What is a rule-of-thumb multiple?
A rule-of-thumb multiple is a shorthand for price: one figure multiplied by a ratio someone remembers from past deals. In agencies it is usually quoted against total revenue, against a rent roll's annual management income, against an insurance or mortgage book's recurring income, or against profit.
The ratio is a summary of other people's transactions, passed on in industry conversations and online forums. It is not a method. The Australian Government's business.gov.au guidance says comparing your business with similar businesses for sale or recently sold 'isn't a formal valuation', although it can give you an idea of your market price. That is the fair way to treat a rule of thumb: a rough first idea, never the answer.
Why can two agencies with the same revenue be worth different amounts?
Hypothetical illustration, with invented figures that are not market data. Two marketing agencies each report $1.5 million of annual revenue.
Agency A pays its principal a market salary for the account director role she performs. Most of its fees come from monthly retainers spread across 30 clients, and two senior staff run the largest accounts day to day. After the principal's salary, it earns $300,000 a year.
Agency B's principal takes no salary and is paid through trust distributions, so its reported profit looks higher than it is. Two clients on project work provide almost half its fees, and both deal with the principal alone. Once a market salary for the principal's role is deducted, it earns $150,000 a year.
A revenue rule of thumb gives both agencies the same price. Any method that looks at maintainable earnings and risk puts Agency A well above Agency B, because A earns twice as much for a new owner and its income is far less likely to leave with one person.
What does a rule of thumb leave out?
A single ratio cannot see the facts that move an agency's value most:
- ·Which income recurs: rent roll management fees against letting and sales fees, insurance renewal income against new business, trail income against upfront payments on new loans, retainers against one-off projects, contractor margin against permanent placement fees.
- ·Earnings after a market salary for every working owner, and after market rent where a related party owns the premises.
- ·Client concentration: how much revenue sits with the largest clients, landlords or referral partners.
- ·Key person risk: whether relationships sit with the principal or with the team.
- ·Deal terms: retention and clawback clauses, earn-outs and vendor finance can make the price received very different from the headline.
- ·What is being sold: a rent roll or book alone, the business assets, or shares in the company, with or without its debt and working capital.
- ·The date: a ratio from a deal three years ago reflects that market, not today's.
Where do quoted multiples come from, and why don't they compare?
Quoted multiples are ratios taken from private deals, and the figures underneath them are rarely disclosed. One quote may divide a headline price by gross income including GST; another may divide the price after retention adjustments by income net of ancillary fees. One deal may involve a buyer paying extra for a book that fits its existing office; another may be a forced sale.
For tax purposes, market value is the price a willing but not anxious buyer and seller would agree, and the ATO's guide to market valuation says that estimate excludes value available to one specific owner or purchaser. The same guide lists common problems it sees in valuations, including inappropriate choice of comparable assets, inappropriate use of averaging, and lack of support for size, risk and other adjustments to the chosen capitalisation multiple. A rule of thumb applied without adjustment runs into each of them.
How does an independent valuation use market evidence instead?
A valuation starts with the agency's own records, not a ratio. The valuer normalises earnings, chooses a primary method that suits the agency and the evidence available, and explains why. For a whole agency that is often an earnings-based method; for a rent roll or insurance book on its own, it may be a multiple of recurring income where comparable evidence supports one. Transaction evidence is used after adjusting for differences in income definition, size, risk and deal terms, rather than copied across.
The ATO recommends that, where possible, a secondary or cross-check method supports the primary method. Every report we prepare follows the guidelines of APES 225 Valuation Services and sets out its inputs, assumptions and reasons, so a buyer, co-owner, lender or adviser can test them.
What do we need from you?
To value an agency rather than apply a ratio, we usually ask for:
- ·Financial statements for the last three years and year-to-date management accounts
- ·Revenue by client, or a report from your trust accounting, broking, CRM or booking system that ties to the accounts
- ·How each working owner is paid, and the role each performs
- ·A staff list showing who manages the larger client relationships
- ·Agreements for the largest clients, managements, insurers, lenders or suppliers
- ·Any offer, term sheet or appraisal you have received, so we can explain differences
What does an agency valuation cost?
Every valuation is a fixed fee, agreed in writing before work starts, and it does not change with the value we reach or with whether a sale goes ahead. The band is set by the annual revenue, excluding GST, of what is valued: a rent roll's annual management income, an insurance or mortgage book's annual recurring income, or the agency's total annual turnover where the whole agency or shares or units in it are valued. Delivery time starts once payment and all required information have been received.
- ·Small Business Valuation: $1,495 + GST where the revenue of what is valued is under $2 million, delivered in 2 business days
- ·Medium Business Valuation: $2,495 + GST from $2 million to $3 million, delivered in 3 business days
- ·Large Business Valuation: $3,495 + GST above $3 million up to $10 million, delivered in 3 business days
- ·Above $10 million: quoted in writing before work starts, with the delivery date agreed before commencement
- ·Expert report for a dispute or court: $4,495 + GST, with the delivery date agreed before commencement
- ·Add-ons: +$495 per retrospective (past) valuation date and +$795 per additional entity