How Much Is Your Event Agency Actually Worth?

Welcome to Event Business Intelligence, weekly deep dive insights on growth, strategy, measurement, innovation and M&A for owners of event businesses and executives responsible for event P&Ls.

In today’s newsletter:

• Valuing event agencies: EBITDA multiples based on size

• Average net profit margins for event agencies

• Private equity’s growing interest in event businesses

• Thinking about buyers for whom your customers’ LTV is higher than it is with you

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Valuing Your Event Agency

In November someone paid $6.2 million at an art auction to purchase a banana duct-taped to a wall. Truly, the emperor has no clothes. Like Bitcoin, currently over $100k, it's proof that the value of anything is ultimately worth what someone is willing to pay for it. Alas, the market for event agencies is not quite as robust, but it’s a market that’s gotten a lot more attention recently, particularly from private equity investors. Here are some key metrics and factors to consider.

A Multiple of Adjusted EBITDA is the most common metric used to value event agencies, and most other businesses. EBITDA (earnings before interest, taxes, depreciation & amortization) is a close proximation of your net profit, but since most agencies are small businesses looking to minimize income taxes, some adjustments need to be made so a buyer can understand the true profit, such as:

• Removing any expenses you ran through your company for tax purposes (e.g. excessive travel, meals, cars, paying family members, etc.) that the buyer wouldn’t need.

• Adding back any income that you intentionally didn’t capture (e.g. a job that took place in December that you put on the books for January so you could defer that income until the following year.)

• Putting in a market salary for yourself. Some owners pay themselves much less than it would cost to hire a CEO, others pay more. Adjust this number to what a buyer would have to pay someone.

Negotiating these adjustments can be a source of contention, and buyers will pick your claims apart if they can’t be substantiated.

SDE (Seller’s Discretionary Earnings) is often used to value smaller businesses and includes everything the owner took out of the company: salary, profits, benefits, etc. The benefit of using this model is it eliminates any debate about what a market salary is for an owner/operator.

Valuation Multiples is what everyone wants to know and is the source of most negotiations over a company’s valuation. It’s subject to A LOT of factors (profit margins, growth trajectory, client concentration, recurring revenue, etc.), but here’s what I’ve seen recently:

Agency Profit Margins

Higher profit margins command greater multiples. Tight margins mean that even a slight decrease in sales could have a serious impact on the bottom line, whereas stronger margins provide some cushion. Most event agencies I’ve spoken to average 8-10% net profit margins. [An important consideration when calculating this is whether your top line revenue is all fees, or includes any pass-through event costs.]

Since labor is far and away the biggest cost in operating an event agency, the explosion of AI presents a unique opportunity to double that number to 20% or more. If you’re not aggressively looking at how to leverage AI to improve your net profit margins, you’re leaving money on the table.

Private Equity Cometh

Last summer a private equity firm looking at acquiring a mid-sized ($70-90 million in revenue) event agency asked me to advise them on the deal. They liked the company but didn’t really know the space. The experience was fascinating: though I’d sold 3 companies over the years and had advised a number of owners on potential acquisitions, it was interesting to see how sophisticated financial investors evaluate an event business.

Unlike a strategic buyer who is already in the space and understands it well, financial buyers are comparing an event business to companies in completely different industries. The questions they asked, and the analysis they went through, were eye-opening.

I’ve since had meetings with three other PE firms interested in event businesses, ALL of whom have never invested in the industry, a clear sign that well-run and profitable event companies are getting a level of outside attention that’s never been seen before. TrueLink Capital’s acquisition of GES Exhibitions as an example.

While PE firms typically want companies with at least $3 million in EBITDA, though exceptions are made for many reasons, this has prompted a number of agencies to look for smaller firms to acquire, knowing that once they get to the $3-5m threshold, whole tranches of PE buyers open up.

[More on what PE firms look for in a future post.]

Know Who You’re Selling To

Different buyers have different agendas and look at your company differently. Knowing who you’re selling to can help you position your business for maximum value.

Financial Buyers, whether a private equity firm or an outside investor, look solely at the return they can get, which is a combination of the profits it generates each year and the potential increase in sale price when they look to exit. They’ll likely fund expansion or acquisition opportunities to grow the company, such as Shamrock’s purchase of Nth Degree. They have shorter time horizons and typically want to sell their stake in 5-7 years.

In most cases, PE firms want owners to roll some of their payment into equity with the new owner, perhaps 20-30%, to align incentives for growing the business for a larger exit down the road.

Strategic Buyers are companies in the same space. They’re buying you for synergies (e.g. consolidating back-office functions like finance, IT, marketing, HR, etc.), opportunities to expand their client base and/or leadership team, ability to add new areas of expertise or service offerings, or perhaps just to prevent another competitor from snatching you up. They tend to have longer time horizons.

As an example, Informa’s acquisition of Ascential (owners of Cannes Lions & Money 20/20) became the springboard to build out the new Informa Festivals division.

Who pays more? Traditionally, strategic buyers used to offer higher multiples, for the reasons listed above. However, there’s been such an influx of private equity money in the space that many of the financial buyers are offering the same, and sometimes higher, multiples than strategic buyers.

For a deeper dive on this, check out my colleague Ken Sonenclar’s white paper Selling Your Event Business: A Strategy for Founders, Owners & Senior Executives. I’ll be doing a dedicated post on pros and cons of each in the future.

Multiple Bidders vs. Direct Talks

The best practice is to have multiple parties vying for your company. A buyer may think your business is worth 5 times earnings, but if they like it and think it’s a good fit for them they might go to 6 or 7x if that’s what it takes to win the deal. Knowing that other bidders are willing to pay a higher price for your business becomes the social proof, or validation, of its value.

That said, there are many situations where deals are done under the radar between a buyer and a seller where the company was never put on the market. This often happens when the companies have worked together, know the synergies of combining the firms, and the leaders have built strong relationships between them, as was the case with Freeman’s purchase of Sparks last year.

NOTE: I've spoken to a number of owners recently who've been approached by potential buyers out of the blue. They're excited about the interest in their companies and it's made them explore the idea of selling. However, in most cases the offers they're getting are below market value. An opportunistic buyer LOVES being able to come in under the radar and acquire a company before it gets a chance to explore the market, but it's rarely in the best interest of the seller. It's the equivalent of taking the first offer on your house before actually gauging the market value of your property. In the case of the Sparks example above, the company was owned by Eagletree Capital, a sophisticated private equity investor with experience in the industry, who knew exactly what the company was worth.

Sell the Future, Explain the Past

Sell the Future. Your current and past numbers are important to the extent that it shows your track record, but what you’re ultimately selling is the company’s future potential in the hands of a given buyer. If you can show, for example, that what’s been holding you back is a lack of marketing, and that if you can leverage the marketing resources of the buyer you’d be able to double your numbers, that’s a compelling story.

Another way to think about this is to understand your average customer’s LTV (lifetime value) and look for buyers who can sell higher priced services to those same customers, making them worth more to them than they are to you. Groupize’s acquisition of The Vendry is a good example: The same planner that sources a reception at a restaurant on Vendry could also source a larger hotel contract in Groupize.

Explain the Past. Even though buyers are focused on your potential future growth, they need to understand your past financial performance, and if those numbers aren’t great, you’ll need to explain why. Perhaps you invested in new technology, hired some rock star salespeople, or did a restructuring that forced your numbers to take a hit but positioned you for strong growth moving forward. Buyers understand these kinds of things, as long as they pass the smell test.

Conclusion

Obviously, coming up with a company valuation entails numerous factors, of which this article barely scratches the surface. And determining a price is only part of the equation. Structuring the deal – how much money to get at closing, potential earnouts, whether to roll some of your equity into the new business, etc. – is critical. I plan to cover many of these topics in detail in this newsletter, and to share stories of actual deals, including hearing from owners and buyers on what the process was like.

[*Note: Even if you’re not interested in selling any time soon, every owner should know the value of their event agency, an exercise that should be undertaken at least once a year. [See QuickValue: Discover Your Value & Empower Your Business In 3 Easy Steps, by Oaklins | DeSilva + Phillips CEO Reed Phillips.] Growing your business is not just about increasing revenue or profits; it’s just as important to be building a company that is growing in value.]

Here’s to taking your event business to the next level,

Howard Givner

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If and when you’re ready, here are ways I work with owners of event businesses:

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