Businesses are valued as a function of their cash flow.
In a contract service business, the cash flow can be tied to the contracts that are in place.
Here is the problem, if the contracts don't go very far into the future, then you won't get a very high multiple of cash flow as a business valuation because the continuity of the cash flow is uncertain.
This is why many businesses in this space sell on terms related to the performance of the business in the years after the transition.
If you're thinking about selling your marketing agency, arrange a call and I'll tell you about some other deals I've done with similar businesses.
The best way to value a marketing or advertising agency is through using multiples. There are two types of trading multiples EV (Business Value)/EBITDA and EV (Business Value)/Sales. For marketing agencies we use EV/Sales multiple instead of valuing on the basis of EBITDA as cost concentration is high in this sector and also there are chances of customer concentration as well.
Hi. Businesses are traditionally valued at 3 - 5 times their annual net profit or 1x their annual turnover.
If they have not been achieving those profits levels for 3 years and/or there are reasons why that wouldn't be sustained for a further 3 years, the valuation comes down.
When I sold my own agency, our retained monthly income exceeded our costs and these were annual contracts.
I hope this helps.