How to Sell a Digital Agency & What’s My Ad Agency Really Worth?
Got questions about selling your agency?
I often get asked things like: “what’s my agency worth?” or “how can I increase my agency’s value?” or “what’s the process for selling my agency?”…. and, the people asking aren’t just owners who are actively seeking to sell.
Be honest, it has crossed your mind before.
Even if you’re in it for the long haul. Everyone’s got an endgame in mind. It might be the near future, it might be the distant future. But wondered about the value of your agency and even thought about selling, retiring or moving on at some point.
If that’s true, the absolute best thing you can do is build a business worth selling. Be an attractive agency that any smart business person wants to acquire.
First Determine Your Digital Agency’s Valuation
In short, your agency’s worth is the magic number between the amount someone is willing to pay and the amount you’re willing to accept. Right?
But for a lengthier, technical answer about agency worth — it’s all about profit margin. Your goal is to be at 40%+ in profit. If you’re not hitting that mark then you’re doing something wrong. And, if you’re not hitting that mark it’s important to see where your profit leaks are so you can fix them (whether you’re looking to sell or not).
You can get a baseline by looking at the past 3 years growth. An acquirer isn’t going to look at the details, they want to know that you are trending in a positive direction. If not, it will be a fire sale and you will be stuck taking whatever is offered.
To maintain the upper hand, maintain positive, upward growth percentages year over year. A good range of growth would be between 15% and 50% gross.
You also need to look at the profit. Revenue isn’t everything if you’re not paying attention to the bottom line. Whether you’re $10 million agency or $1 million agency, you should be making mad bank from a profit standpoint.
Using my Agency Valuation Chart you can get a base line of what your agency is really worth. (This is just a baseline!)
For example: on the low end, if you’re at 15% growth every year and 15% profit margin, then you’re looking at a 5X multiple. So if you’re grossing $1 million at 5X that’s a $5 million value. (That doesn’t mean $5 million cash.)
On the other end of the scale, if you’re at 30% growth and 40% profit, you’re looking at 11X multiple in agency worth.
So How Do You Increase Your Digital Agency’s Value?
There’s a number of ways to increase your valuation. The key is NOT to wait until you’re ready to sell. These are things you should be doing to consistently grow your business. And when you do you will not only benefit in the short run, but you’ll attract the right kind of buyers and benefit in the long run too.
Build your business to sell, but treat it like you never will.
- Valuable Assets – Your clients are your only real assets. Totally buttoned-up contracts are super important. The more long term, transferable contracts the better. Transferable means that you can hand off the business to your buyer with little more than written notice to the client. Talk to your lawyer to make sure your contracts work in your best interest in terms of a future merger or acquisition.
- Reliable Cash Flow – Don’t let too much of your revenue be tied up in just one client. Diversify your client roster (by size, not be category) so you aren’t too reliant on just one big fish to pay all the bills.
- Solid Profit – Are you under charging? Are you over delivering? Are you a victim of scope creep? Make sure your bottom line is solid by having a handle on scope creep. Don’t do more while getting paid less. The best way to increase your value is with a healthy profit margin.
- Strong Pipeline – Make sure you have a multi-channel business development strategy. I like to suggest a 3 prong approach to consistently fill your pipeline: inbound, outbound and strategic partnerships (and I mean actual partnerships, not favors) in order to fill the pipeline.
- Know the Numbers – Always have a good idea of your KPI’s. You should be measuring and tracking your KPI’s, like: profit margin, lifetime client value, burn rate. Not only do you need to know your numbers but you also need to watch them to identify areas for improvement.
- Outside Perspective – It’s alway hard to see the forest through the trees. When you’re in the trenches, it’s a great idea to bring in an objective third party to help you see areas that need improvement. Consider an advisory group, board of directors or even a coach like me, hint! 🙂
Here’s The 6 Stages You Will Go Through When You Sell Your Agency.
It can be pretty exciting when someone reaches out with interest in acquiring your agency. But the reality is that it can be a very lengthy process and really difficult if you aren’t prepared with realistic expectations. Here’s a sketch of the process you’ll go through in order to sell your agency:
- Initial inquiry: An acquirer reaches out and asks questions about your agency with the intent to make an offer. Your answers determine whether or not they want to go the next step and issue a letter of intent. When the inquirer is asking questions, answer honestly but don’t go overboard with it. Don’t allow your excited make you offer up more info than what is requested… that’s a very common mistake and never works in the seller’s favor.
- Letter of intent: The letter of intent is an evaluation of what the buyer feels your agency is worth, as well as a high level structure of the deal they’re proposing. Make sure you will be happy with the general terms described in the letter before you move onto the next step. If you’re not, this is the time to negotiate.
- Escrow account: This is something you should request as a way to weed out time-wasters. Serious inquirers should be willing to set aside a small portion of the sale amount in escrow. For example, let’s say your agency is valued at $5 million and you’re taking $1 million cash up from and $4 million in equity over time. You can request the buyer set aside $25K-$50K in escrow now. Then if everything you’ve stated is true but the buyer backs out, you keep the escrow money. If not, it would be applied to the sale.
- Due diligence: Both parties use this time to learn as much as they can about the other. You have just as might right and responsibility to ask the buyer all the same questions that they’re asking you… from client lists to financials. You’ll also want to make sure cultures will mesh, so tour their offices and get a feel for things.
- Term sheet: Following the due diligence phase, the final step is the term sheet. This is the legal document that spells out every detail of the sale. In most cases you’ll have a cash amount and an earn out. Enter into the deal with an amount of cash in mind and don’t count on receiving the earn out. I stress – don’t sign a deal until you are happy with the cash amount. Most earn outs are designed to fail. So, expect you won’t see a dime of the earn out and be happily surprised if you do.
- Final step: Figuring out what’s next… This is the part I struggled with for a couple years. It’s time to figure out your next phase. Will you stay on with the new company for awhile? Should you sign a non compete? Do you work for someone else, or start a new business? All that’s up to you. One thing you definitely must do now is CELEBRATE! 🙂