Knowing your agency valuation is crucial if you’re a digital agency. It gives you an idea about how much you should charge for your services (SEO, SMM management, PPC management, etc.
It’s a question agency owners often ask when selling their business. Knowing the right price can be crucial for anyone purchasing an existing business.
How to Determine Your Digital Agency Value?
How do you calculate the worth of your digital agency’s services? The price of your digital agency is determined by how much someone will pay. You’ve worked hard to get here. It would be best if you also held some value. It’s not possible to settle on a number that isn’t meaningful.
The actual value of your digital agency is one that accurately reflects your achievements and future potential. You need to understand the factors that influence the value of your digital agency if you want to get the upper hand.
You can justify the price by understanding the impact of each.
Profits and earnings
Making a profit is the main goal of any business. This should be your first concern. You need to examine your earnings history to determine the agency’s true worth.
A buyer doesn’t want to invest in a dead company. It is not worth taking the chance of investing in an unsuccessful initiative.
To determine the true value of your business, and the revenue it generates, you need to take into consideration SDE (Seller’s Discretionary Earnings). This will include both the income that you report to IRS and any other non-cash expenses.
Digital media companies typically sell for between 4-6X EBITDA.
Time in operation
Your agency will be more valuable the longer you have been in business. It’s quite simple. A company takes around 3 years to become financially successful. Your agency’s value can be affected if you do not achieve this milestone.
The longer you have been in business, better your reputation and the longer you will need to build a client base.
Previous clients
It’s great to have well-respected businesses like Capital One and Dell Technologies under your name but it’s equally important for the valuation of your agency that you’ve worked with smaller brands.
Your reputation can be affected by the reviews and testimonials that clients leave. Your agency’s reputation will grow as it is well-respected in the industry.
Your agency’s current projects value will affect your agency valuation
A digital agency provides continuous services. A digital agency cannot terminate recurring, long-term contracts just because the owner changes. This could cause serious reputational damage.
The agency’s value can be affected by clients that are already in the pipeline. These projects can increase your value if they have high potential revenue. This is related to the next point.
Concentration of clients
In a few years, where will the agency be? If the workflow is growing steadily, it will be more attractive to invest in the agency.
A buyer might want to think about what will happen if the clients stop using the agency’s services or the contract is terminated.
Even though large, reputable companies have their perks, the revenue streams can drop if they leave. For the best digital agency valuation, it may not be wise to have any customer accounts that exceed 30% of your sales.