What Buyers Actually Underwrite When Buying an Agency

Earnings Quality vs. EBITDA: Two Pillars of Buyer Confidence

For many business owners, navigating the complexities of selling your agency begins with the question: “What is my agency worth in today’s market?”

Determining your agency’s value is often more nuanced than expected; the process of selling your agency often reveals a jarring gap between perceived value (what you think your firm is worth) and a buyer’s actual underwriting (what a buyer will actually pay). Understanding why that gap exists — and how to close it — can be the difference between a good outcome and a great one.

An agency’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), assuming it is adjusted properly and accurately, is a strong starting point for determining its value. But to secure a successful exit, sellers must move past what is sometimes referred to as the "EBITDA myth."

There is more to the value of your business than a single earnings number. Two pillars drive buyer confidence — and ultimately, deal value and deal certainty: Earnings Quality and Margin Stability. Understanding them and how they drive value and deal certainty, is how owners maximize their deal value.    

In this article, we’ll cover:

• Why EBITDA is a starting point, not the finish line.

• How buyers segment agencies based on margins and business model.

• What a Quality of Earnings (QofE) review actually examines, and why it matters before you go to market.

• Why margin stability signals more to buyers than margin size alone.

• How to position your firm for the strongest possible valuation.
  

   

1. How Does EBITDA Impact Agency Value?

If EBITDA is the foundation of business valuation, where buyers assign a multiple to your adjusted earnings to arrive at a purchase price for your agency, then…

The EBITDA for an agency is a terrific place to begin when considering the value of your agency. There are always exceptions and outliers, but most buyers segment business services companies into a few categories based on their Adjusted EBITDA. This segmentation can be a helpful starting point for sellers who are getting a feel for the valuation of their business.

What multiples are agencies selling at?

Agency valuation multiples are highly contextual, so sellers should be careful about latching onto a multiple in isolation. Multiples vary depending on the earnings period being measured, the structure of the transaction, and whether contingent consideration such as earnouts is included in the stated purchase price.

Sellers should be cautious when hearing headline multiples from buyers or peers without understanding “a multiple of what,” how the deal was structured, and whether the comparable companies are truly similar.

Public company trading multiples are often poor benchmarks for closely held agencies.

Ultimately, valuation is driven not simply by a headline multiple, but by the quality of earnings, growth trajectory, strategic relevance, competitive dynamics of the sale process, and the terms of the transaction.

Recent Valuations for Marketing & Digital Agencies

Looking at 21 of our recent agency transactions:

• The average multiple based on trailing 12-month EBITDA at the time of LOI was 6.50x

• The average multiple based on a weighted three-year EBITDA average was 7.20x

• The range of trailing 12-month EBITDA multiples was 2.65x to 12.64x

   

Transaction structure materially impacted realized value:

• 12 of the 21 transactions included rollover equity

• Rollover equity represented approximately 21% of the average purchase price

• 15 of the 21 transactions included earnouts

• Earnout consideration averaged approximately 28% of the total purchase price
  

Key Factors that Impact Agency Valuation

The broad valuation range of 2.65x to 12.64x was driven by numerous factors, including company-specific value drivers and transaction terms. The primary factors influencing valuation and deal structure include:

• Revenue and EBITDA growth

• EBITDA margins

• Size and scale

• Unique market positioning and differentiation

• Client concentration

• Client retention and recurring revenue characteristics

• Management depth and scalability

• Lead generation and business development capabilities

• Strategic relevance to the buyer
  

Companies are acquired with after-tax dollars, so for buyers to justify paying 6.0x EBITDA or more, they generally need confidence in sustainable growth, respectable margins, and scalable operations.

Smaller agencies are frequently viewed as founder-dependent businesses with limited institutional infrastructure, key-person risk, and less predictable scalability. Agencies with EBITDA margins (measured as a percentage of Adjusted Gross Income) in the 8% to 15% range that are not achieving double-digit growth will often only command valuation multiples in the 3.5x to 5.5x range, with a portion of the consideration potentially tied to future performance through an earnout structure.

The highest valuations are generally reserved for larger, faster-growing, strategically differentiated firms. In five larger transactions where EBITDA multiples averaged 9.81x, the agencies had:

• Average EBITDA margins of approximately 35% of Adjusted Gross Income

• Strong growth profiles

• Strategic importance to buyers or financial sponsors
  

Our clients with EBITDA between $3 million and $7 million are often particularly attractive to private equity groups and family offices as potential platform investments and may receive more favorable valuations and deal terms than firms being acquired solely as add-on acquisitions.

The next tier of agencies has evolved beyond being simple “service-for-hire” businesses. These firms have strengthened and differentiated their value proposition, institutionalized processes, developed scalable management teams, and built sustainable growth engines. Agencies at this level frequently generate EBITDA margins in the 20% to 30% range and may receive offers in the mid- to high-single-digit EBITDA range. They also tend to have multiple alternatives, including selling to strategic buyers, becoming add-on acquisitions for existing platforms, or serving as standalone platforms backed by private equity groups or family offices.

There are always exceptions and outliers. Ultimately, valuation is determined not by a headline multiple alone, but by the quality and sustainability of earnings, growth prospects, strategic fit, transaction structure, and the competitiveness of the sale process.

2. What’s the Difference Between EBITDA and Quality of Earnings?

EBITDA is a starting point for agency valuation, but Quality of Earnings scrutinizes whether the adjusted EBITDA is accurate, sustainable, repeatable, and truly available as cash flow. 

Many sellers believe a simple EBITDA multiple defines their price, but in reality, buyers underwrite the Quality of Earnings (QofE). This is what ultimately determines the company’s value.

During the diligence phase of the sale process, a third party specialist does a deep dive into your financials, including tax returns, bank statements, and your general ledger. This analysis, not the headline EBITDA figure, is what ultimately determines the value a buyer will pay and the certainty with which they'll close.

Understanding QofE ahead of time helps you get your company positioned for a successful, lucrative transaction. What does a Quality of Earnings review examine?

• Sustainability Over History: A QofE does look at historical accuracy. While EBITDA looks at what you did, a QofE report looks more at what a buyer can continue to do. (Learn more here about what buyers look for). The ultimate question is: “will the business keep earning this?”

• Normalization Adjustments: Buyers "normalize" your earnings by stripping out one-time windfalls, like a massive non-recurring project or a pandemic-related surge, that won't exist under new ownership.

• Add-Back Skepticism: Sellers often try to "add back" personal expenses to boost EBITDA. Buyers heavily discount these if they aren't clearly documented or if they represent roles the buyer will need to hire for (e.g., replacing a founder’s "free" labor with a market-rate CEO).

• Revenue Concentration Risk: For agencies, if 50%+ of your revenue comes from one or a limited number of clients, a buyer will underwrite a significant "risk discount" or move a larger portion of the price into a contingent earn-out. Concentration is one of the most common value-eroding factors we see, and one of the most addressable with advance planning.

Learn more about other factors that can significantly affect value.

Understanding these factors before going to market helps agency owners take strategic steps to improve their valuation. Sellers who have done the work to clean up their financials, document their add-backs, and address concentration risk enter the process in a materially stronger position.

3. How Does Margin Stability Drive Confidence and Deal Certainty?

Buyers tend to shy away from volatility, and margin stability shows buyers that the agency you've built is sustainable, scalable, and transferrable.

At TobinLeff one of our core values is “M&A is about the people.” That’s particularly true in professional service businesses: Your "inventory" goes home every night! Buyers understand this. Stable margins act as a proxy for operational excellence and institutionalized value. They tell a buyer that the business can run, scale, and perform not just because of a talented founder or a hot market cycle, but because of systems, processes, and a differentiated offering.

• Proof of Pricing Power: Fluctuating margins suggest a company that competes on price or has "leaky" project management. Consistent margins prove you have a differentiated offering that clients are willing to pay for regardless of market cycles.

• Scalability Signals: Stability suggests that your systems—not just your talent—drive the business. A buyer is much more likely to close a deal quickly when they see that increasing revenue doesn't cause a chaotic drop in margins.

• Forecasting Accuracy: Buyers value predictability. If your historical margins are stable, they can trust your future projections, which leads to higher upfront cash and more certain deal terms. Future projections, your pipeline, needs to be real and substantiated with some data and detail, not simply based on what you are hoping for.

Final Takeaways

Agency valuation is not just about multiples of EBITDA or the absolute dollar amount of profit. The valuation is about the efficiency and predictability with which those dollars are generated, plus the confidence a buyer has that they will continue to be generated after you hand over the keys.

Savvy business owners will build companies that not only create profits, but create margin that is repeatable and sustainable. And they understand, before going to market, how buyers will examine their earnings so that nothing in due diligence comes as a surprise.

 

Thinking about selling your agency in the next few years?

Earnings quality and margin stability are just two of the factors that shape your outcome. TobinLeff has helped owners of leading marketing agencies, PR firms, technology, and professional services businesses achieve outstanding results — strong valuations with buyers whose values, culture, and vision align.

Schedule your confidential conversation today.

 

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Frequently Asked Questions: Quality of Earnings and Selling an Agency

What is a Quality of Earnings (QofE) report in an M&A transaction?
A Quality of Earnings report is an independent financial analysis, typically prepared by a third-party accounting firm, that examines a company's financials, including tax returns, bank statements, and general ledger. Buyers commission QofE reports during due diligence to verify that what the seller is presenting is what the business actually earns — and will continue to earn — under new ownership.

Why does quality of earnings matter more than EBITDA when selling an agency?
EBITDA is a starting point, but buyers underwrite the quality of those earnings — not just the number. A $2M EBITDA built on one large non-recurring client, undocumented owner add-backs, and volatile margins will command a very different valuation than a $2M EBITDA built on diversified retainer revenue, clean financials, and consistent margins. Quality of earnings determines both the multiple a buyer will apply and the certainty with which they'll close.

What is a sell-side Quality of Earnings review?
A sell-side QofE is a Quality of Earnings analysis commissioned by the seller — before going to market — rather than the buyer. It surfaces financial issues on the seller's timeline, allows for correction or explanation in advance, and positions the seller to move through due diligence faster and with greater confidence. Sell-side QofEs are increasingly common among well-prepared sellers of marketing and professional services firms.

How does client concentration affect the sale of an agency?
High client concentration — particularly when one client represents 20%–25% or more of revenue — is one of the most common factors that reduces valuation in an agency sale. Buyers view concentrated revenue as a concentration of risk: if that client leaves, a significant portion of the business's value disappears. Buyers typically respond by discounting the valuation, reducing upfront cash, or increasing the earnout component. Sellers who begin diversifying their client base at least 12–24 months before a planned sale materially improve their outcome.

What EBITDA margin should an agency have before selling?
While there is no universal threshold, buyers tend to view EBITDA margins below 15% as high-risk and margins of 20%+ more favorably. Firms with consistently recurring revenue, specialized positioning, and margins of 20%–25%+ typically command mid to high single-digit multiples. The consistency of margin matters as much as the level — buyers want to see stability over time, not just a strong recent year.

How can I prepare my agency’s financials before selling?
The most impactful steps sellers can take to prepare their financials include documenting all EBITDA add-backs thoroughly, addressing client concentration, reviewing revenue for one-time items that will be normalized out, and preparing credible forward projections supported by pipeline data. Sellers who complete this preparation before going to market experience fewer surprises in due diligence, move through the process faster, and command more competitive valuations.

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