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The 5% Club

By January 22, 2021Uncategorized

Every industry is stratified in terms of business size. There is always a pyramid structure distribution of business sizes. The creative, marketing and agency space is no different.

Agency size distribution

Business Size Distribution

At the bottom of the pyramid is a large number of small businesses and at the top of the pyramid is a small number of large businesses.  

Most people who start out in business begin the journey at the bottom of the pyramid and hope to end up at the top of the pyramid.

Relatively few do.

In the world of agencies, we can consider 3 categories of business size.  As these are professional service businesses, it is convenient to measure their size in terms of headcount. For the purpose of argument, they naturally fall into three categories as follows:

CategoryHeadcountTypical revenue rangeTypical EBITDA
Small1-9$100,000-1,5m$20,000-250,000
Medium10-25$1.5m – 4.5 m$250,000- 1m
Large26+$4.5m+$1m+

It turns out that this breakdown defines 3 distinct phases of business evolution that are essentially driven as a direct function of leadership acumen development, crudely represented below:

CategoryLeadership ModalityTeamCulture
SmallOwner fully hands-on, day to daySemi formalNot constituted
MediumOwner partly hands-off

1-3 people in part time management roles

Formal team structureSemi formally constituted
LargeOwner mostly hands-off

3+  people in full time  management roles

Organisational structureFormally constituted

Of course, these are all ballpark figures and there are bound to be specific instances where specific businesses don’t fit the numbers exactly, but generally the characteristics do. (It should be noted that the term ‘large’ is relative. By world standards, even a 50 or 100 person agency is not particularly big. There are some that are a good deal bigger, indeed some that are global operations.)

So when we look at the agency market as a whole the breakdown is approximately as follows:

Small 80%
Medium 15%
Large 5%

And so that leads us to the definition of the 5% Club. This is an elite group of agency owners whose businesses are making in excess of $1m EBITDA. 

Not only are these businesses making handsome profits for their shareholders, but typically it is at this sort of size that a business can expect it’s valuation multiple to be relatively a lot higher than smaller ones. 

If you calculate the total business value delivery, which includes profits over a period of time plus the value realized at sale, you can expect agencies in the 5% club to deliver a massively disproportionate greater amount of value over smaller ones.

Crema Business’s mission statement is:

“To help agency owners break their growth barriers to go on to join the 5% who have businesses making over $1 million profit per year.”

If you would like to find out more about how we do this, click here.

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