Multiples and Valuations for Agencies: How much is yours worth?

Multiples and Valuations for Agencies: How much yours is worth?

What are we talking about in this article?

When it comes to your marketing agency, it’s absolutely imperative you get a business valuation carried out so you know the current market value of your agency. Luckily, our team is on hand today to help you find out more about how to value your agency worth, which in turn can offer a number of benefits. So, without further ado, let’s take a look at how to work out your agency’s value, and why it is an important goal for business owners and managers to be aware of in the first place.

Why should I have to get my agency valuated?

First of all, we need to consider why knowing your agency’s value is actually a beneficial thing to achieve. Indeed, across all facets of industry, knowing your company’s value is crucial – but why is this?

There are a few different reasons why knowing your brand’s net worth is important. So, let’s take a look at the importance of getting a value for your business, and how this can help you improve your overall business management and the like.

Know Your Business Value for Planning Purposes

One of the first reasons why you should know the net worth and value of your firm is for business planning purposes. Indeed, while a glance at the balance sheet and net profit can also help with this, your overall agency worth can say a lot about how you should be managing your brand. Indeed, your agency’s value is based on the business’ potential and profitability, and so, knowing the asking price can give you an outline of how you should be planning. Your agency’s value can serve as a benchmark for your brand’s performance, helping you to determine whether your recent actions have had a beneficial or negative impact on your business’ growth rate and net worth. In turn, this can help you to make viable and well-reasoned decisions about your brand’s management and the success of your bottom line

Indeed, being aware of your business value is something that many business owners unfortunately overlook. However, being aware of this can offer a huge variety of benefits for your business management, which is absolutely worth considering. Indeed, not only can knowing your company’s value help highlight whether your previous actions were effective for improving the brand’s bottom line, but it can also offer you some insight into whether risk factors are worth taking or not.

Internal Perpetuation Planning

Has your brand been considering internal perpetuation planning (when the business is transferred to a new owner, but retention stays with the company’s employees or the business owner‘s family) then regular valuations can prove important. Indeed, monitoring the value of your business can help you to ensure that things are going as predicted and the firm’s growth rate is on track with what you had predicted, which in turn can help you determine suitable prices for stocks that work both for your firm and potential buyers

Finding the Right Asking Price

Irrelevant of whether you’re buying or selling a company, having the correct asking price is absolutely crucial. Indeed, for a business owner selling a company, ensuring that the right market value is paid is imperative. After all, you wouldn’t want to sell your business for a low asking price, so it’s crucial you know your agency’s value first! Fortunately, getting a reliable agency valuation is one of the best ways to make sure you’re getting a fair price for your business sale. 

From the perspective of the business owner, this will also help ensure that only those parties who are genuinely interested in your business will purchase it. This is as opposed to someone who’s only out to make a quick buck from selling on your business at a higher price. So, if your agency is your passion and you want to be sure it sells to someone who will do right by it, then getting a professional to assess the business’ market value could be a good option to pursue.

In addition, as someone looking to become a new owner of an existing marketing agency, it’s obviously worth ensuring that you are paying a fair price. Indeed, many business owners can overvalue their firm, and this could result in you having to overpay for your new purchase. Don’t make this mistake – make sure you pay a fair price for your new agency purchase by getting a professional agency valuation first.

How is Agency Value Calculated?

So, how can you work out the agency’s value for your business? Understanding your business value doesn’t need to be difficult, and this can help you understand your business’ success or conclude a fair asking price. It should be noted at this point, though, that most people will hire a professional with valuation-specific know-how to value their brand. Indeed, some business owners assume that the value of a firm should equate to approximately twice the total value of the revenue stream – but this is often too simplified. Indeed, true agency valuations should consider a wide variety of factors.

Here, it’s important to consider that your team’s value is worked out by professional independent valuation experts. As such, when you get a professional valuation for your firm, you can be confident that you’re getting top-quality, reliable services that offer an accurate insight into your business’ value and potential purchase price.

So, how do professional agency valuation officers come up with a price for your marketing agency? Well, when working out a reasonable price for your business, your independent valuation provider will consider a few different aspects of your business:

  • Business metrics and statistics
  • The length of time for which your business has been operating
  • Past clients and their value
  • EBITDA (earnings before interest, taxes, depreciation, and amortization)
  • Net profits and income for the brand
  • Market value
  • Value of assets and asset depreciation  

By considering all of these aspects, a professional valuation officer will be able to come up with a suitable determination of agency worth, which can be beneficial for both the buyer and the business owners. In addition to this, it’s worth remembering that external factors can also impact on your business’ value, such as the current economic climate.

What are Valuation Multiples?

At this point, we need to consider Valuation Multiples. But what are these? Well, let’s start by defining what valuation multiples are and how they can benefit your business valuations

These valuation multiples are used during the estimation of business value, and usually consider the sales, earnings, and assets for the business. They are determined based on a ratio of business metrics, in comparison to similar competitor companies. The data needed to create valuation multiples include the price-to-earnings ratio (PE) and the earnings per share value (EPS). 

Calculating valuation multiples can be a little bit of a faff, but fortunately, your professional business valuation team will be able to help with this. Alternatively, if you have the mathematical know-how to complete the relevant equations, you can determine your own valuation multiples. Whichever you choose, this can help determine a suitable business valuation.

Determining Your Digital Agency Valuation: What’s the Math?

So, how can you determine the value for your digital marketing agency? Well, with some patience and a little math know-how, you’ll be on the right track to working out a suitable net worth for your agency. 

Calculating EBITDA Value

Calculating the EBITDA Multiple is a good way to get started. As we’ve already mentioned, EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is effectively a measure of your business’ overall return on investment; as such, it’s clear to see how this calculation can offer good value for business owners and potential buyers.

The different aspects of the EBITDA calculation are important aspects of your agency value calculations, and you can use the resulting calculation to determine your firm’s overall success and competitiveness. Many business acquirers will often want to know about these calculations, as well as other basic information such as your brand’s cash flow, net profits, and the like.

The EBITDA multiple margin can be calculated simply by dividing the EBITDA value by the total revenue for your firm. Once you have done so, you can then look at how your agency’s worth compares to the value of other rival firms. 

Online Valuation Tools

In addition to considering the EBITDA for your firm, you can also use a range of online available valuation tools to accurately determine your company’s value. Growing numbers of business owners are using these such online tools to calculate a suitable asking price of agency value – and, notably, they are often free to use at a basic level. These online tools usually consider the type of business, the total revenue for the company, and the annual net profits and owner’s salary to determine a relatively accurate agency worth. Some examples of online valuation tools include Bizex, ExitAdvisor, ValueMyBusiness, and CalcXML.

Get Help From The IRS

A third option available to your business is to get support from an internal revenue service, often abbreviated to IRS. These can help provide an accurate value for your business or agency.

How Can I Increase the Value of My Agency?

At this point, you’re probably wondering – how can you increase your company’s value? Fortunately, there are multiple methods by which you can improve your agency worth, and we’ve summarised these as follows.

First of all, you should consider the age of your business. This is especially true for new, small businesses, which are often younger in age than larger rival firms. When you consider the size and age of your business, this will have a significant impact on your company’s value. So, if you’d like to get a slightly higher price for your agency, then one of the easiest ways to increase agency worth is simply to wait until the agency is a little older and innately more valuable.

Next, you should look at the profit margins for your agency. Indeed, one of the most notable ways to rapidly increase business value is to focus on your net profits. For the best results, most marketing agencies typically aim for minimum profit margins of 40% on services; if you can increase your net profit to higher than this, then your company value will continue to increase concurrently. 

Steady growth is crucial for increasing your agency’s value, too. Having a solid long-term plan for your marketing agency is an important aspect of improving overall net worth. This is, once again, especially important for medium and small businesses which need to ensure that the bottom line is continually improving year-on-year. Contrastingly, generally speaking, large companies typically have a more reliable business plan in place already. And so, continuing to push for growth may not be quite so influential for improving business value compared to increasing the brand’s net worth.

Additionally, make sure your business reputation is sound and healthy. Indeed, buyers looking to invest in your business will look for agencies with a good reputation, particularly those with specializations in a particular niche (as these typically have a better client retention rate and rating). So, actively focusing on improving your brand’s reputation and increasing outreach through social media and the like, you will achieve superior results for your business sale.

Finally, keeping track of your clients’ metrics is also an important aspect of improving your brand’s value. Indeed, even small slips in your clients’ metrics can have an impact on the success of the marketing services you are offering. In turn, this can affect the perceived viability and value of your marketing services. So, keeping your clients’ crucial KPIs stable or improving is always vital. These include profit margins and the like. 

Luckily, all of these factors are easy to implement. Indeed, many brands could benefit from improving their agency’s value through these simple steps, helping you get the best bottom line and asking price for your brand.

 

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