Here's Why You Should Consider Phantom Equity When Selling Your Agency

The Very Real Promise of Phantom Equity

The terminology may frighten some away. But phantom equity, especially when it comes to selling your agency, has the potential to breathe new life into your agency. The upsides are well worth taking the time to ensure that phantom equity is anything but elusive to you. Make phantom equity work to your advantage by using it as the adhesive that binds essential human capital to your agency long-term, especially post-sale, promising profit shares in return.

What Is Phantom Equity and Why Does It Matter When Selling Your Agency?

Phantom equity is both equity and not equity. It offers the benefits of company stock without actually issuing any. Known also as “phantom stock” or “virtual shares”, they offer deferred compensation in line with company performance much like actual stock would. And much like actual stock, this equity will vest over time and according to an agreed schedule. However, unlike actual stock, phantom equity never offers the opportunity to exercise a voting right; they are financial-only. This means holders of phantom equity don’t sit on the cap table, carry no liability and, as such, pose practically no added legal requirements or costs to get set up as phantom stockholders.

Should I Take Advantage of Phantom Equity When Selling My Agency?

If you are considering selling your agency and you’re an owner who is looking to stay on long-term, phantom equity makes perfect sense. Phantom equity ensures that a founder – or any other essential team member for that matter – stays on, stays committed and stays a part of the continued growth story even after a sale and post-sale transition period have been completed. Offering phantom stock in the business post-transaction offers an objective guarantee, aligning buyer and seller incentives for continued success.

After all, human capital is the key component to the business that was just acquired. Keeping the engine room of an agency firing on all cylinders means binding that human capital to the agency’s continuing journey down the growth path. Especially when the agency is a smaller business – approximately 15 people or fewer – the value of each team member tends to be magnified. Binding essential team members to the long-run success can be a sure-fire win-win.

When Does it Make Sense to Avoid Phantom Equity?

If you are looking at selling your agency but do not plan to stick around for the long haul once your agency has been sold, then phantom equity may not be for you. Even a full year of commitment post-sale is not in alignment with the purpose and likely vesting schedule of phantom equity. Generally speaking, it takes a minimum of a three-year commitment for phantom equity to really begin to pay off.

In addition, if a buyer only wants to incentivize team members that stick around for an agreed minimum period that extends beyond the start of the vesting schedule, they may want to consider a cash bonus plan instead. The reason here is that these are generally forfeited altogether when an employee leaves whereas the vested phantom equity could mean having to pay out somebody who left sooner than a buyer might have liked.

The Bottom Line

The initial post-sale transition period of, on average, 90 days is tied into every deal. What happens beyond that is down to the interests and alignment of seller and buyer. If the interest is there for a seller to stay on board long-term and keep reaping the benefits of an agency’s ongoing growth story, the direct path to participating in the profits to come, is phantom equity.

by Amanda Dixon

Flexibility Is The Key To Sell Your Digital Agency

Selling Your Digital Agency? Why an Owner’s Flexibility is Key to Sealing a Deal

When you are looking to sell your digital agency, negotiating the sale will take time. That time will require more than just patiently waiting on the sidelines. It will require a back and forth that will see most owners giving way at some point, be it with regards to the selling price, payout terms, or the time it takes to complete a deal. Staying focused on the goal of completing the deal – rather than staying focused on a timeline or a price tag – will help ensure a successful transaction.

Your Transaction Doesn’t Live in a Silo

As promising as the performance metrics on the books may look, the growth trajectory of your agency is taking place in a complex environment comprised of many players. There will always be a market reality outside of your agency. And a buyer scanning the market will be well aware of this reality. It’s important to show you understand this in practical terms by adjusting deal terms and pricing in line with what the market suggests is feasible.

Your Agency Has More Than One Type of Buyer

While you may have your mindset on a specific type of buyer, market shifts mean that not only are price and deal terms a dynamic part of the equation, but the buyer type continues to evolve as well. Larger agencies looking to acquire your client portfolio may have been a classic buyer type in the past, but they are far from the only one nowadays.

Solo-preneurs, in particular, have reshuffled the deck. These high-net-worth experts are sitting at a corporate job or a large agency and are looking to apply their know-how and their network to scaling something they don’t have to build from the ground up. Keep an open mind as to who will be steering the ship following your departure and you will be sure to up your shot at getting the deal done.

Take It One Step at a Time To Sell Your Digital Agency

Flexibility won’t go far if you don’t have a healthy dose of patience when you go to sell your digital agency. Keep a leveled head as negotiations inch forward and continue to be calm post-transaction as well. Staying flexible with respect to how long you will be needed after the date of a transaction will help ensure smooth sailings beyond the moment of signing. Putting in the bare minimum of just 30 days to cash out fast is never recommended. A 90-day minimum that is ideally extended into the range of 6-12 months is optimal to make sure all parties’ best interests have been served.

One Step at a Time

An agency sale is not complete on the occasion of signing the deal. It’s important to understand what happens in the run-up and the post-sale and what sort of attitude can help all involved feel like they’ve hit a home run. Just like a solid workout demands a warm-up and a cool-down, no transaction is complete without buyer scoping, due diligence and transition period in the stages before and after a sale. And just like that workout, your sale will fall into place one step at a time. Staying flexible along the way means that you will be prepared for what the process will inevitably throw at you – and ensure sure that you’ll be there to answer the door when opportunity knocks. Ready To Sell?

by Molly McCartan

M&A Timelines: How Long Does It Take To Sell My Marketing Agency?

When you finally say to yourself, I want to sell my marketing agency, you may think that things will move quickly. But the reality is that the waiting can be long and is often the hardest part. Normally – the Barney M&A timeline in its entirety is 4-6 months.

However, knowing exactly what happens before, during, and after a sale should provide the transparency you need to help you manage the process. Below, we help you understand the necessary steps – and the expected timeline attached to each of them – so that you can get a clear understanding of how long it takes to sell your marketing agency.

Sanity Check

First things first. Before you jump into the deep end and run the risk of amping up the expectations, you may want to ensure that you are ready to sell in the first place. Has your agency been showing sustainable growth year-over-year? Are your margins raising eyebrows or just red flags? Are you delivering an EBITDA of $500k and up?

The M&A Timeline to Triumph

While there is some flexibility around the exact duration of each element required to make the sale of your agency a success, the process that will take you there is very defined. The Barney M&A process in its entirety is 4-6 months. Here is the step-by-step:

Initially, there is a valuation period before any agency owner enters the circle of sellers. This period requires the vetting of financials to get an accurate picture of what’s on offer. Once a price is agreed upon, the listing agreement is prepped and signed before a listing goes live. Expect this readying stage to take up to 1 week.
Once your listing is live, it’s showtime! We do our homework to identify your perfect buyer profile before we scour our network to identify potential prospects. We give this stage a solid month to generate enough leads in order to begin issuing a first term sheet.
Once there is a genuine offer in place, expect a further two weeks to transform those initial leads into a detailed LOI.
Finally, turning a serious buyer’s intention into a closed deal will take…well, it will take the time it takes, really. The due diligence timeline is correlated with a buyer’s thoroughness and a seller’s previous processes. As a benchmark, we attach an expected duration of 45-90 days – but that can move in either direction. Expect to be able to improve on this timeline with more sophisticated buyers that have gone through this before. In addition, the required paperwork to close a deal will be produced during this 45-day window, which takes into account a small buffer for the required back and forth.

M&A Timelines Vary

Depending on the buyer’s experience and buyer type, the pace of the process can move in either direction as well. Strategic buyers with an eye for an operational fit will typically move faster while entrepreneurial types will take more time as they are likely entertaining more options. Financial buyers will put their targets through a Quality of Earnings report (think of this like a mini-audit), which can add another 3-5 weeks to the process.

Beyond getting the alignment right, which is something out of a seller’s hands, a seller can help shorten the M&A timeline as well. If a buyer and seller remain in agreement with the initial closing docs, and if a seller is well-organized and on top of his operations and financials during the due diligence process, this will help drive up confidence and drive down duration.

Understanding The M&A Timeline For Digital Agenices

by Esther Townell

Shifting Your Mindset For A Success Agency Acquisition

If you're trying to sell your agency, you’ve met them by now: those potential buyers who have dollar signs for eyes, calculators for hearts, and bank vaults for souls.

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.

by Clara Stedman

What Is The Valuation Of Your Digital Agency?

Whether you’re buying a digital agency or selling your own, it’s vital to understand the “science” behind the valuation process! We’ve outlined the basics so you have a good understanding of how to digital agency valuations are determined.

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

If your digital agency is doing $1M a year in net profit, you can expect to sell your agency for 2-4x EBITDA.

If your digital agency is doing over $5M a year in net profit, you can expect to sell your agency for 8-10x 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 10X EBITA multiple for a digital agency doing $5M in net profit could be a difference of millions of 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 the valuation of a digital agency. Bring in the 14 metrics that go into determining how much a digital digital agency is worth. Buckle up, this is exciting stuff.

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

When determining digital agency valuations, 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:

For digital agency valuations, 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 your digital agency’s valuation, 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 digital 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 digital agency. 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 digital agency 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 digital agency 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 digital 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 digital 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.

by Clara Stedman

Selling A Marketing Agency For The Best Price

12 Tips For Selling A 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.

Selling A Marketing Agency

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 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!

by Molly McCartan

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 acquisition 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 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 acquisition 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!

by Anthony Costanzo

Acquisition Goals: It Pays To Know The Buyer You Want

Entrepreneurs often spend years building their agency and, when it comes time to sell, they naturally want to sell for the best price, whether to retire or simply to cash out and move onto something new. However, sellers often focus solely on the financial components of an offer and overlook some of the most important factors in determining if a buyer fully aligns with their acquisition goals. When selling your agency it pays to know the buyer you want!

Defining Your Acquisition Goals: Know Your Buyers

Buyers fall into four categories — strategic, financial, internal and solo entrepreneurs — and each type of buyer approaches buying a business like yours with a totally different acquisition goal in mind.

1 – Strategic Buyers

Strategic buyers often want a company that fits with their own, perhaps because of complementary products or to advance their geographic or vertical expansion. Often times these buyers are competing companies who place a premium on things like market share and brand recognition. Strategic buyers generally don’t value your current management team or employee base as much, since their team will most likely assume day-to-day operations. When evaluating agencies to purchase, strategic buyers like to see growing profits and the potential for even more in the future.

2 – Financial Buyers

Financial buyers are often times private-equity investors who want to grow earnings or merge companies to capture savings. These buyers almost always have the goal of selling the agency for a higher price in three to five years and aggressively pursue their agendas to maximize their investment return as quickly as possible. Financial buyers want free cash flow and growing revenue and are often times less concerned about profits since they view themselves as experts in squeezing the maximum from operations. Unlike strategic buyers who don’t place any value on your current management team, financial buyers favor a strong team that can execute on their vision. If the seller wants to cash out but would like to remain at the company for a few more years, a financial buyer would make the most sense.

3 – Internal Buyers

An internal buyer, often management teams or second-generation family members, are people who work at the company and often times share the owner’s vision and want to build upon it. These buyers are unlikely to pay the highest price, but they will almost always commit to preserving the culture or core ethos of the company. Internal buyers generally want to see strong financials and a solid balance sheet, as well as a good corporate culture and a diverse offering of products and services.

4 – Solo Entrepreneur

An entrepreneur buyer is generally a single person who is purchasing their first business or is looking to add a business to their modest investment portfolio. In most cases, solo entrepreneurs plan on being involved heavily in the day-to-day operations of the business and will most likely not plan on “flipping” the business in a few years. Entrepreneurs vary greatly in what they look for in a business and often require the most hand-holding during the business transition. For some sellers, the heavy involvement during the transition period can be a deal-breaker, but on the other hand, solo-entrepreneurs often pay top dollar for businesses because they are more emotional and personal purchasers than the other buyer types.

Identifying Your Goals As The Seller

Each seller has different motivations when exiting, ranging from their transition commitment after the sale to maximizing price or maintaining the company legacy – and this is where the matchmaking is critical. Remember, when selling your business it pays to know the buyer you want, and this starts with identifying your own acquisition goals.

A seller who has a primary goal of finding someone who will operate the company in the same manner and protect the current employees may favor a deal with an internal buyer or the right solo entrepreneur. A seller that’s retiring and wants the highest sale price should position the business to be most appealing to strategic, financial or certain solo entrepreneur buyers. When it comes time to sell your agency, knowing the right buyer type ahead of time can make the sales process quicker and more streamlined.

Once a seller has defined his or her acquisition goals, it becomes easier to make an honest assessment of the strengths and weaknesses of the agency through the lens of what that buyer-type values. After all is said and done, it’s important that no matter the buyer type, the seller feels confident that the buyer will be able to maintain or grow the company once they are no longer involved. Using an M&A advisor who understands the type of buyers that suit your agency and personal needs best will ensure you get what you’re looking for in an exit and can also save a significant amount of time in weeding out buyers that won’t fit.

by Amanda Dixon

17 Tips For Selling a PR Agency For Top Dollars

Tips To Sell A PR Agency For Top Dollars

Sell A PR Agency For The Best Price

You founded your PR agency, took the time to grow it, and now are reaping its benefits, but the time will eventually come for you to sell it. Maybe you’re at the top and are ready to strike while the iron is hot, or maybe you’re ready to join forces with a larger agency. Regardless, there are a few things you should do while you’re embarking upon the exit process. These tips for selling a PR agency will help you get top dollar for your firm.

1 – Streamline, Organize & Document Everything

Before selling a PR 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. Think about your firm as if you were out of the picture…would it survive? If not, what can you do to make sure the walls don’t crumble if you’re gone? If you don’t already have thorough documentation of the ins and outs of your firm’s processes for key areas of the business, this is the right time to get those in place. Sophisticated buyers willing to pay top dollar for your PR firm 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

Business development is a really big deal to buyers! Given that most PR firms don’t have a lot (or any) collateral assets, a lot of the “secret sauce” lies in the way the firm gets new business. Do whatever you can to systemize this process, ideally in a way that doesn’t center around you. Even if you’re looking for a strategic buyer that will keep you on board for several years post transaction, buyer still want to see a clear business development process that operates without the founder leading the charge.