Building Your Marketing Agency To Maximize Its Exit Value, Even If You Don’t Intend To Sell
In the midst of all the excitement building an agency, business owners lose sight of one important element: what do you want the exit value of your marketing agency to be?
It might seem counter-intuitive to think about selling your agency when it’s new and you’re still building it.
Actually, it’s essential to think about maximizing the exit value of your marketing agency from day one. Even if you think you might never sell.
As a Productized Service Builder, I can tell you that those selling for the highest multiples have distinct characteristics which have been cultivated from day one. I also wanted to quickly define the difference between a traditional agency and a productized service.
–>A typical Agency will serve many customers, create custom proposals, and have a variety of “bspoke” offerings. This makes it very hard to scale, hire, and create an asset that doesn’t rely on you.
–>A Productized Service is an offering packaged with a set price, a clear picture of what you get, a clear value proposition, set deliverables, defined scope, and all delivered within a set timeline. See the Anatomy of a Productized service here.
All of which you can — and should — implement in your business plan, too.
Why should you think about selling your agency if you never intend to do so?
I’ve got one word for you: optionality.
This means always building a business with the option to sell even if you don’t plan on doing so, ever.
Because guess what? Life is unpredictable. Situations change. People change.
It’s your ability to adapt that defines your success. And yes, that means leaving open the option of selling your business. Even if it’s your passion, your life’s work.
Don’t get me wrong. I hope your business brings you many years of fulfilling work and success. But ultimately life is full of curveballs. There’s no harm in preparing for them. There’s no harm in having options.
You don’t have to sell, but at least you know the option is there to fall back on should you need to.
Why is it important to consider the exit value sooner rather than later?
Without question, you’re committed to making your agency a success. You’re focused on profits, sales, agency growth, client retention, and other financial KPIs. That’s what ultimately makes your business of value, right?
However, there’s more to agency valuations than the typical indicators for success. And some factors are harder to implement once your business is already well-established.
In fact, some might be near impossible to implement a few years down the line. They really do need to be thought about whilst you’re first building your agency.
Additionally, paying attention to the exit value will avoid an earn-out.
An earn-out refers to a pricing structure where, rather than getting the full price upfront, you must “earn” part of the purchase of your business based on its performance following an acquisition. In most cases, this requires you to stay in the business for an unspecified amount of time after the sale is complete.
On the plus side, earn-out can facilitate a sale as buyers don’t have to front the full value.
But, as a seller, earn-out can lead to disadvantageous situations: delayed payments, potential loss of the selling value, and even litigation.
Luckily, the answer to avoiding earn-outs is actually pretty simple.
Earn-outs occur because a business lacks proper systems, trust, and, ultimately, value in the investor’s eyes.
To make up for this, buyers require the previous owner to stay at the business to lower any risk involved with the handover, keeping processes in place, retaining existing customers, and essentially making sure the agency continues running as promised.
So, to avoid an earn-out you have to focus on your “exit checklist” of items that ensure a smooth handover. And you should do this from the very start.
So, how are marketing agencies and other productized services valued?
Most agencies are valued based on SDE (Seller Discretionary Earnings) or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
To value a service agency, the SDE or EBITDA is taken and multiplied. This is known as a profit multiplier.
The profit multiplier amount varies from business to business. From my experience, service businesses typically gain a 1–4x multiple. This can vary based on market conditions and the value of the business.
For example, let’s say you own an agency and you want to secure a $1 million exit value. You know your agency can secure around a 3x multiple. Therefore, in order to secure the $1 million exit valuation, you should aim for $333,000 in SDE or EBITDA, as 3 x $333,000 is $1 million.
But, how do you know what your multiple is?
Many factors are at play here, and it is within your power to make the profit multiplier higher or lower, which I will delve into further in the next section.
To find out what your multiplier currently is, you can start by seeing what similar businesses have sold for over the past 2–3 months to get a rough indication.
Then, I recommend contacting at least three business brokerages for an evaluation. (Clarity.fm is a great place to start searching for local brokers and comparing options. You don’t have to list them just yet. Get their opinion first, then make an informed decision on how to proceed.)
An important consideration is finding a broker who specializes in selling your type of business model and not a general broker. A couple of business brokers I highly recommend are Nick Hastreiter of We are Barney and David Newell of Quiet Light Brokerage, who both specialize in selling agencies and service businesses.
What are the key things to focus on to maximize my agency’s exit value and increase my exit valuation?
There are many aspects of your business that can impact its value. These are important to properly consider whilst you build your marketing agency.
Before I break them down, I want to emphasize one essential overarching component.
First and foremost, consider: what do investors and buyers want? Put yourself in their shoes.
Think about it. When you sell your marketing services or conduct campaigns on a client’s behalf, you put the customer at the center of all your decisions. What do they want? What pain points do you solve for them?
You should have exactly the same attitude when it comes to selling your business. What would a buyer or investor want? What would you want to see in a company you were buying? What makes a business attractive to someone?
Believe it or not, even as a marketer it’s easy to forget this when it comes to your own agency or service business. You’ve been there from the beginning. Your agency is your baby, and like any proud parent, you see the best in it. However, it’s not the buyer’s baby and if there are problems with your business they won’t go unnoticed.
With that said, let’s take a look at what buyers and investors will look for, and what you can do to maximize the exit value of your marketing agency.
A key part of any productized service agency — and one that will massively improve the value of your business — is having clear, predictable systems in place which are proven to maximize sales and cash flow.
Not only are your processes clear, tried, and tested, but they also make your handover to the new owner easy, as the process isn’t dependent upon you.
Ask yourself: how many hours do you work “in” the business a month? Are your sales processes and lead generation tied to you or your network? Have you implemented captured processes and systems that run without your monitoring?
If your answers to any of these suggest your agency is reliant on your presence, it’s not going to be appealing for a buyer and investor to take over the responsibility. As such, the value of your business will be diminished and an earn-out is inevitable.
A process I typically follow here to get started is to track everything you do each day. Your team can also do this. This will bring to light the most common activities within the business that happen consistently. The next step is to ensure these activities are properly documented and organized. I love to capture processes with tools like Loom and build out process playbooks using ClickUP docs. This allows us to create a “library” of processes that our team can leverage and access.
Long-Term Business Growth
Let’s start with the most obvious factor impacting your agency’s value: long-term business growth and profits.
Yes, of course, buyers are going to look at your agency’s profit margins. Not just recent margins, but over at least the last 12 months, and realistically the last 2–3 years. Investors want to see a track record, and the longer you’ve been in business the more confidence they will have.
To maximize the value of your company, maintain consistent revenue growth and a minimum of 65% gross margins.
Specialists are considered more valuable than generalists. This means getting specific on the industry area, client type, and service offering your agency focuses on. The more specific the better! Productizing will drastically help compared to a bespoke model.
Who are your customers? How many do you have? How big are they?
When selling your agency, the more consistent relationships you have with bigger, well-established brands the better.
Additionally, you shouldn’t be over-reliant on one customer in particular, no matter how reputable they are. No single client should represent more than 25% of your turnover.
Your team and customer relationships are the key tangible assets for marketing agencies due to the industry being service-based.
Therefore, alongside your client portfolio, buyers will assess your agency’s employee and subcontractor contracts to ensure the workforce is stable and reliable. This is a huge asset for your business, so keep this organized.
Diversified Income Streams
In addition to having income from a range of clients, you should also diversify your sources of income in terms of your service offering.
Whether it’s courses, memberships, consultations, or otherwise, the more income sources the better. This shows your agency’s success isn’t over-reliant on one particular service offering, or on you as the founder.
Who helps run your agency? Having a senior team of “A players” running the business is essential, as it shows potential buyers the handover to new ownership will be smooth as the key leaders will remain within the business.
A Clean Track Record
It is important to have nothing on your track record that could reduce your agency’s value. This means having solid and clean financials, tracked and organized COGS balances, transparency around any refunds and chargebacks, and no outstanding legal disputes.
You might never sell your marketing agency.
But life is full of surprises. Anything could happen.
By focusing on maximizing the exit value from day one, you ensure your business’ optimal value for any future sale and avoid earn-out.
Many of these value indicators might be hard to implement further down the line, so it’s important to consider them while you’re still building your agency. Consider them your “asset checklist”, which only compounds over time.
And hey, if you never sell it’s fine: the same processes optimizing your business’ value will also ensure its overall success with regards to profits, customer retention, and efficient processes.
Quite simply, what a buyer would look for in your business, you’d surely want for yourself anyway. There really is nothing to lose by focusing on the exit value from the offset, and by focussing on the above-mentioned factors you can take your profit multiplier into your own hands.
- How You Can Optimize The Exit Value Of Your Marketing Agency From Day One - 25 November, 2020