Businesses in the advertising industry create advertising campaigns for clients in various industries. This typically involves advertising through radio, TV, newspapers, periodicals, digital platforms, etc. According to IBIS World, the advertising industry generates over $14 billion dollars in revenue each year. Moving forward, we can expect the advertising industry to continue to grow. As such, it may be a good time to buy, grow, or sell an advertising agency. However, owning an advertising agency comes with many challenges. To succeed, it is important to understand how to reduce the risks associated with an advertising agency. You can start by learning how to value an advertising agency.
When learning how to value an advertising agency, there are various factors to consider. It is best to receive a business valuation for an advertising agency. As part of a business valuation, a business appraiser identifies the strengths and weaknesses of an advertising agency. In addition, they will determine the value of an advertising agency.
Peak Business Valuation, business appraiser, is passionate about helping businesses succeed. We work with many advertising agencies throughout the country. With Peak, you can receive a business valuation for an advertising agency. We can also discuss any inquiries you may have on how to value an advertising agency. Schedule a free consultation with Peak Business Valuation today!
How to Value an Advertising Agency
Business appraisers may use various valuation approaches when valuing an advertising agency. The most common methods are the market approach and/or the income approach. Each valuation method measures the value of an advertising agency using different metrics. During a business valuation, a valuation analyst determines which valuation approach is most suitable for your advertising agency. This often includes using a combination of valuation methods.
Valuing an Advertising Agency Using the Market Approach
Peak Business Valuation often relies on the market approach to determine the value of an advertising agency. The market approach is similar to how a real estate appraiser values a property. Real estate appraisers assess similar homes that were recently sold in the area. This helps them accurately determine the value of the property. When using the market approach, business appraisers assess similar businesses that recently sold on the market. If the advertising agency is private, the expert gathers information from private transaction databases.
Multiples for an Advertising Agency
Valuation multiples are a defining characteristic of the market approach. Valuation multiples are financial ratios that indicate an advertising agency’s value based on a financial metric. These metrics typically include cash flow, sales, and earnings. To determine the appropriate valuation multiples for an advertising agency, business appraisers use the proper NAICS or SIC code. Below, we highlight basic valuation multiples for an advertising agency.
SDE (Seller’s Discretionary Earnings) Multiples for an Advertising Agency
- SDE multiples assess an advertising agency’s cash flow. To use the SDE multiple, multiply the seller’s discretionary earnings of the agency by the multiple. This multiple is common when valuing an advertising agency.
EBITDA Multiples for an Advertising Agency
- EBITDA multiples measure an advertising agency’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) an operator can expect from an advertising agency.
REVENUE or SALES Multiples for an Advertising Agency
- REVENUE multiples measure the value of an advertising agency based on its total sales. This multiple is less common when valuing an advertising agency. However, the business appraiser will determine which multiple is most applicable to your advertising agency.
To learn more about how to value an advertising agency using valuation multiples, see Valuation Multiples for an Advertising Agency.
Valuing an Advertising Agency Using the Income Approach
Another common valuation approach is the income approach. The income approach measures the value of an advertising agency according to its future cash flow or earning potential. This approach also assesses the risks an investor may encounter when buying or selling an advertising agency. Valuation experts may consider the following risks when valuing an advertising agency.
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- Workforce: It is crucial for an advertising agency to have a skilled workforce. Advertising agencies should hire individuals with proper education and experience in advertising.
- Competition: The advertising industry is very fragmented and competitive. Operators must find ways to differentiate themselves from competitors.
- Technology: Technology plays a crucial role in advertising agencies. It is important for establishments to acquire useful and reliable technology.
- Client Relationships: Advertising agencies need to build strong client relationships. This promotes recurring revenue and increased profitability.
Methods to Value an Advertising Agency Using the Income Approach
There are several variations of the income approach. When valuing an advertising agency, business appraisers typically use the capitalization of cash flow method and the discounted cash flow method. Both of these methods assess the cash flow potential of an advertising agency. We discuss how to value an insurance agency using these income approaches in the following paragraphs.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is best for advertising agencies with stable histories. This method involves determining an appropriate measure of cash flow for a specific period. Then, a business appraiser calculates an appropriate capitalization rate by assessing the risks of the agency. The capitalization rate indicates the rate of return an investor can expect. By dividing the future cash flows by the capitalization rate, a valuation expert can determine the present value of an advertising agency.
Discounted Cash Flow Method
- The discounted cash flow method is ideal for advertising agencies with strong financial histories. In addition, this method may be useful for agencies that have built reliable forecasts. The discounted cash flow method involves projecting future cash flows or earnings over a 3-5 year period. Then, a valuation expert uses a discount rate rather than a capitalization rate to account for the time value of money. The future cash flows are then discounted back to their present value using the discount rate. This approach accounts for the fact that money received today is worth more than money earned in the future. Please note that the discounted cash flow method is less common since it relies on future cash flow estimates which can be arbitrary.
Summary
When valuing an advertising agency, a business appraiser may use various valuation approaches. Each approach measures the value of an advertising agency using different criteria. To know which method is best for your advertising agency, receive a business valuation. During a business valuation, a valuation analyst can help you understand the risks and advantages of an advertising agency. In addition, they will determine value when selling or buying an advertising agency.
Peak Business Valuation is happy to help! Peak works with advertising agencies on a regular basis. We can provide you with a business valuation and answer any questions you may have on how to value an advertising agency. Start now by scheduling a free consultation with Peak Business Valuation below!
See also Value Drivers for an Advertising Agency.
