What Is EBITDA? | Agency M&A Definition
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company’s core operating profitability by stripping out financing decisions, tax strategies, and accounting conventions. In agency M&A, EBITDA is the most common baseline for determining what a business is actually worth.
EBITDA in Agency M&A
EBITDA is the lingua franca of agency dealmaking. When a buyer says an agency is worth “6x,” they almost always mean six times EBITDA. For marketing agencies generating between $500K and $5M in revenue, EBITDA margins typically fall in the 15-30% range, though this varies significantly by discipline. SEO and performance marketing agencies tend to sit at the higher end due to lower labor intensity, while full-service creative shops often land closer to 15-20% because of heavier staffing requirements.
When selling a digital marketing agency, the first thing a serious buyer will do is reconstruct your EBITDA from your profit-and-loss statements. They are looking for consistency — ideally three years of stable or growing EBITDA. A single strong year preceded by flat or declining performance will raise questions about sustainability. Buyers also scrutinize how much of the agency’s EBITDA depends on the owner’s personal client relationships versus repeatable systems and team-driven delivery. Owner-dependent EBITDA is riskier, and risk compresses multiples.
How EBITDA Affects Agency Valuation
EBITDA directly determines your headline valuation. Marketing agencies typically trade at 4-8x EBITDA, meaning a $200K EBITDA agency might sell for $800K to $1.6M depending on growth rate, client concentration, and contract quality. Agencies with EBITDA margins above 25% often command premium multiples because they signal operational discipline. Conversely, agencies with thin margins — say 10-12% — may struggle to attract institutional buyers at all, since small fluctuations in revenue could wipe out profitability entirely. Buyers also discount EBITDA that appears inflated by deferred spending on staff, technology, or business development, since those costs will resurface post-acquisition.
Example
A digital marketing agency generates $2.4M in annual revenue. After accounting for $1.5M in employee salaries, $180K in rent and overhead, and $240K in software and contractor costs, the agency reports $480K in operating profit. Add back $30K in depreciation on office equipment, and EBITDA comes to $510K. At a 5x multiple, the indicative enterprise value is $2.55M. If the owner can demonstrate two more years of similar performance and a diversified client base, a buyer might stretch to 6x, pushing the value to $3.06M.
Related Terms
- Adjusted EBITDA
- SDE (Seller’s Discretionary Earnings)
- Valuation Multiple
- Enterprise Value
- Normalized Earnings
Further Reading
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