Advertising in the United States over the past ten years has witnessed tremendous growth. Over the past five years, the industry has seen an annualized growth rate of 4.4%, with advertising expenditures decreasing year-over-year. Such growth is influenced by the rise of technology and the Internet.
Moreover, the rise of social media is projected to account for 61.0% of all internet advertising revenues by 2022 and mobile is forecasted to be close to around 72.0% of online ad revenues. Needless to say, advertising agencies are experiencing an age of unprecedented growth in the U.S. For more information regarding advertising outlook, refer to PwC’s Global Entertainment & Media Outlook.
If you currently own an advertising agency, consider the possibility of selling. Current industry trends point to further growth; however, there are also more parties entering the space due to the lack of barriers to entry. The first step to selling your business is obtaining a business valuation. Whether you are looking to sell or hold on to your company, understanding the market value of your business is important. A valuation specialist will show you a range of values for your business and consult with you on how to increase the value of your business.
Over the past five years, I have provided business valuations for several advertising agencies for various valuation purposes. To give you an idea of each of those engagements, I will list out some of the key factors used in valuing an advertising agency. Keep in mind that the factors listed below are only a guide.
Market Multiples for an Advertising Agency
- 62.0% – 89.0% of annual sales
- 2.0x – 3.0x Sellers Discretionary Earnings
- 2.2x – 4.2x EBITDA
With a clearer understanding of what your business is worth, you can begin taking steps to increase the value of your advertising agency prior to a potential sell. I will touch on two ways in which you can increase the value of your business. There are many factors to take into consideration, but this will provide you with the basis of what your company is worth and a few ideas to increase your company’s value.
If you are searching for a more extensive valuation, reach out to a valuation professional like myself.
1. Key Success Factors
There are several success factors that help distinguish advertising agencies:
- Effective Performance Monitoring System
- The ability to show clients the results of their spending and the direct results of the company’s campaign will build trust and competency among clients.
- Ability to Produce Unique and Creative Ideas
- Promoting products through unique ideas helps secure and retain clients. A company that exemplifies a unique advertising proposition is Chamber.Media. This will differentiate your business from competitors and is a worthwhile investment.
- Membership in the AAAA
- The American Association of Advertising Agencies is among the largest associations in the country. Membership in the association provides credibility.
- Relationship with Upstream and Downstream Industries
- The ability to maintain strong relationships with media buyers and media outlets will ensure a healthy return on investment for clients.
Technology is another key to success, but I want to focus on it in detail. Advertising agencies must be aware of new technology and general trends in the industry. For instance, Gary Vaynerchuck who prides himself on being ahead of trends or jumping in on trends after firm momentum. He invests in those trends to maximize his return on investment due to a lower cost per click.
The emergence of new media technology continues to impact demand daily has new media outlets develop. For instance, digital and mobile internet connections have increased at an annualized rate of 10.7% over the five years to 2018, representing a new market for advertisers to take advantage of.
Traditional advertising agencies have been slowly shifting away from TV and print media because of the number of readers on the Internet. However, it is important to understand that there is a balance between digital and traditional advertising. A 30-second commercial for the Super Bowl in 2018 cost on average $5.05 million. Despite changes in technology it is vital to observe technology trends and adapt accordingly.
In conclusion, understanding the value of your advertising agency is important, regardless of any near future transactions. Even if you have not thought about selling your business, consider the future of your business; it is never too early to start planning. The first step in that process is a business valuation, which we are happy to provide you with.