Ditch The Guesswork - Get All Over Your Agency’s NumbersJun 16, 2023
The world of digital agencies is full of myths, usually divorced from reality:
- “Fred sold out for 15 times EBITDA.”
- “Erica is making 49% net profit.”
- “Jo is doing £5m revenue with 22 people.”
I get how these stories are blown up out of all proportion: everyone claims to be “really busy”; everyone claims to be about to cut an amazing deal. And everyone, at some point, has done some kind of work for Virgin, Barclays and Google!
However, when you look under the bonnet of these “high-performers”, the truth is often very different. Most agency owners are not “all over their numbers”. Most agency owners are not “business people with an uncanny entrepreneurial acumen and a nose for an awesome deal” (or so they say). And most are not “in the top 1%”. (It reminds me of the urban myth/stat that 90% of male drivers think they are above average!)
What is clear to me is that a large number of our heroes - agencies that are alleged to be the stars - are not.
It is not unusual to see a set of concerning stats that look roughly as follows:
- EBITDA: 10%
- Sales per head: £50,000
- Utilisation: 51%
- Blended fee rate: £65 per hour
- Blended fee cost: £55 per hour
Before we look at these numbers, I would like to make the following comments about 90% of agencies when they are asked to produce their financials:
- Very few agencies have all the numbers to hand. You often have to wait a week to get them
- Very few agencies know where to find this information
- Very few agencies know what this information means
- Very few agencies have accountants who can help them piece together the information or have accountants who know what key numbers an agency should be looking at or what they should be
- A little poking and prodding, and a few back-of-fag-packet calculations will reveal that the numbers just don’t stack up. They just aren’t right. They make a few sweeping assumptions here and there and suddenly a set of numbers has been created that does not reflect the reality.
So, having debunked the myth that agencies know their numbers, let’s look at the numbers they should have to hand - and what they mean for the agency.
If you don’t know what EBITDA means, then go and find out now. Many agencies have their bespoke way of calculating it, yet there can only be one way to do the sums. They like to add and subtract bits and pieces that will disguise the true (in)efficiency of the outfit.
There is no shame in not knowing what EBITDA is, but this is the number that any potential agency buyer is most interested in. If people don’t know what it is, then it is unlikely they know how to interpret it.
I will say that 15% has become the new breakeven, the amount you need to wash your face and invest a bit in the business. Right now, we are seeing plenty of agencies in the 20-30% EBITDA range.
SALES PER HEAD
Sales per head or, even better, per fee-earner gives us an accurate understanding of agency efficiency. Right now, we are seeing plenty of agencies doing north of £100,000 per fee-earner.
Like EBITDA, too many agencies have their own way of calculating utilisation. This has got to stop. You need to be comparing apples with apples. Understand how to measure utilisation.
BLENDED FEE RATE
On average, what is your fee rate per hour? I know many agencies do not charge by the hour (quite right!), but you still need to know your average charge-out rate. How else can you cost out your proposals?
BLENDED FEE COST
It is crucial to understand how much it costs to deliver one hour to a client. (See Blended Fee Rate above) And usually, the costs are alarming. You will have figured out that this agency claims that they are making £10 per hour on a member of staff. If there are any inaccuracies in the reporting (and there usually are), then the net profit, the gap, will be shot to pieces.
The conclusions about this agency are not great, and please bear in mind that a bit of detective work will almost certainly prove these figures aren’t right in any case! But let’s assume these figures are “there or thereabouts”.
They aren’t making enough money… they aren’t charging enough… their people aren’t working enough of the time that is available to them. Not great. And probably not a lot of fun.
Put the work in
In reality, most agency folk are not all over the numbers and should be. So, what is to be done?
- Get yourself a decent accountant
- Get someone in the business to take ownership of the numbers
- Start behaving like a grown-up!
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