EBITDA (Agency Context)
Quick Definition
Earnings Before Interest, Taxes, Depreciation, and Amortization — the standard measure of an agency's operating profitability and the basis for most agency valuations.
What Is EBITDA (Agency Context)?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In agency terms, it's your profit after paying for everything that runs the business (salaries, rent, software, freelancers) but before accounting for financing costs, taxes, and non-cash charges. It's the closest thing to a "true operating profit" number and it's the metric that drives agency valuations.
For agencies, EBITDA is calculated from AGI, not total revenue. You start with AGI (revenue minus pass-throughs), subtract all operating expenses (salaries, benefits, overhead, freelancer costs), and what's left is your EBITDA. A healthy agency typically runs 15-25% EBITDA margins on AGI. Below 10% means the agency is underpriced, overstaffed, or poorly managed. Above 25% usually indicates either a premium-positioned agency or one that's underinvesting in growth.
The "adjusted" version of EBITDA is what you'll hear about most in acquisition conversations. Adjusted EBITDA adds back owner-specific expenses that a new owner wouldn't incur: the founder's above-market salary, a spouse on payroll, the company car that's really a personal vehicle, personal travel charged to the business, and other discretionary expenses. These adjustments can significantly increase the EBITDA figure — and therefore the agency's valuation.
Why It Matters for Agencies
EBITDA is the single most important number when it comes to agency valuation. Acquirers typically value agencies as a multiple of EBITDA (or adjusted EBITDA). If your agency generates $500,000 in EBITDA and the market multiple is 5x, your agency is worth roughly $2.5 million. Bump EBITDA to $700,000 and the same multiple puts you at $3.5 million — a $1 million increase in value from $200,000 in additional annual profit.
Even if you never plan to sell, EBITDA is the best metric for measuring your agency's financial performance year over year. It strips out the noise of financing decisions, tax strategies, and accounting methods, leaving you with a clear picture of how well the business actually operates.
Example
An agency's financials: Total revenue $5M, pass-through costs $800K, AGI $4.2M. Operating expenses: salaries and benefits $2.6M, freelancers $350K, overhead $500K. EBITDA = $4.2M - $2.6M - $350K - $500K = $750,000. EBITDA margin = $750K ÷ $4.2M = 17.9%. For adjusted EBITDA, the owner adds back: above-market owner salary premium of $80K, owner's personal car lease ($15K/year), and one-time office move costs ($25K). Adjusted EBITDA = $870,000. At a 5x multiple, the agency's valuation is $4.35M based on adjusted EBITDA vs. $3.75M on unadjusted.
Key Takeaways
- ✅ EBITDA = AGI minus all operating expenses (before interest, taxes, depreciation, amortization)
- ✅ Healthy agency EBITDA margins: 15-25% of AGI
- ✅ Adjusted EBITDA adds back owner-specific expenses and is used for valuation purposes
- ✅ Agency valuations are typically expressed as a multiple of EBITDA (4-8x depending on size and growth)
How Holdings Helps
Holdings gives agency owners a clean, real-time view of profitability with AI bookkeeping — so you always know your EBITDA without waiting for your accountant's quarterly report.
Related Terms
AGI (Agency Gross Income)
Your agency's total revenue minus pass-through costs — the money that actually stays in your agency to cover salaries, overhead, and profit.
Multiple (Valuation)
The number applied to your agency's EBITDA (or revenue) to estimate its total value — a 6x multiple on $500K EBITDA means your agency is worth roughly $3 million.
Earnout
A portion of an agency's sale price that's paid over time, contingent on the agency hitting specific performance targets after the acquisition.
Overhead Rate
The percentage of your agency's revenue that goes to non-billable costs — rent, admin salaries, software, insurance, and everything else that doesn't directly deliver client work.
Profit Sharing
A compensation structure where employees receive a portion of the agency's profits in addition to their base salary — aligning the team's financial interests with the agency's success.
Profit Sharing
A compensation structure where employees receive a portion of the agency's profits in addition to their base salary — aligning the team's financial interests with the agency's success.
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