We’ve all seen them on TV. Those power hungry, business gobbling Dragons, who take one look at business and know exactly how much they’re worth.
You may be wondering how much your business is worth. If you’re even vaguely considering selling, you’ve got to know your business value.
Knowing the value of your business is important for your long term plan, for further growth, for spotting weaknesses, and ultimately, for when you do want to sell.
So how do those Dragons do it then?
Well, they’ve been around a long time, that’s the simple answer. They live and breathe business, so they can make lots of comparisons with similar companies, know exactly what numbers to look for, and work out where hidden values or costs lie, based on their experiences.
In addition, there are subjective elements. You can have the best idea or business in the world, but it comes down to personality, too. Your business can be worth as much as someone is willing to buy it for.
If you took your creative agency on Dragon’s Den, you might find they really like you, identify with you, and want to pay. But if someone else took the exact same agency on the show, but wasn’t as likeable as you, they might not get as much. Dragon’s are fickle you see. Just remember, if Deborah is flirting with you, you’re on to a winner!
Why Value Your Creative Agency?
Well, maybe, because you want to sell it. That’s probably the most obvious reason. Perhaps you’ve reached your exit strategy, or maybe you’re ready for retirement. You might even just want a change of business, a chance of tactics, or a change or scenery.
Or maybe you’re not selling, and are just interested. There’s nothing wrong with that, because knowing how to value your creative agency could help you look at the value of other smaller agencies, if you’re feeling very dragon like, and thinking of some acquisitions!
You might want to value your agency in order to identify restructuring opportunities, or just to spot where your weaknesses currently lie, and adjust them accordingly.
If you’re looking to raise equity for the company, issue shares, or offer management incentives, then knowing the value of your agency is vital.
So How Do You Value Your Business?
There are many ways. The value can depend on external things you haven’t looked into yet, such as specifics about the economic climate, current or perspective market, and the type of buyer.
There’s the potential for lots of number crunching involved too.
For a creative agency, there are some things you probably don’t need to consider too much, like asset value. The chances are you don’t own lots of interesting machinery.
So, let’s start with this simple equation:
Adjusted Annual Net Profit x Profit Multiplier
What? Lost you already? Not to worry, we’ll explain.
Adjusted Annual Net Profit
You know what your annual net profit is don’t you, because you already use Xero like we keep telling you to do. Yes? Good. Well the adjusted net profit is your profit adjusted for reality basically. It makes it real, and it’s what the Dragons often use to rip business apart. So make sure you know it!
Basically, it just makes sure your profit is realistic. For example, it might be that as the owner of the agency, you don’t pay yourself the same wage as other people in your industry are receiving in that same position. Maybe you’re taking a smaller wage to keep cash flow healthy, or maybe you were feeling generous and decided to pay yourself more than average.
Either way, the adjusted net profit takes this into account. It also looks at your earnings before interest too, to make sure you’ve not earned extra profit just from interest on cash reserves or had to pay back interests on loans.
It can be good or bad for your profit indicator, depending on your business situation, but it’s about as real an indicator as you can get. Trust us on that.
Profit Multiplier
This ones harder to explain. Basically, every business and industry has a profit multiplier, and this number is based on factors like the type of work you do, the current market and the economic climate.
To know the creative agency multiplier, you’ll need to look at other companies which have recently been sold, and speak to stock brokers and accountants who’ll help with the research. For most creative agencies, the average profit multiplier is between 2 and 3, lower than other industries because it’s a very relationship focused business.
The Non-Number Factors
That gives you a very brief overview of the value of your business, but there are also other factors to take into consideration, the ones that you can’t really put a number on! That’s hard for us as accountants, but we can still help.
These factors include the strength and reach of your brand, the clientele you have, and the relationships you have with others. You should also think about whether your agency could run without you, what unique things you offer to the industry, and whether your agency could work anywhere in the country, or even the world.
These will all contribute to future profitability and risk analysis.
But remember, your agency is worth what someone will pay for it.
Still, valuing your business is very useful for internal review and the spotting of weaknesses you can improve on. So get calculating. And if you’re feeling brave, tell us your valuations in the comments box below, but be sure to include the reasoning on reaching that figure!
