Key Factors That Drive the Valuation of Your Agency — Q&A
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M&A topics are in high demand in the digital agency space.
Recently we co-hosted a live webinar with Cactus. The aim was to identify and expand upon the key factors that drive the valuation of your agency.
We spoke with Mark Sainthill, Managing Partner at Cactus about the key factors you should take into consideration to understand the value of your agency. Here’s what we covered during the conversation:
The methods of agency valuations
Factors of attractiveness for your agency
Our audience had a lot of interesting questions for Mark at the end of the webinar. We bring you the full list of questions and answers below.
1. Is the more turbulent business/political environment affecting buyers’ appetites and/or pushing multiples down?
Yes, certainly. Buyers are being more cautious, especially around consumer-focused agencies. Generally buyers have an M&A strategy and they’re looking to fill capability or geographical gaps, so will continue to acquire. Tech firm multiples have taken a significant hit, but on the agency services side, multiples have held up.
2. I’ve heard about ‘roll ups’ being an effective M&A strategy… What’s your take on them?
Combining multiple businesses together via M&A’s creates size and diversification which generates significant value (much higher multiples on exit), and provides the fastest route to scale—rather than growing a business organically. However, with services businesses you need to be mindful of integrating teams and maintaining a strong and align vision and culture for the business, so staff don’t leave.
3. I run an event management & video production agency & we’ve been approached by our main client to join them. They are planning to IPO in 2-3 years. Have you had any experience in selling an agency and using the funds from the buy out to buy shares in the clients business?I’ll put them all together and add an intro and your boilerplate and bio and send you the link to check it out before publishing.
You can sell 100% of your company and exchange part of that value in cash and part in shares in the buyers group. Often buyers want the seller to retain some kind of equity incentive. You have to carefully assess the value of the shares, potential growth and terms around selling them. There’s always a chance the shares fall in value, like with any investment.
4. In terms of ’emerging industries’ that the bigger agency networks are investing in… which sectors are stimulating their appetites?
AI/Machine Learning, data/analytics, tech-enabled / automation, next-generation platform integrations e.g. Headless, CX/digital creative.
5. Say we wanted to pack a ‘Conor McGregor’ style punch in terms of making an impact… but have few clients willing to take a risk: is a proof of concept/spec campaign a good way to do that?
Find the right client that is willing to take a risk, and prepare to invest time and resources to plan, test and measure impact and/or value.
6. Which KPIs should I measure for my agency’s brand reputation? Which tools can I use?
Awards, thought leadership, brand, content, marketing, profile of founders, client surveys (NPS) and staff survey questionnaires (even Glassdoor) are very valuable. There are also industry surveys that give you a sense of how you’re performing versus your peers. Awards always provide a good yardstick, but use multiple data points and aggregating a measurement from that, rather than looking at purely one metric on its own.
7. When working with agencies and businesses, what will you advise them to focus on first to bring their overall value up?
Build robust and regular management information to understand performance and then build a growth plan to set goals/objectives for the next 3-5 years. Then, go into execution mode and prepare to invest your cash in people or technology.
8. When is the right time to sell my agency? We have been on the market for 8 years and grew from 3 to 60 people with revenue reaching EUR 10 million yearly.
Hard to time the “market” and when the business is ready. Agree as owners/shareholders what you want for the business and personally, and aim to align those ambitions with an exit strategy, assuming you’ll be tied in for 3 years.
9. What are typical concerns that surface from agency founders while getting a valuation of their agency with selling in mind?
It’s hard to time the “market” and when the business is ready. As owners or shareholders, agree on what you want for the business and personally, and aim to align those ambitions with an exit strategy—assuming you’ll be tied in for 3 years.
Cactus is a corporate M&A advisory and growth consultancy for agencies. Over the last decade they worked with over 3,500 agencies and businesses, offering support on growth, exit planning and sale.
Mark Sainthill, Managing Partner at Cactus, has over 15 years of experience in the agency business and his expertise lie in corporate finance and growth advisory. At Cactus he leads the M&A function and a team of about 20 consultants.
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