Selling Your Agency? There are Two Very Different Kinds of Buyers.

You need to know the difference.

At least for now, it’s encouraging that M&A activity seems to be holding steady. Deals are still being made despite the uncertain economy.

As agency owners contemplate the potential sale of their agencies, they need to recognize there are two categories of buyers that are most actively seeking acquisitions. These include independent agencies seeking to grow through acquisition and private equity firms looking to add to an existing grand vision.

Each of these groups falls into Prosper Group’s categorization of buyers as either a Value Buyer or a Strategic Buyer. It’s important that agency owners understand the difference. Then you can plan your strategy and prepare your firm for sale accordingly.

Value Buyers – Larger independents who seek to acquire other independents.

These are generally larger independent agencies, often with financial backing, that wish to  acquire other independents in order to build scale.

 The main advantage for smaller agencies is that the Value Buyer will consider smaller acquisitions. A Strategic Buyer/private equity firm generally pursues acquisition targets at $10M+ in revenue. The independent agency buyer will consider acquiring agencies much smaller than that.

 Another advantage of selling to an independent agency is that any transaction is very meaningful to that buyer, so it will work hard to make post-transaction life under its umbrella as positive as possible. While holding companies and private equity firms can make an acquisition mistake and survive, an independent agency can ill afford to make a mistake either culturally or financially. 

 There are other important considerations when evaluating which type of buyer is better for your firm.

 These include:

1.     Value Buyers are more willing to look past low revenue size and profitability, which Strategic Buyers generally are not. However, we find that many Value Buyers tend to prey on weaknesses and offer much lower prices than Strategic Buyers.

2.     Value Buyers are more willing to acquire agencies that have a broader brand proposition where a Strategic Buyer is often seeking to fill a niche. Value Buyers frequently want to grow by acquiring revenue and new capabilities while the Strategic Buyer is generally looking for a very specific type of firm.

3.     Value Buyers look to acquire agencies that are smaller because they don’t have the deep pockets of Strategic Buyers. The Value Buyer may be the only opportunity to sell for agencies with under $3M in revenue.

4.     While providing an opportunity for smaller agency owners to sell, the Value Buyer often offers only a steeply discounted deal and most sellers are disappointed in the proposed transaction price.

5.     The Value Buyer frequently staggers the down payment or guaranteed money over several years. With a private equity sale, you receive all of your sales proceeds at close (except for the amount you leave in the company to participate in the future PE sale).

6.     The Value Buyer will generally have an earn-out where either profit or revenue must grow for the selling owner to realize the full sales price. The private equity buyer generally has no earn-out as they believe the second future sale is enough motivation to keep the selling owners in place.

Strategic Buyers – Private equity firms who seek to advance their grand vision.

Private equity buyers generally fall into the category of Strategic Buyer.

Here are just a few examples of their differences vs. Value Buyers:

1.     Strategic Buyers generally have a very specific set of strategic needs and are motivated to pay a premium price to fill that need.

2.     Private equity buyers typically seek agencies with higher revenue and profit. $10 million is often the minimum revenue level they seek.

3.     Private equity also looks for potential productization of service offerings to minimize the risk of acquiring an agency based solely on its relationships with clients.

4.     Strategic Buyers seem to be less involved than other buyers in the day-to-day management of the companies they acquire.

5.     Private equity buyers will frequently require that the seller keep some of the premium upfront purchase price in the company until the private equity firm executes its future sale of the business down the road. This sale is often at a very high price and the selling owner participates in that second sale. With the right PE firm, proceeds from the second sale can dwarf the proceeds received from the original sale.

There are some similarities in that both the independent agency and private equity buyer look to secure ownership commitment for a longer period than the standard three-year employment agreement.

Please note that with a private equity or Strategic Buyer, you’ll undergo a higher level of scrutiny during due diligence.

 Side Note: We did not comment in this piece about holding companies as buyers because they have not been very active in recent years, at least in the United States. Broadly speaking, the holding company transaction model falls into the Strategic Buyer category but at generally lower sales prices than private equity firms. 

If you’re serious about selling, take the time to get fully prepared.

You have one opportunity to sell your agency. The timing is critically important. Sell only when you and your agency are prepared to sell. Then, it’s always best to have multiple suiters versus dealing with a single buyer which generally happens when a buyer proactively approaches an owner. You’ll have very little negotiating leverage in that scenario.

Take the time to prepare your agency (and yourself) to go to market. You should work with a qualified professional. Many quality buyers will be more receptive to your firm as an acquisition option when you have an experienced advisor in place to make the transaction process as smooth as possible for both parties. 

If you’re considering a sale or unsure if your agency is ready for a sale, Prosper Group has the experience to educate you about the risk factors, your agency’s current valuation, how to increase agency value and then successfully navigate the complexities of selling your agency.

We’re here to help you prosper.

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 is comprised of former agency leaders and owners who have built and sold their own agencies or worked as buyers of agencies at the publicly-traded holding company level.

Prosper Group has deep experience implementing proven proprietary methodologies across our three practices of agency performance, owner exit planning and M&A transactions to drive owner and agency success.

To learn more about how we can help you sell or exit your agency, or improve you agency’s performance, please visit our Services page.

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