Valuation Guide: Advertising Agencies

|||Valuation Guide: Advertising Agencies

Valuation Guide: Advertising Agencies

Description of Industry

Advertising agencies (SIC 7310, 7311; NAICS 541810) are traditionally known to prepare and place advertisements through magazines, newspapers, the internet, television and radio. However, globalization of the industry has led many agencies to expand their suite of services. Many advertising firms now offer media planning, market research, graphic design, media buying and public relations services.[1]  More and more, customers look for advertising agencies that see ideas through from inception to execution. This expansion of services is what has led to much of the growth the advertising industry has experienced in recent years.

In 2011, U.S. advertising agencies generated approximately $33.2 billion.  Over 50 percent of those revenues were from the four primary players in the advertising industry: Interpublic Group of Companies, Omnicom Group, Publisis Groupe SA ADS, and WPP Group PLC.[2] Although these companies dominate the global advertising landscape, the advertising industry is somewhat fragmented.  There is still plenty of room for small, niche firms. This is validated by the fact that nearly 79% of advertising organizations have less than 10 employees.[3]

The advertising industry is in constant flux. Technological changes, consumer preferences and economic volatility all play a critical role in success or failure of advertising agencies.  

Industry Trends

There are several trends that have developed in the industry over the past few years. A few of the most significant trends are:

  1. Agencies are recovering from hard times during the recession.  Although advertising firms cater to a variety of consumers, the bulk of sales are received from corporate clients in the automotive, telecommunications and financial sectors. During the recession, corporate spending went down in general, and the weakened economy was especially harsh on these particular sectors, forcing many companies to cut back on media and advertising budgets.  A drop in requested services, in turn, led to a decrease in advertising sales. In 2008, automotive advertising declined 15.4% while advertising for retail and telecommunications declined 7.1% and 5.7% respectively.[4] Collectively, the decline in advertising industry revenues was 6.4% in 2008 and 3.5% in 2009.[5] Although the past few years proved to be particularly unpleasant for the advertising industry, agencies are again experiencing revenue growth.   Revenue for advertising agencies in the U.S. grew 4.7% in 2011, while marketing and communications agencies as a whole grew 7.9%.[6]
  2. Firms are focusing on specific niche markets.  Although some firms have expanded their global presence, many niche firms have thrived because there is increased demand for companies that specialize in a particular sector or product-type.  Moreover, smaller firms may have advantages in providing higher quality service and creativity at lower costs for a particular industry than larger agencies.[7]  Clearly, small firms do not necessarily mean not competitive firms. The advertising market has proven to have enough room for both large players and small, specialized firms.
  3. Traditional advertising media are shifting toward new technologies.  For years, advertising agencies worked closely with traditional media outlets like newspapers and magazines.  However, the decreasing demand for printed newspapers has meant that advertising firms must look to other sources for business, primarily the internet.  Social networking and online gaming are just two new digital outlets that offer advertising agencies an expanding clientele.  Revenues for agencies specializing in digital advertising increased 17.1 percent in 2011.[8]  Technological advancements will undoubtedly continue to provide the advertising industry with new business opportunities.  However, agencies with a primary focus on print media will face difficulty in this very competitive landscape.[9]

Summary of Valuation Approaches

The commonly accepted methods of business valuation should each be considered when valuing an advertising agency.  The four commonly accepted methods are:

  1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities.  This approach is also sometimes referred to as a “cost-based approach”; that is, the business value is equal to the cost of acquiring its physical assets.  An asset-based valuation can be considered when valuing advertising agencies but tends to be less relevant than other approaches.  This is because the value of an advertising agency is tied closely to its industry relationships, reputation, and talent, not its physical assets.
  2. Income approach to value (capitalization of earnings): This method is the most applicable for advertising agencies if they are expected to have a constant growth of earnings. The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).
  3. Income approach to value (discounted cash flow):  The value of equity under this method is equal to the present value of free cash flows available to equity holders over the life of the business.  This method works well for both established companies with low growth rates as well as new firms with higher rates of growth, but requires predicting changes in future cash flows.
  4. Market approach to value: This method utilizes market indications of value such as publicly traded comparable company stock as well as acquisitions of privately held advertising agencies.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Benchmark Statistics

The following performance metrics are based on a study of U.S. advertising agencies, each with less than $250 million in annual sales.[10]

Operating Profit (% of Net Sales) 5.5 5.0 3.7 6.6 6.5
% Owners Compensation/Sales 12.0 11.3 11.1 12.3 12.4
Sales/Fixed Assets 46.0 40.3 37.5 40.6 42.4
Current Ratio 1.1 1.1 1.1 1.1 1.1


Before using these metrics for a specific valuation their appropriateness should be evaluated for a particular subject company.

Industry Organizations and Publications

  • American Association of Advertising Agencies,, a trade association for advertising agencies in the United States
  • International Advertising Association,, an international trade association for advertising associations with a focus on education
  • Advertising Age,, provides advertising agency and marketing industry news.

Availability of Publicly Traded Comparable Companies

Fulcrum identified 12 publicly traded advertising agencies that trade on Nasdaq and the New York Stock Exchange.The top four publicly traded advertising agencies ranked by market capitalization are: [11]

  • WPP Group PLC (WPPGY, $15.8 billion)
  • Omnicom Group, Incorporated (OMC, $12.5 billion)
  • Publicis Groupe SA (PUBGY, $9.2 billion)
  • Interpublic Group of Companies, Inc. (IPG, $4.3 billion)

Availability of Private Purchase Transactions

Many privately held advertising agencies are bought and sold, which allows for potential valuation multiples from privately held companies.  The size of advertising agencies that were bought and sold over the past five years varies greatly, both in terms of their sales, and the purchase price paid for the companies. One database records 12 advertising agency transactions over the five year period from July 1, 2007 through June 30, 2012.  These transactions show the following ranges:

  • Total deal values ranged from $35,000 to $35.9 million.
  • Market value of invested capital (MVIC) to net sales ranged from 0.2 to 2.0 times with a median of 0.8.
  • MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from 1.0 to 40.2 times with a median value of 5.0.[12]

These wide ranging deal values and market multiples may not be informative for valuating any particular advertising agency without further analysis. Care should be given to selecting private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject.  Industry economic conditions also vary widely over time, affecting advertising agencies as investment opportunities.Fulcrum Inquiry performs business appraisals for advertising agencies as well as other businesses.

[1] “Advertising Agencies in the US: 54181,” IBISWorld Industry Report, January 27, 2010, p. 7.

[2] “Not-So-Slow Recovery: U.S. Agency Revenue Surges nearly 8% in 2011,”

[3] 2012 Business Reference Guide

[4] “Advertising Agencies in the US: 54181,” IBISWorld Industry Report, January 27, 2010, p. 8.

[5] “Advertising Agencies in the US: 54181,” IBISWorld Industry Report, January 27, 2010, p. 8.

[6] “Not-So-Slow Recovery: U.S. Agency Revenue Surges nearly 8% in 2011,”

[7] “Advertising Agencies in the US: 54181,” IBISWorld Industry Report, January 27, 2010, p. 8.

[8] “Advertising Agencies in the US: Market Research Report,”

[9] “Advertising Agencies in the US: 54181,” IBISWorld Industry Report, January 27, 2010, p. 8.

[10] RMA (The Risk Management Association)


[12] Private transaction data obtained from Pratt’s Stats available through


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