No basic template exists to value a business, including a creative agency. Whether you’re considering the sale of your agency, an acquisition or merger with another agency, an employee buy-in or just want to understand what your agency may be worth, it’s important to be aware of costly mistakes that could lead to an inaccurate value. It may be appropriate to use one or more established valuation approaches to find a proper value for your agency. These approaches include the income, market and asset-based approaches.
Industries and the market dynamics are continuously changing. The key factors driving the value of your agency and others in the industry today may be different than they were five years ago. When determining value, it’s critical to reflect the unique attributes of your agency, which may include, among many other unique characteristics:
- Recent and future growth potential
- Brand value
- Market position
- Size
- Profitability
- Degree of recurring revenue
- Client concentration and retention rates
- Industry accolades
- Experience of the management team
Over the years, we’ve observed a number of common mistakes creative agency owners make when assessing the value of their agency.
Overestimating the Value of Creativity Over Metrics
Creative accolades and/or a unique agency culture are important but do not always directly correlate with value. Investors and potential buyers are generally more focused on a range of quantifiable metrics, such profitability, revenue streams and growth potential. Accolades and culture are relevant, but in many cases will not be primarily drivers of value.
Ignoring Market Trends
Neglecting to properly analyze how current trends in the market are impacting agency transactions, acquisition multiples and valuations can lead to an inaccurate value driven by subjective expectations rather than market realities. If financial projections are prepared for the agency, they should reflect market and economic trends. Owner expectations frequently fail to acknowledge the trends, which may impact both future top line growth as well as profitability.
Underestimating the Importance of a Diverse Client Base
A common oversight is the impact on value of a reliance on one or two major clients for the majority of an agency’s revenue. Often, this client concentration creates considerable risk, which impacts an agency’s value given the impact on future cash flows if a major client is lost. Alternatively, a highly diversified client base generally reduces future cash flow risk and it’s even more valuable if a significant portion of the agency’s revenue is recurring in nature.
Emotional Valuation
If you built your agency from the ground up, you may, understandably, have an emotional attachment to the business. Unfortunately, this can lead to an overvaluation of the agency. While it may be difficult, detaching personal sentiment from the agency’s actual worth is crucial for a fair valuation.
Not Properly Accounting for Digital Assets and Intellectual Property
In today’s market, the value of assets like proprietary software, digital content, and intellectual property can be substantial contributors to the value of an agency. In our experience, many agency owners fail to properly reflect the value of these assets. Breaking down this information and how it contributes to the agency’s value helps potential buyers or investors understand the agency’s history and gain important insight into its future.
Relying Too Heavily on Rules of Thumb
Rules of thumb paint an industry with a broad brush and are commonly based on historical and often outdated transactions and general observations. We’ve discussed a variety of factors that may result in your agency’s value, or the appropriate multiple of revenue or an earnings metric for your agency, to be well above or below the multiple suggested by a rule of thumb. Use of a rule of thumb may provide you with a back of the envelope figure, at best. At worst, it may lead to a highly inaccurate value and perhaps a costly mistake in a transaction.
The Anders Forensic, Valuation and Litigations group works with creative agencies, including marketing, digital, graphic design and others, to help determine business value and help you chart a path forward. To learn more about our services, and the associated cost, request a meeting below.
