Financial performance drives value.

The most important factor in the valuation of any marketing communications agency is its financial performance. It’s customary to look at the previous three years of financials, the current (or projected current) year and also any available future year operating forecasts.
 
We analyze key metrics such as performance and trends in gross revenue, operating profits, balance sheet barometers (working capital, quality of receivables, debt/equity ratios, etc.), client revenue concentration, revenue by service offering, staffing and freelance utilization, operating cost ratios, the potential incremental value of special or unique services and more.

We go far beyond the financials to tell you how to improve your agency's performance and increase its value.

But financial performance isn't everything.

We also look beyond the numbers to more accurately assess an agency’s true value. To provide not only a fully informed valuation but also show agencies how to become more valuable in the future, we believe in evaluating all of the key areas of the agency which include:

1. Financial performance.
2. Financial management, systems and controls.
3. Clarity and execution of the agency's vision/purpose/reason to exist.
4. Agency differentiation vs. competition (Positioning, areas of deepest knowledge, services, any unique methodologies or processes, Intellectual Property, special skills or offerings).
5. Client list (Size, tenure, quality, percentages of total agency income).
6. Agency’s principal(s) and leadership.
7. Management team (Tenure, experience, quality, ability to lead and also work together effectively).
8. Managing the agency/Operations/Systems and procedures.
9. Working environment and culture.
10. Creative work (Strategic thinking, effectiveness, quality across media channels, awards, reputation).
11. New business development (Strategic approach, having and implementing a plan, quality and consistency of efforts, wins/losses in past 3-4 years).
12. Website (Overall impression, effectiveness, being new business-friendly, SEO).
13. Digital and data capabilities (either in-house or via strategic alliance with third-parties).
14. Growth potential.
15. Business risks potentially affecting future growth and income.

 
Our evaluation of each area is based upon information provided by the agency, supplementary phone calls and other due diligence including an in-person visit to the agency to meet with the parties involved (both individually and together).
 
For each of the fifteen areas above and the agency overall, we develop a rating for “Agency performance in our opinion”. There are five possible ratings: Superior, Above-Average, Average, Below-Average and Poor.
 
Above-average performance will yield an above-average valuation and vice versa.

CALCULATING VALUE

Establishing the true valuation of a marketing services firm is a complex process.  It requires consideration of a combination of quantitatively measurable and qualitatively subjective factors. In general, we do not believe that any one formula or methodology is always the most appropriate for determining how these factors are applied and what an individual agency or firm is worth.
 
The most common methodology/formula applied to marketing services agencies is based on a multiple of average normalized earnings (EBITDA) which is sometimes alternatively expressed as a percentage of agency gross income.
 
However, we believe that each agency is unique and will apply a methodology best suited to that agency’s particular characteristics and circumstances. This might be the traditional earnings-based model, discounted free cash flows, market-based (i.e. – reflecting comparable transactions) or some other formula.