In the previous post, we talked about some of the items that can lead to higher (or lower) multiples. In this post, I wanted to dive a little deeper into 3 that really matter. .
I call it the Triangle of Value.
- Retention – are your clients sticking around? High churn kills value. Delivering results, sticky services, and satisfied customers create recurring revenue. What’s good? Good agencies will have ~75% gross revenue retention. This means, for any given cohort of customers, at least 75% of them are still around 1 year later.
- Growth – is your revenue moving up and to the right? Flat revenue is definitely a worrying sign for a buyer. Aim for growth around 15-20%, but make sure that it’s good quality growth that does not negatively impact retention.
- Profitability – are you generating sustainable margins? Buyers don’t just want growth, they want efficient growth. For agencies that have predominantly US-based employees, strive for margins of 20-25%; if your agency outsources work to a low-labor cost country, those margins could push into the 30%-ish range.
Why does this triangle matter? Because together, these three create predictable cashflow. And predictable cashflow is the holy grail in M&A.
I’ve seen agencies with $10M in revenue but shaky retention get discounted heavily. I’ve also seen $5M agencies with strong retention and profitability get bought for premium multiples.
The takeaway: you can’t ignore any corner of the triangle. Growth without profitability isn’t sustainable. Retention without growth gets stale. Profitability without retention is fragile.
Contact us if you’re and agency owner and have considered selling or joining something bigger.