Agency profitability isn't always what it seems. In this episode, Peter Kang and Sei-Wook Kim break down how to really evaluate your agency's profit. The hosts also talks about why two agencies reporting the same margins can mean totally different things.
They unpack the difference between EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and SDE (Seller's Discretionary Earnings), showing how owner salaries, distributions, and "normalization" adjustments can completely change the story. Whether you're thinking about selling your agency or just want a clearer view of your true financial performance, this episode will help you see beyond surface-level numbers and benchmark your agency's health the way experienced acquirers do.
Key Moments
1. SDE vs. EBITDA — and why the difference matters when valuing your agency.
2. How owner salaries can inflate or deflate your real profit margins.
3. A walkthrough of sample P&L scenarios to illustrate EBITDA normalization.
4. What Barrel Holdings looks for when assessing profitability across agencies.
5. The "replacement cost" principle: paying yourself like someone you'd hire.
6. How agency size changes the EBITDA-to-SDE gap.
7. Why scaling up makes your profit story more consistent and credible.
8. The final takeaway: Normalize your numbers before you talk about valuation.
Real Talk Takeaways
1. Many agency owners misread their profit margins. Clarity starts with defining how you calculate them.
2. SDE includes owner comp; EBITDA assumes you've paid yourself a market-rate salary.
3. If your EBITDA looks high, check whether your salary is unrealistically low.
4. For acquirers, EBITDA reveals the agency's true operating performance, not the lifestyle of the owner.
5. Always factor in the cost to replace yourself when analyzing profitability.
6. At scale, the gap between SDE and EBITDA narrows, showing a healthier business model.
7. Transparency in financials builds credibility with potential buyers and investors.
Timestamps
00:00 – Welcome to Agency Habits
00:18 – Why profitability discussions often aren't apples-to-apples comparisons
00:44 – Defining SDE (Seller's Discretionary Earnings) vs. EBITDA
01:12 – The importance of understanding these different calculation methods
01:59 – Walking through concrete spreadsheet examples
02:11 – Sample P&L breakdown: $1M revenue agency with $500K COGS
02:35 – What constitutes COGS in an agency business
03:10 – SG&A expenses and how owner salary factors into calculations
03:56 – SDE calculation: adding back owner salary for 40% margin
04:26 – Why owners might take distributions instead of fixed salaries
05:18 – EBITDA scenarios: how different owner salaries create different margins
06:11 – The "too low" scenario: $65K salary inflating EBITDA to 33.5%
06:40 – The "too high" scenario: $250K salary depressing EBITDA to 15%
07:48 – How Barrel Holdings normalizes owner salary for fair comparisons
08:23 – The replacement cost framework for owner compensation
09:27 – Adjusting EBITDA calculations based on realistic replacement costs
10:38 – Why Barrel Holdings requires 15% EBITDA using their calculation method
11:22 – How these calculations change dramatically at scale
11:56 – $10M revenue example: why percentages converge at larger scale
12:57 – When owner salary becomes negligible in large, structured agencies
13:26 – The importance of understanding owner role and replacement cost
13:43 – Practical advice for agency owners on calculating true profitability
Notable Quotes
"Oftentimes when we look at agencies and people talk about their profitability, it's really unclear how they're calculating it — it's not always apples to apples." — Peter Kang
"Are you talking about profit after paying yourself a market salary, or before? That one choice can swing your margins by 10–20 points." — Sei-Wook Kim
"If your agency says it's doing 40% profit, the first question to ask is: 40% of what? EBITDA or SDE?" — Peter Kang
"For acquirers, we always normalize the numbers — it's the only way to compare agenc
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