What if we told you that there is an obvious and straightforward way to partner with other agencies and grow your value substantially? The model of agency aggregation is powered by the principle of multiple arbitrage that can help you scale your agency more than 3 times its original value and do it quickly. This approach involves strategically bringing together several specialized agencies under one umbrella to increase business value and spur growth.
Understanding Multiple Arbitrage and Agency Aggregation
Multiple arbitrage is a strategy wherein an entity acquires businesses at a lower valuation multiple only to hold them within a larger entity with a higher valuation multiple. The increase in the entity’s worth due to the higher multiple is the crux of this strategy. In the context of marketing agencies, this involves aggregating – or combining – multiple specialized agencies. The strategy is so simple that any agency owner who can find the right
entities to partner with, can easily achieve this. Each of these entities may have a lower valuation multiple, but when considered as a part of a larger, diversified entity, they can benefit from a higher valuation multiple, thereby increasing the overall value of the aggregated agency.
Example of Agency Aggregation and Multiple Arbitrage:
Agency A: Specializes in Social Media Marketing
Agency B: Focuses on SEO
Agency C: Has expertise in Content Marketing
Each agency has an EBITA of $500k and is acquired at a valuation multiple of 3x. This means each agency is initially valued at $1.5 million. Once these agencies are aggregated into a larger entity, Agency D, they achieve a combined EBITA of $1.5 million and a higher valuation multiple of 6x.
Agencies A, B, and C were acquired for a total of $4.5 million (each valued at $1.5 million). Afte aggregation under Agency D, the total EBITDA of $1.5 million is valued at a 6x multiple, leading to an increased value of $9 million. This results in a value uplift of $4.5 million purely due to multiple arbitrage after aggregation.
Steps to Grow Your Agency through Aggregation
The agency aggregation model, backed by multiple arbitrage, is an innovative strategy for agency growth. Bringing together specialized agencies under a single, diversified entity can increase business value, expand service offerings, and command higher valuation multiples. However, careful planning, meticulous due diligence, and efficient integration are vital to maximize the potential of this growth strategy. Adbox can help you with this process and in choosing the right entities to aggregate with.