April 19, 2024

Productive created a questionnaire in 2022 with the goal of better understanding agency mergers. Understanding the factors that affect your agency’s worth is crucial to your growth, whether you are trying to sell it or just curious.

Productive managed, between January and June 2023, to collect responses from 796 agencies on questions relating to agency valuations. Data was collected from agencies in more than 60 different countries using the Agency Valuation Calculator.

The collected data was analyzed, and the 2023 Agency Valuations Report was created to provide agency professionals with insights based on the most recent data.

Continue reading to learn the latest trends in agency valuation.

Basics: Agency revenue, size, EBITDA, and growth

It may not be obvious that the size of your agency is a metric to keep an eye on, but it often correlates with revenue. This means that larger agencies tend to bring in more cash.

The size of the agencies was divided into four categories.

Source: Productive.io

Respondents were divided into two categories when asked about revenue: those with income above USD 1M USD and those below. The multiplier for valuing your agency was determined by this revenue category combined with EBITDA. The multiplier will increase the more money you earn and the greater the value of your agency.

Source: Productive.io

Around 22% of companies reported a revenue growth below 10% per year in the two years between 2020 and 2022. Nearly half of agencies stated that their growth averaged over 30%.

Client Concentration is a key element of the value of your agency. This shows what percentage of your annual revenue is generated by your biggest client.

It’s natural to ask: “Why is this important?” It may not seem important at first, but the risk that your business is carrying can be quite significant. How much revenue would you lose if your largest client left? When looking at the concentration of clients, it’s generally accepted that anything under 25% is positive.

About 26.3% (of surveyed companies) reported that their biggest client accounts for more than 30% of annual revenue.

It’s important to know the percentage of revenue that is recurring. Investors value knowing your recurring revenues because they feel more secure about the business that they are acquiring. Over half of the agencies that participated in the survey said at least 50% of their revenue was recurring.

Business Development and Management Resilience

Buyers appreciate well-documented workflows and processes. This shows that your company has a structured operation. It is recommended to have a business strategy in place, as it allows buyers to see how the agency will function after it has been sold.

The majority of businesses said that they have a strategy for business development in place. However, the founders are still involved. Around 80% said they had some form of management but that their founders were still active.

The willingness of the management to continue to work with the agency even after its sale is another factor that can contribute to perceived stability. Most agency owners intend to stay with their company between 12-24 months, according to the findings.

Business Operations and Data Consolidation Tools

The study found that less than half the agencies used an integrated platform to consolidate all their business data.

The consolidation of data is essential to effective agency management. This data can be used to optimize operations, allot resources more efficiently, and forecast future trends.

This step is crucial to maximizing opportunities for mergers and purchases and enhancing agency values. Productive offers a comprehensive solution for managing agency businesses.

Dos and Don’ts

Take a look at this list of dos and don’ts to help you determine if you are making any of the most common errors.

Overview of the best-performing agencies

It might be interesting to see how you compare with the top agencies. You can see below a list of the top 5% agencies in terms of valuations, both for revenue under $1M and above $1M.

There are several obvious differences between the top agencies with revenue over $1M and those under $1M. The top agencies that have revenue under $1M are more dependent on their founders to develop business since many do not have a formal strategy. They also tend to use a number of different tools, which do not allow them to consolidate all their data into one platform.

Source: Productive.io

Takeaway

A few key decisions can have a significant impact on the value of your agency in today’s dynamic market. Prioritize steady growth by diversifying clients and aiming to increase revenue consistently, preferably more than 30% per year. It will not only boost your daily operations but also the market value of your agency.

Consider risk management next by maintaining a diverse client base. A good rule is to keep client concentrations below 25%. At least half of the revenue generated by your agency should be recurring. This will provide a steady income stream to attract potential investors.

It is important to have a high level of operational efficiency. Document your processes and workflows in order to present a well-structured operation that is appealing to buyers. Adopt integrated platforms for data consolidation to streamline operations, allocate resources efficiently, and make accurate forecasts.

Plan for the future. Even after a sale, your involvement matters. The founders of most successful agencies stay with the agency for 12-24 months after the sale, which contributes to the perception of stability.

The key to increasing the market value of your agency is to adopt a strategy that incorporates consistent growth, risk management, operational efficiency, and future planning.

Use the Agency Valuation Calculator to estimate your agency’s value.

Understanding the value of your agency is important for long-term success, whether you are considering a sale or just curious. It is important to ensure stable revenue streams, have a diverse clientele, establish a strong management system, and leverage integrated data. These factors improve the day-to-day operation of an agency, but they also increase its market value.

Leave a Reply

Your email address will not be published. Required fields are marked *