Technology, Media & Healthcare

How to Underwrite a Marketing or Creative Agency

Underwrite a marketing or creative agency by separating retainer revenue from project work and pass-through media, then testing client concentration, staff utilization and founder dependence. Key metrics are agency gross income after pass-through costs, retainer share, top client concentration, billable utilization and client tenure. Agencies with diversified long-term retainers support more debt than project shops.

What makes marketing / creative agency underwriting different

Agencies sell people's time and ideas: strategy, creative, media buying, SEO, paid social, PR and content. Value comes from long-standing client relationships, retainers that renew year after year, specialized expertise and a team that can deliver without the founder. Risk comes from client concentration, accounts moving to new agencies or in-house teams, key staff leaving with clients, and pricing pressure from automation and freelancers. Reported revenue often includes media spend and production costs passed through to clients, which can make a small agency look large. Agency gross income, net of pass-through, is the real economic revenue.

Lenders treat agencies as cash flow credits with little hard collateral. They lend modestly against EBITDA, rely on personal guarantees or SBA programs for smaller agencies, and focus on client diversity and retention. They are cautious about media payables, since the agency may owe large sums to platforms on behalf of clients. Equity investors and acquirers value specialized capabilities, client rosters and talent. They typically structure deals with earnouts and retention packages because much of the value can walk out the door.

Key metrics

Agency gross income

Revenue net of media and pass-through costs reflects the agency's real fee revenue and is the basis for valuation.

Retainer share

Retainers provide recurring revenue, while projects must be won repeatedly.

Top client concentration

Losing one major account can eliminate a large share of profit.

Buyers commonly flag any single client above roughly 15 to 20 percent of agency gross income.

Billable utilization

Measures how much staff time is billed, driving margins in a people business.

Client tenure and retention

Long relationships suggest the agency delivers results and is embedded in client operations.

Labor cost as a percent of gross income

Payroll is the main cost, and rising wages without price increases compress margins.

How to underwrite it, step by step

Restate revenue as agency gross income by removing media spend and pass-through costs.
Analyze revenue by client, service line and engagement type, including retainer and project mix.
Review client contracts for term, notice periods, scope and termination rights.
Assess client tenure, retention and reasons for lost accounts.
Analyze staff utilization, billing rates, compensation and turnover.
Evaluate founder and key staff roles in client relationships and plan retention.
Review media payables, client prepayments and working capital practices.
Normalize EBITDA and structure debt with earnouts or seller financing to manage client retention risk.

Due diligence checklist

Revenue and gross income by client and service line
Client contracts and statements of work
Client retention and tenure history
Staff roster with roles, compensation and utilization
Time tracking and billing reports
Media buying agreements and platform payables
Client prepayments and deferred revenue detail
Non-compete and non-solicit agreements with key staff
Case studies and performance reporting to clients
Pipeline and new business reports
Freelancer and subcontractor agreements

Key risks and mitigants

Client concentration

Size debt excluding the largest client and use earnouts tied to client retention.

Founder or key staff departure

Use retention packages, employment agreements with non-solicits and transition periods.

Media payable exposure

Review client payment terms and media payables, and require clients to prepay large media spends.

Clients moving work in-house

Analyze service lines at risk and favor specialized capabilities with demonstrated results.

Margin pressure from wages

Review pricing power and stress margins for wage increases.

Typical financing and deal structure

Smaller agencies are often acquired with SBA 7(a) loans, buyer equity and seller notes, with lenders focusing on cash flow and client diversification. Larger agencies are acquired by holding companies or private equity platforms, typically with a mix of cash at close, earnouts tied to gross income or EBITDA over several years, and rollover equity for founders. Senior debt is usually modest because there is little hard collateral and revenue can change quickly. Acquirers may hold back part of the purchase price in escrow. Covenants focus on leverage and fixed charge coverage, and lenders often require key person life insurance on founders.

Red flags

One client above a quarter of gross income with a short notice termination clause
Reported revenue mostly media pass-through with thin gross income
The founder personally manages most client relationships with no succession plan
Key staff without non-solicit agreements
Large media payables due before client payments are received

Frequently asked questions

How are marketing agencies valued?

Agencies are typically valued on multiples of EBITDA or seller discretionary earnings, with adjustments for client concentration, retainer share, growth and founder dependence. Specialized agencies with strong retainers and diversified clients command higher multiples. Many deals include earnouts because client retention after the sale is uncertain.

What is agency gross income?

Agency gross income is revenue minus pass-through costs such as media spend, printing and third-party production. It represents the fees the agency actually earns for its work. Buyers and lenders use gross income rather than total billings to measure size, margins and concentration. Using gross income also prevents media-heavy agencies from appearing larger than they are.

Why are earnouts common in agency acquisitions?

Agency value depends heavily on client relationships and key people. Earnouts tie part of the purchase price to future performance, protecting buyers if clients leave after the sale. They also keep founders motivated to transition relationships and grow the business during the earnout period. Earnout metrics should be clearly defined to avoid disputes.

Can you get an SBA loan to buy a marketing agency?

Yes, SBA 7(a) loans are often used for agency acquisitions with consistent cash flow. Lenders review client concentration, contracts, financial statements and transition plans. They may require a seller note and personal guarantees, and they can be cautious when one client dominates revenue. Retainer-based agencies are generally easier to finance than project shops.

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Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.