How the market values any asset is a function of the supply and demand for that asset. 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.
The businesses reputation is its main asset. A few poor reviews 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.
If the business has processes in place to bring on new clients, this means less risk for the buyer. 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 better.
As with all small to mid-sized businesses, the larger the business is, the fewer sellers there are, the more a buyer will need to pay for the business.
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 X annual profit once it crests the $5M annual profit threshold.