Sector Report

Marketing Agency Industry

Paul Whitney

Corporate Finance Director

Overview of the Market

The Marketing Agency industry is currently estimated to be worth approximately £22.9bn with revenue having grown at a compound annual rate of 4.1% over the five years through 2018-19. Strengthening economic conditions allowed downstream businesses to expand their marketing budgets steadily during the first two years, enhancing demand. Major events such as the 2015 Rugby World Cup also boosted demand. Household finances improved during the years through 2015-16 and supported expansion as the purchasing power of consumers strengthens. Online advertising revenue also grew strongly as the number of consumers with access to the internet increased. Revenue growth slowed from 2016-17 as uncertainty surrounding the UK’s exit from the EU forced businesses to become cautious when increasing marketing budgets. Rising inflationary pressures also caused real household disposable income to fall in real terms, constraining growth. Revenue expansion is expected to be restricted during the current year as business confidence is anticipated to remain weak, forcing businesses to tightly control spending.

Revenue is expected to increase at a compound annual rate of 4.1% over the five years through 2023-24 to reach £28 billion. Research and development expenditure is also projected to rise and propel demand, as firms generally raise awareness of new products and services through advertisements. In addition, household finances are expected to improve, aiding industry expansion. Major events like the 2020 Olympic and Paralympic Games are projected to further enhance demand. Demand for online advertising services is also expected to continue at a steady pace. However, the extent to which the industry benefits is likely to be curbed by strong competition from public relations (PR) firms and other companies that are not included in the industry.

Market Agency Companies

A profitability analysis on the sector from a pool of 2,416 leading UK-based Marketing Agencies revealed the following points:

  • The most profitable 1,110 companies benefitted from an average profit margin of 7.7%
  • The least profitable 1,306 companies made an average profit margin of (0.5%); the industry average is 3.2%
  • 879 Marketing Agency companies increased in value over the year with 552 companies increasing by more than 25%
  • 865 companies decreased in value, 488 fell by more than 25%
  • 345 companies have made a loss for two consecutive years

Based on analysis, companies were rated on their ‘takeover attractiveness’. A total of 1,274 companies were given a ‘Strong’ rating whereas 458 companies were given the lowest rating, ‘Danger’. 363 companies in the industry were highlighted to be highly attractive takeover prospects. The South East was the most attractive region for takeover prospects.

M&A Activity in the Sector

Market IQ data indicates a total of 530 significant deals in the industry from January 2011 to September 2018, with UK targets. Deals are only reported over a certain value threshold (c.£500k), therefore, it is likely that not all deals have been captured.

Upon breaking down the deal type, M&A activity within the sector is mainly categorised by acquisitions, with 455 since January 2011. There were also 46 MBOs, 20 mergers and nine other deals. A geographical breakdown of the deal shows that London dominates M&A activity, with 231 deals. This is likely down to the concentration of marketing agencies in the region. The remaining deals are spread through the U.K.; slowly declining in number to Northern Ireland, with only four deals.

Deal flow has been significant in each year, with a steady increase through 2016 before a significant dip in 2017, this is likely characteristic of the uncertainty effect of the UK’s exit from the EU. Without the clarity that a deal will bring, UK businesses are highly likely to be risk adverse and therefore adopt protectionist strategies. With 54 deals through September 2018, forecasting the same rate to the end of the year gives 72 deals. A strong recovery versus 2017 that had 64 deals. If the 2018 trend continues, the data will likely illustrate improving confidence on the part of acquisitive businesses.

Industry Benchmarking Information - September 2018

Hallidays’ client base consists of small to lower mid-market enterprises. Our benchmarking analysis reflects businesses with turnover below £20m, in line with the majority of our clients in this sector.

Marketing Agency Benchmarking Data Mean Median Lower Quartile Upper Quartile
Turnover Growth/Decline (%) 7.36 4.42 (11.20) 18.44
EBIT Margin (%) 7.42 6.60 (0.38) 15.46
EBIT Growth/Decline (%) 18.77 15.60 (36.09) 88.27
EBITDA Margin (%) 8.90 8.25 1.02 16.86
EBITDA Growth/Decline (%) 19.52 14.62 (35.92) 88.82
Total Net Assets Growth/Decline (%) 11.67 8.95 (12.94) 36.57
Current Ratio 2.75 1.50 1.03 2.34
Acid Test 2.72 1.46 1.00 2.34
Market Research Benchmarking

Using full company accounts filed in the last two years under the SIC-Code “73 Advertising and market research”. Excluding companies with nil turnover in either period, we have summarised key benchmarking information for businesses under £20m turnover in the table above. September 2018.

M&A Activity Source

Experian Market IQ (September 2018)
Search Criteria: SIC-Code “73 Advertising and market research”

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