On February 14th Productive co-hosted a live webinar with Cactus, a corporate M&A advisory and growth consultancy for agencies. Mark Sainthill, Managing Partner at Cactus, spoke with Marija K. Vlasic, Content Specialist at Productive about the key factors that drive the valuation of your agency.
Recently there has been a great interest in agency valuation topics in the digital industry. At some point in their careers, agency owners start wondering how much value they’ve created while building their agency. They might not have the slightest intent on selling the agency yet, but they’re still curious about its worth. So, where do you even start?
We’ve covered what key factors you should take into consideration when thinking about a strategic M&A exit in a previous webinar we co-hosted with Madison Alley, so be sure to check out the summary of that webinar as well.
To help you get started you can also check out the Agency Valuation Calculator by Productive, an end-to-end agency management tool that can help your agency thrive. The Agency Valuation Calculator will give you a value estimate in under 10 minutes, as well as areas you could focus on to increase your agency’s value.
Keep reading to see what Mark’s list of key factors that drive the valuation of agencies looks like.
1. Recurring Revenue vs Project Revenue
In the webinar, Mark states that recurring revenue is more appealing to buyers than project revenue because it gives them more certainty around what they’re buying. Ultimately, potential buyers are looking to acquire your client list, so they can bridge gaps in their own business. This also means that different buyers will value different things depending on what they’re looking for, so there won’t be a consistent valuation methodology between buyers.
The skill set of an agency’s leadership team is critical. Someone with a finance background might not be as valuable to buy as someone with a very technical or creative background. What also helps is not having a single founder but a management team that covers key functions and key departments. That protects your value and gives more certainty to the buyer and the team.
3. Internal Tools and Client Tools
Internal tools drive efficiency and productivity and client tools add value or act as a point of differentiation to your clients. With good tools and processes in place, you should be able to better understand what’s going on in your business. Having good tools and tracking of KPIs and data is really important. Without that, a buyer can’t figure out how to value the business. If it’s not well-run and there isn’t clear management information, they could walk away from the deal.
Whereas with other tech solutions and tools, you can deliver your client work faster and you can do more work for them as a result of having those tools implemented. It’s all about building a kind of automation and added value for the client so that you can charge more, but also deliver more in terms of results.
4. Brand Reputation
Brand reputation or how your employees perceive you is another key factor for your agency’s value. The critical thing is building a deal around the teams and the alignment of future growth and the shared vision. No matter how high your margins are—your brand image is just as critical for your agency’s valuation. Sites like Glassdoor can have a significant impact on buyers if they detect that employees aren’t satisfied. It’s worth investing in tools that help you run a business and keep everyone happy.
5. Market Reputation
Having a good reputation on the market, winning awards, offering content that speaks to your audience, attending and speaking at events—all this adds to your agency’s value. It’s an investment. Sure, you might not see any immediate return on it, but in the long run, you should reap both return and interest from your initial investment.
Picking and choosing the awards you want to go for is also crucial because you probably won’t have any time to do client work if you decide you want to go for all the awards out there. You should pick the awards you want to go for based on your stage of growth and what kind of work or campaigns you do.
6. Low Staff and Client Turnover
There’s a whole process behind attracting, developing and retaining staff that shouldn’t be taken lightly. Having an HR specialist could be critical to your efficiency, happiness and the success of your agency. Just like you would invest in any other part of your agency, you should be investing in the development and well-being of your staff as well.
A similar concept applies to your clients as well. You should monitor your clients’ happiness and how you could do a better job in providing what they need.
7. Investing in Marketing
When talking about marketing, a 3-5% investment of your annual revenue is a good benchmark. You should keep a kind of holistic approach to your marketing strategy, rather than just focusing on external spending. The first step is building a marketing plan where you’ll be able to break down the investment into various goals, be it brand awareness or performance. You should decide what the right investments are for your agency based on the particular stage of business you’re currently in.
Cactus has worked with over 3,500 agencies and businesses over the last 10 years. They focus on supporting agencies in the earlier stage of their life, 1-10 million dollars in revenue, that are digitally focused.
Mark Sainthill leads the M&A function and has mainly focused on helping agencies with growth and preparing them for sale. He leads a team of about 20 consultants at Cactus, they all have a different skill sets, but they all owned, ran or exited agencies.
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In our latest series of webinars, Productive is hosting experts from the M&A field as well as agency owners to cover the issues of agency valuation and the key factors that impact the value of your agency.