5 Key Pieces of Financial Information That Will Make Your Creative Agency or Marketing Firm More Valuable

Owners of service-based companies often have a harder time selling their company than owners of product-based companies such as manufacturing.

Some of the reasons for this are the following:

-         Complicated and customized service offerings where the sales process is difficult

-         Frequent reliance of a few large customers

-         Sometimes lower priority placed on business development

-         Usually, unpredictable project-based revenue

-         Inadequate financial information

There are several ways to alleviate this. I will in this article deal with the preparation of solid financial information. When a business owner is putting a company up for sale, he is making an assertion that the company has a business model that can generate a certain amount of profit and cash flow. To a large extent, the financial statements are the proof of that assertion. If these statements are unreliable, potential purchasers will either walk away or pay much less.

There are five main elements to complete financial information.

1.      Know what it costs to produce a product/service. The inverse is the gross profit of a service which is the selling price less the direct cost per unit. The long-term value of a customer would be (in months), the monthly gross profit from that customer multiplied by the number of months you have that customer. For a customer that orders projects on an irregular basis, this may a little difficult to calculate, but approximations can be used based on history.

2.      Know the Customer Acquisition Cost (CAC) This case includes all selling and marketing costs. An owner should distinguish between costs to acquire a new customer and costs to upsell or cross-sell to existing customers. A viable business model should have an LTV of at least three times CAC.

3.      Metrics. Metrics, or Key Performance Indicators (KPI) would vary a little from industry to industry. For a creative agency, some metrics may be Accounts Receivable in days, Cash runway in days, Utilization and Project Overruns in percent.

4.      GAAP financial statements. Financial statements that have a review engagement or audit report must comply with Generally Accepted Accounting Principles. These reports are more expensive than a Notice to Reader and business owners generally don’t want them unless required by their bank. However, a purchaser may find them more reliable, and a purchaser’s bank may very well require these statements. Therefore, a higher valuation may outweigh higher annual accounting costs.

5.      Budgeting. The two most important forecasts are sales forecasts and cash forecasts. The financial statements budgets follow from the sales forecasts. If future sales are completely unpredictable, there is little point in preparing expense budgets. Nevertheless, complete budgets should be prepared with actual monthly results compared to budgets and prior year. This will help with managing and modeling a business owners’ company but are also items a potential purchaser would like to see.

 Cash forecasts are useful even if a company does not a problem paying for payroll. If the cash conversion cycle (CCC) can be steadily reduced, the value of the company may increase.