Factors in valuing agencies

When owners and managers of marketing communications firms are presented with the opportunity of merging, acquiring, or selling, here are some of the key factors to be considered and reviewed.

Typical documentation requested for due diligence

  1. Two years financial statements (balance sheet and income statements)
  2. Detail of aged accounts receivable by client
  3. Schedule of salaries
  4. Equipment and building leases
  5. Client contracts and letters of agreement
  6. Current rate sheet and fee schedule
  7. Inventory of furniture, fixtures, equipment or other assets
  8. Any contracts or obligations not covered above including any employment contracts
  9. Any other information that is reasonably applicable to the purchase

Factors often used in evaluating a potential agency purchase:

Financials and Operations

  • Sources of revenue
  • Income for past three years
  • EBITDA for past three years
  • Employee count past three years
  • Salaries as percent of income
  • Current debt
  • Working capital as % of average monthly operating expenses
  • Current ratio (current assets/current liabilities)
  • Quick ratio (cash plus receivables/current liabilities)
  • Physical and financial assets
  • Longevity in business
  • Geographic footprint

People

  • Quality of executive management
  • Strength of mid-tier management
  • Employee turnover ratio

Clients

  • Quality of client mix
  • Length and nature of client relationships and compensation agreements
  • Client turnover ratio
  • No single client makes up more than one-third of income
  • No two clients make up more than one-half of income
  • Type and health of industries served

Reputation

  • Creative awards
  • Marketing effectiveness awards
  • Industry awards and recognition
  • Press and publicity, offline and online

Strategic Assets

  • Proprietary processes
  • Copyrights, trademarks, patents
  • Licenses, licensing agreements
  • Content ownership, media properties
  • Revenue-sharing agreements, royalty agreements
  • Databases
  • Professional networks, certifications
  • Brand names, URLs, online properties
  • Joint ventures, strategic partnerships

Questions or feedback? Contact us.

Copyright © 2011 Ignition Consulting Group, Inc. Terms of Service