Valuation Multiples for an Advertising Agency

Valuation Multiples for an Advertising Agency

Advertising agencies are businesses that create and place advertising campaigns in periodicals, newspapers, radio, television, and other media. They provide a range of services including advice, account management, creative service, production of advertising material, media planning, and placement. The advertising agency industry includes over 75,000 businesses across the United States. These advertising agencies generate nearly $55 billion in revenue. With the recent pandemic, this industry saw a hard hit – declining nearly 9% in 2020. This is due to the pandemic causing higher levels of uncertainty resulting in reduced business and consumer spending. However, the pandemic also created an increase in demand for online advertising and television, as more individuals spent time at home. As a result of these factors, transactions for advertising agencies increased. A key part of any business transaction is understanding the value of an advertising agency.

Valuing an Advertising Agency

Understanding the value of an advertising agency is useful whether you plan on buying or selling an advertising agency. As a buyer, a business appraisal can help you feel confident in the purchase price. If you are selling an advertising agency, a business appraisal can help determine the fair market value of the advertising agency. In both cases, a business valuation can help with negotiations between the buyer and seller. The more informed you are about the business and the value of the advertising agency the more confident you can be. Get started today by scheduling a free consultation with Peak Business Valuation.

How does a valuation expert determine the fair market value of an advertising agency? A valuation expert uses several approaches including the use of valuation multiples. Below is a brief overview of what average valuation multiples of an advertising agency look like. Keep in mind these multiples are only a guide. For specific information about an advertising agency you are looking to buy or sell, schedule a free consultation.

Be sure to also read the article on Valuing Advertising Agencies. This article goes into more detail about what drives the value of an advertising agency.

 

Valuation Multiples for an Advertising Agency

 

Valuation Multiples For An Advertising Agency

Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.

 

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What is a Valuation Multiple?

A valuation expert commonly uses valuation multiples when valuing an advertising agency. A valuation multiple is a ratio that compares two factors. For instance, one of the common ratios in valuation is an SDE multiple. The SDE multiple compares the seller’s discretionary earnings of the business and the implied value of the business. The valuation expert uses the multiples of similar businesses that have recently sold on the open market and applies a multiple to your advertising agency to get a range of value.

For example, an advertising agency has $145,000 in SDE. The valuation expert applies a 3.09x SDE multiple. In this case, the implied value of the advertising agency is $448,050. ($145,000 times 3.09x) On the contrary, a 3.64x multiple would imply the value of the company would be $527,800. ($145,000 times 3.64x)

As a business appraiser, Peak Business Valuation has worked with dozens of individuals looking to buy, sell, or expand an advertising agency. As such, below is a range of valuation multiples that advertising agencies transact at and are valued at. Every advertising agency is unique and as such the range of value can be significant. Below we discuss SDE, EBITDA, and REV multiples for an advertising agency.

SDE Multiple

Average SDE Multiple range: 2.11x – 3.64x

According to our data, advertising agencies transact between a 2.11x – 3.64x average SDE multiple.  To derive an implied value of an advertising agency, apply the multiple by the most recent 12-month period of revenue. The calculation is as follows:

SDE X Multiple = Value of the Business

For instance, an advertising agency makes $330,000 in sellers’ discretionary earnings. It transacts at a 2.74x multiple. Here the business value is approximately $904,200.

$330,000 X 2.74x = $904,200

Seller’s discretionary earnings is a common cash flow multiple. Valuation experts often use it when valuing small business transactions. It starts by calculating the company’s operating profit and adding back potential expenses that may not be incurred by a new owner. These expenses may include the owner’s compensation, the owner’s personal expenses, and other expenses such as non-recurring or non-related business items.

EBITDA Multiple

Average EBITDA Multiple range: 3.53x – 12.34x

The average EBITDA multiples for an advertising agency range between 3.53x – 12.34x. This range can be significant particularly depending on the size of the advertising agency. Apply this multiple to EBITDA to derive an implied value of the business. The calculation is as follows:

EBITDA X Multiple = Value of the Business

For example, an advertising agency has an EBITDA of $640,000. It transacts at an EBITDA multiple of 3.64. Using the above calculation, the advertising agency is worth approximately $2,329,600.

$640,000 X 3.64x = $2,329,600

An EBITDA multiple measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses. Normalized ratios also more accurately represent the future earnings a buyer can expect from the business.

REV Multiple

Average REV Multiple range: 0.40x – 1.68x

According to our data, advertising agencies sell for an average of 0.40x – 1.68x revenue multiple. You can calculate the implied value of the business by multiplying the amount of revenue or sales an advertising agency makes by the valuation multiple.

Revenue X Multiple = Value of the Business

For instance, an advertising agency makes $1,050,000 in revenue and transacts at a 0.82x multiple. The advertising agency is worth approximately $861,000.

$1,050,000 X 0.82x = $861,000

An advertising agency is most often valued using an EBITDA or SDE multiple. However, there are instances where the revenue multiple may be more applicable. A valuation expert will assess what valuation multiples are most applicable for your advertising agency.

Summary

When using a valuation multiple, keep in mind a valuation expert considers many factors that impact the business and multiple used to value that business. As such, Peak Business Valuation, business appraiser Utah, would love to talk with you about factors that impact the value of an advertising agency.

Peak Business Valuation, business appraiser Utah, values advertising agencies across the United States. We love helping both the buyer and seller of a business feel confident in the transaction. Questions are always welcome! Get started today by scheduling your free consultation below!

 

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