Knowing your agency’s valuation is crucial when you run a digital marketing agency. It gives you a good idea of what you should charge for your services.
It’s a question agency owners often ask when selling their existing business. For those looking to purchase an existing business, knowing the right price can mean the difference between an investment that is a bargain and an overpriced one.
It cannot be very safe to significantly determine your company’s value in today’s business world since several factors can affect its value. We’re here, then, to help make sense of all this.
This blog is for all digital agency owners who want to evaluate their agency’s value.
Calculating the value of your digital agency
How do you value your digital agency? The price of a product is only as reasonable as the amount that someone will pay for it. You’ve invested much time and energy to reach where you are now. That would have some value. It’s not enough to settle on any number.
The value of your digital agency should reflect all the factors that are important to you, including your reputation, past achievements, potential for growth, etc. If you want the upper hand, you must be aware of all the factors that influence the value of a digital agency.
Understanding their impact can help you justify the price.
Profit and Earnings
Profit is the key to starting a new business. This is the first thing to consider. It would help if you examined your past earnings to determine the value of your agency.
A buyer would not want to invest in a dead project. Nobody wants to invest in a project that will not work.
EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) highlights the net profit. It shows how much money remains after subtracting expenses like rent and salaries.
It would help if you considered SDE (Sellers’ Discretionary Income) when determining the value and revenue of your business. This includes the income that you report to the IRS, as well as non-cash expenditures.
The majority of digital media companies are sold for between 4-6x EBITDA.
Time in operation
Your agency’s value increases the longer you have been in business. It’s pretty straightforward. About three years is required for a business to grow and establish itself. Any less can reduce the value of your company.
The longer you’ve been doing business, the better your reputation will be, and you’ll also have more Time to build a client base.
It’s great to work with big brands like Dell Technologies or Capital One, but working with smaller companies is also essential for the valuation of your agency.
Your reputation can be significantly affected by the testimonials and reviews of your past clients. Your agency’s value will surely increase as your industry reputation grows.
Your agency’s valuation is affected by the value of current projects.
A digital agency provides continuous services. Contracts that have been in place for a long time and are recurring cannot be terminated just because the owner changes. This could seriously damage your reputation.
The value of an agency can be affected by clients on the way. If these projects’ revenue potential is high, they can increase your weight. This ties in with the next point.
What will the agency look like in a few years? When the agency’s workflow grows steadily, it is more attractive to invest in the company.
Suppose a digital agency has several large clients primarily contributing to its revenue stream. In that case, the buyer should consider what will happen if the client discontinues services or the contract isn’t renewed.
Even though there are benefits to working with reputable large firms, revenue streams can trickle down when they leave. For the best-performing digital agencies, avoid having any client account representing more than 30% of sales.
In the same way, the number and type of clients and the retention rate of those clients can impact the valuation and growth potential. Focus on retaining the right mix.
Digital marketing agencies should be valued based on their competitive advantage.
Scarcity may have a cost. Your digital marketing agency’s value increases if you offer niche services, unique technologies, or other things that only some people do.
A buyer will place a higher value on an agency with years of experience and services for a clearly defined customer target in a particular industry.
This can go both ways. If your services are too specific and there’s little demand for them, you may find achieving the value you want challenging.
Work structure within the organization
You are the face and voice of your digital agency. Even though you might be involved in operations, buyers will pay close attention to how the work processes within the company are managed and your role daily.
Do you run the entire agency, or are there separate managers for each department?
You must tell the buyer of your digital agency what will happen if you leave.
A management structure with different departments can still run smoothly even if you are not there.
The department heads will be on hand to continue the work process. An integrated agency with structured internal management is more valuable than an individual.
The level of commitment from critical employees is also essential. Will they remain on board once the sale has been completed? What will happen to the office culture after a sale or takeover if the owner changes?
Current market prices
Any individual considering launching a digital agency will research the prices other agencies currently command. Check the agency’s cost in the past six months to ensure you do not undervalue or overvalue it. Compare the factors that can affect the price, such as size, services, location, etc.
Every business is affected by a recession. You are also at risk of devaluation as a digital agency during difficult times.
Increase the value of your digital agency.
How can you make your digital agency more valuable now that you know how much it is worth?
You need to consider more than EBITDA in terms of a percentage. Improving a digital agency is the key to increasing its value.
You can add value in several ways:
Give it Time
You are in the early years of your career when you’re still learning and experimenting. Your value will increase as you gain experience in digital marketing.
Create a healthy margin of profit to improve agency valuation.
It would help if you constantly strived to find new ways to increase profits. You need to profit at least 40%, whether you charge more to your customers or reduce operational costs.
If you are in debt, it’s Time to pay off your debt. Your value will drop if you are in debt.
Plan for steady growth
A growing company is attractive to buyers. Profits increase. If a company is less than five years old and has 30-50 percent annual revenue growth, it’s on the right track.
Increase your client base for digital marketing agency pricing.
You’ll grow faster if you have more clients. Large clients have both pros and cons, as we’ve already mentioned. They can negotiate for more services and lower prices, reducing the profit margin. To improve your bottom line, find more clients.
If you plan to sell your agency, look for long-term, transferable contracts you can easily hand over.
More testimonials are needed.
Your reputation will increase the more you are heard. The more you are worth, the better.
Increase the value of your marketing agency by identifying new revenue streams.
Digital marketing is a vast field. You can offer a variety of services. You can take advantage of the opportunity, depending on demand/supply.
Of course, agencies with a high level of specialization are more valuable, especially if they have more clients.
Establish management teams
The value of agencies with different staff members responsible for other processes and procedures is higher. This is because the buyer only has to perform a few roles.
Keep track of metrics.
Digital marketing is all about numbers. Monitor, measure, and evaluate essential KPIs, such as lifetime customer value, profit margin, burning rate, etc. This will not only help you identify your weaknesses, but it will also enable you to increase the value of your agency.
Get a significant online following.
Content of high quality can help you build your brand and establish yourself as an industry expert. A solid financial base and specialized knowledge of your industry can increase the value of an agency.
Order your paperwork
The more easily a buyer can acquire and manage your agency, the higher its value. Continuing their earnings throughout the whole handover/takeover procedure is essential.