Selling Your Agency? There are two very different kinds of buyers. And you need to know the difference.
Even with lingering high interest rates, the M&A team at Prosper Group is encouraged that activity for marketing and communications agencies is holding steady. Deals are still being made despite the uncertain economy.
Today’s most active buyers – Who they are and what they’re looking for.
As agency owners contemplate the potential sale of their firms, they should recognize that there are two types of buyers in today’s market 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.
One consequence of the current high-interest rate environment is that the upfront multiples applied to profit currently used by private equity firms are lower than a couple of years ago due to the higher cost of money. This will likely be the case until interest rates begin to decrease later in 2024.
However, the big attraction for agency owners in a private equity transaction is the opportunity to participate in a much larger future transaction. A private equity deal provides the opportunity for a second and sometimes even a third “bite at the apple” meaning that the upfront money can be lower but the cumulative sale proceeds will be much higher than a traditional sale.
Generally, Prosper Group categorizes 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.
The differences between Value Buyers and Strategic Buyers.
Value Buyers are generally larger independent agencies without financial backing from an outside bank or PE firm. They typically look to acquire smaller agencies. However, it should be noted there are several large independents with financial backing that wish to acquire other independents in order to build scale. These buyers are in the position to make attractive offers and may also present an opportunity for a “second bite at the apple”. This select group of independent agencies can be considered Strategic Buyers.
The main advantage for smaller agency owners is that the Value Buyer will consider smaller acquisitions. For Value Buyers, the selling agency does not have to meet the typical $5M-$10M minimum revenue requirement of Strategic Buyers in order to be acquired.
In addition to larger ongoing revenue, Strategic Buyers also have higher profit margin expectations for acquisitions. The Value Buyer usually looks to acquire agencies with lower EBITDA margins but where they feel there is potential profit growth through client roster synergies or back-office cost savings. These buyers may be the only possible sale partner for agency owners with firms that have lower net revenue and profits.
Conversely, a Strategic Buyer/private equity firm generally pursues acquisition targets at $10M+ in revenue with solid profitability that they feel can scale revenue dramatically over a five-year or shorter period. The depth and future commitment of the selling agency’s existing management team is important to private equity buyers as they generally have a five-year timeline for their exit and expect selling ownership to stay in place for five years or longer. The independent agency buyer will consider acquiring agencies much smaller than that.
For both types of buyers, every transaction is very meaningful so cultural fit is VERY important.
The buyer will work hard to make post-transaction life under the new 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:
While there are several quality Value Buyers in the market, beware that some tend to prey on weaknesses and look for sellers in distress and offer much lower prices than fair market value. A seasoned M&A pro can help you identify and stay away from such buyers.
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.
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.
While providing an opportunity for smaller agency owners to sell, recognize that the Value Buyer often moves to an aqui-talent transaction model. This provides little upfront money for the sale, a commission on the initial book of business being transferred, a new business commission on all subsequent new clients from the owner’s referral network and a series of performance and long-term incentive plans. There may or may not be a material upfront payment for the selling agency brand depending on the buyer’s perception of the brand name market value or use as a conflict brand.
In the event a Value Buyer makes a traditional offer for an acquisition, they frequently stagger 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).
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:
Strategic Buyers generally have a very specific set of strategic needs and are motivated to pay a premium price to fill that need.
Private equity buyers typically seek agencies with higher revenue and profit. $10 million is often the minimum revenue level they seek.
Private equity also looks for potential productization of service offerings to minimize the risk of acquiring an agency based solely on its relationships with existing clients.
Strategic Buyers seem to be less involved than other buyers in the day-to-day management of the companies they acquire.
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.
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. However, we are beginning to see more interest in potential acquisitions from holding companies in 2024. 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, which means you believe revenue will scale over time. Then, it’s always best to have multiple suiters versus dealing with a single buyer, which generally happens when a single buyer proactively approaches an agency that is not currently in the M&A market. 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.
Also, you should gain an understanding of your agency’s current fair market value AND what you will need for a sales price in order to live your desired post-sale and possibly retirement lifestyle.
If you’re considering a sale, wonder if your agency is ready for a sale or don’t know your firm’s fair market value, Prosper Group has the experience to help. We can inform you about the risk factors buyers use to assess acquisitions, your agency’s current valuation, how to increase agency value and then successfully navigate the complexities of selling your agency.
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Prosper Group exists to help the owners of independent marketing and 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.
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