When someone asks you the size of your agency, invariably you’ll probably respond with the number of staff you employ and your annual sales (not necessarily in that order!). Whether we want to admit it, turnover is a barometer for judging quality, depth of service and growth.
However, when it comes to valuing a business, the general calculation is based on a multiple of earnings – earnings being bottom line profits before tax. So nothing to do with sales. Obviously sales have a part to play in this, if you’re aiming for annual profits of £200k then your sales have to be well over this to stand any chance! But focusing on improving the bottom line has a much more dramatic effect than increasing sales.
What does this actually mean in practice?
Let’s work through an example.
You are a £2m turnover agency with current annual profits of 5% (so £100k). Taking a multiplier of 5 (a rough average for a Digital agency), this would value the business at £500k. You’re looking at increasing revenue next year by £1m, with profits staying consistent at 5%. If you were to hit this target, your profits for the year would be £150k, thus valuing the business at £750k. So in other words you’ve had to put in blood sweat and tears to increase revenue by £1m and the business is only worth £250k more as a result! Seems unfair.
Contrast this with the second option – staying at £2m turnover but increase profits to 15%. By achieving 15% (£300k) bottom line profit, the business is now valued at £1.5m, so £1m more than the previous year without any increase in revenue. That’s more like it!
In reality you’ll want to sit somewhere in the middle and focus on both revenue and bottom line improvements. As a starter ask yourself the following questions:
- How can you increase the earnings potential of your existing team to earn more for the business at a relatively similar cost?
- Are your team wasting too much time using inefficient systems?
- Do they need extra training to improve efficiency & quality of work?
- Can you replace an expensive freelancer with a full time employee who can do the same quality and volume of work for a fraction of the price?
- Are the team focused on achieving the same goals as the business owners and how will they share in the eventual successes?
Maybe it’s time to stop growing your agency and choose sanity over vanity. Sign up to our webinar ‘Stop Growing Your Agency’ here.