You may be one of those agency founders that start out from day one with the intention of building it to ultimately be sold at some future date. On the other hand, you may be in the group who would contend that thought could not be further from the truth. No matter what intention you start out with in reality there is a very high likely hood that one day you will find yourself in a position where you want to sell your agency.
Whether it is to one of the large public holding companies, a private equity group, or even a management buyout, at that time there are two things that I am certain you will want to be present.
- Significant interest in the company from several buyers, in order for there to be competitive bids that give you more than one option.
- The highest possible price for your agency. (With as much of it in cash up front as possible and a relatively short earn out, linked to reasonable deliverables)
Ideally, you need to start planning the sale three years ahead (two at the very minimum) in order to make sure that you have built and managed your agency to be as attractive an acquisition target as possible. Here is a brief list of tips to consider when starting down this path:
Three years earnings history. Virtually every prospective buyer will want to see financial statements for the past three years. Preferably audited already, and if not you can be sure rigorous due-diligence will be forthcoming. They will be looking for stability in your numbers. Large swings either way will set off a warning bell.
Competitive or above average operating margins: Operating margins need to be competitive and preferably consistent or improving year on year. Your cost/overhead ratios should be within acceptable market norms and stable or better still, improving year on year.
Here is a special word of advice: Avoid crediting back any costs to improve your profit numbers, unless they are truly extraneous costs. If a potential buyer finds this type of activity in the initial prospectus, it can significantly undermine your credibility and diminish their interest in your agency.
Client stability with consistent organic growth. It is very important to be able to show that your core client base has been stable over the years and that you have been able to consistently deliver meaningful organic growth across the core client base. A financial history that shows clients coming and going or revenues that vary considerably year on year will affect the price they are willing to pay or worse still could help to sour the deal.
Clients they recognize and look good on the roster. I recently spoke to an agency founder who was approached by a private equity group about possibly being acquired. At the end of the initial meeting between the two, one of the PE group members commented “There is nothing to buy here. We have never heard of any of your clients”. It is very difficult to sell an agency that supports a plethora of unknown client companies. Ideally, you should at least have a mix of both in order to make your agency an attractive acquisition target.
Positive Client interviews/feedback: Should discussions progress to a more serious level of interest, most buyers will want to have the opportunity to meet with your key clients and discuss the client/agency relationship. They will be looking to determine satisfaction levels, strength of the relationship, perceived value delivery, and overall stability of the account. This could include both senior level and day to day client contacts.
In my next posting I will share additional tips that address new business, creativity, leadership and agency differentiation in the market place.