Productive recently co-hosted a live webinar with Madison Alley, an M&A and capital advisory firm that exclusively serves digital marketing, advertising, media and commerce agencies.
At the webinar, Michael Seidler, Founder and CEO of Madison Alley and Tomislav Car, Founder and CEO of Productive, discussed strategic M&A exits and what a digital agency can expect during an exit process. We’ve already covered the basics of agency valuations in one of our previous blog posts, so make sure to check that out as well.
Even if you’re not looking to sell your agency business at the moment, you still might be wondering how much your agency is worth, what you could do to increase its value or what the key drivers of valuation are for your agency.
Our Agency Valuation Calculator can help you get started with agency valuations. Using this new tool powered by Productive, an end-to-end agency management system, you can get an estimate of the value of your agency in less than 10 minutes. Besides a general estimation of the value of your business, in the detailed report generated after filling out the questionnaire, you will get suggestions on which areas of your business to focus on that can influence your overall agency valuation.
Read on to find out what the key takeaways from the webinar were.
It’s All About the Money – or Is It?
When talking about drivers of valuation, there are a few that stand out among the rest. Growth in terms of revenue margins and EBITDA are the most obvious drivers of value for your agency because they let buyers know how much money your agency is bringing in.
Generally speaking, the more money your agency brings in—the perceived risk will be lower and your overall value will increase. You should aim for $3-5 million EBITDA before you sell your agency since most deals start around that value.
Your revenue category will determine the multiple which is used to value your agency. Simply put, the higher the revenue, the higher the multiplier.
Client concentration is another key factor in determining the value of your agency, but what is it exactly? To put it simply, it’s the percentage of revenue that a single client brings to your agency. Most would say that staying under 10% is the sweet spot, but Michael argues that everything below 25% is ideal.
When talking about client concentration, it’s also important to note that who your largest client is, plays a role in your agency valuation. If your largest account is Google, Apple or Microsoft, or any other company of prominent stature, that brings more value to your agency than let’s say a lesser known brand.
Managing Your Agency’s Risk Portfolio
Managing your risk portfolio is crucial if you plan on selling your agency as is risk diversification. To understand your agency’s risk you’ll need to know your monthly overheads, client churn rates, your new business pipeline, loans, and/or multi-year projects.
The geographical location might not seem like an important factor these days, especially if we take into consideration the growing trend of remote work, but in the world of strategic M&As, geographical location is closely tied to revenue profiles. If you’re based in New York, San Francisco or London, your valuations will most likely be higher than those companies that are based in second or third tier markets, because most valued clients tend to be US clients.
How Scalable Are You?
During this webinar, another topic was agency scalability. The scalability of your agency is the combination of technology, processes and procedures that allow your business to run efficiently. Running your agency and having all your business data in one platform or software is something that adds value to buyers. Because ultimately, buyers aren’t buying your agency for where it is now, but for the future potential and how well it can scale as a business.
The World Around Us
Another interesting topic for agency owners is the current state of the global economy and the possible upcoming recession. In the webinar, Michael stated that the recent downturn in the market is causing a slight aversion to risk and buyers are being more selective. Nevertheless, there are a lot of diversified buyers, a tremendous amount of capital, and in the end—a lot of acquisition activity and interest in the field of strategic M&As. As long as your business is being built and it’s growing, there will be plenty of buyers and plenty of different options, according to Michael Seidler.
Types of Buyers
Last but not least, a key topic for agency owners was deal structures and types of buyers.
When talking about deal structures, we’re generally talking about three types of buyers:
- Global consultancies like Accenture and Deloitte acquire a business and try to integrate them. They are revenue-focused and make deals based on EBITDA or some form of profitability metric. Most of the time, they pay more upfront (anywhere from 70 to 90%), and the earn-out is anywhere from 2 to 4 years.
- The second type is the ad holding companies like Omnicom Group and Ogilvy. Their deals are done on the basis of EBITDA and they pay 5-6x EBITDA upfront with a 2 to 5 year earn-out.
- Lastly, we have private equity groups, which have some sort of exit in mind when buying an agency. They’ll invest in agencies that they can grow organically and that they can acquire and build. Ultimately they’re probably going to exit in 3 to 5 years. They do 51-85% of cash upfront and the remainder is paid in equity in the business that they’re investing in.
About Madison Alley
Madison Alley is led by former global CEOs and strategic Corporate Development executives. The company was founded nearly 20 years ago as the world’s first M&A and capital advisory firm exclusively serving the digital marketing, advertising, media and commerce industry.
Michael Seidler is the Founder & CEO of Madison Alley Global Ventures. He is also the Founder and Host of MadisonAlley.tv, which broadcasts live exclusive interviews with prominent leaders of Marketing, Media & Technology.
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In Productive’s new series of live webinars, Productive is hosting M&A experts and agency business leaders to cover agency valuation topics.