When you are a digital agency, knowing your agency valuation is important. For one thing, it gives you an idea of how much you should be charging for your services, whether that entails SEO, SMM, PPC management, etc.
But it’s also a common question that agency owners ask themselves when they want to sell their current business. And for those who intend to buy an up and running one, knowing what price is right can make the difference between a good bargain and an over-priced investment.
In today’s business world, it can be somewhat intimidating when it comes to determining your own company’s value, especially when several aspects can impact its value. But that’s why we’re here to help you make sense of it all.
For all those digital agency owners who want to analyze their agency’s value, this blog is for you.
Determining Your Digital Agency Valuation
How can you calculate the value of your digital agency? I mean, the price is as good as how much someone is willing to pay for it. But you’ve put a considerable amount of time and effort to get where you are today. That should hold some value, too, right? So settling on just any number won’t do.
So the actual value is one that properly reflects your reputation, achievements, future potential, and much more. But if you want to have the upper hand, you need to be aware of the factors that can influence the value of a digital agency.
Understanding the impact each one has can help you justify your asking price.
1. Profit and earnings
Starting a business is all about making a profit. So this should be the first thing you look at. To get an actual worth of your agency, you need to look at your earnings history.
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The last thing a buyer will want is to make a dead investment. No one wants to risk investing in an initiative that won’t work.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) highlights the net profit. It measures how much money is left after expenses such as salaries and rent are cut out of the equation.
However, you should also take into account SDE (Seller’s Discretionary Earnings) to determine the actual value of your business and the revenue it generates. That will include the income you report to the IRS as well as any non-cash expenses.
Most digital media companies sell for 4-6X EBITDA.
2. Time in operation
The longer you’ve been in business, the more your agency is worth it. It’s pretty straightforward. It takes about 3 years for a company to establish itself and grow financially. Anything less than this can detract the value of your agency.
The more years you’ve been in business, the better the reputation, and the more time you’ll have to develop a client list.
3. Your previous clients
While it’s a bonus to have renowned businesses such as Dell Technologies and Capital One under your name, having worked with other small brands is equally essential for your agency’s valuation.
It all comes down to the testimonials and reviews that your previous clients offer, both of which can significantly impact your reputation. As your reputation grows within the industry, your agency’s value will no doubt improve as well.
4. Current projects value affects your agency valuation
A digital agency provides continuous services. Long-standing, recurring contracts cannot be discontinued simply because the owner is changing. Such an action could significantly damage your reputation.
Clients that are in the pipeline can influence the value of the agency. For instance, if the potential revenue from these projects is high, they can improve your worth. And this ties up with the next point.
5. Client concentration
Where will the agency stand a couple of years down the line? If the workflow experiences steady growth, there is a greater charm in investing in the agency.
For example, if a digital marketing agency has a few large clients that are the main contributors to the revenue stream, a buyer will need to consider what happens if they discontinue services or the contract is not renewed?
So even though working with large reputable firms has its perks, revenue streams could trickle down if they decide to leave. It may be advisable not to have any customer account that is over 30% of your sales for the best performing digital agency valuation.
Similarly, the number of current contracts, client retention rates, and the variety of mid-sized clients can impact the valuation process and its growth potential. Ideally, focus on maintaining the right mix of clients.
6. Competitive advantage is important for digital marketing agency valuation
There just might be a price for scarcity. Offering niche-specific services, unique technology, or anything else that others don’t increases the value of your digital marketing agency.
An established agency with years of experience that provides services to a clearly defined target customer in a specific industry is significantly more valuable in a buyer’s eyes.
However, this can work both ways. For instance, if the services you offer are too specific, and there isn’t much of a demand for them, it may be hard to get the value you’re hoping to get.
7. Internal work structure
As the owner of a digital agency, you are the face of the company. Though you may be a part of operations, a buyer will closely consider how work processes are managed within the company and your role in the day-to-day activities.
Is the agency run entirely by you, or do individual managers operate separate departments?
This is important because the person who buys your digital marketing agency will want to know what will happen when you step away.
A management structure that has different departments can continue to run smoothly even when you’re not present.
Department heads will still be available to ensure work processes do not stop. So an integrated internal management structured agency has a better valuation than a one-man show.
However, the level of commitment of key employees should also be taken into consideration. Will they stay on board after the sale is complete? How will a takeover or sale impact the office culture if the owner changes?
8. Current market prices
Before any individual considers launching a digital agency, they are sure to research the price that other agencies are currently fetching. To ensure that you don’t go under- or overvalue your agency, check the market price within the last 6 months. Carefully compare aspects that will influence the price, such as the size of the agency, services they were offering, location, etc.
9. Economic conditions
When an economy goes through a recession, every business is impacted. As a digital agency, you are equally prone to devaluations during tough times.
Increasing The Value of Your Digital Agency
Now that you’ve found the way to find out how much your digital marketing agency is worth and the factors that influence it, how can you increase its value?
As a strategic agency, you need to be interested in more than just EBITDA as a percentage of revenues. Increasing value of a digital agency lies in finding ways to improve on it.
Here are several ways you can add value:
1. Give it time
The starting years are times when you are still learning and testing the waters. As you mature in the digital marketing arena, your value will grow as your experience increases.
2. Develop a healthy profit margin for improving agency valuation
You need to strive continuously and explore new ways to make more profits. Whether you decide to charge your customers more or cut operational expenses, you need to ensure that you’re getting 40%+ in profit.
On the other hand, if you have a debt, now’s the time to clean up your act. Being in debt will decrease your value.
3. Plan for steady growth
Buyers are interested in a company that grows. And that comes from increased profits. A company less than five years old that has a revenue increase of 30–50 percent per year is on the right path.
4. Expand clientele for your digital marketing agency valuation
The more customers you have, the more growth you’ll witness. As mentioned above, large clients come with pros and cons. Moreover, they can bargain for more services at a lower price, bringing down the profit margin. Find more clients, preferably mid- and small-sized businesses, to improve your bottom line.
But if you are planning to sell your agency, you need to be looking into long term, transferable contracts that you can hand off easily.
5. Gather more testimonials
The more people that hear positive reviews about you, the more your reputation will grow. And the more you’ll be worth it.
6. Identify new revenue streams for increasing marketing agency valuation
Digital marketing offers a vast playing field. There are several services you can offer. Depending upon demand/supply, you can make the most of this opportunity to either branch out and present more services or dive in and provide niche-centric services.
Often, highly-specialized agencies are worth more, especially when they secure more accounts.
7. Set up management teams
Agencies that have different people who handle different processes and procedures are worth more. That’s because the buyer has fewer roles to fill.
8. Keep track of the metrics
Digital marketing is always about numbers. Monitor, measure, and evaluate crucial KPIs such as lifetime client value, profit margin, burn rate, etc. Not only will this help identify your shortcomings, but also allow you to improve your agency’s worth.
9. Acquire a large online following
Creating quality content can build your personal brand and reputation as an expert in your industry. Specialized knowledge of the industry, backed by strong financials, can help improve the value of your agency.
10. Get your paperwork in order
The easier it is for a buyer to acquire your agency and manage it, the more valuable it is. The goal is to help them continue the earnings stream through the entire handover/takeover process.
Selling a Digital Agency
Most digital agency owners don’t want to face the harsh truth that a digital marketing agency has an expiration date.
Having an exit strategy in mind can make the process less stressful. That means getting your books in order, not taking on risky projects, keeping tabs on cash flow.
Selling a digital marketing agency can take time. So have a transition timeframe mapped out. Trying to finalize the deal too quickly can bring down the value of your business.
A gradual transition where you’re willing to stay on board for 6-12 months can not only ensure that the new owner settles in comfortably, but also gives you time to plan for your next business venture.
Knowing what to expect can help prepare you for what lays ahead. Here is an outline of the steps:
1. Facilitate the sale
List your agency or hire a quality business broker to get the ball rolling.
2. Expression of interest
Anyone interested in buying your agency will make an initial inquiry. Your answers will dictate what happens next. Though you need to answer honestly, you should refrain from offering too much information.
3. Letter of intent
The interested party will make an offer through a letter of intent based on the digital agency valuation.
4. Get the legal work underway
The sale proceedings can take time. But getting started with a reputable lawyer can help you stay on top of all the legal documents, ownership rights, taxation laws, etc.
5. Get on the same page
Get a know-how of day-to-day operations, key employees, client lists, office culture, management criteria, financials, and whatever else to make the transition as smooth as possible.
Offering transparent services can help build a spotless reputation and a list of satisfied customers. Knowing how to separate yourself from other agencies that are currently selling on the market is the first step to getting a better valuation for your digital agency
At the end of the day, it all comes down to how you present your agency and the way you deal with people. Respecting others in the trade is, in essence, the way to improve your own self-worth. Are you ready to start the evaluation process?