Whether you’re looking to sell your digital marketing agency in the near future or you simply want to know how much your business is worth, understanding digital marketing agency valuation is essential.
This process is largely the same as it is for any other type of business, but there are some small details that you’ll need to be aware of when evaluating a digital marketing agency specifically.
Today, we’re going to go over what valuing a business is, a step-by-step rundown of how to do it, and several considerations that you’ll need to make when you go to do it.
Let’s get started.
What is a Business Valuation?
Most business professionals know about this already, but if you’re a relatively new business owner, you might be aware of the basics, but the full concept might elude you. That’s okay.
A business valuation is the process taken to determine how much a business is worth.
Unlike a normal product, you can’t just add up the material costs, add a percentage to cover your time and overhead, and set the price. There’s a long list of factors that have to be considered while determining a dollar amount, and different parts of the business might need to be valued independently depending on how you plan to sell the business.
There are multiple methods that can be used, but we’re primarily going to focus on the basic method of considering all possible financial figures and determining the total asking price.
Step-By-Step Digital Marketing Agency Valuation Guide
Now that you know the basics of what a valuation is and the ultimate goal of the valuation, we’ll get into the steps you need to take to do one on your own.
1: Profits and EBITDA
This initial step is fundamental in the digital marketing agency valuation process, creating a base from which you can develop a more comprehensive evaluation. It’s not the sole factor, but it’s a vital component in determining your agency’s market value.
To start, you need to take a look through your earnings history data and add up all your profits for the year. When you actually go to sell your business, you’ll need far more than a year’s worth of data, but we’re going for a solid, accurate number that you can get on your own.
This is fairly easy, but next, you need to find your EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Your EBITDA is essentially just your total earnings after you pay the “bills”. So, take your total earnings and then remove your lease payments, taxes, and other serious recurring fees.
SDE is another good factor to look at. This consists of your discretionary income. So, everything you report to Uncle Sam quarterly would fall into this category.
This step gives you a couple of things.
First, it’s the foundation for the rest of the process, and it gives you a number to start with. It’s the core of your company’s worth, as it’s the actual results that you’re getting from operating.
Then, there’s the fact t that it’s what’s enticing buyers.
A buyer doesn’t want to spend millions of dollars buying a business that doesn’t make anything unless there’s a specific reason for the purchase. Your EBITDA is going to be one of the most attractive selling points if it’s positive and proves that the investor can make a lot of money after the purchase is finalized.
2: How Long You’ve Been in Business
An investor typically won’t want a business that doesn’t have a track record, even if it is currently making tons of money. It leaves too much room for financial flukes to make a business seem more profitable than it truly is, and by the time they take it off your hands, the business can be falling apart.
Take the fidget spinner craze, for example. It lasted about a year. What if a business started and focused itself entirely around fidget spinners, had an amazing first 6 months of business, and then the owner wanted to sell to enjoy a very early retirement?
If a buyer had invested in a business like that, and the sale finalized 9 months into the business’s operation, the new owner might have gotten a few months of great profits before the entire thing fell apart overnight.
Usually, buyers want to invest in businesses that have been operating for at least 3 years, but the longer your business has been in operation, the more you can ask. This is essentially social proof that your business can make it.
After all, most businesses fail within three years, and if you have been in operation for 10, you’re clearly doing something right and have the support of your customers.
If you’re not at the three-year mark, don’t get too discouraged. Selling a business should be something you spend years planning for. So, you’ll have the longevity you’re looking for by the time you actually go to sell.
On top of that, this gives you the opportunity to be aware of the necessity for organized record keeping, and you can avoid one of the biggest problems businesses face when selling; not having all the data needed to present to buyers.
3: Your Reputation
A digital marketing agency is almost entirely based on reputation. You’re not providing a physical product. You’re helping business owners market their businesses. While money is a good indicator that you’re doing well and have a client base, being able to prove your company has a great reputation is key.
A list of your former clients and the testimonials they’ve provided add a lot to the value of your business. Since you’re operating a digital marketing agency, a buyer will be able to correlate that long list of high-quality, satisfied clients to future potential profits.
As a middle-market company, you might have a client list mostly consisting of smaller companies. That’s perfectly fine. You don’t need to have Amazon on your list to prove you’re worth investing in. You just need satisfied customers, and a few that are recognizable definitely helps.
4: Don’t Forget Current Projects
With traditional businesses, value is often linked to completed sales, with future earnings projections playing a supporting role. However, digital marketing agency valuation operates on a different paradigm.
The client projects you’re currently on are just as important as those you’ve completed and moved on from.
This is because your work tends to be long-term and continuous. If you just started working with a client, you might be working with them for the next 3 years to continuously help them with their marketing needs.
So, if you sell your business, your buyer can benefit from the existing contracts you have.
To determine the value of these, you need to approach it just like you did your profits.
5: Long-Term Health
This isn’t something you can tie a number to, but it is something that a buyer will look at, and it will greatly impact the value of your business.
You need to look at the long-term health of your business and the possibilities that can affect its future. Namely, you need to look at how your revenue is coming in.
Unlike a retail business, you probably have a handful of clients, not hundreds or thousands of customers coming in every day. So, each client you have and their potential impact on your company’s future.
Think of it this way. If you currently have 10 clients, but the vast majority of your income comes from one or two, what happens to your business if those businesses shut down? You would lose the bulk of your income immediately. That’s just one of the harsh realities of being a B2B business.
If that sounds like you, don’t get discouraged. Figure it into your possible price deductions on your business, but since you’re likely far away from making a sale, you have time to make some smart moves. Namely, try to diversify your income flow.
Focus on picking up a couple more clients, marketing your business more heavily toward continuous contracts, and more.
You don’t need to drop your big clients, but you do need to get enough coming in from other sources so that your business doesn’t fail because their business fails. Consulting with M&A advisors can also provide valuable insights in this regard.
If you pull that off, your clients will add to your company’s health, and you’ll be able to ask for a premium for your business.
6: Factor in Your Scarcity
In business, you generally think that you want to have as many clients as possible to grow and make more profit. However, it’s often a far better idea to be a bit more niche. If your service is unique enough to only appeal to certain customers, and your service is in demand, that adds value.
That’s because your business is one of very few options for a target market that has to be satisfied. There aren’t 400 different options like customers get with a broader business. Thus, customers have to come to you.
This means that you have a more stable place in the industry. There’s high demand and very few options to satisfy it, and your business will likely do well even after the sale.
You can’t rework your entire business model, but simply deciding to be pickier with who you target as a client is a good way to start setting yourself apart from the rest of the digital marketing industry.
7: The Economy
The economy affects the sale of literally anything. If money is scarcer, and everyone is trying to watch what they spend, even wealthy investors are going to be a little hesitant to buy an entire business.
It’s extremely costly during a time when money counts, and the investment might not even pay off. Not to mention, the economy will likely affect your financial figures, as well.
The drop in profits throughout an economic downturn can make your business look less appealing on top of buyers not having the financial freedom to make such large purchases.
You’ll need to take this into account when valuing your agency, but don’t get too attached to any differences it makes.
Again, most businesses take a while to sell because the owner needs to take time to make sure everything is done right. The economy can be dramatically different by the time you actually try to sell your business.
It’s the economy at the time you go to sell it that matters. Not what it was five years prior when you last did a business valuation.
Tips to Boost Your Digital Marketing Agency’s Value
You might have noticed that we said most business owners spend a few years preparing to sell their business. That’s a great opportunity if you finish your valuation and decide it’s not quite as impressive as you’d like. You have time to fix it.
Here are some tips to do that.
- Raise Profits and Reduce Debts: This is crucial since your earnings are the foundation of your company’s value.
- Diversify Income: As we said earlier, an agency is healthier in the long run if its earnings come from a multitude of sources rather than one or two.
- Stay in Business Longer: The longer your business stays open, the more valuable it is. You might just need to stick with it for a few more years.
- Focus on Sustainable Growth: As your business grows, it gains value. Focus on growing it, but don’t grow it to the point that it starts failing.
Get Business Consultations from Final Ascent
When you’re doing a digital marketing agency valuation, you’re probably looking to sell the business in the near future. At least, it’s part of your short-term game plan.
Doing that is extremely difficult, and since it’s likely the largest earning event you’ll experience, you want to make sure you do it right.
Contact us to get a start-to-finish consultation to ensure you’re making the right moves to get the most out of your business.