Unlocking Success: 14 steps to maximise your agency’s valuation
All too often when we speak with Agency owners about selling their businesses, it will be the first time they have considered its value.
However, understanding your agency's worth is like being a homeowner and knowing your home's value, is essential for strategic growth and preparedness for unforeseen circumstances.
The value of agencies typically ranges from 2x to 12x your profit, also called EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation).
On the whole the higher the profit, the higher your multiple, however determinants of your agency's value will also be your agency size, location, revenue vs net income, the talent you have, quality of your leadership, current demand for services you deliver, sectors you operate in and who your clients are, so there will always be tweaks to these as well as specific additional measures you can adopt to ensure you secure the highest possible price for your agency.
These 14 actionable steps are key practical steps and advice to protect and increase your agency’s valuation and sell price.
Step 1: Determine your agency's current valuation
Knowing your agency’s market valuation will help you understand what factors are having a positive or negative impact on your valuation for you to build on or improve. It will also help you understand how far away you are from reaching a valuation that may increase your future options.
It will also potentially save you time having wasted conversations with speculative buyers when your value is not in line with your expectations.
Step 2: Don’t sell to the one person that reached out to buy you
Sure it’s flattering when this happens to you, but in a recent example of this, the agency owner nearly sold their business at half the price it was worth because the founder was so blinded by the calibre of business approaching them. If one person is interested that means many will be and the more people looking at your business will ensure you reach the best value for your business.
When the valuation is at a level you are happy with, it’s ok to enter these conversations, but set expectations quickly with the people that are approaching you.
The majority of people start working with us once they are getting approached. Running a process means that you should market to a longer list of suitors, then shortlist to a group of people interested and then by having several people to evaluate this will help make the bid more competitive and hold the pricing up. More importantly, it will stop you from having seller’s remorse, selling to the only person who contacted you, and not knowing what other agencies out there could have a better culture fit and future for your agency and team.
Step 3: Turn profit into value
If you have excess working capital, typically more than 3 months of operating costs. How can you turn that £1, $1, €1 of cash into increased EBITDA (which would be valued at whatever your current multiple is)?
Two examples of this.
You may consider recruiting a consultant for £10k cash who can help you generate 100K growth at 20% profit. Your agency has just added 2-12 x 20K in value from just a £10K cash investment.
You may consider buying a smaller agency with your excess working capital, you may buy that small agency on a 3x multiple and once you have bought the business their EBIT is now worth 2-12 x (where you will be with the two businesses combined).
When you sell your business your excess working capital may only be valued at 1x EBITDA, so how can you invest your excess cash to create more EBITDA?
Step 4: Streamline and document efficiently
Before initiating the sale of your digital agency, focus on streamlining your operations. This involves reducing inefficiencies, organising your technological assets (such as CRM systems), and optimising your organisational structure. Importantly, if you haven't already, commence thorough documentation of your agency's processes. Discerning buyers looking to invest in your agency will seek a well-organised machine with established systems and processes throughout the company.
Consider getting a third party to review and benchmark your agency’s performance.
Step 5: Refine your new business strategy
One of the foremost challenges buyers often face when acquiring an agency is the transition of the business development process.
Consider this: What happens to the new business pipeline when the founder steps away? Even if the founder is willing to remain involved post-transaction, buyers prefer agencies with a clear and structured business development system in place.
Step 6: Secure robust contracts
Sure, it’s great if you have a fully retained business with long contracts, but there is a bit of a myth that agencies with retainers always command higher multiples than agencies who are project based. It certainly can help when raising private equity or selling to businesses that may have more project revenues and would like to create a better balance of billings. The key thing here is Agencies are equipped with contracts with clients, are listed on an approved supplier client roster or that agencies can demonstrate that their clients have had regular and consistent repeat revenue over a period of time even if they are projects or fee paying clients who agree fixed annual budgets for you to work with.
It's a wise move. If you can secure contracts with durations exceeding 12 months and minimal exit clauses, even better.
Step 7: Demonstrate your financial intelligence
To achieve the best price for your agency, you must present an accurate financial picture. Demonstrate your ability to accurately forecast and achieve your revenue numbers. Have accurate revenue recognition reporting. This may seem self-evident, but it's crucial to know precisely what is coming in and out each month. Remember all unnecessary costs removed could go straight to the bottom line and save you 2-12x that amount on your value.
Step 8: Develop a tailored marketing strategy
Whilst most M&A practices will have a network of buyers, it’s important that you raise the profile of your agency so potential buyers are aware of you.
Once you have a clear understanding of your agency's value, it's time to broadcast the opportunity to potential buyers. Given the sheer volume of businesses listed for sale daily, it's imperative to position your agency as a stand out in the marketplace.
Step 9: Create a killer IM pack
While some businesses may be purchased by first-time entrepreneurs, the majority are acquired by seasoned entrepreneurs and strategic buyers who evaluate numerous opportunities each week.
Sending a traditional Executive Summary to a potential buyer may not suffice. It's crucial to have a professionally designed Business Prospectus, essentially a visually appealing presentation summarising your company in PDF format.
Step 10: Embrace creative negotiation and terms
Once you have completed the vetting process with a buyer and believe they would be an excellent fit to own your digital agency, you're in an excellent position to commence negotiations regarding the Letter of Intent (LOI).
The LOI specifies the price the buyer is willing to pay and the terms under which the amount will be paid. In practice, buyers rarely (but it does happen) come forward with all-cash offers or offers that meet the full asking price. More often than not, your buyer will seek to negotiate the asking price and propose terms that mitigate their risk. This may include suggesting a percentage of owner financing, an earn-out arrangement, or a phased payment structure.
Step 12: BAU - Business as usual
Certainly, when going through the process of selling your agency, maintaining BAU (business as usual) is critical.
Preserving business as usual during a sale process is essential for sustaining revenue, retaining clients, and minimising risks, ultimately safeguarding the agency's value and successful transition.
Step 13: Seek legal expertise
Certainly, requesting a light touch legal due diligence review from your lawyers is a crucial step in the sale process to verify legal compliance, update agreements, mitigate risks, and ensure a smooth and legally sound transaction during the sale of your agency.
Step 14: Get a deal team
Choosing the right M&A advisory deal team can make all the difference when selling your agency.
Such a team can accurately value your agency, deliver an effective, targeted marketing approach and most importantly, tap into their firm’s network of existing relationships with potential buyers.
At bluhalo io, we choose to only work with agency shareholders who put their people first when considering a sale, merger or transaction of any description. In our experience, there is a clear correlation between agencies that sell that put their people and culture first and the success outcomes.
Considering the sale of your agency is a significant decision that demands a comprehensive approach. Our team can help you optimise the value before you go to market then support you with the go to market process.
If you’d like to know more, get in touch today.
You can also get an indicative valuation free of charge via our tool at https://bluhalo.net.
