When it comes to building a valuable creative agency there is a common perception that businesses such as digital marketing agencies and advertising agencies do not have a realisable value.
In other words, many believe these businesses are difficult to sell and difficult to build up as a saleable asset for the business owners.
There’s good news and bad news here.
The bad news is that, in most situations, that perception is the reality.
The good news is that it doesn’t have to be that way.
In our experience as Accountants and Business Advisors for creative agencies we’ve identified 5 keys that, when implemented, build realisable value in your business…
5 keys to building a saleable creative agency
As a creative agency owner it’s important to focus on establishing the following:
1. Strong systems and processes
Having strong systems and processes adds value to all businesses, especially to creative agencies. Having strong systems and processes minimises business risk, imbeds efficiency and creates a consistent experience for your clients.
An agency with a strong niche is valuable because the returns or profit it creates are typically above industry averages for generalist agencies. A strong niche establishes a unique offering and depth of knowledge that is hard for competitors to replicate. This is why niche agencies can charge their clients a premium and as a result, earn more profit.
3. Recurring revenue
Having clients on retainers for ongoing or recurring services adds value to your business because the income of the agency doesn’t require a constant stream of new clients coming through the door.
Another approach is the development of products. If you develop a saleable product—such as a training product or app—rather than just provide bespoke offerings on a time-for-money basis, your off-the-shelf product will add value as it is a leveraged ‘plug and play’ solution for clients that requires little to no ongoing work for you.
4. Not reliant on the owner
This is arguably the most significant factor. An agency that is heavily reliant on the owner struggles to demonstrate it has any value when the owner retires.
This kills the saleability of the agency. Why would someone purchase a business that— once the original owner departs—won’t continue to operate as well or be as profitable as it was previously?
This key person dependence on the business owner can be overcome but requires the owner to be willing to hand over control, with oversight, of elements of the business.
When done well, the hand-over of control can result in:
- greater engagement by staff,
- better and more timely outcomes for clients,
- more free time for the owner, and
- a saleable business now that the agency isn’t controlled solely by the owner.
5. Profit after a market salary for owner
In order for a business to have value, it must generate profit over and above the market salary of its owner(s). Potential purchasers won’t and shouldn’t buy a job.
The agency’s profit after adjustments for:
- market owner salaries,
- interest income and expense, and
- other non-business or one off expenses…
… is typically the basis of an agency’s valuation.
This adjusted profit is then typically multiplied by a capitalisation rate of between 2 to 4 times. The multiplier is dependent on a number of factors, including:
- owner reliance and
- consistent financial performance.
Implementing these 5 keys
These 5 keys can all be implemented into any agency. The process requires:
1. A willingness to change,
2. Strategic direction, and
3. Advice and support along the way.
You’re in control of No.1 and we can provide you with Numbers 2 and 3.
If you would like to learn more about how we can support you on your journey to creating a saleable business, please get in touch and we can have an initial chat about your plans and aspirations for building your creative agency into a saleable and valuable asset.