GLOSSARY
What Is PEG Ratio? | Agency M&A Definition
The PEG ratio, or price-to-earnings-growth ratio, measures a company’s valuation relative to its earnings growth rate. It is calculated by dividing the price-to-earnings (P/E) ratio by the annual earnings growth rate. A PEG ratio below 1.0 suggests a company may be undervalued given its growth, while a ratio above 1.0 may indicate overvaluation relative to growth prospects.
PEG Ratio in Agency M&A
While the PEG ratio originated in public equity markets, it has become increasingly relevant in marketing agency M&A as buyers look for ways to compare agencies growing at different rates. A fast-growing programmatic advertising agency and a mature traditional media buying shop might both trade at 6x EBITDA, but the PEG ratio helps distinguish which deal offers better value. Buyers evaluating a creative agency with rapid revenue growth can use the PEG ratio to justify paying a premium multiple. For instance, an agency with a P/E equivalent of 12x and 30% annual earnings growth has a PEG of 0.4, suggesting strong value. In practice, most private agency transactions do not explicitly cite the PEG ratio in term sheets, but the underlying logic is embedded in every negotiation about growth premiums. Private equity firms acquiring marketing agencies are particularly fond of this metric because they need to model exit multiples. An agency growing earnings at 25% annually can absorb a higher entry multiple because the effective PEG ratio compresses over the hold period. Sellers should prepare historical and projected growth rates to support PEG-based arguments for premium pricing.
How PEG Ratio Affects Agency Valuation
The PEG ratio gives buyers a framework for paying above-market multiples for high-growth agencies without overpaying. In the marketing agency space where typical EBITDA multiples range from 4-8x, the PEG ratio helps explain why a rapidly growing HubSpot partner agency might command 8x while a flat-growth web design shop trades at 4x. An agency with $500,000 in EBITDA growing at 40% annually has a PEG of approximately 0.15 at a 6x multiple (equivalent P/E of ~6 divided by 40), making it appear attractively priced despite the seemingly high multiple. Conversely, an agency with stagnant earnings at 6x would have an extremely high PEG ratio, signaling that the buyer is paying for a plateau rather than a trajectory.
Example
Two email marketing agencies are for sale. Agency A has $600,000 EBITDA growing at 8% annually, priced at 5x ($3M). Agency B has $450,000 EBITDA growing at 35% annually, priced at 7x ($3.15M). Agency A’s PEG ratio is 0.63 (5 divided by 8). Agency B’s PEG ratio is 0.20 (7 divided by 35). Despite Agency B’s higher sticker multiple, its PEG ratio reveals it is the better value relative to growth. A buyer acquiring Agency B at 7x today could see the effective multiple compress to under 4x within two years if growth continues.
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