it is coming in than 12 months ago? And how much of it is left once your operational expenditures are covered? These are basics that have to add up. But a buyer will want to dig deeper than revenue and EBITDA to understand how your earnings behave. How many different revenue streams are there? Does your business experience seasonality? How dependent is the revenue on any given customer or contract? These questions are equally important to understand the sustainability of your earnings in detail.
A buyer will want to assess these questions in line with a look at your financial statements. Understanding risk factors in your cash flow will require full transparency, so it is important to have maintained these statements properly and stay on top of them to allow for an honest exchange of information to enable a win-win decision.
While your financials might be in order, that speaks mainly to your past ability to tap the market. Looking ahead, and understanding what's still in store for your agency once it's in new hands, will require a broader assessment of the market your agency is operating in. How big is the total market for your line of business and what is the addressable and obtainable market for your business specifically?
These are important factors that need to be distinguished. So, although digital marketing's overall market may generate a given amount of revenue each year, various segments within this market will be sized differently – and growing at different rates. Knowing your addressable market's size and trajectory will allow you to assess the size of your obtainable market. This, in turn, will give a buyer a solid look at the future potential of your business as they gauge their investment options.
Your competitive advantage is the moat you build around your agency. It comprises the various factors that will allow your business to serve customers better – or more cost-effectively – than your competition. Specifically, this is your team, your positioning, and your brand. These are the things that make up your agency's identity and its capacity to execute on its potential.
Of course, there are other forms of competitive advantages for different types of businesses. Still, unless you are developing an algorithm as part of your business model or a patentable technology, your focus should be identifying your niche and aligning it with your people.
In a post-Covid world, investors will be looking closely at how well you can manage your operations remotely. In today's day and age, agency owners are not bound by their zip code – and the value of an upscale address on a business card has been reduced dramatically.
If you are still renting and renting in a pricey part of town, buyers will take the liberty to see this as a cost-cutting opportunity. That doesn't mean all buyers want you to become fully remote to lower your costs. It does mean, however, that there are options. Co-working spaces that suffered greatly due to Covid could be the answer for flexible, discounted office space – as could a newly negotiated lease.
Moving ahead with the sale of your agency
Getting to grips with how to value your agency is just the first step. Next up, it's time to find the right type of buyer for your specific agency. And from personal experience, the best way to find qualified buyers is to work with an M&A advisor. M&A advisors make the sale of your agency much less burdensome as they have the experience and relationships that most agency owners don't have.
Regardless of your industry, the most important thing you want to look for in your advisor is their relationships. This is why it's so important to seek out an advisor with years of experience in the field, as they will have the right kind of network to hit the ground running, as well as solid know-how of the dos and don'ts of moving ahead with the sale of your agency.
There are plenty of variables to consider when assessing the value of your agency. Different buyers will even value some of these differently. That said, there are essential boxes you will need to check to move from valuation to negotiation.
Your agency will need to tell a success story, both in numerical and operational terms. In numerical terms, this relates in particular to your earnings, your 12-month growth trajectory, and your future potential. In operational terms, this pertains to your competitive advantages.
Once your success story is convincing enough, it all boils down to finding a buyer that constitutes the perfect fit. This is where an M&A advisor with the right network will make all the difference. Since most agency owners won't have an existing network or relationships with buyers, the best route here is the direct path to a specialized advisor in the field.
The common denominator of successful buyouts goes well beyond the book value of an agency. Bear in mind that a buyer will operate your agency in the future. Therefore, the fit between the buyer and the agency makes all the difference to your agency's future success.
Entrepreneur Leadership Network Writer