How to value a Digital Agency for EMI

How are digital agencies valued for EMI share options?

If you run a digital agency and you’re thinking about granting EMI (Enterprise Management Incentive) share options to your team, one of the first hurdles you’ll face is: “What’s my business worth?”

The valuation is crucial. It sets the exercise price for the options, impacts the employee’s future tax bill, and it’s the figure you’ll need HMRC to agree with before you grant the options. Here’s how the process usually works for digital agencies in the UK.

Step 1: Understand what’s being valued

When valuing a digital agency for EMI purposes, we’re usually talking about the ordinary shares in the company. HMRC will want to know:

– What is the fair market value (FMV) of the business?

– What is the unrestricted market value (UMV) — i.e. what the shares would be worth if sold on the open market without restrictions?

– What is the actual market value (AMV) i.e. the realistic price taking into account restrictions that apply to EMI option shares?

Employees are normally granted options at the AMV, but HMRC expects to see a calculation of both AMV and UMV.

Step 2: Choose the right valuation approach

For a digital agency, the most common methods are:

1. Earnings multiple approach
Digital agencies are typically valued on a multiple of EBITDA (earnings before interest, tax, depreciation and amortisation).

– Multiples vary depending on size, client base, recurring revenue, and growth prospects.

– A smaller agency might see 3–5x EBITDA, while larger, fast-growing ones could justify 6–10x EBITDA or more.

– Any ratio used needs theory behind its use and as such you may typically use the PCPI average or P/E Ratios of other  comparative companies and recent deals.

2. Revenue multiple
In some agency sales, revenue multiples are used, especially where profit figures are volatile. For small-to-mid agencies, this might range 0.5x – 1.5x annual turnover.

3. Net asset basis
Less common for agencies (which are service-based and light on assets), but can be used as a very basic ‘floor’ valuation.

In practice, most EMI valuations for agencies are EBITDA-based, cross-checked against market data and industry deals.

Step 3: Enterprise Value vs Equity Value

This is a key concept many founders and owners overlook.

– Enterprise Value (EV) represents the value of the whole business regardless of how it’s financed. It’s calculated using your profit multiple (e.g. EBITDA × multiple). EV shows what a buyer would pay for the business on a “cash free, debt free” basis.

– Equity Value is what’s left for the shareholders once you adjust EV for net debt or surplus cash.

– If the business has debt, this reduces equity value.

– If the business has surplus cash, this increases equity value.

Example:

– EBITDA: £500k
– Multiple: 5x → EV = £2.5m
– Less debt: £300k bank loan
– Plus cash: £200k in the bank
– Equity Value = £2.5m – £300k + £200k = £2.4m

Why it matters for EMI: HMRC looks at the equity value of the ordinary shares, because that’s what the employees are being granted options over. The EV is just a starting point — adjustments are crucial in any business valuation and must be considered and included.

Step 4: Adjustments for EMI purposes

When preparing the valuation, HMRC expects you to adjust for:

– Working capital: Is the business carrying excess cash, or is it under-funded?

– Director remuneration: In owner-managed agencies, profits can be distorted by high director salaries. These may be normalised in the valuation.

– Non-recurring costs: One-off legal, restructuring or exceptional costs may be added back.

– Discounts for minority holdings: EMI options are often for small shareholdings, so HMRC allows discounts to reflect lack of control or marketability.

Step 5: Submitting for HMRC clearance

Before you grant EMI options, you need to agree the valuation with HMRC. This is called an EMI valuation agreement.

– Submit an online valuation application via HMRC’s ERS service (Enterprise Management Incentives).

– Provide your detailed valuation report showing method, assumptions, calculations, and adjustments.

– HMRC may ask questions or challenge assumptions, but if the valuation is reasonable and properly supported, they usually agree.

Tip: Once HMRC approves, the agreed valuation is usually valid for 90 days. You must grant the options within this window.

Step 6: Granting the options and filing with HMRC

After clearance:

1. Grant the EMI options at the agreed value (usually AMV).

2. Notify HMRC of the grant via the ERS system (previously within 92 days but now can be as part of the annual return).

3. Keep proper records — HMRC can revisit valuations if challenged later.

Why it matters

– For employees: Getting the value right means they benefit from tax-advantaged growth without unexpected liabilities.

– For the company: Clearance gives you certainty and protects against future HMRC disputes.

In summary
Valuing a digital agency for EMI options isn’t about guesswork.

It’s about:

– Starting with Enterprise Value (EBITDA or revenue multiples)

– Adjusting to reach Equity Value (after debt and cash adjustments)

– Factoring in HMRC’s AMV/UMV definitions

– And securing clearance before granting.

Done properly, it’s a powerful way to incentivise your team and share in the long-term success of your agency.

👉 Thinking about an EMI scheme for your agency? We help digital and creative businesses with valuations and clearance applications.

A worked example:

Here’s a simple step-by-step example of how a digital agency valuation might be presented, moving from EBITDA to Enterprise Value, then to Equity Value, and finally showing how AMV/UMV are considered for EMI purposes.

In this example:

– The Enterprise Value is derived from EBITDA multiples. Remember the EBITDA is adjusted in the valuation report for items identified as required.

– Adjustments for debt and cash convert it into Equity Value.

– For EMI, HMRC then considers Actual Market Value (AMV) and Unrestricted Market Value (UMV), with AMV often lower due to minority and marketability discounts.