Your agency isn’t worth what you think it is.
In my work helping digital agency owners achieve freedom in their business and life at UGURUS, I often tell my backstory of selling my web agency in 2012. Thirteen years of blood, sweat, and tears bundled up in a single transaction. The American Dream at it’s finest. It was all part of my grand plan, right?
I think we all know that’s not how business works. Entrepreneurship is the original scientific process. Trial and error baby!
I tried a bunch of stuff while building my agency, most of it failed miserably, a few things took, and those ended up being the basis for being able to sell. This article is about looking back in the rearview mirror with clarity and sharing the critical things that helped us sell and get a substantial valuation.
If we hadn’t done these few important things, our agency would have been worth squat. Zilch. Zero. The same value that ninety-seven percent of agencies are worth today.
During a recent UGURUS company retreat, a few of our agency owner mentors were discussing how many agency owners have built jobs for themselves, and don’t have businesses. To make sure we were all on the same page, I asked a fundamental question:
“What is a business?”
I got a lot of interesting answers, things like having revenue, employees, and clients. Part of the picture, but not the answer I was after. It’s simple I said:
“A business is an asset.”
So to sell a business, one must define the assets and come up with a market value. If you can’t do that, or if the assets don’t add up to a whole lot, then I guess your work is cut out for you. Three years before we sold our agency, we found ourselves in this situation.
Many agency owners mistake revenue with the ability to produce future income. Before I sold my agency, I bought a couple of small agencies whose owners were moving on. The conversation looked something like this:
Seller: “I’d like to get around $300,000 for my agency.”
Me: “How did you come up with that number?”
Seller: “That’s one and a half times my annual revenue.”
Me: “Can you break down that revenue for me?”
Seller: “Ninety-five percent is website and marketing projects from clients, and five percent is hosting and other small recurring revenue.”
Me: “Who is responsible for bringing in all that great client service revenue?”
Seller: “Oh, that would be me, I do all of the marketing and sales.”
Me: “Are you part of the transaction?”
Seller: “No, I’m moving on, remember?”
Me: “Ok good, so we’ve established that we’re not buying you – so let’s go ahead and ignore ninety-five percent of your current valuation.”
Then, he hung up on me. He was going to find someone serious. I told him that I was and that I would gladly pay cash for the only asset in his business – the five percent recurring revenue that didn’t require the owner’s direct participation to earn.
Two weeks later I got a call, and we had a deal.
Revenue is not an asset. It’s a flow. The system, process, or mechanism to generate revenue is an asset or stock. I can’t buy a flow, only stock. Historical revenue flow is proof that the mechanism works and to what degree, and therefore helps with valuation.
Think about buying a rental property – I can’t buy past rents. I can buy the property – and past rents give me an idea of future rents, but aren’t a guarantee. I’m buying the land and the dirt and the house which gives me the ability to charge future rents.
This agency owner had built up a client roster of hosting clients. Every month their credit card was charged an agreed-upon fee, and in return, their website would continue to run. The agency owner wasn’t involved. I wanted to buy that asset. I would have also bought him – if he was willing to stay in the business marketing and selling to generate client service revenue, but his response to that was, “If I wanted to keep doing that, I would just keep running my business.”
About three to four years before we sold our agency, my business partner gave me a presentation about obtaining peace of mind in our business. At the time only three percent of our annual income was dependable recurring revenue. We set a goal to achieve fifty percent by the end of the year.
It took us three years because over the same period our annual revenue tripled. Combine this with a web care helpdesk system that operated independent of my business partner and I’s involvement, and we had the basis for a legitimate valuation.
Let’s take a look at a few different types of assets that will help you determine what (if anything) your agency is worth today.
1. Clients, contracts, or products that generate ongoing revenue
Ideally with little to no interaction with you. It’s ok if someone interacts with these customers to create this revenue, as long as those interactions are done through well-documented processes that someone can operate with the right skills and training (the fewer skills and training the better).
In the web agency business, hosting is a no-brainer. Another recurring revenue that is great here is web care (maintenance and support) and marketing retainers. However, marketing retainers usually require highly skilled people and possibly the owner’s involvement. If the retainers are highly process driven and the people involved are part of the transaction (or easily replaceable), then these can offer value.
A good test here is to consider what would happen if you took a sabbatical for a year. Would this revenue continue to flow? If not, find what would have to be in place to change that, and now you have your plan.
2. Client list or book of business
This is a tricky one. Especially if the owner is the primary contact and person with the strong tie relationship to the client. Remember how an asset is the ability to generate future revenue? You need to prove that your client list has potential to do this. That you have a history of repeat business, and that the business is likely to happen without you.
If you have a history of one-time website, app, or marketing projects with little to no repeat business, then the value of your book of business diminishes quickly. However, if you can show that your client list purchases X amount on Y frequency and they request this work without owner involvement, you have an asset with value.
3. An opt-in email list
In the right hands, a permission-based email list is a very valuable asset. Especially one that has been proven to generate sales in the past. If you have an email list, but you’ve never made an offer to that list, then the value is in question – but it’s still an asset. One important caveat is how you acquired that email list. If you did it through an opt-in box that says “we will never sell your information,” then go ahead and punch yourself in the face. That means the list dies with your business as it can’t be sold or part of any transfer transaction.
If you’ve never made an offer or sold to your list, and you want to sell your agency at some point in the future, you might want to start using the list to generate clients or revenue now. Build up some history and processes around turning that list into money so you can illustrate and quantify the value in the future. Who wouldn’t want to generate more income now?
4. Marketing assets
Besides an email list, your other marketing assets hold a certain amount of value, but again, only if they have the (proven) potential to produce revenue. If you have a website that generates consistent leads without additional ongoing activity (unless that activity is well documented and process-driven), then this is an asset that can add to your valuation. Your websites search ranking for specific terms, traffic, and lead flow are all key measurables that you can quantify into dollars.
Besides your website, if you have trade show materials that can be reused, automated email series, or any other asset that is transferable and can illustrate a history of generating business, it can add value to the transaction. The business card that you hand out at events while networking is likely not a very good one to add to your list.
5. Brand goodwill
Kraft Foods is on the record as one of the first companies to ever be sold where the value in the brand’s goodwill far outweighed its value on paper. Philip Morris paid a lot for Kraft than it was worth on paper, and the difference was quantifiable as Kraft’s “brand goodwill.” Philip Morris wanted the reputation, not just the foods and factories.
For the value of your agency, there is likely a number here above $0, but how much depends on the decisions you’ve made to establish your agency’s brand as separate from yourself. Does your agency have a reputation that is worth something – or is it just you?
If people talk about your agency through word of mouth – and not just you as their “web gal” – then you might have something here. We spent a lot of our time doing pro bono work and getting free PR about our company in the press. I tried to avoid the story being about Brent Weaver as much as I could and instead made it about the agency. This helped establish some measurable goodwill in our local market.
6. Intellectual Property (IP)
Patents, trademarks, or copyrights. I have yet to meet an agency owner with a patent. I’m sure they are out there, but it’s just not that common. If you have something that is patentable and it has value, then you should get that going. More commonly I see savvy agency owners develop processes and systems that drive results for their clients and they choose to trademark that material. SixthDivision, an agency that focuses on automation, has a lot of trademarked material. They have taken their entire customer experience and turned it into a worksheet-based process with catchy names and video training.
Others turn their material into books like Ryan Levesque’s Ask Method®. The value of a process or method that has also been turned into a book with a large group of practitioners carries a lot more value than a process with no proof or following, but you could still make your case. If you haven’t yet put a ™ next to your proven process, get on that. Map out what you do for your clients, and start making it something you can protect.
Colorado is a work at will state and abolished slavery many years ago. So you can’t sell people. Thought we needed to get that straight first. That being said, there is value in not having to find a bunch of designers and developers. If you’ve already done the hard work of hiring, vetting, and training, then getting access to solicit your team to get hired by a new agency has value. If I’m a fast growing agency, buying other agencies can be a fast track talent acquisition path.
When small companies get bought, most of the time, it’s structured as an asset sale. Meaning that the buyer doesn’t usually take over the legal business entity. This protects them from having to deal with any liability from the business they are unaware of. Including people as assets might have to be a part of goodwill. This is an area we had legal help with and I suggest you do the same.
8. Equipment and furniture
(Old office gear acquired over a decade got donated to Goodwill.)
All those monitors, computers, desks, and chairs. While not worth a lot, can add a few thousand to your valuation. Since we hired pretty organically over many years, we had such a mishmash of gear and furniture that it didn’t make sense to include. If you just went out and splurged on a suite of MacBook Pros for the entire team, then there’s something there.
The good news about electronics, in particular, is that there is a robust market for this type of stuff outside the small business buyers market. So even if it doesn’t make it into your asset sale transaction, you can offload it to buyers via eBay or Craigslist.
We gave a lot of our gear to team members and their families. What was left, went to Goodwill.
9. Systems and processes
Documentation. Documentation. Documentation. Not for stuff that you are doing. That is interesting, but again, that requires you. This type of stuff can be rich nectar for a valuation if you can prove your systems produce revenue without your direct involvement. Documentation should outline the process and system, but also be complete with training material for a new hire to take over the seat with as little downtime as possible. I think a new hire should be able to take over a role or position within one week of being hired, assuming they have the right qualifications.
We had locked down our web care helpdesk into a single seat with a great system to drive revenue. Our clients were trained in how to interact with this system, and if I went on vacation for a month, it would continue to operate and drive revenue. I could show the system in action, and more importantly, I could export a report of the monthly income and cost to service that seat. We had documentation explaining how it worked and the qualifications of the person sitting in the seat.
Your valuation can skyrocket if you can lay out how marketing, sales, and operations work together to create revenue. If these different teams operate on these processes without you and your business generates revenue and profit, you have a fighting chance of using your gross revenue or net earnings as the basis for your valuation. Not only that, but you could probably bundle in your salary into that picture.
For some reason though, for all the talk agencies make about developing processes. Usually, it’s this area that proves the least developed. Maybe there are processes in place for managing projects, but I think the ones that matter are marketing and sales. If the front side to generating revenue is bottled up in the owners head with their secret “,I build relationships” recipe. Then there is big money left on the table.
This post isn’t about helping you determine your agencies valuation. There are a lot of different ways to come to that number. 1x revenue. 2x net earnings. 2 to 5x this or that number. The most important thing for you to do – if you want to sell your agency now or in the future – is to take stock of the assets you have today.
Bust out a spreadsheet. Take an inventory. Do your best not to kid yourself. When we looked at this for ourselves – particularly in the case of our recurring revenue – we weren’t happy with what we found. That dissatisfaction drove action and that action created value and a profitable exit. If you see a big fat $0 next to any of these items, your work is cut out for yourself.
Whether you want to sell or not, looking at your business as an asset is a good thought experiment. Before this thinking, I thought my business was me. I was so emotionally tied to my company. When I started to think of my business as separate from myself – like a rental property – it helped me treat it (and myself) better.
Perhaps you end up selling your agency as I did. Or maybe you build a business that can operate without your direct involvement so you can get paid well and take a vacation every once in a while.
That’s what life is about after all right?
Freedom to choose your path.
I did. I hope you can too.