The Ultimate Agency Valuation Breakdown: Know the Ropes In 5 Minutes or Less

In the agency M&A world that I call home, negotiations are the subject of a lot of speculation and misunderstanding. As someone who’s had a seat at her share of deal-making tables, I can assure you that negotiations aren’t as mysterious as you think. At the same time, they’re one of the most exciting parts of my job. Being founder-led, Barney is naturally also founder–friendly – and in the negotiations we navigate, valuation is a big deal. It’s a delicate dance of priorities and value alignment where we need to balance the founder’s wants and needs with those of the buyer.

Over the years, we’ve drilled this down to a science.

Today, I’m going to lay down all the factors that go into your agency’s valuation. I hope this helps you achieve the exit of your dreams – as well as learn what buyers look for when they’re exploring an acquisition deal.

Time to dive in.

Valuations 101: The Basics

First, a ground course. You deliver value to clients every day. But how does that value stack up against what your agency is worth? How do agency valuations work??

It’s not as scary as it sounds!

If you already know the valuation basics, skip this part and scroll straight down to “10 to Win” below. ????

Valuation Methods

• Method 1: Multiple of Annual Earnings

This method looks at your agency's net income. How much are you billing? Next, add any personal expenses, taxes, or interest that you've earned from the business back in. And there you have it: your valuation.

• Method 2: Multiple of Annual Revenue

This method looks at how much your agency bills annually, minus any ad spend that you're covering for your clients.

Now that you know the methods, it’s time to move on to some other important considerations.

Size Matters

Your agency’s size factors significantly in what buyers are willing to pay for it. The rule of thumb here is: the bigger the agency, the bigger the multiple.

YOY Growth Rate

Is your year-over-year (YOY) growth rate 30% or higher? If so, your valuation will use numbers from the trailing 12 months.

If, on the other hand, your numbers are steady – or if you’ve had an off year in the last 3 years – your valuation will average the numbers from the trailing 3 years.

So far, so good?

(Home, Home on the) Multiple Range

Now it's time to determine where you fall within the multiple range. There are 3 possibilities.

• Under $5M

If your revenue falls here, your valuation is between the following range:

?? 2X–6X your earnings

OR

?? 0.8X–1.5X your revenue

• Between $5M-$10M

If your revenue falls here, your valuation is between the following range:

?? 4X–8X your earnings

OR

?? 1X–2X your revenue

• Between $10M-$20M

If your revenue falls here, your valuation is between the following range:

?? 6X–12X your earnings

OR

?? 1.5X–3X your revenue

Those are the ranges. But how do you figure out which one you fall in?

This is where things get really juicy.?

10 to Win: The 10 Key Agency Valuation Factors

1) The Revenue Riddle: Projects or Retainers?

How you structure out your contracts is a huge part of the valuation puzzle. If you’re retainer-based, you’ll land on the higher end of the valuation range. If you’re project-based, your agency will be valued lower. Retainers, on the other hand, weave the ideal narrative for buyers because they hint at predictable revenue. And from an acquisition perspective, predictability always wins –?it’s a key de-risking factor for a buyers’ investment.

2) Niche It to Win It

Buyers prefer agencies that are hyper-focused over generalist agencies. This also helps expand the pool of buyers because you start to look like an exciting acquisition target for larger agencies who want to absorb your offering and merge it with theirs. Example: a buyer that’s looking to serve B2C e-commerce brands is naturally on the hunt for an agency that has mastered this niche. If that agency is yours, this is a win-win.?

3) A Rock-Star Leadership Team

An agency’s greatest resource is human capital. To that end – from a post-exit transition perspective, the structure of the leadership team that stays on post-acquisition is a huge deal for buyers. The stronger the core team, the more aligned they are to the agency’s continued success – more theoretical dollars get added to your valuation.

4) Blitz-scale or Die: Ready, Set, Growww?

How ready is your agency to scale? This is super important for buyers. Ask yourself: how quickly can you scale your top-line and personnel without completely overhauling your agency’s structure? The answer will weigh heavily in determining your exit price. Why? Because this factor signals how strong the foundation for your agency is – and gives an indication of whether it’s ready for the big leagues.

5) Be BD-Ready: Sales Pipeline FTW!

Inbound is great – but inbound alone is not enough. Buyers want to ensure that the agency they’re buying isn’t just attached to your reputation and growth isn’t heavily tied to just word of mouth. To make the most of this aspect of a valuation, marry a stellar reputation with outbound marketing and a seasoned business development team that’s firing on all cylinders and filling your pipeline like a well-oiled machine.

6) Robust Contracts, Minus Lawyers in Designer Suits

Buyers want to know that you didn’t just dream up your top-line numbers in a fever dream the night before you meet with them. This isn’t as complicated as it used to be – you can do it in 5 minutes using SaaS products like PandaDocs templates. Just remember: if you have retainer-based contracts, try and extend their length. Because yearly contracts will land you higher on the valuation scale than monthly retainers.

7) The Ultimate Red Flag: Client Concentration

If you ever see a buyer tense up once they get access to your client list, a concentration of revenue with one single client is probably why. Broadly, try and avoid clients that make up more than 10% of your total revenue – this could end up hurting your valuation. Or worse, they could leave post-exit, and then your buyer will be left scrambling to make up for the lost revenue. The end result? Deal terms that are less than stellar, meaning: a portion or even the lion’s share of the total deal value will be paid based on what happens post-transaction with these key clients. That’s a lot of potential loss for you as the seller. So spread out your client base and make sure you get a better deal!

8) Churn and Burn: Are You as Good as You Think You Are?

No one wants to acquire an agency that’s constantly churning through clients. This signals the agency is more focused on topline than delivery. That’s a bad sign, and one that will end up hurting your valuation. If your agency has clients who’re raving fans, they should ideally want to demonstrate that with their checkbook – leading to long-term contracts. This will bump up your valuation because churn rate is an important metric for buyers.

9) Reputation Is Everything – So Use It

In this day and age, the loudest voice on the internet is often seen as the most authoritative. But that doesn’t mean you need to be Gary Vaynerchuck to land a stellar valuation. Just have a presence online and let buyers know you exist. Show up on Google. Update your LinkedIn page regularly. If they can’t find you with a quick google search – that’s not exactly going to inspire confidence.

10) Transition Plan: Meet Them in the Middle

This is a huge deal for agency founders, so jot it down on your essentials list and hang it somewhere as a reminder. Buyers want founders who believe in the long-term viability of their business – and when the founder books a one-way ticket to an island immediately post-exit, this is not a good look. It will also negatively affect your valuation. It’s just better to stick around for a more robust transition plan.

Takeaway: So Plan Things to a “T”

I hope this gives you some clarity on how you build up a credible narrative when you eventually decide to take the plunge and sell your agency. Just remember: valuations ARE sometimes subjective, and value is always open to interpretation. But as long as you can reduce the risk for the buyer in the months immediately post-acquisition – you should be well on your way to that sweet post-exit life. These 10 tips will help you get there sooner.

Oh, and if you’re already there, you know who to call. ????