There are a few different approaches to valuing an agency and a number of different factors contributing to the sum under each approach. To keep it simple, I will focus on the most common of each. Keep in mind that the only accurate valuation is what a willing buyer, under no compulsion to buy, will pay to a willing seller, under no compulsion to sell.

The two most common valuation methods that I see are:

(1) A percentage of the average of the past three year’s revenues (AGI, equaling the total of commissions, fees, hourly billings, markups, etc.). In some cases, this approach is expressed as simply a percentage of revenues. The median percentage of revenue is 70 percent for general advertising agencies, and somewhat more for digital or other “new technology” businesses.

(2) A multiple of operating profit (EBITDA). AdMedia Partners, Inc., an investment banking and advisory firm specializing in media, advertising, digital, social and marketing services companies, conducts an annual survey among prospective buyers and sellers regarding prospects for mergers and acquisitions. The median multiple of operating profit in the most recent AdMedia survey was 5.0x for general ad agencies.

It should be noted that whatever the multiple, it is applied to “adjusted profit.” “Adjusted profit” usually reflects reported profit with additions or deductions for the difference between compensation paid to an owner, and what would be paid to, or on behalf of, a non-owner executive performing the same duties. As you know, that adjustment could go in either direction. In addition, items such as depreciation and interest are added back into the equation. Usually, the market value is an average of both of these methods of agency valuation.

Stated simply, your agency is worth about 70 percent of last three years’ average AGI; or, 3 to 4 times adjusted net profits. Or, some average of both of these methods.