In this case study, we explore how preparation work allowed us to justify a higher valuation (ultimately securing a 7.5x EBITDA multiple).
Background
The company provided paid media management, content production and marketing analytics for B2B clients. Most revenue came from monthly retainers, with additional project fees for campaign launches, website work and one-off content packages.
For the latest financial year, the company reported:
Revenue: £5.6m
Gross profit: £3.4m
Reported EBITDA: £780k
Cash: £220k
Debt: £90k asset finance
Founder salary: £70k
Largest client: 22% of revenue
Top 10 clients: 57% of revenue
The business was attractive, with recurring client retainers, a strong reputation in a specific B2B niche, and a team of 32 people across paid media, creative, analytics and account management.
The preparation work focused on five areas: improving gross margins as much as possible, managing client concentration, cleaning up WIP to improve the health of the balance sheet, adjusting EBITDA and reducing reliance on the founder before approaching buyers.
Improving gross margins
The reported P&L showed £5.6m of revenue and £3.4m of gross profit, giving a gross margin of 61%. However, £1.1m of this was media income recharged directly to clients. While the client was presenting gross profit as a KPI, we decided to strip out passthrough revenue from that figure. This would give a clearer picture of the quality of revenue on margin-generating activities and also improve the gross profit margin which we presented to buyers.
The revised view was:
Reported revenue: £5.6m
Less pass-through media spend: £1.1m
Net agency revenue: £4.5m
Gross profit: £3.4m
Gross margin on reported revenue: 61%
Gross margin on net agency revenue: 76%
While gross profit hadn’t changed, we were now leading discussions on the basis of a 76% margin, which was a stronger hook for buyers and improved the apparent quality of the business we were presenting.
The next step was to improve the actual margin on agency income. Several legacy clients had not been repriced for years. They generated around £620k of net agency revenue but only £140k of gross profit, for an average gross margin of 23%. They also required more senior delivery time through out-of-scope work.
We advised the company on increased pricing where the relationship was still commercially attractive and recommended they exited work that could not be delivered profitably. By the time we started our outreach to buyers, around £280k of low-margin annual revenue had either been removed or repriced. This both improved gross margin to ~79% and increased the quality of revenue.
Issues with client concentration
The margin work created a trade-off as removing or repricing low-margin legacy clients improved the margin profile, but it also increased the relative weight of the larger accounts.
Before the clean-up, the largest client represented 22% of revenue and the top 10 clients represented 57%. Once the smaller legacy clients were removed, the largest client would have represented closer to 24% of net agency revenue.
While there wasn’t much which could be done in the short run to increase the weight of other clients, we advised the company to at least lock in that client for longer than their original 12-month renewable contract. The relationship was strong and the founder managed to negotiate a 36-month renewal, with a consistent scope of work over the period. This allowed us to significantly reduce the risk of a buyer treating the revenue as short-term or poorly protected.
We also advised the company to focus commercial effort on smaller retained accounts rather than chasing more project work in the short run. Five project-only clients were moved onto monthly retainers, adding £38k of monthly recurring fee revenue.
At the time we began the sale process, the company still had a concentration risk, but we had managed to minimise it as much as possible. The largest client had been extended, smaller retainers had increased, and the revenue base had lower reliance on founder-led relationships with a few large accounts.
WIP clean-up
The company reported net WIP DR of £492k, made up of £710k of WIP DR and £218k of WIP CR. However, within the £218k WIP CR, around £45k related to projects that were already complete, but where supplier costs had not yet been billed.
The revenue side had already been moved to accrued income, so the remaining cost accrual should not have been left sitting in WIP. It should have been shown in accrued expenses.
Leaving it in WIP meant the £45k was offsetting WIP DR on active projects. The reported net WIP DR was therefore understated, and the balance sheet mixed two different things: live project WIP and costs still expected on completed projects.
We reclassified the £45k from WIP CR to accrued expenses. The revised WIP position was:
Reported WIP DR: £710k
Reported WIP CR: £218k
Reported net WIP DR: £492k
WIP CR reclassified to accrued expenses: £45k
Revised WIP CR: £173k
Revised net WIP DR: £537k
The reclassification showed a stronger WIP position at the reporting date. There was £45k more net WIP DR than originally presented, meaning the balance sheet showed more ongoing project work and drew a more accurate picture. The related cost exposure on completed projects was still recognised, but in accrued expenses rather than being netted against live WIP. It also simplified our work during due diligence as we were able to be transparent about the need for this adjustment.
Adjusted EBITDA
The company had initially been leading discussions with £780k of reported EBITDA. Before going to buyers, we prepared a proper EBITDA bridge and separated the adjustments that could be defended from the ones that were more optimistic.
The founder paid himself mostly via dividends and only received a salary of £70k. Given his level of involvement in the business, a buyer would not assume those functions could be replaced for £70k. A market-rate replacement cost was estimated at £170k based on a benchmark we ran, which required a £100k deduction.
There were also a few clear add-backs. The company had incurred £60k of legal costs relating to a customer dispute which had been settled, £45k of severance costs following the restructure of the creative team, £32k of recruitment fees for a new paid media director and several other one-off items amounting to about £41k.
Management also suggested adding back £83k of freelance creative support, £26k of industry events and £55k of losses on incomplete projects. We did not include the freelance support as the cost had been incurred to deliver client work during the year, so it was part of the cost base. The industry events were also left in as the company attended similar events most years for business development and client relationships, so it was not a one-off cost. The project losses were split: one cancelled project had created a £28k loss from a specific client decision which was not expected to repeat, so we added this back. The remaining £27k related to poor scoping and normal under-recovery on client work, so it stayed in EBITDA.
The final bridge was:
Reported EBITDA: £780k
Add back settled customer dispute costs: £60k
Add back severance costs following creative team restructure: £45k
Add back recruitment fees for paid media director: £32k
Add back other one-off items: £41k
Add back non-recurring cancelled project loss: £28k
Deduct market-rate founder replacement cost: £100k
Adjusted EBITDA: £886k
Management’s first adjusted EBITDA figure was higher, but it relied on adjustments that buyers would almost certainly push back on. We went to market with £886k instead, which was a cleaner number and still gave a meaningful uplift from reported EBITDA.
Improving the operating maturity level
The founder remained central to the business, leading new business development, managing the largest clients: he was the person buyers would naturally see as holding the key commercial relationships. While this is common in founder-led agencies and does not necessarily prevent a sale, it affects how buyers assess risk.
If client retention depends heavily on the founder, a buyer may require the founder to stay for longer, push more consideration into an earn-out, or reduce the overall valuation. A mature business which can easily be integrated into an acquirer’s operations is obviously more valuable than one run informally by one person.
The short-term solution was to push for more structure in operations and to strengthen formal internal controls. On the operations side, the client services director took ownership of all clients previously run by the founder, a new set of KPIs was prepared for the paid media director to take ownership of key metrics, formal monthly client profitability reporting was implemented with full ownership given to the finance team, and a few other measures were implemented to move ownership down the pyramid.
In parallel, formal internal controls were implemented. New work above £25k required a signed scope before work started. Material scope changes had to be approved before the team delivered additional work. Media budgets above £50k required upfront client funding unless Finance Director approved an exception. Rebates and discounts above 10% required approval from both the founder and Finance Director. A few other controls were also implemented to tighten operations.
The goal was to increase the maturity of operations to position the business as a self-running machine rather than a founder-dependent structure. These changes materially reduced perceived key-person risk and helped demonstrate to buyers that the company was becoming more professionalised.
To conclude…
By the time we started buyer outreach, the business was being presented on a cleaner basis. The revenue story had moved from £5.6m of reported revenue at 61% gross margin to a 76% gross margin. After repricing and exiting low-margin work, gross margin increased further to around 79%. Reported EBITDA of £780k was also normalised to £886k.
The business still had client concentration and some founder dependency, but the story was more compelling: a niche B2B marketing/media business with high-quality recurring revenue, a capable team, and improving professional standards.
This preparation work allowed us to justify a higher valuation in our outreach (ultimately securing a 7.5x EBITDA multiple), greater buyer confidence and smoother due diligence. Even relatively short-term, pre-sale optimisation can have an outsized impact on both valuation and transaction certainty. Starting prep work 6-12 months ahead remains one of the highest-ROI activities available.