Maximize the Sale Value of Your Agency
Knowledge and preparation are the keys to maximizing the sale value of your agency. Your agency is probably the most valuable asset you will ever have. Here’s how to maximize its value when you sell it.
When you’re ready to sell your firm, don’t jump the gun. Be smart, be patient and carefully prepare for that critically important event. Here are the four things you must clearly understand to do it right:
1. How buyers define value from their perspective.
2. Paths for monetizing value.
3. There are different types of buyers.
4. The nine criteria which affect agency value.
This is the first of two in-depth pieces on this subject. Today, we’ll cover points #1-3 above. Our next piece (coming soon) will cover point #4.
How we know what we know.
We’re deeply experienced in helping agency owners secure the best result when selling their firms. In 2022 alone, we have been involved to date in 21 M&A transactions.
At Prosper Group, we work exclusively with the owners of independent marketing communications firms. Our team of former agency owners and leaders focuses on three areas including performance improvement, exit planning and M&A (both internal and external sales).
We are sale/exit path agnostic. Our unbending commitment is doing what’s best for the owner, not simply to generating a fee.
Buyers begin to define agency value through a qualitative assessment.
As an agency owner, it’s vitally important that you know (and respond to) how buyers define value.
Before you receive a letter of intent, your agency must first pass a qualitative assessment by the potential buyer. This assessment will include but not necessarily be limited to:
- The fundamentals of your business.
- Whether or not your firm will deliver an adequate ROI.
- Perception of the agency’s growth potential.
- Will the agency fulfill a strategic need for the buyer?
- Cultural fit.
- What it will be like to deal with the agency owner post-transaction.
The fundamentals noted above include both intangible and tangible factors. There are nine of these. They’re all very important. They are:
1. Mission
2. Vision
3. Brand
4. Leadership
5. Structure
6. Methodology
7. Business Development
8. Culture
9. Finance & Operations
Each of these will be examined in detail in the second piece in this two-part series (which is coming soon).
Owners must be aware at all times that the buyer is constantly assessing the agency during every meeting, phone call and video conference. Carefully prepare for every one of these interactions. Never take anything for granted. And never, ever “wing it”.
If you pass the qualitative assessment, the next step is the Letter of Intent.
The Letter of Intent (LOI) from the buyer includes a quantitative offer for buying your firm. This offer is usually based on financial performance. It includes both an historical component (essentially a down payment based on actual results in recent years) and projections of the future which will determine the eventual total sales price.
In the eyes of buyers, the two most important predictors of financial performance in the future are:
1. Consistency of revenue growth over time.
2. Consistency of profitability.
The higher the levels of growth and profits which you can demonstrate to the buyer, the higher the offer will be.
How to leave your agency in style.
The sale of an agency is often linked to the owner’s exit path. For the benefit of both owner and agency, exit planning should begin five years ahead of the sale. Developing and then executing the right exit requires detailed planning and preparation.
For owners, the goals of your exit and agency sale should include:
1. Exiting on your own timeline.
2. Clearly defining the role you wish to play prior to your exit.
3. How much money you need or want for your desired post-agency life.
4. Identifying your desired successor/owner (which can be a person, team or outside party).
5. Preserving and protecting the agency’s culture.
6. Adding value to stakeholders (attractive careers for your senior team, upward growth opportunities for staff, more service offerings and greater scale for clients).
Four paths for monetizing value – Options for the sale and owner’s exit.
1. External sale – The sales price is earned over time and usually includes an earn-out for the seller. With a private equity buyer, it’s common for part of the purchase price to be paid upfront followed by a rollover and second deal.
The timing of payments is generally faster than with other exit/sale options. The change in ownership is effective immediately upon close.
Please note that external sales are often more difficult to achieve than owners might expect. Buyers have become more sophisticated in their assessments and they’ve learned from historical mistakes.
2. Internal sale – This is most often a sale to your senior team or successor. It takes longer than an external sale to receive the proceeds. However, the owner remains in control of the agency and its decision making until paid in full.
With internal sales, the agency’s leaders or team often have limited financial resources. In that case, a deal can be structured which first sells a small portion of equity to the leader/team. The corporation then buys and retires the owner’s shares over time. (For this to make sense, the owner will no longer work day to day.)
3. Passive ownership – This is potentially the most lucrative option for owners. In general, key leaders are sold some level of equity while the owner still retains a significant amount of it. This approach allows the owner to:
- Remain on the company’s benefits plan until age 65.
- Earn a modest salary for no work.
- Also earn a percentage of cash profit each and every year.
- Maintain control of the firm in case an external buyer makes an offer you can’t refuse.
In the long run, passive ownership may be the most lucrative option for the owner. It works like an annuity, best protects the culture you have built and also best protects your brand and legacy.
4. Roll-ups and IPO – In this case, several independent agencies band together for a future sale. Each agency continues to be run independently and keeps most of its profit while paying a management fee to a leadership structure.
The goal is to execute a larger-scale sale via an IPO. However, you can lose control of your agency’s destiny by placing your exit/sale in the hands of others.
What we’re seeing today with owner exits and types of buyers.
As noted earlier, during 2022 to date, Prosper Group has been involved in 21 agency-specific transactions including:
- 15 external sales (5 to private equity, 2 to management consultancies, 2 to holding companies and 6 to other independents)
- 4 internal sales to agencies’ management teams
- 2 transactions involving passive ownership
As you can see, external sales (especially to other independents and private equity firms) dominate M&A for marketing communications agencies. Among external buyers, foreign or emerging companies are also becoming more important and large traditional holding companies are re-emerging.
Based on this experience, there are important lessons learned for agency owners who are thinking about selling their firms. Perhaps the most significant is that there are two very different types of external buyers.
Strategic buyers are looking to fill a strategic hole in their capabilities and are willing to pay a premium. These buyers are typically holding companies, private equity or management consultancies. Multiples are currently 6X+ on average EBITDA. Generally speaking, they look for annual revenue of $10MM or more (although there are exceptions). Some of these buyers have not been very active except in certain niche areas.
Value buyers are usually looking to prey on weakness and searching for deals. They’re either unwilling or unable to pay market price. Accordingly, their multiples can be 4X average EBIDTA. They’re also more than happy to execute aqui-talent transactions which involve salary plus commission, a bonus based on growth but very little payment for the brand.
Transaction models differ based on the type of buyer.
Holding companies – These buyers seek 3-4 year earnouts. Their multiples range from 5 to 8 on average EBITDA. Typically, 40-50% of the sale price is paid at close. The balance is paid based on a multiple X average EBITDA.
Independents – As a general rule, independent buyers are now looking for a 5-year earnout. Multiples are 4-6 on average revenue or revenue growth. These agencies want full integration to be achieved more quickly. Between 30-40% of the sale price is paid at close with the balance being earned based on a multiple X average revenue.
Management consultancies – These buyers want shorter 1-2 year earnouts. Multiples range from 5 to 8 on average EBIDTA or revenue. They may wish for quicker integration. Expect 40-60% of the sale price to be paid at close. The balance is earned based on a multiple X EBITDA or average revenue.
Private equity – PE buyers can represent the highest potential value to agency owners. Multiples are 8-10+ on current or past year EBITDA. 70% is paid at close and 30% is rolled into equity in a new company to be sold five years later by the PE firm. This can result in a significant second sale for the agency owner (where the total multiple might reach 15). In this way, owners can often receive double the upfront 70% sale price.
Wrapping this all up.
If you’re thinking about selling your agency, remember that knowledge, preparation and time are the keys to achieving a premium sale price. We can help you do that. Please feel free at any time to contact our Managing Partner Alex Halbur at alex@prospergroup.net or 310-936-3774.
Finally, to review our thought piece on what you need to consider in BUYING another agency, click here.
We’re here to help you succeed.
Prosper Group exists to help the owners of independent marketing communications agencies achieve their ambitions and maximize the value of their life's work.
Our team of former agency leaders and owners focus their deep experience on implementing proven proprietary methodologies across our three practices of agency performance, owner exit planning and M&A transactions in order to drive owner and agency success.
To learn more about us, please visit our Services page
