The Hidden Profitability Problem in Agencies
Exit Preparation and Turnaround
How Mergify Helped a Digital Agency Unlock Hidden Profitability & Prepare for a High-Value Exit
A thriving agency with a strong client portfolio approached Mergify to explore acquisition opportunities. On paper, they had:
✅ A growing client base
✅ Increasing revenue year after year
✅ A strong reputation in their niche
But when it came to valuation, the numbers didn’t match the expectations. Despite high revenue figures, their profitability metrics weren’t strong enough to command the valuation they hoped for. The agency was doing well—but not well enough to attract premium buyers. What we uncovered is a challenge many agencies face—they focus on revenue growth but often ignore the hidden inefficiencies that erode profitability.
The Challenge: Why the Agency’s Valuation Fell Short
The agency’s leadership was confident they could secure a strong exit. But during valuation, Mergify identified four major challenges that were limiting their profitability and lowering their potential acquisition value:
1️⃣ Unclear Profitability Per Client
- Some high-revenue clients were barely profitable due to excessive servicing costs.
- Without tracking profitability per client, the agency was leaving money on the table.
2️⃣ Staffing & Utilization Inefficiencies- Senior employees were spending too much time on low-margin work, while junior staff was underutilized.
- The agency lacked real-time tracking of billable vs. non-billable hours.
3️⃣ Scope Creep & Revenue Leakage- The agency consistently exceeded scoped project hours but didn’t charge clients for the extra work.
- This silent revenue drain was significantly reducing project profitability.
4️⃣ Service Offering Misalignment- Some services had high demand but were low-margin, impacting overall profitability.
- Legacy services continued to be offered despite low ROI, taking up valuable resources.
✅ A growing client base
✅ Increasing revenue year after year
✅ A strong reputation in their niche
But when it came to valuation, the numbers didn’t match the expectations. Despite high revenue figures, their profitability metrics weren’t strong enough to command the valuation they hoped for. The agency was doing well—but not well enough to attract premium buyers. What we uncovered is a challenge many agencies face—they focus on revenue growth but often ignore the hidden inefficiencies that erode profitability.
The Challenge: Why the Agency’s Valuation Fell Short
The agency’s leadership was confident they could secure a strong exit. But during valuation, Mergify identified four major challenges that were limiting their profitability and lowering their potential acquisition value:
- Some high-revenue clients were barely profitable due to excessive servicing costs.
- Without tracking profitability per client, the agency was leaving money on the table.
- Senior employees were spending too much time on low-margin work, while junior staff was underutilized.
- The agency lacked real-time tracking of billable vs. non-billable hours.
- The agency consistently exceeded scoped project hours but didn’t charge clients for the extra work.
- This silent revenue drain was significantly reducing project profitability.
- Some services had high demand but were low-margin, impacting overall profitability.
- Legacy services continued to be offered despite low ROI, taking up valuable resources.
At this stage, the agency had two options:
--Sell now at a lower-than-expected valuation.
-- Optimize profitability first, then exit at a much higher valuation.
They chose the smarter path—working with Mergify to turn operations around and boost their valuation before going to market.
The Solution: Mergify’s Profitability Measurement Framework
Mergify introduced a Profitability Measurement Framework to help the agency:
✅ Identify the real profitability per client and adjust pricing strategies
✅ Improve staff utilization by balancing workloads and increasing billable efficiency
✅ Reduce scope creep by implementing real-time tracking and automated alerts
✅ Align service offerings with profitability to maximize overall margins
By using a data-driven approach, the agency transformed its operations from reactive to proactive, ensuring that every project, client, and service contributed to long-term profitability.
Key Results: The Profitability Transformation
Within just six months, the agency saw significant improvements:✔ 28% increase in project profitability after better pricing and scope control
✔ 22% improvement in billable utilization, reducing unnecessary staff costs
✔ 30% reduction in revenue leakage by tracking and charging for extra work
✔ 40% increase in overall business valuation before going back to market
How Mergify Helps Agencies Prepare for High-Value Exits
🔹 Optimize profitability before going to market
🔹 Identify and fix inefficiencies that lower valuation
🔹 Strengthen financials to attract premium buyers
🔹 Ensure agencies don’t leave money on the table during acquisition
Many agencies approach Mergify looking for a valuation for acquisition—but what they often find is an even bigger opportunity to improve their financials before selling.
By implementing profitability tracking and operational turnaround strategies, Mergify helps agencies:
The above insights have been obtained from the valuation and trends of past M&A activity at agencies. Each of the following strategies will help you position better with market leaders and lead to higher outcomes in your sale.