Knowing the true value of your digital marketing agency is key. This is true when you’re thinking about selling, getting investors, or planning for the future. The size, scope, and success of your agency, your clients, your reputation, and the ROI from past projects all matter a lot.
To figure out your agency’s worth, you can use three main methods. These are asset-based valuation, income-based valuation, and market-based valuation.
Understanding your digital marketing agency’s valuation and the revenue multiples gives you important info. It shows your agency’s financial health, growth potential, and where you stand in the industry. This info helps you make smart decisions. Whether it’s getting investors, looking at mergers, or planning for the future, it’s crucial.
About the Digital Agency Industry
The U.S. digital marketing agency industry is thriving, with revenue projected to reach $44.75 billion in 2024, nearly doubling since 2019 due to rapid digitalization. This growth underscores businesses’ increasing reliance on digital channels to engage customers. The sector employs nearly 300,000 people, contributing significantly to the economy, with revenue per employee averaging $220,000—a rise of 11% since 2019. Notably, major hubs like New York City and San Francisco dominate, but emerging markets such as Austin and Portland are gaining traction. Despite consolidation by top agencies, opportunities exist for niche and tech-driven firms to thrive in this competitive landscape.
Understanding the Importance of Valuation
It’s vital if you’re thinking about selling your agency now or later. It also helps when you want to use your business as collateral for a loan or to bring in a new partner.
Reasons for Valuing Your Agency
It helps you make better decisions about growth, partnerships, and exit strategies.
- Prepare for a future sale or acquisition
- Secure financing or loans using your agency as collateral
- Determine equity distribution or ownership transition plans
- Assess the health and performance of your agency
- Identify areas for improvement to increase your agency’s value
Knowing your agency’s value is a smart move for making strategic decisions. It helps you plan for growth, get financing, or look into selling your business. Understanding the importance of agency valuation helps you make your business stronger.
Calculating Your Agency’s EBITDA
Valuing a digital marketing agency starts with figuring out its EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a key profit metric that helps level the playing field by ignoring tax and depreciation differences across regions.
To find your agency’s EBITDA, start with your total revenue. Then, subtract all your expenses, leaving out interest, taxes, depreciation, and amortization. This “profit” is key for figuring out your agency’s value.
The formula for EBITDA is simple:
EBITDA = Total Revenue – Total Expenses (excluding interest, taxes, depreciation, and amortization)
Knowing how to calculate your agency’s EBITDA gives you deep insights into its profitability. This metric is vital for valuing your digital marketing agency. Using ebitda to value agency operations is also crucial.
Applying the Multiple
After figuring out your digital marketing agency’s EBITDA, you need to multiply it to find the total value. The usual range for marketing agency multiples is 3x to 5x EBITDA. However, this can change based on various factors that affect the multiple.
Factors Influencing the Multiple
Important things that affect your digital marketing agency’s valuation include:
- Dependence on the owner: Agencies with a strong, independent team get higher multiples than those needing the owner’s direct help.
- Documentation of standard operating procedures: Having clear processes shows the agency can run smoothly without the owner.
- Stability and predictability of revenue: Agencies with many clients and steady income are seen as safer bets.
- Client concentration: Agencies relying too much on a few big clients are riskier than those with a varied client list.
Agencies with lower risks and strong business basics usually get higher multiples. For instance, agencies with steady growth, few customer losses, and long customer relationships can get multiples of 8-12x EBITDA.
Traditional marketing agencies often have higher EBITDA multiples, especially in the $5-10 million EBITDA range. This is because they are seen as more stable and have a longer history.
Calculating your agency’s EBITDA and applying the appropriate multiple provides a foundational approach to valuation. This process often involves methods that consider revenue diversity, operational efficiency, and market dynamics, as well as broader valuation strategies used in consulting sectors.
How to Value a Digital Marketing Agency?
Valuing a digital marketing agency is more than just looking at the EBITDA and applying a multiple. Buyers look at many factors to figure out the agency’s true worth. They want to know what makes the agency special and valuable.
To figure out how to value a digital marketing agency, follow these steps:
- Look at the agency’s income sources and who its clients are. Buyers check if your clients are diverse and if your income is steady. They also look at how often you make money.
- Check out the agency’s team and how things run. A strong, skilled team and efficient processes can really boost the agency’s value.
- See how unique and secure your agency is in the market. Buyers want to know what makes you stand out, your special tech or methods, and how hard it would be for others to take your place.
- Think about what could go wrong. Too many clients from one source, depending too much on certain people, or focusing on just one service can make buyers worry about the risk.
- Look at what the agency owns, like gear, contracts, and lists of clients. These things add to the agency’s overall value.
By knowing what makes your agency valuable, owners can make their business more attractive for sale. This way, they can get a better price when it’s time to sell or move on.
Typical Multiples for Marketing Agencies
Valuing a digital marketing agency involves looking at typical industry multiples. Most agencies sell for EBITDA multiples between 3x and 5x. Those with over $1 million in EBITDA usually get 4x to 6x.
The valuation range is wide, though. Some agencies sell for just 2x EBITDA, while others get 15x to 20x. This depends on things like brand strength and how well it fits with the buyer.
Higher multiples often mean more non-cash deals. This includes equity in the new company or earn-out deals that keep founders involved after the sale.
What affects agency valuation multiples includes:
- Revenue growth and consistency
- Diverse client base and strong client ties
- Innovative services and digital skills
- Skilled management and efficient operations
- Ability to grow and strategic partnerships
Agencies with a history of profit, a strong market spot, and growth potential get higher valuations. This is true for buyers like private equity and strategic partners. Knowing these multiples helps you understand your agency’s worth and plan for selling or investing.
Selling Your Marketing Agency
When you’re ready to sell your digital marketing agency, knowing who might buy it and how to approach them is key. You should think about four main buyer types: brands wanting to hire your team, other agencies or companies looking to grow, private equity or investment funds, and individual investors.
The way you sell and the value you get will change based on who buys your agency. Making connections through your network can help you find brand or agency buyers. Brokers can connect you with private equity and individual investors, making the competition fierce. No matter the buyer, making your agency as profitable as possible, having good documentation, and reducing risks are essential to get the best valuation.
Potential Buyers and Strategies
To sell your marketing agency well, knowing the different buyers and strategies is crucial:
- Brands Seeking to “Acqui-Hire”: These buyers want your skilled team to work for them directly. Show off your agency’s great culture, deep knowledge, and success in getting results.
- Other Agencies or Holding Companies: These buyers aim to grow by adding your agency’s services and clients. Talk about how your agency can help them grow and reach new clients.
- Private Equity or Investment Funds: These buyers look for businesses that can grow and make more money. Show your agency’s strong finances, efficient operations, and strategies for selling a marketing agency.
- Individual Investors: These buyers might want a ready-to-go digital marketing business. Highlight your agency’s well-run systems, processes, and how to sell a digital marketing agency.
No matter who buys your agency, making it as profitable as possible, having solid documentation, and reducing risks is key to getting a top valuation. Working with brokers or advisors can also help you sell by connecting you with the right buyers.
Conclusion
Figuring out what your digital marketing agency is worth is key. You might be thinking about selling, getting financing, or making big business decisions. Knowing what affects your agency’s value, like EBITDA, risk, and strategic benefits, helps you boost its worth. The valuation process looks at your agency’s money matters, how it runs, who it works with, and its growth chances.
To get the best value for your agency, focus on building a strong, varied, and well-documented business. This means having a solid financial performance, offering specialized services, working with a diverse group of clients, and showing you can make your clients’ money grow.
In the end, it’s clear: understanding how to value a digital marketing agency helps you make smart choices. These choices lead to long-term success and make your business more valuable and ready for growth.
If you’re looking to value your digital marketing agency accurately, contact our team at Arrowfish Consulting. We provide tailored insights to help you plan for growth, secure investments, or prepare for a sale. Reach out today for a free consultation.
Jeremiah Grant is the Managing Partner of Arrowfish Consulting. In addition to acting as a primary liaison for many of the firm’s engagements, He primarily focuses on business valuation and economic damages expert witness assignments, in addition to forensic accounting and insurance claims analysis.
