Preparing to Exit: How to Sell a Digital Marketing Agency
Find out how to secure the highest price possible for your digital marketing firm.
In the ever-changing worlds of technology and marketing, it can be tough to stay current. Business owners in the web marketing realm are always striving to adapt to new trends and platforms and the industry is a breeding ground for innovation and growth. Due to platforms like Facebook and smartphones, everyone has constant access to the internet, making the web the largest medium for advertising. Just in the last two years, global media spending has more than doubled and small businesses in every sector are putting more money into their web marketing strategies. The digital advertising industry has grown to become a 68 billion dollar industry and global spending is expected to increase 5% every year for the next five years. The industry itself is incredibly profitable, with firms pulling an average profit margin of 35% and employees generating around $150,000 in revenues.
As a business owner, it’s important to always have options for your future. The current state of the market and growth predictions come together to create a very favorable atmosphere for business owners who are ready to plan the next step. If you have been thinking about possibly selling your web marketing agency, we recommend getting a confidential business valuation. While only a professional business broker can tell you what your digital marketing business is worth, we have included some commonly used multiples to give you an idea of where you currently stand.
- 4-6x EBITDA
- 3-4x Cash flow
Now that you have an idea of what goes into valuing a digital marketing agency, you can begin taking the necessary steps to ensure you get the best valuation possible. We have compiled some pointers to give business owners the insight they need to build up their firm and get the highest sales price possible when it comes time to sell.
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One of the biggest red flags to buyers is high customer concentrations. Typically, we advise business owners to begin taking action when any one customer accounts for over 30% of your sales. In the marketing world, the same applies but it’s also wise to watch for too many small clients. Oftentimes, business owners spend too much time on customers that aren’t generating enough revenue for them, thus wasting time and resources when it is not beneficial. When it comes to larger clients, high customer concentrations can be very problematic for not just your business valuation, but also your bottom line and model. Big clients often know they are important and demand more resources for lower pricing. We often see uneven time and service allocation to these types of clients, ultimately hurting the chance to build up small account and obtain new clients. We recommend a healthy balance of 20-30 clients in the small to mid-sized range and constant analysis of your concentration levels.
Another major buyer concern is when a business depends too heavily on the owner or a key employee. Generally, when customer relations are funneled through the owner or only one employee knows how to do a really important task, buyers get nervous. The fear is that when the new buyer takes over, the things that make the business successful will not transfer due to loyalty with the previous owner. As a seller, you want to put buyers at ease and ensure that the business will run the same it did when you were managing it. Creating actual handbooks that document processes is one way to ensure that the current processes will transfer to the new owner and the success of the business does not rest in the hands of any one employee. While this can be a tedious task, it will show buyers that proven processes that lead to success can be transferred to anyone and that you have taken the necessary steps to ensure future stability.
Service contracts are a great way to attract buyers and build up a consistent cash flow. While the benefits of securing recurring revenues through contracts are obvious, contracts are also very beneficial when it comes to finding a buyer. Buyers become concerned when customer relationships are with the owner, not the business, and long-term contracts can quell these fears guaranteeing future service and ample opportunity for the new owner to win over the clients. While long-term contracts are great, they are not easy to obtain. It can be difficult to talk a new client into signing on with your agency for a year so we often recommend starting off with 6-month contracts then pitching an annual contract when it expires. Service contracts are a great to put buyers at ease when it comes to the future of your business and also balance your cash flow, which plays a huge role in the valuation.
Depending on the services your business offers, designing a client revenue sharing plan could be a way for your firm to bring in extra cash. Metrics and tracking are a large part of the digital marketing world and firms in the industry are beginning to use metrics to measure the increase in their customer’s sales due to their services. Instead of charging customers a flat rate, lower the rate and negotiate a percentage of the sales they get via your services. For example, if you provide SEO services and your client closes a deal through Google Adwords, you would get a cut of that. As time goes on, your firm could potentially earn more revenue through the share program versus the same rate, month after month.
In the marketing world, the phrase “jack of all trades, master of none” could not be truer, especially during the valuation phase. Businesses in this field are highly specialized and worth more if they provide niche services. Being great at one thing will go much further than being mediocre at many, and ultimately, you will secure more accounts by specializing in one area. Your clients will come to expect great things from you in your one arena of expertise but you can pleasantly surprise them with new services that cater directly to them, thus building rapport and revenues in one swoop. Full-suite marketing firms are often not as masterful in all areas but decent in a few. A niche business will also come in handy when considering strategic buyers. Strategic buyers are often business owners in your current industry that are looking to acquire a smaller agency with offerings that they do not already provide. This would increase the appeal of your agency and ensure security when your customers are rolled up in the acquisition.
Hopefully, our tips have helped you realize ways you can build up your digital marketing agency so that when you decide it is time to sell, you are able to get the best price possible. Our current economy coupled with a growing business put business owners in an advantageous position and we believe it is never too early to begin planning your exit. We have helped several business owners in the digital advertising field sell their business and it all starts with a no-cost, no-obligation valuation. No matter where you are in the small business cycle, every entrepreneur needs to know the value of their company. Take the time to plan for your future and the future of your business today, you will thank yourself at closing.