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How to increase the value of your agency for a potential sale

If you are planning to sell your business or want to increase its value, it is crucial to understand the optimal timing and strategies to maximise your value and how much you will get for the sale. Equally, even if you are not ready to sell, knowing what aspects to focus on to enhance your business’s appeal is equally important. If you are unsure of your route, you should read my other post on lifestyle vs performance agencies.

Navigating the mergers and acquisitions (M&A) landscape can be a complex journey for many agency owners. It requires expertise in finance, legal matters, and business strategy. As an expert in your field, owning your agency, you are not expected to have industry-leading knowledge within the M&A market. However, having a fundamental understanding of the attributes that make an agency attractive to buyers empowers your decision-making and instils confidence as you progress towards a potential business exit.

First, you need to know what EBITDA is, as the end figure you receive for selling your agency is based on a multiplier of your EBITDA.

What is EPITDA & how does it work for agencies?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure used to evaluate a company’s operating performance without considering financing decisions, accounting decisions, or tax environments. Essentially, EBITDA provides a clearer picture of a company’s operational efficiency by focusing on the earnings from its core business activities.

Here’s a simple example of how EBITDA might work for an agency:

Suppose you have a marketing agency. Let’s look at its financials for a particular year:

  • Revenue (from client projects, consulting fees, etc.): £2,000,000

  • Cost of Services (salaries, freelancers and software for delivery of your service): £1,000,000

  • General & Administrative Expenses (rent, utilities, insurance, marketing costs): £200,000

Now, let’s calculate the EBITDA:

  1. Start with the agency’s Revenue: £2,000,000

  2. Subtract the Cost of Services and General & Administrative Expenses:

    1. Revenue: £2,000,000

    2. Cost of Services: -£1,000,000

    3. G&A Expenses: -£200,000

  3. This gives you an Operating Profit (or EBIT, Earnings Before Interest and Taxes) of £800,000

To get EBITDA, you add back Depreciation and Amortization (if there are any). For simplicity, let’s say your agency has an estimated 1% of revenue for depreciation and amortisation expenses, totalling £40k.

So, the EBITDA for your agency would be:

  • EBIT (Operating Profit): £800,000

  • Add back Depreciation and Amortization: £40,000

  • EBITDA: £840,000

In this example, the EBITDA of £840,000 represents the earnings of your agency before any interest, taxes, depreciation, and amortisation. This number helps potential buyers or investors understand how much profit your agency makes from its operational activities, which is a good indicator of its financial health and operational efficiency. EBITDA is typically always larger than net profit, with tax often causing the big divide. The above is just for illustrative purposes; a typical £2m agency would have a much lower profit than the above example.

If you are struggling with this, don’t worry too much. You need to be aware of this metric and ask your accountant to include it in any reports, like your P&L / management accounts. Now we’ve discussed EBITDA, it’s time to talk about multipliers.

Multipliers vary by industry; it’s an attempt to give a numerical figure to the perceived value of your agency. This value is based mainly on how scalable your business is, the risk factors involved, the growth potential and how much the seller fits the overall vision and structure of the buying company. This multiplier can be influenced through higher performance or strategic positioning, as I’ll cover below, but these multipliers will always be limited based on your business model.

For example, technology and SAAS companies often command some of the highest multipliers due to their scalability, potential for rapid growth and high profit-to-head ratios. These ranges vary drastically, and specific cases aren’t given out as public knowledge. Speaking from experience within the agency space, specifically in digital, the multipliers range from 4x up to 8x. Again, these vary so much based on market trends, new technology and perception of the buying company. To give a basic example, the first SEO agency to prove the model works and can scale to multimillions of pounds would have had a larger multiplier than today as new IP knowledge would have had higher demand.

Based on the above information, you do some quick calculations to show how influential the multiplier figure will be on your overall sale value.

  • £840k EPITDA 4x multiplier = £3,360,000 sale

  • £840k EPITDA 5x multiplier = £4,200,000 sale

  • £840k EPITDA 6x multiplier = £5,040,000 sale

For every increase in multiplier, you are adding an extra year’s worth of business performance to your overall sale value.

How can you influence your multiplier?

Here are several crucial factors that typically influence an agency’s sellability, with a focus on what potential buyers seek:

EBITDA  

As mentioned above, the attractiveness of your business in the M&A market is heavily influenced by your EBITDA. EBITDAs from £500k-£1m would be the sweet spot for starting discussions. You will want to prove to the buyer that there’s more to come, so timing is essential to avoid selling right at the peak. This may sound odd as you’d think you’d want to sell right at the peak; however, the most common scenario with an agency buyout is for the money to be paid out over multiple years (the earn-out period), the majority of the money is then paid out over time as an incentive for the founder to continue growth and ensure a smooth transition. Therefore, you need to have the mentality that when you sell, you still need to keep the momentum going for another 3-4 years after the sale.

Market Position and Specialisation 

I preach about niche agencies, which are more valuable in the agency M&A world. Why? Because the buyers are often full-service or broad-serviced agencies. They want to buy niche agencies that will complement their existing services so that they can cross-sell efficiently to existing clients. They want agencies with a depth of knowledge and reputation for a specific service they don’t have. This is where ‘perception’ comes into this process and why finding the right buyer is essential.

  • Two agencies are on the market looking to purchase

    • Agency 1 is an eCommerce agency that offers strategy and all paid channels.

    • Agency 2 is a marketing agency that offers SEO, Paid Search and Affiliates.

  • Agency 1 will likely give a much higher multiplier (and therefore value) to my eCommerce SEO agency as we are so specialised we can slot right into their overall service offering. Agency 2 may still find it valuable to broaden its eCommerce knowledge in its existing SEO team, but it’s unlikely it would match Agency 1’s multiplier.

Overall Profitability 

The profitability of your business, mainly when it represents a high net profit percentage. If you’ve scaled an agency with over 20/30 staff members and still command net profit margins of over 20%, you’ve proven a successful model that buyers will admire. They will be able to increase the profits by bringing your agency under their group and getting you to operate on their systems, which is already a cost to the group.

In contrast, exceedingly high profits might be scrutinised for potential under-investment in the business. It wouldn’t be a deal breaker but expect more intense questioning about why you didn’t invest more to build and scale the business.

When scaling and investing in growth, your net profit margins can sink as low as 10%, some months lower, as you constantly reinvest in development. Once stabilising, you should aim for the 20-25% levels.

Consistent Revenue Streams 

Though not always expected, having consistent, recurring revenue can significantly enhance your business’s market value, sometimes even pushing the EBITDA multiple to higher-than-average levels.

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