What Is Lifetime Value? | Agency M&A Definition
Lifetime value (LTV) is the total revenue or profit an agency expects to earn from a single client over the entire duration of that relationship. It is calculated by multiplying the average annual revenue per client by the average client lifespan in years. LTV is a key indicator of client relationship depth and the long-term revenue potential embedded in an agency’s book of business.
Lifetime Value in Agency M&A
Lifetime value is a powerful metric in marketing agency M&A because it quantifies the economic worth of each client relationship — the core asset in any agency transaction. When selling a digital marketing agency, presenting LTV data demonstrates to buyers that clients are not just sources of current revenue but long-term income streams. Buyers evaluating a creative agency typically calculate LTV alongside customer acquisition cost (CAC) to determine the LTV-to-CAC ratio, which measures how efficiently the agency converts business development spend into durable revenue. An LTV-to-CAC ratio above 3:1 is considered healthy for service businesses. In practice, LTV varies significantly across agency types. An SEO agency with average annual retainers of $60,000 and an average client lifespan of 3.5 years has an LTV of $210,000 per client. A project-based branding agency with $40,000 average project fees but a 1.5-year average relationship has an LTV of just $60,000. These differences explain why retainer-heavy agencies typically command higher valuations. Sellers should segment their LTV calculations by client type, service line, and acquisition channel to tell a nuanced story about which parts of their business generate the most durable value.
How Lifetime Value Affects Agency Valuation
Lifetime value directly influences agency multiples because it reveals the compounding nature of retained client relationships. An agency with a high average LTV signals to buyers that each client acquired continues generating revenue for years, reducing the need for constant new business development and improving long-term margin stability. Agencies with average client LTVs above $150,000 tend to command multiples in the 6-8x EBITDA range, while those below $50,000 cluster at 4-5x. The metric also helps buyers model post-acquisition revenue: if the agency’s 30 current clients each have a remaining projected LTV of $120,000, the buyer can estimate approximately $3.6M in future revenue from the existing base alone, before accounting for new client wins. High LTV also reduces integration risk because long-tenured clients are less likely to churn during the ownership transition.
Example
An integrated marketing agency has 25 active clients. The average annual revenue per client is $96,000, and the average client relationship lasts 4.2 years, yielding an average LTV of $403,200. The agency’s total client portfolio LTV is approximately $10.08M (25 clients multiplied by $403,200). The agency generates $2.4M in current annual revenue with $480,000 EBITDA. A buyer sees that the portfolio LTV of $10.08M represents over 4x the current annual revenue, indicating deep, durable relationships. This supports a 7x EBITDA offer ($3.36M). A competing agency with similar EBITDA but an average LTV of only $120,000 receives offers at 5x ($2.4M), reflecting its less durable client base.
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