Marketing Services Agency Valuations In M&A In 2022
Over the past two years, as my company has evaluated potential acquisitions, I’ve spoken with numerous founders, bankers and private equity firms with M&A experience to see how the current market values marketing services and agency businesses. When connecting with many first-time sellers in this process we’ve often seen a gap between their perceived value of a company and its market value.
If you enter the acquisition market with an unrealistic sense of your agency’s worth, you just won’t get far. While the calculations in the valuation of an agency business are complex, they can be briefly expressed in a formula: the Enterprise Value of a business is equal to its Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) multiplied by a figure known as a multiple. Buyers calculate this multiple by evaluating variables that are a proxy for the health of the business: its growth potential, profitability potential, employee and customer-concentration risk, and more.
Based on the feedback of sellers, bankers and investors, I put together the following graphic which effectively summarizes how a strategic or financial acquirer evaluates a marketing services/agency business today, including explaining how multiples are determined. At the end of the day, these are just guidelines, but they are based on input from experienced industry insiders and represent an accurate picture of the transactions that have been completed in the past two years.
A mobile-friendly version of the graphic is available at this link.