When the time comes to considering agency M&A initiatives (such as merging with another firm or selling all or part of your agency) at some point you will want to establish the value of your agency.
As most of you know there is a simple shorthand for agency value and that is simply a multiple of profit.
Before pondering what multiple you might attract consider that it’s called a multiple because there are multiple factors to consider! Some of these you can control but many others are totally outside your control e.g. the interest rate that affects market liquidity and therefore buyer demand and agency values.
Today, let’s start with the half of the valuation equation that is far less subjective (and some would say ultimately is therefore the boring bit).
Well, there’s an adage in adland that “profit sets you free” (the source for this is lost to me sadly, but if anyone knows let me know!)
Before even developing a view on the likely multiple for your agency, anyone trying to value it will take a look at your profit over time.
There is simply nowhere to hide on this.
Nowhere.
You are profitable or you aren’t.
The ability of your firm to drive a profit is fundamental.
And yet 90% of agencies that we see fail to make over 15% EBITDA: Gross Profit and less than 5% make 20% or greater.
I get it – and we’ve been there. You’ve worked hard to build a winning proposition. Your agency has happy clients and does good work, has a strong culture and great people.
But no matter how unique it is, the value conversation will always circle back to how all of this amazing stuff contributes to your ability to make a profit.
And it’s not easy.
Profit determines how free agencies are to stay fiercely independent, reward valued staff, contribute to a favourite charity AND how they can conduct M&A activities from a position of strength.
Multiples can range wildly from 2x to 12x EBITDA in this sector, depending on many many variables such as performance, growth potential, market conditions, scale and buyer appetite. I’ll take a look at multiples in future posts.
But with EBITDA you are in control. It is infact the brutal outcome of all your decisions as an agency owner. And every dollar you add to it can add 5 or even ten times to your value.
With a clear strategy you can do well, but first please always remind yourself of that very useful old adage that : profit sets you free!
As always, hope this was useful – what are your thoughts on agencies and EBITDA?
Here’s to your limitless success.
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At Agency Futures we help entrepreneurs buy and sell agencies to realise the maximum value of their life’s work. Please contact me if you have anything related to Agency M&A you want to chat about.