What Is Churn Rate? | Agency M&A Definition
Churn rate measures the percentage of clients or revenue lost over a given period, typically calculated monthly or annually. In the agency context, it reflects how many clients discontinue their engagements or reduce their spending. A high churn rate signals instability in the client base, while a low churn rate indicates strong retention and client satisfaction.
Churn Rate in Agency M&A
Churn rate is one of the first metrics buyers examine in marketing agency M&A because it reveals the durability of the revenue stream. When selling a digital marketing agency, owners should expect buyers to calculate both logo churn (percentage of clients lost) and revenue churn (percentage of revenue lost) over the trailing 24 months. These numbers often tell different stories: an agency might lose 20% of its smallest clients annually while retaining all major accounts, resulting in high logo churn but low revenue churn. Buyers evaluating a creative agency typically benchmark churn against industry standards. For retainer-based agencies, annual revenue churn below 10% is considered strong, 10-20% is acceptable, and above 20% is a red flag. Project-based agencies naturally have higher logo churn since clients come and go with campaign cycles, but savvy sellers reframe this by showing repeat client rates instead. During due diligence, buyers will also analyze churn patterns — seasonal fluctuations, churn spikes after team departures, or churn concentrated in a specific service line — to understand root causes and predict future retention under new ownership.
How Churn Rate Affects Agency Valuation
Churn rate has an outsized impact on agency valuation because it directly determines the predictability and longevity of future cash flows. An agency with 5% annual revenue churn commands significantly higher multiples than one with 25% churn, even if both have identical current-year EBITDA. In concrete terms, each 5-percentage-point improvement in annual churn rate can add 0.3x-0.5x to the EBITDA multiple. For an agency with $500,000 in EBITDA, reducing churn from 20% to 10% could increase the sale price by $150,000-$250,000. Buyers discount high-churn agencies because they must spend more on business development to replace lost revenue, which compresses future margins. Some buyers use a discounted cash flow model that directly incorporates churn, projecting revenue decay over the hold period.
Example
A content marketing agency with $2.2M in revenue starts the year with 40 retainer clients. Over 12 months, 8 clients cancel their retainers (representing $380,000 in annual revenue) while 6 new clients are added. The logo churn rate is 20% (8 out of 40), and the gross revenue churn rate is 17.3% ($380,000 divided by $2.2M). A buyer applies a 5x EBITDA multiple to the agency’s $440,000 EBITDA, then applies a 10% risk discount ($220,000) due to the elevated churn, arriving at an adjusted offer of $1.98M instead of $2.2M. The seller counters by demonstrating that 5 of the 8 lost clients were project-based, and the true retainer churn rate is only 7.5%, ultimately negotiating the price back up to $2.1M.
Related Terms
Further Reading
Ready to find out what your agency is worth?