How to set your agency up for acquisition and get the best price possible! (Part Two)

June 16, 2009

imagesIn part one of this posting I shared tips related to financial requirements and clients. In this posting I turn the focus to inside of the agency and the most common areas of interest for a potential buyer.

Successful new business program. Buyers are going to want to see a demonstrated capability to target, attract and win new business. There will be questions about your pipeline, your process and your win rate etc. They will want to see that you have a pipeline and a process. Ideally, there should be a mix of both project assignments as well as more sustained and AOR type of accounts. What they want to see is that your new business activity/approach is capable of supporting your projected growth targets and that it is also scale able.

Strong and talented leadership team. It will be important for them to feel confident in the leadership team’s talent and capabilities. A major concern is that the agency might be too reliant on the founder alone, and what would happen should he/she disengage or leave. A strong leadership team, with close relationships to both clients and internal staff, is critical to being able to get the prospective buyer comfortable.

Above average creativity, innovation and work. The quality of the creative work and the use of innovation in areas like new media, technology, applications, widgets etc are very important. The buyer will want to see a strong creative product that stands out and, most importantly, produces solid results for the clients. You do not have to be Crispin but on the other hand you don’t want to be Acme Advertising. Excellent creativity and innovation within the space your agency operates will be an important consideration.

Differentiated positioning within the marketplace. When agency holding companies or private equity groups set out to acquire an agency, they normally have a very clear focus on the type of agency they are looking for. Over the past few years many of the acquisition activity has been centered around specialist agencies in a few hot categories. Those categories include direct marketing, database management & analytics, digital agencies, digital media agencies including SEO/M and Social Media to name a few.  A clear positioning and focus combined with a robust reputation in your specific category of expertise, will help put you on the radar screen.

Trend leader or unique capability/product. Premium prices are often paid for agencies that are leaders in new trends, channels or technology applications. Since the late 1990’s direct digital, direct and database agencies have been at the top of the list. SEO/M agencies are still in demand and most recently those agencies skilled in Social Media are getting a lot of attention. In addition those agencies with a unique selling proposition or set of tools are also in demand. Not long ago Naked was purchased by an Australian agency holding company for an undisclosed amount. Naked’s unique communications planning approach supported by proprietary tools like their Big Tool, made them a very attractive target. You can increase the value of your agency exponentially if you are able to carve out a unique positioning in the marketplace and/or develop your own truly proprietary tools.

Leadership position within a category. My comments on this point will be short and succinct. Who does not want to be associated with or better still own the category leader?

Unusually high client reliance on your services.  The more reliant you can make your clients on your agency, the more attractive an acquisition target you will be. Because the more reliant the client, the less likely the chance of them terminating the relationship. Examples include: agencies that house and manage the client’s database, custom analytical models or tools developed specifically for the client but owned by the agency etc.

What I have shared with you comes from my experience over the past 25 years, having sold four agencies to four different holding companies. I made all my own mistakes along the way and leant my lessons the hard way. In some instances I made good calls and was able to command a premium as a result. In others I failed to get as much value as I might have had I known some of the above pointers ahead of time. Setting an agency up for acquisition takes time, planning and excellent strategic execution. It’s also a lot of fun building it, so enjoy the journey along the way.

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How to set your agency up for acquisition and get the best price possible!

June 12, 2009

(Part One)

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.

Those being:

  • 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.


How advertising and marketing agencies can avoid the pitch death spiral!

June 11, 2009

woman_posterWhat other industry do you know of where upwards of 8 competing companies will willingly and enthusiastically:

Invest hundreds of thousands of dollars of their own time and money into a speculative pitch for new business, with no guarantee of reward?

Apply their best talent and years of experience to developing the most innovative ideas/concepts and voluntarily sign away their rights to them, even if they do not win the business?

Just accept the fact that the budgeted spend is now $1 million and not $3million when you win it – Even though you invested pitch resources based on the larger opportunity?

Roll over even when the agency has already spent the time and effort pitching the business, and the client decides not to make a change for undisclosed reasons?

The pitch spiral can be an ugly place to be for even the most successful agencies. You never win them all so you have to fund the losses out of the wins, and of course, the lower your win ratio the higher your new business strain. In my opinion, the formal agency pitch environment is the last place you want your agency to be in.

Consider an alternative approach:

What if you invested a similar amount of money against a highly targeted strategic new business prospect on a pro-active basis? Invested the same amount of money, or even less, doing your homework on the category, the competition, and the company’s brands?

Then used that homework and the actionable insights to secure an initial presentation focused on what you discovered and how your agency can leverage those insights to help them succeed.

At the meeting, share with them your brilliant pro-active thinking and ideas on how to solve some of their most pressing challenges. Giving them concrete proposals to react to, versus academic thinking.

And do all this in an environment where you are not pitching in a head to head face off against 7 other agencies with the outcome being decided by a sudden death decision.

Seems to make more sense, does it not? I can tell you that it has worked for me over and over again. Be cognizant of the fact that you may not hit a home run every time. If you do strike out, the likelihood is that there is a competitor that you can repurpose the content for, and go after them.

Sometimes you do not get an immediate hit. That does not mean that you give up there and then. Keep the doors open. Continue to keep in contact without being a nuisance. Forward on any information you come across that may be of interest to the client.

There have been times where it took me nearly two years and multiple contacts to finally get in the door of a target client. Perseverance and follow up will ultimately lead you success.

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To Ad Agencies: If it was your money would you approve this campaign?

June 10, 2009

stanrappOne of the most notable Gurus in the direct marketing world, Stan Rapp, recently described the current economic environment to me as “The Great Disruption”.  He went on to say: “The crash of 2008 marked the end of an era and the start of a new one…. Web-based mass networking. There’s a whole new paradigm emerging. You take the data-driven ROI of direct response, and slam it together with the networking capacity of Web 2.0. The result is an ability to reach your target consumer, create a trackable connection, and build on it. You are buying more than just awareness. Clients can cut two dollars of mass media and get more results investing one dollar in iDirect”.

Stan has deep history in direct and is often very critical of the world of brand advertising. He has however over the years consistently been ahead of the pack predicting changes and trends that have impacted the whole industry. Therefore, I have no reason to believe that he wrong now.

Never before has there been such a focus on the use of data leading to actionable insights, the interrelationship between direct and digital, the need to track and measure results, and ultimately to make more efficient use of our clients marketing dollars.

My suggestion for all agency leadership is to consider asking this one question before you send your team out the door to present the agency’s ideas to either a current or prospective client.

If you were in their shoes on the client side and it was your money, would you go ahead and approve this campaign?

Please give it you’re considered thought before just blurting out that of course you would. Your agency came up with it so why wouldn’t you? Here are some basic support questions that may help you decide on your final answer:

  • Is the work innovative within the parameters that apply to this opportunity?
  • Is the idea/concept based on actionable insights?
  • Are you addressing and solving the business problem?
  • Have you done adequate research and due diligence to minimize the risk of failure?
  • Have you estimated the expected results and outcome based on your research and experience?
  • How do your estimates line up with client expectations or sales targets etc?
  • Do the metrics make sense related to cost versus outcome?
  • Can you execute it flawlessly within the time period and within the budget?
  • Have you defined how to track and measure the results or sales?
  • Are you proud of the work and do you believe it will achieve the required impact/results?

If you can answer all or most of the 10 questions with a positive response you can be confident that your team will have a high possibility of selling the work. If you cannot, why not call the client, tell them that upon review you are not happy with the work and ask for an extension. While they may be a little angry and frustrated by the call, you may ultimately save their career and your agency’s relationship with the client.

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Do your clients treat your agency as a vendor or partner…There’s a huge difference!

June 7, 2009

dog_newspaperMy discussions with other agency leaders invariably results in them lamenting the fact that over the years the agency/client relationship has continued to deteriorate. They all mention the fact that we have slid down the ladder when it comes to being seen as strategic partners, and most of all the apparent lack of client loyalty.

The dictionary definition of a vendor is, “A person or agency that sells”. Related words are “marketer”, “seller” or better still “trafficker

On the other hand the definition of partner is “a person who shares or is associated with another in some action or endeavor; sharer; associate. A player on the same side or team.”

The reality is that some client companies have a culture of treating all external suppliers of goods or services as vendors. It’s inherent to their way of doing business and is unlikely to change any time in the near future. It therefore becomes your decision as to whether you want to do business with them and accept the implications of that type of relationship.

Remember that vendors are usually interchangeable, on average do not contribute any strategic value, can command only a commodity price for what is seen as a commodity product, and are perceived as reliant on the client for business and revenue.

The result is that these clients are generally not very profitable to the agency. They drive margins down to the lowest possible level without regard for the agency’s financial outcome. They are often the least loyal, changing vendors frequently. Price bids are commonplace and there are even instances where one agency’s great idea is subsequently bid out in order to achieve the lowest possible price for execution.

If you now turn and look at those clients who pursue a strategic agency partnership, you get a totally different picture. Partners are valued for their knowledge and expertise and what they add to the relationship. They are engaged early on in the process and their opinions are both sought after and respected. Their deep knowledge of the client company and their acknowledged contribution towards the company’s success makes them hard to replace.

These client relationships are commonly more stable, more profitable and have motivated client teams working on their business. These clients acknowledge that the agency needs to make a reasonable profit to survive, and they will adequately compensate the agency for the value and work it delivers.

I know which type of client relationship I would rather have. Of course underpinning this is an assumption that the agency is consistently delivering value, being proactive, executing flawlessly, looking for ongoing innovation and delivering against actionable insights.

 Those clients who take a more collaborative approach and search out strategic partnerships from agencies are generally more valuable clients overall.

 

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Of course our agency can do that, we are a fully integrated full service agency!

June 6, 2009

agencyThis is most commonly given answer by most agencies to their client when asked, “Does your agency have XXXX capability. It’s often said with a modicum of disdain and surprise that the client would even ask such a question. After all, do they not know that we are experts at everything?

I often wonder if we would have the same reaction to our general practitioner if he/she told us that, although we have a heart condition that needs specialist treatment, there is no need to refer us to a specialist as he/she are quite capable of handling the situation? I believe that we all know the answer.

But, is it really in the clients’ interest to tell them that we can handle the work if, in fact, we do not have at least a competitive capability in that discipline? Just because you have one person in that department, or a couple of people on the team, who have had similar experience at another agency, does that make your agency the right solution?

Of course, if we look at the question purely from an agency financial perspective, I can understand the perspective that we need all the revenue we can get to make our numbers. I can also understand the fear of allowing another agency into the equation that might end up usurping your current agency relationship and revenue. All such concerns are valid…if you only look at it from a partisan agency perspective.

If we covet those clients who see us and treat us as “strategic partners” then we need to behave in similar way. If the client requires best in class capability in that specific expertise, we need to ask ourselves if in fact we can deliver it through internal resources. If the answer is honestly “yes” – then go right ahead.

If the answer is honestly “no”, then you have two choices.

The first is to find a suitable company or resource that you can partner with on the assignment. This way all coordination and responsibility remains with your agency and you are accountable to the client. Try to negotiate a discounted partner fee that will allow you to cover your coordination and strategic support costs. My suggestion is to avoid marking their fees up when billing the client.

The second is to either partner with another client roster agency that has the required capability or partner with the client to source a new agency resource. Remember that the strength of your agency relationship is often tightly linked to the work and results you produce for that client. Why risk the whole relationship and all that revenue for the sake of chasing after something that may reflect badly on you. IT MAY JUST BE MORE PROFITABLE TO LET THAT PORTION GO OR AT LEAST MAKE A LITTLE LESS MARGIN ON IT.

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Ideas that drive sales NOW are the key to ad agency new business success!

May 27, 2009

index_r4_c4While traditionally most agencies have gone after AOR type relationships, the key to new winning new business now is the antithesis of that approach! Why do I say this?

I am certain that you have all noticed the continuing trend of clients moving away from AOR type relationships, to more of a project based approach. This varies from the client who has no AOR and just assigns projects as needed to selected agencies, to an approach of having a list of rostered agencies that pitch for each and every assignment as they come up.

The reasons for focusing on the AOR type relationship are primarily continuity of work and profitability. It has always been very difficult to manage agency resources and make money on project assignments. Well, if you want to increase your new business success today, you are going to have to adapt to the new reality.

At a recent Mirren new business conference held in New York, participants in a client panel question and answer session made the following remarks:

  • Most were not of the mindset to put up their whole account for review.
    • It required effort that would distract them from the day to day business. They acknowledged the inordinate amount of time it took not only to conduct the review but also to onboard the agency during the first 6 months.
    • It would put them and their department on the radar screen internally. A negative, given most were trying to keep a low profile.
    • They would most likely require the procurement departments participation which complicated matters.
    • The perceived risk did not justify the likely outcome at this tenuous time.
  • Almost all were open to approaches from agencies with new ideas that could help them succeed.
  • The participants said they were quite often able to find a smaller budget to fund a single initiative, if they felt it was a good idea.
  • They felt more comfortable with the project approach, as it could be assigned outside of their current agency relationship.

So, if you want to increase your new business success in the immediate term take a targeted project approach. Get your ideas in front of them, get your foot in the door, and demonstrate the value you bring to the relationship. Success breeds success and will most often lead to incremental assignments.

You may not make money off the first project, but if you take a 12 month client profitability approach and manage your resources efficiently, you can achieve the desired outcome.