How to Sell Your Digital Marketing Agency
In 2022, I started the process to acquire a second digital agency. I had started my first marketing agency a few years earlier, so I had a pretty good idea of what worked for me, but I was interested in learning how to run a business I didn’t start.
So, I built a wishlist and started reaching out to digital marketing agencies that I thought would be a good fit. Within a few weeks, I was having regular calls with owners who wanted to sell their businesses, and I started getting a look “under the hood” at a few of these companies.
After the first acquisition, I took about a year to focus on learning and stabilizing that business before I started the hunt for my third. So, while my personal experience comes from buying digital marketing agencies, I’ve also gotten to speak with dozens of entrepreneurs who have sold their agencies for my podcast and in my acquisition research.
In this post, I’d like to share a summary of how digital agency acquisitions typically work. If you’re an owner who’d like to sell your digital marketing agency or other digital service business, then this is going to be a highly transparent look at how the process works from valuation all the way to closing.
Let’s dive in!
How Buyers Value Marketing Agencies
If you haven’t thought about selling your marketing agency, you probably haven’t thought about the way valuations work, but it’s actually pretty straightforward. Unlike high-growth tech startups which are much more speculative investments, digital agencies are valued using consistent formulas based on their top line revenue and bottom line cashflow.
So, before you decide to sell your agency, it’s important to understand how buyers will value your agency so you have a reasonable expectation going into the process.
Note: If your agency’s books and finances aren’t in order, this is an essential first step in calculating a valuation. Check out my post on agency finances to get started on this topic.
EBITDA and SDE Multiples
Most buyers will use a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or SDE (Seller’s Discretionary Earnings) to value businesses. I won’t go through the calculations for these here in this article, but essentially, both of these metrics help buyers understand how much cash the business generates.
For marketing agencies with less than $5 million in top-line revenue, SDE tends to be more common as the owner’s salary is often a significant portion of the cashflow and they’re typically pretty active in the business. For agencies in this size range, multiples tend to be between 2x-4x SDE.
For larger marketing agencies (>$5 million in revenue), multiples can get significantly higher. This is because more sophisticated buyers are interested in larger, more stable companies, and typically, higher revenue indicates less dependency on the owner. I’ve seen agencies get up to 10x EBITDA multiples in this size range.
Revenue Multiples
While less common, some agency buyers will use revenue multiples instead of EBITDA or SDE multiples. This happens more often when it’s a larger agency acquiring a smaller one, so they know that post-integration, they’ll get better economies of scale than the smaller agency could get on their own. Revenue multiples are often 1-2x top-line revenue.
As a seller, be careful about assuming you’ll be able to get a revenue multiple valuation. These are pretty rare, so unless you’ve already got a revenue-focused buyer lined up, you can probably assume buyers will use an SDE or EBITDA multiple.
Add-Backs
Because digital agency buyers are buying cashflow, it’s important to have an accurate sense of how much profit your business really generates. But, what if you’ve been running some personal or unnecessary expenses through your business for tax efficiency purposes?
I’ve seen sellers who pay for their car, house, travel, and even meals using their business’ revenue so they can lower their profit for tax purposes. I’m not an accountant or lawyer, so I won’t comment on the legality of this practice, but it happens often enough that buyers have a way to account for it: Add-backs.
An add-back is any cost that your business incurred that will not be incurred by the acquirer. These add-backs can make a huge (mostly positive) impact on your valuation, but it’s important to understand that both sides have to agree to them.
In other words, if you argue that you spent $100,000 on travel that was non-essential last year, but you don’t have receipts to prove it, the buyer may not honor this add-back.
Ideally, you should clean up any unnecessary expenses a few years before you go to market, but if you don’t, make sure you document them and keep records of your spending.
What Impacts Your Agency’s Multiple?
Using add-backs to improve your margins is one way to improve your marketing agency’s valuation, but the biggest lever you have is increasing the multiple that buyers are willing to pay.
Here are a few things you can do to improve your agency’s multiples:
- Top-line revenue - I’ve already said this, but larger agencies are seen as more stable and less owner dependant. It also opens you up to bigger buyers with deeper pockets.
- Recurring revenue - Buyers often look at “quality of earnings,” which basically means, “how likely is the cashflow this business generates likely to continue?” Recurring revenue through subscriptions or reocurring service contracts is a great way to show this.
- Client retention - Agencies that maintain client relationships for years are inherently more attractive to buyers than those that churn through clients every few months.
- Client diversification - If 20% or more of your revenue is tied to a single client, buyers will be more cautious with your valuation. Try to build a client list with no more than 10% of your revenue in any one client and you’ll improve your valuation multiple.
- Industry or niche - Most buyers, especially those looking at smaller agencies, will want to see industry or service specialization. This makes your business more repeatable and differentiated. I’ve seen sellers try to pitch their wide variety of client industries and types of services as a strength, but that’s just not how buyers see it.
- Growth rate - While buyers don’t buy agencies for their potential, seeing steady growth over a number of years is more attractive than declining or flatlined revenues.
- Process and documentation - Finally, the more repeatable and well-documented your processes, the better. Don’t go overboard here, but make sure you (the owner) aren’t the one doing everything and that you’ve been able to train a team to take care of your clients.
Unfortunately, most of these factors can’t be fixed overnight, but that’s why it’s important to prepare for a sales at least 2 years before you plan to start looking for buyers.
How to Find Buyers for Your Agency
Once you have cleaned up your books and you have an understanding of how much your agency might be worth, it’s time to start looking for potential buyers.
Business Acquisition Marketplaces
There are a few marketplaces that list service businesses and as a buyer, I can say that we find a lot of decent deals on these platforms. The ones I’m using right now are:
Each has its own pricing model (and some act more like brokers than marketplaces), but it’s worth checking these out if you’re serious about selling.
Marketing Agency Brokers
Business brokers take a sizeable fee from the seller after the transaction and many also charge a retainer while they’re working with you, but the good ones will introduce you to more buyers and improve your overall valuation.
The quality of brokers varies widely, and I’ve only found a couple that work with small (<$5m in revenue) agencies, but if yours is larger, you should definitely ask around for the best ones in your industry.
Direct Competitors and Complimentary Agencies
Whether you sell soon or not, it’s a good idea to build your network of competitive and complimentary agencies. When you do decide to sell, these are the people you’re most likely to get a deal done with, so the better your relationship is going into this process, the easier the process will be.
Personally, I keep a list of competitors and compliments for each of our companies and I make it a point to stay in touch with them annually, just in case either of us wants to sell or merge.
Private Equity
While private equity fundraising is down from its peak a few years ago, it’s still a very common exit opportunity for larger marketing agencies (>$5 million in revenue).
Private equity buyers often try to acquire multiple businesses within a sector, merge their revenues, and then sell the combined entity at a higher multiple to larger private equity funds or take the company public.
This means that you might be able to retain some equity and roll it over into the larger entity. You might also be able to stay on and work with the fund for years. While this isn’t appealing to every seller, it’s something worth considering.
Individual Buyers or Employees
Finally, smaller agencies (<$5 million in revenue) are often sold to employees or individuals. These acquisitions can be done through “seller financing” (eg: the buyer pays the previous owner off using the business’ profits for a number of years) or a bank loan.
In the US, “search funds” are becoming more common for MBA graduates who want to buy a business rather than start their own. These buyers typically try to buy companies that are too small for private equity with the hopes of growing them and selling them to PE funds down the line.
Deal Structures
As you start building your list of interested buyers, you need to think about the kinds of deal structures you would consider. In agency acquisitions, there is almost always a transition period where you’ll need to work for the new owners, but depending on your priorities, this could be as short as 6 months.
Sellers also rarely get 100% of the purchase price up-front. Most deals are paid out over 1-5 years. Typically, you can make more in total from a longer payout period, but you risk the business failing in the interim.
Offers will commonly include one or multiple of the following:
- Cash - Expect some of the purchase price at close with another chunk paid out after a few months.
- Earnout - Many agency acquisitions will include a multi-year earnout, meaning that you only get the full valuation if you hit certain sales or profit targets.
- Seller financing - You may be asked to finance part of the deal as well. Buyers use this to keep the seller involved, especially if there’s not an earnout.
- Equity rollover - Finally, a partial buyout will allow you to maintain some ownership in the company. This is especially common in private equity rollups.
Most buyers will be aware of the options above and some may have strong opinions about which structure they can and can’t use. Others may be more flexible, so if you have strong opinions, it’s best to state them up front so you can get on the same page.
The Closing Process
Buying a business is usually a significant transaction for both parties, so the closing process is pretty involved. It can take anywhere from 3 to 12 months to go from offer to the final closing date, and don’t forget that you have to keep operating the business well the whole time! If the financials change, buyers may “retrade” or change their offer, often not in your favor.
LOI (Letter of Intent)
Once the buyer and seller are roughly aligned on the valuation for the business, the buyer will typically prepare a non-binding LOI (or “Letter of Intent”).
This agreement is intended to give the buyer time to evaluate the business’ financials and operations before the transaction is official. LOIs are typically “exclusive” for the buyer, meaning that the seller cannot keep speaking to other buyers once signed.
Finally, while LOIs often include a purchase price and some of the major deal terms, they are non-binding, meaning that the numbers and deal specifics can (and likely will) change before closing.
Due Diligence
Once the LOI is signed, the buyer and seller will work together to verify the business’ financials. This will involve giving the buyer access to your books, contracts, invoices, bank records, tax records, and much more. Buyers are typically looking for undisclosed risks or irregularities that would cause them to balk at the acquisition.
Buyers may also want to talk to customers, key employees, or partners at this stage. While you may not want to tell your entire company that you’re working on a sale, you’ll probably have to involve some of them in preparing or accessing documentation.
In the meantime, this is when buyers will typically finalize financing for the deal. If they are using debt, you may need to deliver some documents to their bank as they perform their diligence.
Closing
Finally, once the buyer is satisfied with the diligence process and the financing has been approved, both sides will sign a final purchase agreement.
Most digital agencies are done as an asset sale, meaning that the buyer is acquiring key business assets (contracts, goodwill, domain names, account access, etc.), but not liabilities (debt, legal liabilities, accounts payable, etc.). It’s important to have this document reviewed by a knowledgeable lawyer because it could have huge implications for how or if you get paid fully for your business.
After the Sale
Once the agreement is signed, you will enter the transition period. The timeline and process will vary widely, but you’ll probably start handing over access to everything that makes your business run. There’s a lot to do at this stage, including:
- Announcing the sale to employees, customers, and partners
- Handing over administrative access to all software accounts
- Reassigning contracts
- Setting up bank accounts, invoicing, and payroll
If there’s an “earn out” period where you’ll continue running some or all of the business, then your day-to-day might not change much. On the other hand, if the buyer is replacing you more quickly, things could change very quickly.
Common Mistakes Sellers Make
Data shows that 75% of owners regret selling their business, and this matches my experience with sellers too.
There are four mistakes I see most often lead to post-sale regrets:
- Not understanding valuations or the process - Going into a sale with a naive view on valuations, retrades, the timeline, and the difficult reality of earnouts often causes huge mismatches in expectations.
- Not evaluating multiple offers - Businesses with multiple offers tend to get more than those who have eyes on a single acquirer. If you’re considering one offer, take a step back and go find two or three more to help you level set expectations.
- Not understanding the post-sale expectations - Variable compensation after the sale or a long-term sellers note can both be huge sources of strife. Make sure you understand all the fine-print in your closing documents and financing agreements.
- Not knowing what they want to do next - Finally, for many entrepreneurs, their business is an integral part of their self-worth. When they lose their business, they realize that they have to create a whole new self-identity. Even if you’re selling for enough money to retire, make sure you know what you’ll do with your time and identity because I guarantee, watching TV for 16 hours a day will not leave you happy and fulfilled.
Further Reading
Given that this is only a blog post and it’s only focused on one type of business (digital marketing agencies), I’ll admit that it’s not the most comprehensive resource out there for selling your company. That said, I hope it gave you a strong starting point and inspires you to read more before you consider selling your agency.
Here’s a few books I’d recommend for further reading:
- Exit Rich by Michelle Seiler Tucker
- Built to Sell: Creating a Business That Can Thrive Without You by John Warrillow
- The E-Myth Revisited: Why Most Small Businesses Don’t Work by Michael E. Gerber
I’m also happy to answer questions or have further discussions about selling your agency, so feel free to reach out on Linkedin or via email.