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.

This is why retainers are so valuable; even if you can ‘package up’ your projects to spread out as retainers, it’s a much easier and more stable picture to show to a buyer instead of erratic spikes every few months. It’s not to say projects aren’t desirable, but retainers offer stability and help minimise the risk referenced previously. Suppose you are a buyer getting an agency with over 70% of their clients on a 12-month contract. In that case, you feel much safer and happier than buying one with no guaranteed income in the next six months, and the only barometer is historical performance.

Office Location 

In the post-COVID era, the location of your business is still up for debate. However, there are factors to consider; these larger businesses have different cultures and may need people in the office to work a certain amount of times a week. Your buyer may be a multinational corporation which originated from a country with different working practices and thinking to your country. Finally, ego always comes into play; some companies will want an office in every major city across the world. If they don’t have a London office, they may just be looking to purchase companies in London.

Client Retention and Contract Length

As mentioned, retainers are naturally more favourable than pure project-based due to guaranteed post-sale income. The length and stability of these contracts can be a crucial selling point. High client turnover might be a red flag for potential buyers. Showcasing your clients’ lifetime value can help offer a different lens for both models. For example, suppose you sign a retainer for six months, and it ends versus a client that returns every January for a new year strategy project and pays a premium for not being on a retainer. In that case, overtime will be more valuable than the six-month retainer. It’s also essential to mitigate against risk; relationships are such a critical component of an agency’s growth, and showcasing to your buyer that the client relationships are not deeply connected to yourself, the founder will help ease any risk on the buyer side.

Intellectual Property

When buying a service-based company, the significant factors a buyer will get are IP, Media or Software.

Agencies often possess unique intellectual property, such as proprietary processes, software tools, creative content, and branding strategies. These assets can significantly increase the value of an agency. They must be showcased in an internal knowledge hub as something tangible the buyer gets as part of the sale. In addition, if you can spin any of your internal tools or software and sell it as a small SAAS on the side, this will also be highly favourable.

Talent Pool and Staff Retention

The quality and stability of the agency’s talent pool are paramount. Agencies are often as good as their staff, so a team with a strong track record, specialised skills, and low turnover rates is highly desirable. The reality is that once the founder leaves, the staff is left to deliver the work.

Scalability of Services

The potential for scaling services without a significant cost increase can make an agency more attractive. This includes expanding to new markets or offering additional services with minimal investment. Agencies, by nature, are very scalable. For example, a Shopify developer can operate across any country, and the buying agency can hire local account managers to cover the service’s client relations and language aspects. In contrast, if you niche too much and only focus on a location or a narrow market, this isn’t scalable. An example would be an agency that does SEO for pharmaceuticals. It’s a lucrative market, but there aren’t many businesses that operate in this market, and you won’t be able to work directly with a client’s competitor, so your overall market is limited.

Over reliance on 1 client 

A diversified client base reduces risk and increases attractiveness. Businesses with a well-balanced client portfolio, where no single client dominates the revenue, are seen as more stable and appealing. I aim for no client representing over 10% of our overall income. Yes, there’s been a period where this has been larger, but when it is, I treat it as additional income and avoid relying on it until things have balanced out again. It’s too risky for you and the buyer. I’ve seen a scenario where an agency sold, and within a few months, the largest client who had been with them for over four years. This client represented nearly 25% of the business. It’s safe to say this agency owner didn’t get anywhere near the overall value of the sale as they missed their earn-out targets considerably.

Brand Recognition and Market Presence

An established brand and a strong market presence can be a significant asset, indicating stability and a proven track record. I address This critical point in my other post on lifestyle vs performance agencies. If the agency’s brand recognition is tied to the agency founder’s brand and not the agency itself, this may cause further questions when selling; again, it’s not a deal breaker, but expect questioning. The buyer may even negotiate to buy your social accounts with the agency if they deem them valuable.

Cultural Fit and Management Style

Agencies often have unique cultures and management styles that must align with potential buyers’ values and operational techniques. This point is something that the buyers have tried to put a much higher emphasis on over the last few years, particularly in my space of digital marketing. Digital marketing agencies often have a strong culture, and there have been many cases in recent years of high staff turnover post-sale due to culture clashes. M&A advisors have also emphasised finding you the ‘right’ buyer, but take this as a pinch of salt and do your due diligence on your buyer.

Client Industries and Market Trends

The industries an agency serves can affect its attractiveness. Agencies serving growing or stable industries may appeal more than those in declining sectors. This is a straightforward one to explain: during the COVID period, many e-commerce agencies sold. eCommerce was exploding, and with it did Shopify and the Shopify ecosystem, so some of the largest eCommerce agencies sold up during this peak period for eCommerce. As did I, but in a different route, favouring employee ownership over traditional M&A.

Innovation and Adaptability

The ability of an agency to innovate and adapt to changing market conditions can make it more attractive, as it shows potential for future growth and relevance. Using case studies and historical references can help here. Also, if you have an in-house data or technical team whose role is to innovate and keep the agency ahead of the trends, this can look favourable, but it depends on the buyer again.

In conclusion, understanding the value of your agency and how to maximise it is crucial whether you are planning to sell or not. EBITDA and multipliers are fundamental concepts that play a significant role in determining the sale value of your business. Knowing how to calculate your EBITDA and how multipliers vary by industry can help you make informed decisions as you navigate the M&A landscape. Furthermore, focusing on the factors that influence your multiplier, such as scalability, growth potential, and risk factors, can help you increase your agency’s sellability and overall value. With a better understanding of these concepts, you can confidently take steps to enhance your business’s appeal and increase its value.