Maximising Agency Value
So, I wrote a few weeks ago about having a plan to build an agency of value, which as the business matures, would give the founders some choice about what to do, once the plan had been achieved.
For me, having worked with a number of growing agencies over the years, maximising value is a three part plan in itself and falls into the following areas:
- Turnover Growth
- EBITDA multiple on sale
- Turnover Growth
For an agency to have any real value, in my opinion, it has has to have significant turnover, somewhere in excess of £3m per annum.
If your current turnover is lower than that, and you are looking to grow then you will need to become a sales focussed agency. I am not here to give you a lesson on agency marketing, (my partner, Spencer Gallagher is far better at that then me!) more a lesson in the basics really to ensure that your turnover is growing month on month.
In my last blog, I spoke about having a high level 3–5 year plan, but to achieve that you need to break that down into monthly turnover targets. Having a sales target that is challenging but achievable will drive growth, as it will take a change in mindset across everyone in the agency to achieve it. Set a target for next month of say £5,000 higher than this month, beat it, and move on to achieve a higher sales figure the next month — we call this meet-beat.
A change in mindset means putting in as much effort to win new business, as it takes to keep the current clients happy. Think about the following:
- Have a marketing plan that focusses on your agency’s strengths and creates momentum and builds a long term pipeline
- If you are an agency of £750k-£1m turnover consider hiring a full time marketing person to ensure the plan is delivered on consistently
- When a new business opportunity lands, ensure that you respond to it quickly and professionally. You would be amazed at how slow some agencies are to respond to opportunities
- Are you qualifying your leads correctly? Is there a brief, a budget and a deadline? If the answer is no to any of these, then there may not be a proper opportunity to pitch for. So many times I have seen agencies effectively speculatively pitching for work which does not exist…a complete waste of time and money
- Bring your A++++ game to EVERY pitch. I can guarantee your competitors will as it’s a tough market out there
- Everyone from the developers, to the creatives, finance people, the cleaner, needs to also adopt a sales focussed attitude. I am not saying that everyone needs to be a salesperson, but an agency with a great culture, behind a leader with a clear vision, will be rooting for the agency to succeed
I remember being at an agency a few years ago, where the pipeline for future work was thin and we decided to take the approach (in a business with a great culture) about sharing this fact with the team. The developers were surprised as they were always so busy, and one of them even said that he had a friend who had a £100k opportunity, but did not introduce the lead as he thought the agency were stacked! Needless to say, it was all hands on deck to win this deal, but it was a hard lesson learnt about making sure that everyone in the business knew that we were always looking for new opportunities no matter how small and how busy we were.
I am talking about turnover growth first, as personally I feel it’s the hardest part of the three areas I mention.
There are some excellent talks within The Agency Collective network on agency new business and I would urge you all to sign up and watch them — the speakers on each subject do a far better job than me about explaining this subject!
In addition, I would recommend as a starting point, reading ‘Pitching to Win’ by David Kean.
This is such a huge topic…….I often get asked ‘what will make my agency more profitable?’. I will try and keep the answer as simple as possible and focus on the areas which will make the most difference:
- Day rates — to have any chance of having a bottom line of at least 10% after investing for growth, and paying yourself (!), you need to have a blended day rate of at least £800 per day. The best agencies I work for are charging £1,200 per day
- A full pipeline — Having a full pipeline means that your team are always busy and being fully utilised, and also it means you can pick and choose the projects you want to work on
- Salaries — I am not an advocate for paying people as little as possible. Quite the opposite in fact as I believe in paying people what they are worth and letting them get on with the job, and they will repay you. BUT, clearly, there are economics involved in getting this right. Put simply, if you are charging a day rate which is in the range I suggested above then you can pay towards the top end of the roles you are looking for. If not, you can’t
- Overheads — having control of your overheads is key. Common mistakes I see are having an office that is way too big for the size of the business and also having no purchasing process in place within the business
- Using freelancers as little as possible — this is a tough one to manage as it’s often hard to know when to recruit for a role permanently, but in simple terms if you have sales (turnover) of more than £6,000 per month of a particular service then you should hire, below that freelance or outsource. Rates for freelancers are often 2–3 times the rate of a full time employee, and having the employee on the books adds value to the business, saves money in the longer term and enables you to build a more consistent revenue stream.
- Agency Structure — again, another big subject, within an already big subject, but the key to growth and profitability is having an efficient, organised team structure. The right number of billables to non-billables. Having project managers and proper delivery processes early on will build long term efficiency and therefore profitability
- I could go on, and literally write similar length blogs on each of the above six points, but they are there to give you a flavour of where I see the biggest single areas for improvement are in making an agency more profitable
EBITDA multiple on sale
EBITDA is an another word for profit used by accountants and financiers to value businesses. If you are at the sharp end of your agency growth journey you may have already heard of this description and it standings for:
Earnings before Interest, Taxation, Depreciation and Amortisation. This is the definition of profit that will be used when you need to calculate the value of your agency. There will also be adjustments for one off costs and directors earnings, but I won’t go into that now.
An EBITDA multiple is used as an indicator for how much a business is worth. At the moment, I see a lot of agencies valued at between 5–7 times their annual EBITDA.
Factors that affect multiples are:
- Brand & strong agency proposition
- Focussing on a niche service or sector
- Working in a space that is cutting edge technology
- Strength of the management team
- Having some awards to shout about
- Location — being regionally based is not an issue, but having a small London presence may help
- High day rate/high profitability
- Having a founder who has a high profile
I could go on, but the above as I see it are the key factors. Remember, it’s more about having a plan and seeing that through. The above is more about the icing on the cake.