Digital Agencies Are Selling For Record Breaking Amounts

From 2015-2019, the number of acquisitions of digital marketing agencies doing $2M – $10M in revenue annually surged up nearly 122%. Last year alone, the median sales price of digital marketing agencies increased a whopping 38%. The reason for the gains in acquisitions and sales price is simple. Buyers are catching on to the lucrative – and relatively low risk – industry of digital marketing agencies. The result? The traditional multiples used to value digital marketing agencies are being completely shattered. Entrepreneurs who started digital marketing agencies just a few years ago are walking away with major paydays. To put it simply, we’re seeing that digital marketing agencies are selling for record breaking amounts. Can you tell we’re excited about this?

As traditional media companies and ad agencies scurry to adapt and stay relevant in a rapidly changing market, digital marketing agencies have blossomed as the pulse of future advertising. However, in the business world, digital agencies are still a relatively new business model. Most digital agencies have lacked the sophistication that is found in older, more established industries. In world of buying and selling businesses, digital agencies have long been considered a major risk that only the ultra tech savvy were willing to take.

In the past, first-time business owners have opted for something brick-and-mortar – a business that’s more traditional and comfortable. For seasoned entrepreneurs and private equity groups, digital agencies have lacked any real intellectual property, which is generally needed to attract tech-driven buyers that go for the “risky” investments. In addition, agencies have never had the traditional employee structure or long-standing financial history, ruling out mainstream PE Firms or family offices. The result – a scant and underwhelming pool of potential buyers.

As digital agencies began to get more sophisticated and established, and buyers realized the industry was here to stay, the dynamic of buying and selling digital agencies dramatically shifted. What once was an acquisition for only a strategic competitor has become a breeding ground for everyone outside of the digital marketing space racing to get a piece of the pie. Buyers have jumped in head first, but without the supply to keep up with the rapidly increasing demand, the prices have skyrocketed. In fact, the prices of digital marketing agencies have increased more than any other industry year-over-year.

Buyers love that most digital agencies are able to be managed from anywhere in the world. This lack of location requirement has opened up the buyer pool to include a vast array of strategic, financial and entrepreneurial buyers. Other agencies looking to expand their vertical or geographic stronghold can make a strategic purchase of a smaller, more nimble firm, regardless of physical location. Private equity firms looking to add to their profit-centric portfolio also aren’t bound by geographic location. Entrepreneurs are not as fearful of finding talent outside of a geographic area during an expansion.

Did we mention profit margins? A digital agency bringing in over $8M in revenue boasts an average profit margin over 18%. For smaller agencies, the profits can be significantly higher, sometimes even reaching 60%. Compared to other businesses of the same size and risk portfolio, digital agencies are CRUSHING it when it comes to profits. Needless to say, buyers love the high-profit margin, low risk industry of digital marketing.

For even small agencies, a slight difference in valuation can mean hundreds of thousands or millions of dollars difference in the ultimate payday. Yet, arriving at a definitive dollar figure can be a painstaking effort that encompasses a raft of factors. These valuation factors fluctuate based on everything from the current buyer pool and market conditions to cash flows and team structure.

The discussion does have to start somewhere, though, and there are guidelines. We’ve compiled the ones below from research, our experience and hundreds of interviews with buyers, sellers and financiers. Read on to learn what we’ve found.

A lot of discussions around a digital agency’s valuation start with a multiple of its revenue. In today’s business climate, digital marketing agencies tend to sell for between .9 and 1.9 times revenues. Generally, this revenue number is taken from the previous, or “trailing,” 12 months.

EBITDA, short for “earnings before interest, taxes, depreciation and amortization,” measures how much money is left after the “real” expenses  — things like salaries and office rent  — are paid but before any financial and tax wizardry that can make the reported income, a.k.a. the bottom line, look quite different. Most digital marketing agencies with revenues over $8M sell for about 8–12x EBITDA. Agencies with revenues under $8M generally sell from about 1.5X-4X EBITDA.

Sophisticated strategic buyers look much deeper. They want to know not just the current EBITDA as a percentage of revenues, but also what they might do to improve on it.

Can they cut expenses from combining back end operations like bookkeeping or human resources? They might look to see what new profits they can add through new revenue streams.

Another reason digital agencies are selling for record breaking amounts – the RAPID growth that agencies can experience with minimal overhead and risk. For digital marketing agencies less than five years old, a revenue increase of 30–50 percent per year is considered a reasonable benchmark.

But those younger agencies also tend to put their retained earnings into expansion, hiring more staff and adding services in order to increase revenue growth. Higher growth then means lower profitability, which can lead to some intense discussions during the buying process and even foregoing certain types of potential acquirers looking mainly at immediate financial returns.

Certain varieties of revenue tend to add value in acquisitions – from a half-percentage point on up in the multiple:

• Recurring revenue and retainer based contracts show an audience is willing to pay, and pay consistently. Often times the cash comes before the service is delivered, helping to finance upcoming operations. (Financial professionals call this type of cash “pre-revenue.”) Recurring revenue is also more predictable than project based revenue (think website design agency). Project based agencies don’t have as much control over their cash flow, turning away some buyers.
• Multiple streams of revenue are better than 1. Revenue from different verticals or with different services show buyers that you have a diversified agency. For example, an agency that offers project based content marketing services to law firms won’t be as attractive to buyers as an agency that offers retainer based content marketing across several industries.

Buyers want to be sure that once the seller or founder exits the company, there won’t be an implosion. For sellers that are heavily involved in the day-to-day operations of various aspects of the business, expect buyers to make offers on the lower end of the standard multiples. An owner who is involved in strategy and overall business decisions but isn’t involved in technical or business development work is an ideal set-up for buyers – meaning they will pay a premium.

In general, sellers fall into three different categories. We say these respectively and as an owner, we believe you’ll appreciate the candor:

• Fatigue, boredom and pursuing the next challenge. “This was fun and now it’s not.”
• Highly profitable or quickly growing revenue. “This thing is flying and we want to strike while iron is hot.”
• Loss of revenue, profit, both or key team members. “We no longer have a path to grow and would like to find some value for what we’ve built.”

Your reasons for selling your digital agency are never judged but important to understanding how things should be evaluated and viewed as a proper channel for purchase. The best prospects are those that are open, honest and direct with their expectations and the “why”.

With the low overhead and barrier to entry, the ability to carve your niche as a digital marketing agency has opened the flood gates for entrepreneurs to capture their share of this booming market.

With interest from 65 countries around the world, the success of digital agency acquisitions points to a growing market for many years. If you’re contemplating selling your digital agency, now is the time! Digital agencies are selling for record breaking amounts. The demand is high, the supply is low and owners are walking away with more than ever before!