Do You Know How Much Your Agency Is Worth?
This article shows you the methods to calculate your agency's valuation before you decide anything about your agency's future path. The post Do You Know How Much Your Agency Is Worth? appeared first on Digital Agency Network.
If you’re an agency owner or founder and you don’t know how much your agency is worth—you should find out. Why? There are multiple reasons.
In a nutshell: your business (just like your house or personal vehicle,) has value on the market. Thanks to the Internet, your agency most likely competes on the global scene as well, which means that your business is worth something on the international market, too. How should you grow? Where should you invest? Should you specialize or merge with another agency? Is there an opportunity to sell your business to a bigger group and go global? Getting an estimated valuation of your business can pave the path for your agency’s future.
The Agency Valuation Calculator
The first step to answering all these questions is finding out the value of your agency. To do that, you can use the Agency Valuation Calculator by Productive.
Productive is an end-to-end agency management tool that has launched the Agency Valuation Calculator so agencies can get an estimate of their value on the market. This new tool can help you understand which parameters can positively influence your valuations in the future.
But before using the Agency Valuation Calculator, scroll on to learn some more about the basics of agency valuations.
Agency Valuation Methods
Agencies are primarily valued using multiples. To put it simply, the more money your agency earns, the higher your multiplier gets—and so does your overall valuation.
2. Earnings and Revenue
One of the first figures your agency will be asked for during a valuation is your revenue, i.e. the entire amount of billed services you’ve had in the previous year, subtracted by any expenses you had to pay on behalf of your clients.
When it comes to revenue, your agency will be seen as less financially risky (and its value will increase) the more revenue it earns.
Net income, EBITDA, or “Earnings” are terms for the net amount your agency makes.
To get a valuation of your agency, valuation tools or consulting firms will either use a multiple of your agency’s annual earnings or a multiple of your annual revenue.
3. Revenue Categories
The multiple that will apply to your revenue depends on the revenue category your agency falls into, and this will be one of the main factors that influence your total valuation.
Some categories of agency revenue:Up to USD $1 million/year From USD $1-3 million/year From $3-5 million/year Over $5 million/year
Accordingly, here’s an approximation of your agency’s potential valuation multiple per each revenue range:Under USD $1 million/year: 0.8-1.4 x Revenue Under USD $1 million/year: 2-4 x Earnings USD $1 – $2 million/year: 1-2 x Revenue USD $1 – $2 million/year: 4-6 x Earnings USD $2 – $5 million/year: 1.5-3 x Revenue USD $2 – $5 million/year: 6-12 x Earnings Over USD $5 million/year: 2-4 x Revenue Over USD $5 million/year: 8-15 x Earnings
If you run your agency like you’re intending to sell it, you’re focused on generating more value.James Kane, CEO & Founder at Two Bulls (Part of DEPT)
More Factors That Will Influence Your Agency Valuation
Revenue, earnings, and multiples are some of the first terms you’ll hear when getting familiar with agency valuations, but there are more factors that influence your agency’s value on the market.
Below, we go through some of the main ones.
1. History of Earnings
When getting an agency valuation done, your earnings and revenue are important, but your history of earnings and revenue are also key—especially in the past 12 months, 3 years, and 5 years.
Example: If your agency’s growth has been over 20-30% in revenue in the past 3-4 years, your past 12 months will be critical in determining your agency’s value. But it doesn’t work the same the other way around. So, if your agency has been more or less steady in terms of revenue (or has even been declining in the past 3-5 years), an average of the past three years will usually be factored in.
2. Type of Revenue
Another difference will be your type of revenue, because not only earning more revenue is all that matters. It’s no surprise that you tend to rely on recurring revenue to pay for your agency’s overhead expenses or plan investments.
Retainer work or recurring revenue contracts will be important during the process of selling your agency. Your agency valuation can be higher if you have more retainer-based vs. project-based work. Similarly, yearly contracts with clients will generate higher overall valuations than monthly contracts when looking at revenue.
3. Management Structure and Business Robustness
Buyers usually want to know how the agency they’re considering buying will operate once it’s sold. In other words, they’re interested in how robust the business structure is. Having a clearly defined transition plan as well as already documented workflows and processes is highly recommended and will positively influence an agency’s valuation.
4. Competitive Advantage
Another factor that will be looked at is your competitive advantage. Does your agency have a niche or are you focused on serving multiple industries? Similarly, do you specialize in one type of core service or do you offer diverse services?
5. Brand Image
Last, but not least comes the brand image. If your agency has a great reputation in the local or international market, that most likely means you easily attract and retain top talent and clients and probably shortlist your agency for new projects. Brand image is hard to quantify, but it can be measured to some extent. If you’d like to get some PR KPIs and haven’t worked with a PR or media agency before, that’s a good place to start. A great brand image can lead to a better agency valuation.
Know Your Agency’s Value
If the industry your agency is catering to is expecting exponential growth, you’re interested in M&A opportunities, or you’re considering a new challenge in your career—it’s time to get a valuation of your business. Knowing how much your agency is worth can serve as a guide for your agency’s future.
To find out more about this topic, check out our article on which factors can positively influence your valuation.