How to Grow The Value of Your Marketing Agency Without Raising Revenue
Top-line growth is only one end of the P&L statement. Agency owners that are not just sales-minded but understand operations just as well, know that their margins can be improved elsewhere too. Although an early-stage agency will need revenue to demonstrate traction and proof of concept, a company with enough track record – and one that is looking to sell – needs to do better than that. EBITDA will take center stage for a buyer looking under your financial hood – and there is plenty of ways to raise the roof on your EBITDA without having to drive sales. Especially in the current market environment that is still demonstrably shaken up by the ongoing pandemic, structural readjustments and remote work are redefining operations. If you are looking to drive up your bottom line as you line up a sale, we recommend you take a closer look at our five hacks to grow the value of your marketing agency without the need to raise revenue.
Five Hacks To Grow The Value of Your Marketing Agency
The Roof Overhead is an Overhead
Office leases, in particular, are dead weight in the current market environment. Long leases are not integral to the business of most marketing agencies – something that is especially obvious since 2020 and the proof of remote work as a key component of agencies in the digital age. As tools to work remotely become smarter and employees become more accustomed to them, it is worth reconsidering if that office lease or that prestigious address on the business card are worth their costs. No less, co-working spaces, insofar as they are open for business, offer a smart and flexible alternative. Why not survey your team to see how many days a week they would be happy working remotely and scale down accordingly?
Automate Where You Can
Automation and streamlining are essential ingredients to your margin improvement. Revisit your processes, workflows and operational architecture to check on where there is still room for automation improvements. Tasks that should raise the automation flag include tasks that involve compliance and audit trails, that require multiple people to execute or that are especially time-sensitive.
From invoice generation to time tracking and from automated workflows to streamlined communication through project management tools with automated notifications, the world of process automation is yours for the taking. Things to keep in mind are that no tool is a cure-all and any tool is only as good as its implementation. Set goals, assign accountability and measure your results over time. Your reduced likelihood of error and improved productivity will work its way into your margins in the medium to long term.
Improve Your Brand & Increase Prices
When was the last time your brand got a shake-up? Are your website and your logo still a little too close to when you first launched? It shouldn’t take a Fortune 500 company in the public eye to make rebranding relevant. Give your look and feel a lift that will strengthen your positioning as you gear up a sale – and that can help you justify giving your prices a lift along the way.
Invest In Your Team
Most importantly, take a good look at your team. They will be the ones carrying your agency not only over – but past – the finish line as you execute on a potential exit. Who are the top-tier candidates that will shoulder your agency and drive the marketing agency at this critical juncture? Invest in these individuals and shed any excess weight as you close in on the valuation home stretch and grow the value of your marketing agency.
Future-Proofing In Times of Crisis
It may be a cliché, but that doesn’t mean it’s not worth taking note: there is opportunity in crisis. Even if you are not looking to make a sale just yet, these are things you can do to improve your operational resilience. Take advantage of the current reshuffle. Let it serve as an eye-opener as to how to cut costs and restructure your agency to help bring the value of your marketing agency to where it needs to be so you can turn it into a listing no buyer would overlook.
Think Like A Buyer When Evaluating Your Digital Marketing Agency
Did someone say, “seller’s market”? Yes, indeed, we did. Now, does that mean your agency is automatically at the top of every potential buyer’s list? Unfortunately, not. Or, “thankfully not”, is what we ought to be saying since making the right kind of match happen is where long-term success rests. In other words, long-term success is about making sure that you don’t even begin the buyer-seller dance with buyers who aren’t suited for your offering. So, how can you make sure that there is an alignment of offer and potential buyer, how can you improve your digital agencies valuation, and finally, does your agency offer what a buyer wants?
Think Like A Buyer When Evaluating Your Digital Marketing Agency
We’ve put together a list of key items that will entice just about any agency buyer, and that an agency owner can consider as transactional glue on their way to seal the deal.
Retainers Over Projects: Retainers spell income visibility. Projects, while potentially lucrative in the short term, also spell potential volatility. To keep them coming in, the required sales effort and associated costs add to the challenge of making a dependency on projects look like an attractive prospect. Of course, a mix of both is not in and of itself unattractive, but keep the balance solidly tilted on the retainer side. Pay special attention, all you SEO and PPC agencies, as this speaks directly to your business model.
Year-Over-Year Growth: This isn’t Silicon Valley, and your agency is not a SaaS startup. Agency buyers are not the VC types looking for triple-digit percentages growth. Steady does it – because steady growth means managed growth. It means your growth was not part of a fad or a fluke. And it means that your growth is not only sustainable but responsible. Growth is not an isolated metric; it’s tied to everything from hiring and overheads to your value proposition and your sales cycle. When all these things are in line, your year-on-year growth will be a sign of stability, skill and success.
Sustainable Margins: In line with this kind of well-managed growth, come sustainable and reasonable margins. Reasonable because repeatable. No buyer wants one-off success. Buyers are looking for structured businesses, not side gigs. That means functioning operations and an engine room that keeps churning out an EBITDA of 20-35% – with some margin for crisis-based deviation.
Processes Over Relationships: Processes mean success is business-owned and won’t leave the business as an owner takes their final bow. Success that is tied up in specific relationships, is not transferable – and not repeatable. Think of it this way: can a new owner, with the same skills as the current one, continue to scale your agency? That’s your litmus test right there.
Challenge Yourself to a Pre-Mortem and Improve Your Digital Agency Value
There are plenty of buyers available on the market right now, so that won’t be where the failure to sell your agency lies, so challenge yourself to this pre-mortem scenario: it’s 6 months from today and you weren’t successful in finding a buyer in spite of actively trying to sell your agency. What did you do wrong? Turn our buyer’s wish list into your seller’s checklist to improve your digital agency value and make sure your agency’s offering is aligned with what buyers are after.
Shifting Your Mindset For A Success Agency Acquisition
You’re not the judgmental type. You’re out to get the most value from an agency acquisition and you’ll give the highest bidder the benefit of the doubt. But this type of buyer prospect rubs you the wrong way.
Buying A Business: Where To Find Financing For A Business
If you’re considering buying a business in the near future, it’s a good idea to understand the different financing options that exist. Buying a business is most likely one of the most expensive and important purchases you will ever make, it is imperative to have qualified professionals guide you through the process. A knowledgeable business broker can guide you through the options and help you choose the method of financing that is right for your particular situation.
1 – SBA:
Put simply, an SBA loan is a small business loan that is partially guaranteed by the government (the Small Business Administration), which eliminates some of the risk for the financial institution who is issuing the loan.
You read that right – it’s not the SBA who is doing the lending. The SBA works with a network of approved financial institutions (typically, traditional banks) that lend money to small businesses. SBA loans can be valued from $500 to $5 million, opening SBA financing options to a wide range of businesses. Because the SBA partially guarantees the loans that these lenders extend to small businesses, lenders extend funding more frequently and with better terms than without the SBA backing.
When going through the qualification process, SBA backed lenders will take a close look at the business in question, as they will want to make sure you can repay the loan and still continue to operate the business.
SBA lenders will also look for a buyer with strong experience, 10-20% down as a cash downpayment and a solid credit score (over 680). Buyers are required to personally guarantee the loan and they may have to provide additional security in the form of assets they own.
SBA loans to buy a business have a guarantee fee, typically starting at 3% of the loan amount, and lenders may charge packaging fees of up to $2,500. There may also be other fees associated with an SBA loan to buy an existing business, such as application fees, third-party closing costs, or prepayment fees.
The upside on utilizing a SBA loan is that it is cheap money for the buyer (as compared to other options for financing a business). It also allows a buyer to purchase a business that may have seemed out-of-reach without significant financing. On the other-hand, in order to secure a SBA loan, a buyer may have to pledge a significant portion of their personal assets in addition to providing a personal guarantee.
Sellers also benefit from a SBA loan, as they will usually get of the purchase price upfront in cash (at least 80%).
When financing a business, it’s always a good idea to talk to multiple SBA lenders, as some banks prefer certain types of businesses over others.
2 – 401K/Retirement Plan Rollover:
A Rollover For Business Startups, commonly referred to as a ROBS, helps you access your retirement savings for financing a business purchase without paying taxes or early withdrawal fees – making it a great way to fund all or a portion of the purchase price.
A major upside – the speed. In a Rollover For Business Startups, the funds are generally available in two to three weeks, which is 4 times as fast as traditional bank financing. Another major positive, you’re tapping into your own money, not taking our a loan, so there is no debt and there are no future payments required by a lender.
In simple terms, you transfer your retirement account to a service company (very much like a 1031 exchange intermediary). They will act as your trustee and purchase shares of your new company.
By doing this, you can access your retirement account without having to take a taxable distribution. You can also mix this capital with other sources of funds.
The upside in this case is the buyer is completely in control of his or her funds and enters the business with little to no debt. The downside of this type of financing is that in the event the business fails, the buyer may loose her or her retirement funds.
It’s also important to note that there are a lot of rules associated with this type of funding, so it is imperative to involve a professional business broker during this type of funding.
3 – Traditional Bank Financing:
Securing funding for buying a business from a bank is very similar to SBA financing, but without the backing of the Small Business Administration. Banks like to see buyers with a strong background and an adequate down payment – usually 10-20% of the purchase price.
4 – AR Funding:
Existing businesses use AR funding to help alleviate cash-flow concerns or to help keep up with rapid growth. When funding a business, AR funding can be helpful in bridging the gap between the sellers expectations and the buyers available cash as well as provide the buyer with operating capital they may need to operate the business when they take over.
A 3rd party company will purchase some of the receivables (usually 60% or less) and charge a daily fee until they are paid. The cost of this type of financing is high; however, these are usually very short terms loans so depending on the cash needs of the parties, A/R funding is a good way to receive funds in as little as four to five days.
5 – Seller Financing:
Seller financing happens when the owner you’re buying your business from agrees to finance part or all of the purchase price. Sellers open to seller financing will typically finance 15% to 60% of the purchase price of the business they’re selling. This can help borrowers with less than prime credit profiles gain access to affordable financing they may be unable to get otherwise.
Over the past few years, seller financing has become a key element in financing a business, especially in businesses that have some level of riskiness (rapid growth, short time in business, etc). Seller financing also sends a strong message to the buyer that the seller is confident in the continued success of the business.
There is a lot of upside to this type of financing for both parties. Businesses that utilize seller financing typically close faster than those that use a more traditional bank or SBA backed loan. The seller essentially acts as the bank, so they get to make the decision with regards on who they will finance, how much they will accept, the interest rate, and the term. The seller is in the first position, so if the buyer defaults, they can take the business back quickly, without delay from another lender and get it back on track if necessary. In addition, seller financing may offer a tax benefit to the seller since they can defer some of the tax due on the business until full payment is received.
6 – Earn Outs:
Earn-out financing involves a certain dollar amount or percentage agreed on by the buyer and seller to be paid to the seller based on the performance of the company after a set amount of time has past after the ownership transition is complete. Earn-outs can be structured in a variety of ways and can be based on different financial benchmarks such as company’s revenues, gross profits or net income.
Earn-out financing is often used by companies that are in a turnaround situation, when buyers are purchasing on potential, rather than historical cash flow or when purchasing a business that is considered risky. Earn-outs are tricky and can carry risk for both parties. It is essential to have earn-outs written properly and that both parties throughly understand the terms of the earn-out.
Buying a business is most likely one of the most expensive and important purchase you will ever make, it is imperative to have qualified professionals guide you through the process. A knowledgeable business broker can guide you through the options and help you choose the method of financing that is right for your particular situation.
