Online business is a mainstay of the world economy, and even more so since the COVID-19 pandemic. That means digital marketing agencies, which help online businesses succeed by getting them more leads and sales, are here to stay too and will become increasingly valuable.
According to IBISWorld, the digital advertising industry is a $19.8 billion market with 5,523 agencies now operating in the U.S. This represents a 13.7% average increase year-over-year from 2016 to 2021.
If you run a digital marketing agency, how do you assess its value? When you’re ready to make an exit, how do you sell it for the highest possible price?
To answer these questions, you’ll have to look at the unique factors that increase the worth of agencies, as well as understand the types of buyers who are attracted to this type of business.
It’s a large task for any agency owner to figure out on their own. Seeking the help of a qualified broker is a prudent choice when it comes to selling your digital marketing agency.
Assessing the Value of Digital Marketing Agencies
Digital marketing companies come in many shapes and sizes. The way an agency is run, what type of clients it takes on, and how it generates revenue are just three of the factors that will go into determining the value of your business.
To be more exact, you (or a broker) should consider the following when valuing your agency:
Some digital agencies specialize in content marketing via SEO blog articles and content syndication, whereas others focus on maintaining social media posts, email marketing, or paid digital advertising campaigns.
Other agencies operate on a “full stack” philosophy, striving to offer the whole range of digital marketing services available.
Niche or Specialty
Some digital marketing agencies work for any type of business in need of marketing services, or may focus on helping any kind of small local establishment or “Mom and Pop” store.
Others focus on niches and markets with high revenue potential and ongoing needs, such as healthcare professionals, attorneys, large consumer brands, and business-to-business (B2B) industrial firms.
According to Digital Agency Network, the eCommerce, health, fitness, and SaaS (software as a service) niches might be particularly advantageous for agencies to focus on in the post-COVID-19 era.
Rent, Utilities, and Operational Costs
A handful of digital agencies own their own buildings. Many rent office space, and are responsible for monthly rent and utilities.
Some agencies may conduct business out of a coworking space, which comes with fewer expenses and commitments. Many simply have all their staff work remotely, which eliminates a lot of overhead.
A popular model for digital agencies is to charge on a monthly, quarterly, or semi-annual retainer basis for their services. As long as they consistently acquire loyal retainer customers, agencies that charge in this way can ensure healthy revenue growth for a long time.
However, some agencies may only charge by the project, or offer bespoke services that are custom-tailored to each client, both of which are less scalable.
Some very small digital agencies run on a lean staffing structure, employing no more than a sole proprietor or a few partners. They might hire freelancers and virtual assistants on occasion to handle order fulfillment and administrative tasks.
Larger firms may employ full-time staff for all operations — including sales, fulfillment, customer service, and human resources — which increases overhead costs.
All of these factors can have an impact on a digital agency’s revenues, cash flow, and long-term viability. Discerning buyers will carefully think about these factors and what it will take to turn a profit, should they choose to acquire your agency.
For digital marketing businesses, a few standard valuation formulas are typically employed to arrive at a range of possible sale prices.
Valuation Strategies to Sell a Digital Marketing Agency
Two very common valuation formulas applied to digital marketing agencies are EBITDA and SDE. Using both, with a broker’s help, can yield a range of possible selling prices for your agency.
Using EBITDA as a Valuation Metric
EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” It is a formula that adds back common business expenses, and is multiplied by a certain number (namely, a “multiple”) to arrive at a projected sales price for the business.
Older digital marketing agencies with healthier operations, solid client rosters, and sustained profits may be able to sell at higher multiples.
Using SDE to Calculate Value
SDE stands for “Seller’s Discretionary Earnings,” and it follows the formula:
(Pre-tax, pre-interest earnings) + (vehicles, travel, and other transactions listed as business expenses) = SDE
SDE adds back expenses that can be of personal benefit to the business owner, and which may have been reasonably incurred in the process of running the business. Examples might be vacation costs, club dues, and home improvements. In assessing smaller agencies run by a sole proprietor, SDE may be more applicable and hold more weight than EBITDA.
Make sure you complete all the standard steps while preparing for the sale of your agency. Doing so can increase your agency’s profitability and result in a higher valuation.
Preparing to Sell Your Agency
As with selling any business, owners of digital marketing agencies looking to make an exit must carry out their due diligence. Working with a savvy broker who has experience in selling agencies will ensure you leave no legal, financial, or logistical stone unturned, and will ultimately help you present a compelling offer to buyers.
Common due diligence tasks when selling your agency include:
Working to raise your digital agency’s profits 6 to 12 months out from your planned exit is a helpful strategy for raising your sale price. This can include increasing efforts to win long-term contracts, upselling higher-value advertising campaigns and business growth strategies to established clients, hiring new contractors, and expanding your portfolio of services offered (though not at the expense of performance).
Creating a P&L Statement and Gathering Other Documents
A profit and loss (P&L) statement is one of the primary instruments used by buyers to forecast an agency’s viability. You’ll need to document cash flow on a monthly basis and ensure complete accuracy.
Serious investors will also want to see other financial documentation, such as taxes, statements of equity, and balance sheets, to ensure they’re buying a healthy business. Bookkeeping software and the assistance of accounting professionals may be necessary, in addition to a broker’s advice.
Preparing for Transfer of Assets
Assets, in this case, refer both to physical items owned by your business, such as computers and furniture, as well as intangibles such as long-term client contracts, software license agreements, your website, and your social media profiles.
Your overall brand, if you have a definite presence online that’s distinguishable from that of other agencies and regularly draws in new traffic, can be considered a valuable asset as well.
You’ll need to gather together and document all assets in order to gauge their value and prepare them for efficient transferral to the next owner.
Detailing your company’s processes — including how day-to-day operations are carried out, how you generate leads and make sales, how you delegate tasks to staff members and contractors, and how much you as the owner are personally involved in daily business — gives buyers some insight into the amount of “work” they’re buying into.
After getting your business in shape to present to buyers, the next best step is to consult with an experienced broker who can help you sell for the highest price possible.
Why You Should Work With a Broker
The steps involved in preparing to sell a digital marketing agency, and actually finding a buyer who will take it on for a fair price, can be difficult and even overwhelming. It makes all the difference to have an experienced broker on your side when going through the process.
Raincatcher is here to help. By working with a Raincatcher broker, you’ll be working hand-in-hand with a seasoned professional who understands the M&A market for digital marketing agencies and has access to serious buyers, including larger digital firms looking to make a smart investment and add value to their existing operations.
Contact Raincatcher today to get a free valuation of your digital agency.
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