How we value a marketing agency

Most valuation advice for agency owners stops at “three to eight times EBITDA”. That range is wide enough to be true and too wide to be useful. It leaves three questions unanswered: which earnings figure, which multiple and why that one, and what actually reaches your bank account, which is not the same number.

This is how we answer all three. It is the method we use on live mandates, and every multiple in it comes from bands we publish. The calculator above applies the same bands and curve to your own figure.

1. Which earnings figure: normalised EBITDA

We value on normalised EBITDA (sometimes called adjusted EBITDA), not on revenue, not on gross profit, and not on the profit in your accounts. Normalising means restating your earnings as a new owner would experience them. We apply five categories, the same way every time.

• Owner compensation: salary above or below market, family salaries that are not commercial, excess pension, personal insurances, and distributions booked as salary or bonus

• Personal expenses through the business: vehicles, travel and entertainment beyond what a new owner would spend, personal subscriptions

• Genuine one-off costs: non-recurring legal, restructuring or redundancy costs, a relocation, a one-time IT project, aborted transaction costs

• Non-recurring revenue, as a deduction: one-off project work unlikely to repeat, grant income, gains on disposal, revenue from a contract that has ended

• Other: used sparingly. If most of the value lands here, the categorisation is wrong

Normalisation runs in both directions. If the owners pay themselves below a market package, that is a deduction, not an add-back, and earnings come down. We see that as often as we see the reverse.

The tests are applied together. Adding back an owner’s personal spending without also testing their salary against market overstates earnings, and a buyer’s accountant will find it in diligence. Every adjustment carries the year it falls in, a one-line reason and the evidence behind it. Depreciation, interest, tax, forecast growth and post-deal synergies are never adjustments.

→ Read more: What is adjusted EBITDA? Isn’t it really just cooking the books?

2. Which multiple: the bands we publish

Multiples of normalised EBITDA, by the size of those earnings:

• Micro, under 500k: 3.0x to 4.5x

• Small, 500k to 1.5m: 4.0x to 5.5x

• Lower mid-market, 1.5m to 5m: 5.0x to 7.0x

• Mid-market, 5m to 20m: 6.5x to 10.0x

• Strategic asset, strong recurring revenue, clear growth or a rare capability: add one to three turns on top

The bands overlap on purpose. Read them as hard steps and the arithmetic breaks. An agency earning 1,499,000 at the top of Small, 5.5x, would be worth 8.24m. One earning 1,501,000 at the bottom of lower mid-market, 5.0x, would be worth 7.51m. Earning 2,000 more would cost it 739,500.

So we do not read them as steps. We run one continuous curve through the middle of each band, rising with scale on a log scale, because multiples rise with size logarithmically rather than in a straight line. It sits inside its own band at every point and never steps down as earnings grow. On the curve, 500k reads 4.25x, 850k reads 4.63x and 2m reads 5.49x. The calculator uses the same curve.

Where you land inside the band

Scale gets you to a band. Five drivers decide where in it you sit.

• Client concentration: the largest client and the top five, as a share of gross profit, grouped by ultimate advertiser rather than by brand line

• Revenue durability: the share of revenue that is contracted or genuinely repeats, against project work that has to be won again

• Owner dependence: how much revenue sits on a relationship one of the owners personally holds

• Growth: measured on the same period as the earnings

• Earnings quality: how large the normalisation adjustments are as a share of the result

Together the drivers move a business up to about 15% either side of the curve, and never outside its band. That is why the calculator gives a range around the most likely figure.

3. What you actually receive

Almost every published multiple describes enterprise value, which is what the business is worth. It is not what lands in your account.

Agency deals are normally done cash free, debt free. The buyer takes the business with no cash and no borrowings in it. You keep the cash, you clear the debt, and you deliver a normal level of working capital. So the bridge runs:

• Enterprise value

• plus the cash in the business

• less borrowings and anything the buyer treats as debt

• plus or minus the difference between the working capital you deliver and the normal level

• equals the equity value to shareholders

What counts as debt is negotiated, not given. A credit card balance, unpaid pension or superannuation, a tax instalment plan, a director’s loan. Each one is an argument, and in most deals they are worth more than a tenth of a turn on the multiple.

Normal working capital cannot be set from one year end. It needs a twelve-month average, because agency working capital swings with billing cycles, and a year end chosen well or badly can move the completion payment substantially.

How the price is paid matters as much: the mix of upfront payment, deferred consideration and earn-out. → Read more: The deal structure playbook

What good looks like on profit

Before thinking about multiples, the market is blunt about EBITDA margin, measured on gross profit.

• Under 15%: buyers ask hard questions, and many pass entirely

• 15 to 20%: acceptable, with little room to negotiate on the multiple

• 20 to 25%: strong, and the market’s preferred range

• Above 25%: exceptional. Fewer than 2% of the agencies we see sit here consistently

A healthy cost structure, as a share of gross profit, is roughly 55% staff, 20% other operating costs and 25% EBITDA. Staff costs consistently above 65% of gross profit read to a buyer as a business carrying too many people, and it is priced accordingly.

EBITDA is the part most within your control. Every extra unit of normalised EBITDA can add five to ten times that to enterprise value.

What this is not

This is a method, not a valuation. A real valuation reads your accounts, tests every adjustment against evidence, measures the five drivers against your own data, and takes a view on the buyers actually in your market at the time.

Anything you calculate from this page is indicative. Our indicative valuations are not independent valuations, we are not accountants or tax advisers, and nothing here is a formal valuation. Take your own advice on tax and structure before acting on any number, including ours.

We give an indicative range as part of a first conversation, before anything is formalised. Bring your last three years of accounts and we will tell you what we see, including the parts you will not like.