Selling A Marketing Agency: How The Process Works

Selling a Marketing Agency: How The Process Works

Congrats on selling your marketing agency. This is a super exciting time for you 🙂 If the process seems overwhelming, don’t worry! With the right team guiding you through the process step-by-step, you can rest assured knowing that the acquisition process is a smooth and rewarding process.

Step 1 – Set-Up An Intro Call

Set-up an intro call with our team – you can do that here. On this call, we will answer any questions you have about the process of selling marketing your agency, like how agencies are values, the time it takes from start to finish and transition expectations for you after the sale is complete.

TimeFrame: Within 24 Hours

 

Step 2 – The Valuation

After the initial call, we’ll tell you exactly what we think your agency is worth today. You’ll send over 3 years of P&L statements and a current balance sheet, and we’ll turn around the valuation within 48 hours. There are 14 factors we consider when valuing an agency, the most important being the net profit of the company. Depending on your desired timeline to exit, we’ll work together to determine the appropriate listing price.

TimeFrame: Within 24 Hours

 

Step 3 – The Advisor Agreement

We get paid a % commission of the total sales price of the business upon closing + a retainer while the agency is listed and under contract. Pretty simple right? After the valuation call, our team will send you our Advisor Agreement for review, which outlines our role and responsibilities in acting on your behalf to market and sell your company.

TimeFrame: Within 24 Hours

 

Step 4 – Seller Questionnaire

Once the Advisor Agreement is signed, we will spend time getting to know a lot more about you and your company so we can build a unique marketing strategy, business prospectus and a strong case to our buyer pool as to why your business is a fantastic purchase for them. This phase includes information gathering like the following:

  • Growth potential
  • Key team members
  • Competitive advantages

TimeFrame: Within 2 – 3 Days

 

Step 5 – Prospectus & Documents

This is the holy grail set of documents we use to market your agency to buyers. This is our chance to separate your business from the dozens of others that buyers are looking at each month and showcase exactly why your business is a fantastic opportunity for them. FYI – Before any potential buyers view this document, we require them to sign a legal non-disclosure form to ensure utmost confidentiality.

TimeFrame: Within 3 Days

 

Step 6 – Deal To Market

We’re live! Your agency is officially on the market.

  • Our Buyer Database. Generally, 80% of our deals get sold to our existing database of buyers we’ve worked with in the past. Since we are meticulous in choosing the agencies we sell, buyers know us, they trust us and we’ve probably sold an agency to them in the past. Our database spans every state and includes large agencies that are interested in acquisitions and expansion opportunities, private equity funds looking to expand their portfolio and entrepreneurs who invest heavily in agencies & digital businesses around the country.
  • Our Marketing Channels. There are always new buyers coming into the marketplace across the country and globe, and we know how to reach them. Our team uses 11 marketing channels that are targeted specifically for your type of business. No two marketing strategies are identical. We know every agency is unique, and we treat the marketing strategy as such.

 

Step 7 – Buyer Inquiries & Vetting

As a result of our all-out marketing assault, we immediately garner significant interest from buyers who want to learn more. It’s important to note that not all buyers are the right buyers. It is paramount that the company or person who purchases your company will be able to successfully step into your shoes. We spend a notable amount of time getting to know each potential buyer and vetting them to see if they are a good fit for your particular agency.

Once our team has fully vetted the buyer and they have signed a non-disclosure and confidentiality agreement, we will share additional information about the agency and spend time answering all of the questions they have about your agency.

TimeFrame: Within 1 – 2 Months

 

Step 8 – Negotiate & Accept An Offer

Interested parties submit an initial offer (this is called an LOI, or Letter of Intent). We work on your behalf to negotiate the price and payment terms, using our expansive knowledge in selling businesses to justify why buyers should pay top dollar on favorable payment terms.

We work together to decide on the best buyer for you – discussing variables like the offer price, payment terms, requirements post-sale and the details of the buying entity. When you’re happy, we accept the offer.

TimeFrame: Within 7 – 14 Days

 

Step 9 – Due Diligence

The winning buyer gets an opportunity to dig deeper before they commit to the final purchase – verifying all of the company details we have provided up to this point. The initial offer, or Letter of Intent, provides specifies how long the buyer is entitled to conduct their due diligence. Generally, the more complex the agency, the longer the due diligence process.

TimeFrame: Within 2 Weeks – 2 Months

 

Step 10 – Contract Development

In most cases, when selling you marketing agency, the buyer is responsible for developing the contracts used to purchase the agency. Once the buyer provides preliminary drafts of the contracts, we spend significant time reviewing them to ensure all agreed-upon items are accurately reflected in the documents.

In addition, we always recommend that you also use a seasoned Business Attorney for another complete review, as the contracts will protect your interests after the sale.

TimeFrame: Within 2 Weeks

 

Step 11 – Money Is Exchanged

Contracts are signed, you’re paid and business assets are transferred to the buying entity. We are also paid at this time.

TimeFrame: Within 2 – 7 Days

Step 12 – Post Sales Training

After the deal closes on selling your marketing agency, there is a transition period where all facets of the agency are transferred over to the new ownership group. Undoubtedly, there will be some sort of training you need to do to make sure the buyer is off and running in their new business. The specifics of your requirements post-sale are negotiated and agreed upon before the deal closes.

TimeFrame: Within 1 Months – 3 Years


How Much Is Your Digital Marketing Agency Worth?

Whether you’re buying a marketing agency or selling your own, it’s vital to understand how the industry values agencies! We’ve outlined the basics so you have a good understanding of how to value a marketing agency!

Unsurprising news flash: the size of your digital agency will have a big impact on how much your marketing agency is worth to buyers.

If you are a $2m a year in revenue agency, you can expect to sell your agency for 2-4x EBITDA.

If you are a $10m a year in revenue agency, you can expect to sell your agency for 6-12x EBITDA.

Bigger agencies sell for a higher multiple of EBITA because they are less risky for buyers. The main differences being that if you are a bigger agency, you probably have less likelihood that a few bad employees or clients could hurt the acquisition, and the business is probably more scalable in general. Seems obvious right?

Okay, so the question is, how do you determine where you fall within the multiple range? The difference between a 8X EBITDA multiple and a 12X EBITA multiple for a $10M in revenue agency could be a difference of $5M – $10M dollars in the sellers pocket at the closing table. Needless to say, this is important.

In today’s market, everything from the management structure to the make-up of the revenue stream is considered when determining how much a marketing agency is worth. Bring in the 14 metrics that go into determining how much a digital marketing agency is worth. Buckle up, this is exciting stuff.

The 14 Factors That Determine How Much Your Digital Marketing Agency Is Worth:

When determining how much your marketing agency is worth, there are 14 factors we consider, with the most important being how much the company is making year over year.

Outside of going through these factors to determine a valuation and list price, there is another major benefit to having a detailed valuation system. Having a solid understanding of these factors allows our team to easily justify the asking price to potential buyers during the sales process.

For buyers trying to determine the value of a company, these factors are the must-ask questions before submitting an LOI.

1 – Earnings History:

When determining how much your marketing agency is worth, the most important factor is if it’s making money and how much money it’s making. If you’re familiar with EBITDA, you’re probably already familiar with SDE (Seller’s Discretionary Earnings), too, even if you’ve never heard the term. As a reminder, EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization—essentially, it’s the pure net profit of a business.

Like EBITDA, business owners calculate SDE to determine the true value of their business for a new owner, so your SDE will include expenses like the income you report to the IRS, non-cash expenses—whatever revenue your business actually generates. Unlike EBITDA, though, you’ll also add back in the owner’s salary and owner’s benefits into your SDE calculation. Large agencies generally use EBITDA calculations to value their businesses, and small agencies typically use SDE, since small business owners often expense personal benefits and the buyers are generally solo-preneurs.

It’s crucial that prospective buyers understand SDE, too. Most likely, the agency owner will provide you with that number, so it’s important to understand how the agency owner reached that value, and what these values reflect about the actual agency.

To calculate your agency’s SDE: Start with your pre-tax, pre-interest earnings. Then, you’ll add back in any purchases that aren’t essential to operations, like vehicles or travel, that you report as business expenses. Employee outings, charitable donations, one-time purchases, and your own salary can all be included in your SDE. (Buyers might ask about your discretionary cash flow when you offer them your valuation, so be prepared to include and value each major expense or purchase.)

Simply put: when determining how much your digital marketing agency is worth, the most important factor is how much money the company is making.

2 – Time In Business:

Let’s keep this simple – this doesn’t matter A TON in determining how much your agency is worth, but for some buyers, this can be a notch in the right direction. The takeaway – once you hit the 3 year mark in business with steady or growing financials, you’re in the clear and this no longer becomes a crucial component into adding value or detracting from the value of your digital marketing agency. Five years plus – amazing! If you’ve been around for 20 years and have declining growth – your time in business can be a detriment.

3 – Revenue Streams:

The way that your agency makes money and the structure of those contracts is an important piece of the valuation puzzle. For some buyers, this is the golden ticket in determining how much your digital marketing agency is worth. We’ll want to have a thorough understand of how your agency makes money and we’ll also dive into questions like these:

  • Do you have long-standing, recurring contracts or is your agency project based?
  • How long are your contracts? Are they enforceable?
  • What is your client retention rate?
  • Do you have one really large client that makes up a significant part of your revenue or is your revenue dispersed among a lot of smaller to mid-size clients?

These questions will help our team determine the value of your digital agency and if revenue streams for your agency should add to the value or detract from it.

4 – Management Structure:

For businesses doing less than $10M a year in revenue, the owner’s role within the company as well as the structure of the management and leadership team is vital. In most cases in businesses of this size, the owner has a role in the day-to-day operation of the company, so buyers want to garner a thorough understanding of how the business will operate once you step-away. When determining how much your digital marketing agency is worth, we’ll dive into questions like:

  • What are the roles of each member of your management team?
  • How long have they been with the company?
  • What is their commitment to stay on board after the sale process is complete?
  • Who are other key employees that are vital to business operations?
  • How will the company culture be impacted if you were to leave?

5 – Seasonality

If your agency has significant peaks and valleys in it’s revenue due to seasonality, this factors into the agency’s overall valuation. This generally isn’t a huge issue for marketing agencies, but we have seen some cases where sales teams are more productive during spring and fall months, resulting in an influx of new customers during those time periods.

6 – Diversified Risk

Buyers will want to fully understand your risk portfolio and how that factored into the valuation of your digital agency. When determining how much your marketing agency is worth, we’ll want to understand:

  • Do you have significant monthly overhead?
  • What happens when you’re not there?
  • What is the churn-rate of your current clients?
  • What is the client concentration make-up? Does any one client make up more than 20% of your total revenue?
  • How is new business brought into the agency? How strong is the future-facing pipeline?
  • How long have your employees been at the agency? What are their long-term plans?
  • Do you have any loans, liens or lengthy contracts that pose a risk to the new buyer?

7 – Competitive Advantages

This one is pretty simple. The more niche you are, the easier you are to sell.

  • Are you hyper-focus in one industry?
  • Do you offer one service really well or are you a full-service agency that offers everything to everyone?
  • What do you offer that your competition doesn’t?
  • Does that help or hurt your business value?

8 – Growth Potential

The growth potential of your marketing agency is vital to understand when determining how much your marketing agency is worth. If you’re vertical based and the industry in which you operate is expected to skyrocket over the next 5-10 years, this has a positive impact on the valuation of your company. The opposite is true if you operate in an industry that is shrinking. In that case, the industry will have a negative impact on the valuation. During Covid-19, eCommerce agencies were selling for a massive premium, while agencies that focused in the hospitality and physical retail sector really struggled.

9 – Reputation

If you have a stellar reputation in your desired market, that has a positive impact on your business valuation. The same is true if you have a not-so-good reputation. When determining how much your digital marketing agency is worth, we’ll want to dive into things like:

  • What happens when a buyer Googles your name?
  • How are the online reviews for your agency?
  • Do you have letters of recommendation and testimonials from key clients?
  • What do your employees think about the company?

10 – Industry

For vertical driven or hyper-niche agencies, the industry in which you operate and the projected economic forecast for that industry will have an impact on how much your digital agency is worth. This can also impact the buyers interested in your firm. For example, if your agency offers paid media for the healthcare industry, a SEO agency that works for law-firms probably isn’t a good strategic buyer.

11 – Location

If you have a location-based digital agency, buyers want to see that the location has growth potential and that it is centered in a favorable business environment. While location is a factor in your business valuation, it’s importance is rapidly diminishing.

Keep in mind that most entrepreneurs are not locked into businesses within the zip code in which they live. In today’s digital centric business environment, seasoned business owners are able to purchase businesses (even those with a location focus) and run them digitally.

In the post-Covid world, buyers are looking for agencies that are successfully working remotely. If you have an office location, many buyers will look at how long you have left on your lease and use that as a key factor in their valuations. For buyers that are looking to make acquisitions of agencies with physical locations, mid-major markets are HOT right now! Strategic buyers already have offices in NYC and LA, so being located in Salt Lake City or Denver is a more desirable location for them.

12 – Comps

Similar to selling your home, it’s important to understand what other agencies have for in the last 6 months. Given that there are so many factors that go into understanding a business valuation, this isn’t as cut and dry as it is in real estate, but it certainly is a factor that plays into determining how much your digital agency is worth. After removing the outliers and odd-balls, we’ll carefully examine those transactions to determine what factors went into agreeing upon a final sales price. You can also take a look at our current marketing agencies for sale to get an idea of where the market is today.

13 – Transition Structure

Based on the buyer’s needs, a solid commitment to a transition plan can really bolster the valuation of the company. If there are time pressing health concerns and you need to exit the agency right away, this could have a negative impact on your agency’s value and what someone is willing to pay. On the other hand, if you’re willing to stay on board for 12 months (or even a few years) to ensure the new owner’s success, this could have a positive impact on how much your marketing agency is worth for a certain type of buyer.

14 – Other Assets:

If your agency has significant technology, intellectual property, lead producing materials or other assets that are of value to a buyer, we factor that into your valuation as a positive. Generally speaking, a SaaS platform that is only used to operate the agency does not warrant SaaS multiples.

How Much Is Your Digital Marketing Agency Worth?

If you’re looking for a free valuation of your digital agency, you can do that here. Our experienced team will give you a range as to what you can sell your digital marketing agency for today. Keep in mind that during the sales process, your team of advocates will be forced to defend exactly how the valuation was determined. Using an intricate formula will lead to a faster, more profitable exit as you sell an agency.


How To Sell Your Digital Marketing Agency For The Best Price

12 Tips To Sell Your Digital Marketing Agency For The Best Price

As you contemplate the decision to sell your digital marketing agency, it’s important to have a thorough understanding of what to expect. Digital marketing agencies can sell from anywhere between 1.5X – 12X EBITDA, depending on a multitude of factors. There are some obvious factors that determine how much your digital agency is worth, like the size and revenue structure (project vs. retainer based). Outside of those, there are steps you can (and should) take to get top dollar for your digital marketing agency. Keep reading for our step-by-step guide.

1 – Streamline & Document Wherever You Can

As you get ready to sell your digital agency, take some time to streamline your systems to reduce waste, organize the company’s technology assets (like a CRM) and optimize your organizational and personnel structure. If you don’t already have thorough documentation of your the ins and outs of your agency processes, this is the right time to get those in place. Sophisticated buyers willing to pay top dollar for your digital marketing agency will want to see a well-oiled machine that has proven systems and processes implemented company-wide.

2 – Make Your Biz Dev Process A Well-Oiled Machine

The biggest hurdle buyers often have when purchasing an agency is the business development process. What happens to the new business pipeline when the founder is gone? Even if the founder is willing to stay on board after the transaction, buyers still don’t like to see agencies without a clear business development system in place. For larger agencies, this should be a dedicated person or team that manages the inbound or outbound leads your team receives – ideally the founder isn’t involved in securing new business at all. For smaller agencies where this isn’t a possibility, the founder should have a reduced role in bringing on and securing new business. This is a big one!

3 – Get Better Contracts

Agencies with long-standing, foil proof contracts sell for a significantly higher multiple than those that are project based. If your agency can implement recurring revenue with retainer contracts – do it! If you can make those contracts for 12+ months without a 30 day clause, even better! This small change can be the difference of a lot of money at the closing table.

4 – Get Your Financials In Order

You need to have an accurate picture of your agency’s financials in order to sell your business for the best price. Seems obvious right? In order to convince a buyer your business is the right purchase for them, you need to know exactly what is coming in and out each month. Now is the time to take your mother-in-law off payroll and remove your business credit card from your Amazon account. Basic Profit and Loss Statements for 3 years and a current Balance Sheet should be enough to move you on to step 5.

5 – Find A Quality M&A Advisor To Sell Your Digital Marketing Agency

This could be the difference between selling your digital agency for the best price and not. A quality advisor who understands your niche and industry (this is key) will be able to give you an accurate valuation, produce professionally designed marketing materials and most importantly, tap into their network of ready-to-go buyers. A great advisor will be worth their weight in gold at the end of this process and will absolutely help you sell your digital agency for the best price. If you need to connect with us, you can do that here.

6 – Figure Out What Your Agency Is Worth

Now that you have a clear understanding of where your company stands financially, it’s time to give it a valuation. An agency is only worth what the market is willing to pay for it, but there are some tried and true factors that go into a successful valuation. The agency’s revenue & profits, operational structure, years in business, supporting technology, growth opportunities and the current buyer pool are just a few of the factors that go into determining a valuation of a business. This is where it gets a bit tricky, and a good advisor is going to have unparalleled knowledge to price your business just right to sell. (We can help, schedule an intro call here). Remember, 80% of businesses listed for sale never get sold. Why? Poor valuation formulas and old-school marketing tactics. More about the latter below.

7 – Develop A Marketing Strategy To Sell Your Digital Marketing Agency

Once you know how much your digital agency is worth, it’s time to tell the world about the opportunity to purchase it. There are thousands of businesses that get listed for sale every day, making it imperative that your digital agency is positioned correctly in the marketplace. To get in-front of the right buyers, a unique, full-court-press marketing strategy must be implemented. Think email campaigns, press releases, direct contacts, click-funnel campaigns, paid media, search engine optimization, content marketing and most importantly, relationships. Unsurprising news flash – existing relationships with a pool of seasoned buyers is still the absolute best way to sell your digital agency for the best price.

If you’re using a business broker or M&A advisor, make sure to ask about their existing relationships with buyers in the marketing space. They should have solid, and long-standing relationships with seasoned entrepreneurs and buyers who are always on the look-out for their next opportunity. At Barney, over 80% of the digital agencies we sell get sold to an existing buyer in our database. We can’t stress this enough – these relationships are crucial!

8 – Develop Marketing Materials

While some businesses are purchased by first-time business owners, most are purchased by seasoned entrepreneurs & strategic buyers who are approached with dozens of businesses each week. Sending a potential buyer a traditional Executive Summary just doesn’t cut it anymore. Make sure you have a professionally designed Business Prospectus, which is essentially a presentation overview of your company in PDF format. A Prospectus is generally 15-30 pages long and is visually stunning, helping your digital marketing agency stand-out from the crowded marketplace of businesses for sale.

9 – Thoroughly Vet Interested Buyers

This is where things start to get interesting…and fun. You’ve put in all of the hard work in order to properly value your digital agency, a marketing strategy has been developed and all of the necessary marketing materials to get your digital agency sold for the best price have been designed and produced. If everything up to this point has been done correctly, you should start getting buyers interested in your digital agency almost immediately.

In order to sell your digital agency for the best price, it’s imperative that all potential buyers undergo an incredibly thorough vetting process. The screening and vetting process confirms the buyer is qualified to purchase and own your business and that they are the right fit for your particular industry and organizational structure. This often overlooked step is so, so important.

Here’s why:

Once a buyer submits a Letter Of Intent on your digital agency and you agree to the offer, you almost always enter an exclusive due-diligence period, in which you as the seller are generally not allowed to discuss the sale with other potential buyers. If the first buyer was not properly vetted and ends up not being the right fit for purchasing the business, you very easily could have missed your window of opportunity with another group of more qualified, better suited buyers.

10 – Get Creative With Negotiating & Terms

Once the vetting process is complete with a buyer and you feel like they would be a great fit as an owner of your digital agency, you’re in a wonderful position to start negotiating the Letter of Intent (LOI) submitted by the buyer. The LOI includes the price the buyer is willing to pay and the terms in which the amount will be paid.

Buyers almost never come to the table with all-cash deals or with offers that are 100% of the asking price. More than likely, your buyer will make an attempt to negotiate on asking price and offer terms that mitigate their risk, maybe suggesting a percentage of owner financing, an earn-out or a staggered purchase overtime.

In order to sell your digital marketing agency for the best price, at the best possible terms, it is imperative that you have a thorough understanding of why the asking price is what it is. How was the valuation determined and why is your digital agency worth what you’re asking? Understanding this will give you tremendous negotiating power with the buyer and will certainly help you sell your business for the best price.

In addition to negotiating the purchase price, you’ll need to negotiate advantageous terms. Who wants to sell their digital agency if you don’t get paid for years? It helps if you understand all of the unique ways to structure a business deal so you can make choices in structure that are advantageous to you, not the buyer. When in doubt, use a quality business broker or M&A advisor to help with this…it could be the difference between you selling your digital agency for the best price and you not.

11 – Set-Up A Training Schedule While In The Due-Diligence Phase:

Unlike when you sell real estate, buyers and sellers of businesses almost always have to work together for at least some predefined period of training and transition. Getting on the same page about the training agenda, timeline and expectations as early in the process will help you manage expectations and also show that you are a seller who is dedicated post-sale. If the buyer sees something he or she doesn’t like during the due-diligence, knowing that you are committed to a smooth transition and that you already have a plan in place could be the extra push they need to get across the finish line at top-dollar.

12 – Use A Business Attorney For A Final Review Of Documents

There are a lot, and we mean a lot, of documents that go into the sale of a digital agency. In order to sell your business for the best price, and protect your interests after the sale is complete, it is imperative to utilize a business attorney to review all legal paperwork.

In Conclusion…

If you decide to start and eventually sell an agency, there are things you can (and should) do to help prepare your agency for an exit. We can act as a resource along the way, don’t hesitate to reach out with questions! Connect with us when you’re ready!


Digital Agencies Are Selling For Record Breaking Amounts

From 2015-2019, the number of acquisitions of digital marketing agencies doing $2M – $10M in revenue annually surged up nearly 122%. Last year alone, the median sales price of digital marketing agencies increased a whopping 38%. The reason for the gains in acquisitions and sales price is simple. Buyers are catching on to the lucrative – and relatively low risk – industry of digital marketing agencies. The result? The traditional multiples used to value digital marketing agencies are being completely shattered.  Entrepreneurs who started digital marketing agencies just a few years ago are walking away with major paydays. To put it simply, we’re seeing that digital marketing agencies are selling for record breaking amounts. Can you tell we’re excited about this?

Buyers Were Slow To Take The Leap Into Digital

As traditional media companies and ad agencies scurry to adapt and stay relevant in a rapidly changing market, digital marketing agencies have blossomed as the pulse of future advertising. However, in the business world, digital agencies are still a relatively new business model. Most digital agencies have lacked the sophistication that is found in older, more established industries. In world of buying and selling businesses, digital agencies have long been considered a major risk that only the ultra tech savvy were willing to take.

In the past, first-time business owners have opted for something brick-and-mortar – a business that’s more traditional and comfortable. For seasoned entrepreneurs and private equity groups, digital agencies have lacked any real intellectual property, which is generally needed to attract tech-driven buyers that go for the “risky” investments. In addition, agencies have never had the traditional employee structure or long-standing financial history, ruling out mainstream PE Firms or family offices. The result – a scant and underwhelming pool of potential buyers.

As digital agencies began to get more sophisticated and established, and buyers realized the industry was here to stay, the dynamic of buying and selling digital agencies dramatically shifted. What once was an acquisition for only a strategic competitor has become a breeding ground for everyone outside of the digital marketing space racing to get a piece of the pie. Buyers have jumped in head first, but without the supply to keep up with the rapidly increasing demand, the prices have skyrocketed. In fact, the prices of digital marketing agencies have increased more than any other industry year-over-year.

An Attractive Purchase

Buyers love that most digital agencies are able to be managed from anywhere in the world. This lack of location requirement has opened up the buyer pool to include a vast array of strategic, financial and entrepreneurial buyers. Other agencies looking to expand their vertical or geographic stronghold can make a strategic purchase of a smaller, more nimble firm, regardless of physical location. Private equity firms looking to add to their profit-centric portfolio also aren’t bound by geographic location. Entrepreneurs are not as fearful of finding talent outside of a geographic area during an expansion.

Did we mention profit margins? A digital agency bringing in over $8M in revenue boasts an average profit margin over 18%. For smaller agencies, the profits can be significantly higher, sometimes even reaching 60%. Compared to other businesses of the same size and risk portfolio, digital agencies are CRUSHING it when it comes to profits. Needless to say, buyers love the high-profit margin, low risk industry of digital marketing.

Getting To Payday

For even small agencies, a slight difference in valuation can mean hundreds of thousands or millions of dollars difference in the ultimate payday. Yet, arriving at a definitive dollar figure can be a painstaking effort that encompasses a raft of factors. These valuation factors fluctuate based on everything from the current buyer pool and market conditions to cash flows and team structure.

The discussion does have to start somewhere, though, and there are guidelines. We’ve compiled the ones below from research, our experience and hundreds of interviews with buyers, sellers and financiers. Read on to learn what we’ve found.

Revenue

A lot of discussions around a digital agency’s valuation start with a multiple of its revenue. In today’s business climate, digital marketing agencies tend to sell for between .9 and 1.9 times revenues. Generally, this revenue number is taken from the previous, or “trailing,” 12 months.

Profitability & Its Proxy, EBITDA

EBITDA, short for “earnings before interest, taxes, depreciation and amortization,” measures how much money is left after the “real” expenses  — things like salaries and office rent  — are paid but before any financial and tax wizardry that can make the reported income, a.k.a. the bottom line, look quite different. Most digital marketing agencies with revenues over $8M sell for about 8–12x EBITDA. Agencies with revenues under $8M generally sell from about 1.5X-4X EBITDA.

Sophisticated strategic buyers look much deeper. They want to know not just the current EBITDA as a percentage of revenues, but also what they might do to improve on it.

Can they cut expenses from combining back end operations like bookkeeping or human resources? They might look to see what new profits they can add through new revenue streams.

Growth

Another reason digital agencies are selling for record breaking amounts – the RAPID growth that agencies can experience with minimal overhead and risk. For digital marketing agencies less than five years old, a revenue increase of 30–50 percent per year is considered a reasonable benchmark.

But those younger agencies also tend to put their retained earnings into expansion, hiring more staff and adding services in order to increase revenue growth. Higher growth then means lower profitability, which can lead to some intense discussions during the buying process and even foregoing certain types of potential acquirers looking mainly at immediate financial returns.

Type of Revenue

Certain varieties of revenue tend to add value in acquisitions – from a half-percentage point on up in the multiple:

  • Recurring revenue and retainer based contracts show an audience is willing to pay, and pay consistently. Often times the cash comes before the service is delivered, helping to finance upcoming operations. (Financial professionals call this type of cash “pre-revenue.”) Recurring revenue is also more predictable than project based revenue (think website design agency). Project based agencies don’t have as much control over their cash flow, turning away some buyers.
  • Multiple streams of revenue are better than 1. Revenue from different verticals or with different services show buyers that you have a diversified agency. For example, an agency that offers project based content marketing services to law firms won’t be as attractive to buyers as an agency that offers retainer based content marketing across several industries.

Management Structure

Buyers want to be sure that once the seller or founder exits the company, there won’t be an implosion. For sellers that are heavily involved in the day-to-day operations of various aspects of the business, expect buyers to make offers on the lower end of the standard multiples. An owner who is involved in strategy and overall business decisions but isn’t involved in technical or business development work is an ideal set-up for buyers – meaning they will pay a premium.

Why Owners Decide To Sell

In general, sellers fall into three different categories. We say these respectively and as an owner, we believe you’ll appreciate the candor:

  • Fatigue, boredom and pursuing the next challenge. “This was fun and now it’s not.”
  • Highly profitable or quickly growing revenue. “This thing is flying and we want to strike while iron is hot.”
  • Loss of revenue, profit, both or key team members. “We no longer have a path to grow and would like to find some value for what we’ve built.”

Your reasons for selling your digital agency are never judged but important to understanding how things should be evaluated and viewed as a proper channel for purchase. The best prospects are those that are open, honest and direct with their expectations and the “why”.

Looking Ahead – Digital Agencies Are Selling For Record Breaking Amounts

With the low overhead and barrier to entry, the ability to carve your niche as a digital marketing agency has opened the flood gates for entrepreneurs to capture their share of this booming market.

With interest from 65 countries around the world, the success of digital agency acquisitions points to a growing market for many years. If you’re contemplating selling your digital agency, now is the time! Digital agencies are selling for record breaking amounts. The demand is high, the supply is low and owners are walking away with more than ever before!


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.

Financing A Business In Today's Market

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.

how to finance a business

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.

how to finance a business

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.