You've poured your heart and soul into this business, and now you're wondering, "what's it actually worth?"

While there's no single magic formula, typical market benchmarks are:

• 1-3x your annual recurring revenue, depending on the growth rate and stability of that revenue, plus
• 1.5x your services-related profit.

So, for an agency doing $500K of annual recurring revenue plus $1M in services at a 50% profit margin (i.e. $500K profit), the implied valuation would be $1M. 

There is much more to it.

Let's break it down.

The Key Factors That Drive Your Agency's Value

1. Revenue Composition: Where's the Money Coming From?

How much of your revenue is from one-off project work, and how much is from recurring services like hosting, maintenance, and support?

The more predictable your future revenue is, the better. 

Recurring revenue is king.

If you have a solid base of recurring revenue, a buyer knows they have a steady stream of income from day one. 

That's a lot less risky than a business that's constantly chasing the next big project.

2. The Client Base: How Strong Are Your Relationships?

At the end of the day, your business is your clients.

How strong are those relationships? Are they loyal to you, or are they loyal to the brand?

If all your clients are going to walk out the door the day you leave, it makes it pretty hard for a buyer to get confident in the business.

You want to build a business where the clients are loyal to the brand, not just to you. That means having a team that can build and maintain those relationships.

3. The Brand: Does it Have Its Own Gravity?

A strong brand is a massive asset. 

It's an engine that drives new business, and it's something a buyer can build on.

Does your brand have its own momentum? Are people knocking on your door, wanting to work with you? Or are you constantly hustling to find new leads?

Size matters here too. 

A brand that's known for handling more sophisticated, larger-scale projects is going to be more valuable than a brand that's only known for small, simple websites.

4. The Team: Is it a One-Person Show?

You know the story - the founder is the business. 

They're the lead salesperson, the lead developer, the chief firefighter, everything.

That's a huge risk for a buyer: what happens when the founder leaves?

The less dependent your business is on any one individual, the more valuable it is. 

You want to build a team that can run the business without you.

5. Complexity: Simple is Scalable

The more complicated your business is, the harder it is to grow. And the harder it is to value.

If you're doing a tonne of custom work for each client, that's going to drag down your valuation because if it's hard for a buyer to understand, it's going to be hard for them to scale.

On the other hand, if you have one system, one billing engine, one process that a buyer can quickly understand and plug into, that's a much more attractive business.

Remember, most buyers are looking for growth. 

They want a business they can grow, and simple is always easier to scale than complex.

Pitfalls to Avoid

Many agency owners make three familiar mistakes when it comes to valuation.

• Overvaluation: We all love our own businesses, but you have to be realistic. Don't let your emotional attachment cloud your judgment.
• Underestimating Transition Costs: There are always costs involved in transitioning a business to a new owner. Server setups, team training, client handovers... it all adds up.
• Founder Dependency: The less your business depends on you, the more it's worth.

Valuing any business is subjective, but the best benchmark is the range of outcomes that similar businesses have traded for. 

If you want to be at the top of the range, expect to show strong recurring revenue, loyal clients, a solid brand, a great team, and simple, scalable systems.