Whatever type of agency you run, if you’re looking to exit or sell your business in the future, you’ll need to work on maximising the value of your agency now. There are several points to consider - all of which can increase or decrease the valuation and ultimately impact what will attract a future buyer.
Why is it important to increase the value of your agency?
Even if you’re not thinking about selling your agency, there are benefits to increasing the value of your business. In short, you’ll create a better business, one with the ability to thrive whatever the market conditions, including giving you:
1. Financial stability
Maximising value means maximising profit, which is always a good thing to do. It’ll put you in a better position to weather economic downturns and unexpected events, of which there are many in agency life.
2. Growth and opportunities
By maximising the value of your agency, you can fuel business growth. This growth can come in the form of hiring new employees, expanding your services, or investing in new technology.
3. Competitive advantage
In today's business world, competition is fierce. The process of building value will force you to think about how you can stand out from the crowd and charge premium prices for what you do. This can help you attract and retain profitable clients.
4. Employee retention
When your agency is thriving, your employees are more likely to be happy and satisfied with their jobs. This can lead to improved employee retention rates, which can save you time and money on hiring and training new team members.
5. Better client relationships
When you're able to provide high-quality services and deliver on your promises, your clients are more likely to trust you and refer you to others. This creates a positive, upward spiral, as your reputation (and client base) grows.
Why do agency owners need to understand the value of their business?
Nearly half of all £1m+ agency owners state that building a saleable asset is their number one priority right now, according to our most recent BenchPress report.
Since 2004, The Wow Company has helped clients sell their agencies for anything between 2x and 9.5x adjusted EBITDA (earnings before interest, taxes, depreciation, and amortisation).
If you have a long-term exit strategy in mind, you need to fully understand the value of your business as well as take steps to maximise its value and your likely return.
How do buyers value agencies?
Valuing an agency business is a complex process that involves many factors, such as size, track record and trajectory, niche specialisation, management team, clients and expertise.
Set out below are a set of considerations which affect the value of agencies:
1. Size of business
Bigger tends to be better. The size of your business will have a direct effect on its valuation. Generally speaking, larger businesses tend to be more valuable than smaller ones since they are viewed as less risky - they have more foundations in place. However, size isn’t the only factor that affects agency valuation – quality matters too. A smaller agency with a strong track record may be worth more than a larger one with weaker results.
2. Track record & trajectory
Track record is another major factor in valuing an agency business. Consistent year-on-year growth over several years is worth more than boom/bust over a few years. Potential buyers want to see evidence that your agency has been successful over time and is continuing to grow and evolve. A long-term track record of success will boost the valuation while any signs of instability or stagnation will drag it down.
3. Niche specialisation
A niche product/service aimed at a niche market tends to be worth more. It’ll give you an edge when it comes to valuing your agency business. Specialised agencies are often seen as having higher value due to their greater depth of knowledge in specific areas and their ability to service customers in unique ways compared to generalist agencies. They charge more than generalist agencies and, as a result, tend to be more profitable. This added value can help boost the overall valuation of your business.
4. Management team
The strength and experience level of your management team and key employees also plays a role in determining the value of your agency. An established management team for example, who have been running the business without your day-to-day involvement, will increase value.
Potential buyers will look for evidence that you have capable leaders in place who have demonstrated their ability to drive growth over time and manage operations effectively. The better your management team works together, the higher the potential for increased valuations from prospective buyers or investors.
The type and number of clients you have will also affect the valuation of your agency business depending on how well they fit into the buyer’s strategy or vision for growth. Having high-quality client relationships built up over time can significantly increase the value you receive from interested parties since they view them as potential sources for future revenue or partnerships down the line.
Size, type, sector, the potential for expansion - all these things make a difference to buyers. As does spreading the risk over multiple clients, rather than heavily relying on a single client.
6. Expertise & knowledge
There's value in your team. If you have a stable team full of experts in their field, your agency is worth more than if you have transient freelancers.
Having expertise in certain areas or industries can also add substantial value to an agency business if buyers see potential synergies between their own operations and yours or if they believe they can leverage what you know into additional revenue streams.
Your ability to provide advice or insights into new markets could also be attractive to prospective buyers since it reduces the risk associated with entering unfamiliar territory without prior experience.
7. Recurring revenue & intellectual property
Retainers and long-term contracts are worth more. They provide predictability.
Also, having rights over any Intellectual Property (IP) associated with your offerings can have a significant positive impact on valuations. Buyers view them as assets which will contribute towards future income.
If you've developed a product or piece of technology with value in its own right, that will push the purchase price higher.
8. Earn-out period
Understanding what type of earn-out period is required by prospective buyers can help ensure that all parties involved are properly compensated based on performance during this period.
It might be that if you stay for four years, you'll get a better deal. If you want to leave tomorrow, that's a much bigger risk to the buyer - expect to get a lot less.
Business valuation - What to do next
Valuing an agency business is a complex task which requires consideration across multiple fronts including:
Track record & trajectory
Expertise & knowledge
And the biggest one… profitability.
The value of your agency business will largely be based on a multiple of profit, so that's a key metric to focus on when thinking about a business sale. If you can show year-on-year improvements in your profitability, you'll get a higher multiple too.
It's important for agency owners and managers to understand how each factor contributes to greater business value so they are better equipped when negotiating deals with potential investors or strategic partners moving forward.
You may even want to explore the option of a professional valuation, which will help you figure out what your agency is worth now. If you’d like help with this, please get in touch.
May 31 2022 by Peter Czapp
January 11 2022 by Peter Czapp