What is my creative agency worth?
If you’ve turned to Google or your favorite AI engine to search these exact words, odds are you are thinking about selling your agency, applying for financing, preparing for a merger, or restructuring. This means you’ve also run into a dozen “rules of thumb” for agency valuation. They’re quick, cheap, and deceptively simple — and they’re also the reason many agencies don’t learn what their business is actually worth until due diligence.
The truth: real valuation is far more nuanced. Rules of thumb ignore the traits that make your agency unique and are a common shortcut for untrained valuation professionals. Relying on them can leave you with a number that’s significantly inflated or understated. And that can lead to costly, misguided decisions.
Discover the characteristics of rules of thumb, how to avoid them and related risk factors, and what actually increases the value of your agency.
Are you planning to sell your business but want to increase its value for a higher sale? Let us help you uncover the insights that matter in our Profit-Focused Maturity Assessment.
What Are Marketing Agency Valuation Rules of Thumb?
Creative agency valuation rules of thumb are based on general industry formulas passed along by word-of-mouth over time. Usually, these formulas are based on:
- Outdated historical transactions
- Benchmarks or financial metrics irrelevant to current or future industry dynamics
Each creative agency is unique. By creating a false sense of precision, rules of thumb can be a dangerous approach. One of the most common agency valuation rules of thumb involves EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples, while another is based on revenue multiples.
Challenges of Rules of Thumb
Rules of thumb create challenges to the valuation process. They often under or over valuate agencies, lack adaptability, discount unique agency characteristics, and fail to provide solid or verifiable market data.
Lack of Adaptability
Creative agencies (including advertising agencies, digital marketing agencies, or one-stop marketing agencies) aren’t static. They evolve with:
- Ever-changing market conditions
- Technological advancements
- Marketing platforms
- Strategy changes
Creative Agency Characteristics that Increase Value
There is a range of financial information and metrics needed for an accurate agency valuation including size, operating profit margins, debt levels, owner-related expenses, and rates of annual revenue growth, among others.
In addition, nonfinancial metrics unique to an agency can dramatically impact an agency’s value and are often missed or difficult to capture by “fast-track” valuation methods. Examples of nonfinancial metrics that increase an agency’s value include:
- Strong customer relationships and client bases
- Strong product and/or service diversification
- Established lucrative agency niches
- Recent and future anticipated growth potential
- Average or low agency client concentration
- High client retention rates and recurring revenue streams
- Operational Independence from Ownership
- Ownership of intellectual property and intangible assets
- Low revenue and earnings volatility
- Strong market position
- Substantial brand value
Even if you try making adjustments to a rule of thumb multiple to include your agency’s characteristics, that’s easier said than done, considering the many financial and non-financial factors that can affect a valuation.
Example of How Agency Differentiators Increase a Valuation
Let’s compare two agencies, Agency A and Agency B. Agency A and Agency B each have EBITDA of $1.5 million during the most recent year. But there are significant differences:
- Agency A receives 60% of its agency’s revenue from two large clients, while none of Agency B’s clients represent more than 15% of its revenue.
- Agency A’s EBITDA over the past three years is down 10% overall and has been volatile, while Agency B’s EBITDA has increased steadily over the past three years at an average annual rate of 14%.
- Aside from the agency owner and founder, who holds many key client relationships, Agency A’s management team is relatively inexperienced, with an average tenure with the agency and creative agency industry of six years. On the other hand, Agency B has a talented and experienced team with an average tenure and industry experience of 18 years.
- Agency A is using some outdated processes that decrease team and agency efficiency. Agency B has recently updated and streamlined many of its core processes leading to operational efficiency, causing a 12% increase in its agency’s EBITDA margin.
When comparing Agency A to Agency B, it’s clear that Agency B should likely have a (perhaps significantly) higher valuation. However, if you use a simple rule of thumb multiple of say, 3.0x EBITDA, it would be difficult to account for the financial and non-financial differences between the two.
While a rule of thumb shouldn’t be your first go-to method of valuation, it can still provide a secondary market value to compare to a more thorough income and/or market-based valuation.
If there is a significant difference between the valuation approaches, you can dial into them and examine why they are so different, providing opportunities to improve your business processes or capitalize on unique attributes during the business sale.
Are you looking for strategic insights to help maximize your business’s value before you go to market? Get the data you need using our Profit-Focused Maturity Assessment.