Digital agencies will still fare well in the days after huge multiples

2 July 2009

Prior to the economic downturn, if you were to ask the founder of an independent digital agency about their valuation expectations for their business, they’d get a slightly dreamy expression on their face and talk about double-digit multiples of profit. But what’s the reality in the current climate and beyond?

Is the double-digit multiple a genuine benchmark or an urban myth based on dodgy maths and wishful thinking? The financial terms of the majority of deals aren’t available within the public domain and even where the consideration is disclosed it’s almost impossible to accurately calculate the profit multiple. Deals are typically based on figures which can be a world away from those in the last set of filed accounts. Only the parties actually involved will know the true multiple paid, and those celebrating their new-found wealth down Soho’s finest watering holes can be prone to exaggeration.

That said, digital agencies have typically attracted a higher multiple than their counterparts in other marketing disciplines and, on occasion, some eye-watering multiples have been paid. In the early days, the scarceness of expertise in the area and the realisation by the larger groups that they needed to ‘crack digital’ would often result in competitive bidding for independent agencies. In recent years, the market has been buoyed by acquisitive AIM-listed companies and ambitious private equity investors.

However, the financial crisis has had a significant impact on M&A activity within the sector. While there are still active buyers, they’re increasingly looking at lower-risk transactions with sustainable, profitable businesses with an experienced management team. Whether right or wrong, digital agencies are starting to be viewed more critically by potential acquirers as they tend to have shorter track records, lower profit margins and younger management teams. It’s not all bad news, though. What remains most attractive about digital agencies is their growth potential. As the recession continues to drag down traditional media spend, digital is standing relatively firm and the seemingly unstoppable advancement of digital consumption, combined with a focus on measurability, is driving revenue growth.

Despite the challenges, the overall value of transactions is staying relatively stable - buyers are looking to pay less upfront but are still willing to pay a reasonable multiple for delivered performance. The froth we’ve seen in recent years may have gone off the market but, as confidence returns, deals will be done and at healthy multiples.

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