How I Sold My SEO Agency
My SEO agency (WEBRIS) was acquired by another agency on 1/5/2018.
In this post, I’m going to talk about key things I learned during the acquisition process and give you some tips for how you can sell your agency as well.
NOTE: I am not claiming to be an expert on building or selling agencies. I am writing this because, well, it’s an interesting topic within our industry. Every agency owner at one point has wanted to get out, I hope my story helps you.
1. Do you really want to sell or are you just overwhelmed?
Running an agency is stressful – we all go through it.
But when you learn to manage the headaches, agencies are amazing businesses to own.
- The need for agency services is exploding, there’s plenty of money to be made.
- Once you’ve systematized your service, profit margins are high.
- Large, lump sum, up front cash payments.
I thought long and hard about if I really wanted to sell or if the stress of the business just got to me.
Ultimately, I decided to sell because the terms were perfect for me. They kept me as an equity owner, freed up my time and dropped some cash in my pocket.
2. Would a buyer be interested in your agency?
From a buyer’s perspective, they could want to acquire you for a number of reasons. It’s important to understand the value your agency would bring to a buyer.
- Your book of business. You would add value to the acquiring companies top line immediately. This is why it’s imperative you use contracts, “month to month” agreements are farts in the wind.
- Your offshore solutions. Having an offshore team that can deliver top quality work for a fraction of the price will immediately increase margins for the acquirer (a large reason why Publicis paid $3.7B for SapientNitro).
- Your top notch staff. It’s hard to find good talent – if you have it, it could be worth buying.
- Your unique capabilities. We hack together a lot of tools that provided a ton of value to our purchaser.
- Your systems and processes. Having your service streamlined and automated would help another agency’s internal operations immensely (this is a large reason why we were acquired).
- Your brand and assets. A large social following, proprietary data, tools, lead flow – these are all enticing to buyers.
If you’re serious about selling, my advice is to start thinking about ways to tweak your business to make it more attractive to a buyer.
Processes are key...
Our agency was acquired because our internal processes. We built a system that helped train offshore staff to do advanced SEO work for US based clients. We published those processes as a training platform.
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3. Get a legitimate valuation of your agency
There’s a number of valuation methods available, but for agencies, the earnings multiplier method is best.
I’ve seen some people claiming there’s a standard industry multiple based on revenue and profits (i.e. if EBITDA is 40%, value = 10 x revenue. If EBITDA is 10%, value = 2 x revenue).
This isn’t the case – there is no standard. The multiple needs to be determined and agreed on by both parties.
That’s why agency valuations are so damn subjective. There’s always variance in multipliers (e.g. 1, 3, 5, 10 or more) based on the opinion of the person calculating value.
There’s a number of inputs that can swing the multiple one way or another:
- Top line revenue. Your history of growth and future projections – CAGR is a common valuation metric.
- Book of business. The signed agreements you have and the breakdown of revenue. If most of your revenue is coming from a few clients, your value will decrease.
- Client churn rate. After agreements end, the percentage of clients you resign to new agreements.
- Inbound lead flow. The number of qualified leads you receive each month (and growth rate).
- Profitability. Incredibly important – a $10m agency with 2% EBITDA isn’t a good sign. However, unless you’re grossly mismanaged, profits are easier to increase than revenue (for acquiring agency – mainly through layoffs). For that reason, I believe top line is more important than bottom line.
- Debt. Obviously, being in debt will decrease your value. In all honesty, you shouldn’t have debt as an agency (aside from minor credit cards). You get paid up front at a price you dictate – manage your cash.
- Brand and Goodwill. Often over inflated by the seller, undervalued by the buyer – it matters and should accounted for your valuation.
4. How I valued my agency
Let’s walk through my valuation process…
a. Full list of clients
A Google Sheets file containing:
- Client name (past, current and prospective)
- Retainer amount
- Agreement start / end dates
While these are not official financial statements, I started here for a few reasons:
- To build concrete 3 month projections based on what was in our sales pipeline.
- To calculate average contract length.
- To understand our churn rate (i.e. the number of clients that don’t resign when an agreement ends).
- To show the prospective buyer the types of clients we worked with.
- To show good faith to the prospective buyer that we were open and transparent.
b. Export of financial statements
For tax reasons, we keep our books on cash based accounting.
[quote by=“read more”]Cash based accounting only counts when money hits your bank account. Accrual based accounting counts before revenue is realized, i.e. when an invoice is sent and never paid[/quote]
For the valuation process, we redid our books to account on accrual basis.
At any given point in a year, we had over $100,000 in open invoices – cash based accounting would not show these open invoices on your books. this should be included in your valuation (it will drive it up, greatly).
We used Quickbooks for accounting – we simply exported history of data into Google Sheets and organized revenue by month.
For visual purposes, we plotted that into a simple bar chart (see below, revenue data removed).
c. Projecting value based on growth
Our agency was growing fast (172% year over year, 2 years straight) – we wanted to based our valuation on this.
However, growth can fluctuate based on client lifecycles, payment delays and other external factors. It’s important to look at a number of metrics to help accurately quantify your agency’s growth:
- Average month over month growth. Calculate each month’s growth rate (current month / previous month – 1), averaged across your agency’s history.
- 3 month rolling growth rate. The average growth rate of 3 month intervals (helps to level out inconsistency’s).
- Year over year growth rate.
With these numbers in hand, it was simple to calculate the next 3 years worth of revenue.
This gave me a solid base to stand on as a minimum valuation (i.e. concrete without multiple added in).
d. Finalizing our valuation multiple
As mentioned above, agency’s generally add in “multiples” to beef up valuations. For me, I added in a number of factors.
- Brand value. I looked at items like branded search volume, email list, social followings (10k YouTube subs, Facebook Page, etc)
- Website traffic + leads. Using a similar growth rate calculation, I added in a multiple based on incoming website traffic and inbound lead flow.
- Processes + automations. We have standardized SOPs and trainings for everything we do. We’ve also built automation tools on top of our processes to make our service run like a product.
I came up with a final multiple of 2.5 (on top of my growth rate).
5. Read the paperwork yourself!
I hate giving cliche tips, but this is important.
I received 3 legal documents from the sale:
The documents were perfectly written from a legal point of view, but did not contain some specific items discussed between Nick and myself.
This was not Nick’s fault, nor his attorney’s. His attorney was not present throughout our discussions – there were a number of “boilerplate” items in the documents that were left alone.
My attorney never would have caught these details, as he wasn’t present during Nick and my negotiations.
If I hadn’t sat down and read the documents myself, I would’ve signed away things I didn’t want to.
Small verbiage can have a huge impact on your sale – don’t rely on your attorney to do it for you.
6. Find the right buyer for you
Sounds cliche, but I had several talks with investors / buyers, none of whom I was comfortable with.
My name is tied to my agency and I plan to be in this industry for a long time. I couldn’t afford to sell to someone who would run my reputation into the ground.
The only option for me was to find someone who would further the quality of WEBRIS’ brand and work.
I don’t say this lightly, Nick is one of a few people I consider better than at me at all of this. If anything, this move will improve my reputation in the industry and open more doors. Don’t be short sighted – understand the long term impacts of selling your agency and the ripple effect on your future ability to generate income. Our deal was not your traditional buyout – we sculpted it to fit both of our needs. We chose not to go with a lump sum buyout because I valued my time more than money. While I loved the work I did at WEBRIS, it became a job. I answered to clients, day and night – as much as I worked, I could never get ahead.
7. Find the right deal for you
I don’t say this lightly, Nick is one of a few people I consider better than at me at all of this. If anything, this move will improve my reputation in the industry and open more doors.
Don’t be short sighted – understand the long term impacts of selling your agency and the ripple effect on your future ability to generate income.
Our deal was not your traditional buyout – we sculpted it to fit both of our needs.
We chose not to go with a lump sum buyout because I valued my time more than money.
While I loved the work I did at WEBRIS, it became a job. I answered to clients, day and night – as much as I worked, I could never get ahead.
Time to spend on new projects.
Time to spend creating.
Time to spend traveling and enjoying the success of something I busted my ass (PROUDLY) to build.
More importantly, I finally realized the value of my time.
I saw image this in a Tweet the other day and thought it was incredibly relevant…
TLDR; Managers focuses on team and day to day problems. Executives focus on industry and company problems.
I’ve realized my role at WEBRIS was as a manager, not an executive. I tried to put everything on my back – managing campaigns, client calls, sales, marketing…it got us to over $1M, but it wouldn’t get us to $100M.
This deal lets me focus my time on being an executive.
I’m excited for the future. IFTF is a great agency, with a great team – we’re going to make a lot of noise in this industry.