As an economics professor would explain to his class, the value of anything is a determined by the supply and demand for it. Marketing agencies are no different. In terms of valuation, we see 90% of marketing agencies fall between is 2 – 3.5 X annual profit. Where your business fits into this valuation spectrum is determined by how your business fits the following criteria.
The longer the agencies productive life, the better. Reputations, client relationships and domains all become stronger with time. All other factors being equal, the older a business is, the better.
Size of Clients
In a perfect world, agencies would not have to deliver monthly reports to their clients, answer client’s continuous questions and find a pipeline of new clients to onboard. However, this is the case for a large number of marketing businesses. The few businesses who only work with large, reputable clients have a leg up on the competition in terms of valuation.
Your marketing agencies reputation and reach is one of it’s most important assets. A few poor reviews will not only make it far more difficult for you to get clients, it can drive off potential buyers at first glance.
If the agencies reputation and organic rankings are so strong that it is able to generate inbound leads on autopilot, this will increase its value in the eyes of buyers.
Keeping your clients for a long period of time means that the business has been de-risked to some extent. It also means that the new owner can turn their attention to marketing the business for future growth as opposed to maintaining relationships with current clientele. We have observed that churn rate and reputation typically go hand in hand.
Typically, agencies that have a niche focus see lower churn rate. It seems as though specializing in serving clients in one industry in particular not only benefits the clients by having expert marketers, it also benefits the marketing agency by having clients that stick with them for a longer period of time.
If the business has processes in place to bring on new clients that the new owner can easily manage, this means much less risk. However, If the business is reliant on the owner being the sales person, then there is not marketing funnels that come with the business at all and this represents risk to the buyer.
Management Team In Place
If the agency has processes and procedures in place, this is good. If it has processes, procedures and people in place, that’s even better. Generally speaking, the fewer roles the buyer has to fill, the easier the business is to sell.
Generally speaking, the larger the business is, the higher valuation the seller can demand. There is far more work required to acquire and run a small agency than their is a large one. Buyers are generally not looking to buy themselves a job and therefore look to buy larger businesses.
As businesses creep north of $2M in annual profit, there are family offices, private equity firms and larger strategic acquirers that are in cash positions to purchase businesses that check all of their boxes. It wouldn’t be uncommon to see a marketing agency sell for 4.5 – 5 valuation multiple once it crests the $5M annual profit threshold.