Read This Now If You’re Thinking About Selling Your Agency
The managing partner at Agency Futures, Doug Baxter, knows a lot about the process of buying and selling agencies. That’s not only because he founded a company dedicated to providing merger and acquisition services for agencies, but because he used to be an agency owner himself - as did all of the company’s senior partners.
Having gone through the process of founding an agency and then selling it, Doug wants to help other owners to avoid many of the common pitfalls that the process presents. Agency Futures’ philosophy is centred around what he calls “empathetic M&A”, so that when a buyer and a seller make a deal “both sides are stronger.”
In an environment that’s typically driven by profit above all else, Agency Futures intuitively understands the emotions involved in selling what is often the owner’s life’s work and, with that, their legacy. “Selling an agency is the single most important transaction in an owner’s life. It’s something they spend a lifetime building. It’s always about more than money. We want to help people avoid repeating the mistakes that are easy to make and to get the full value for what they’ve built,” notes Doug,
Below, Doug shares the five essential pieces of advice every agency owner needs to know and keep in mind when deciding to sell.
Understand the process
Agency owners often don’t think about selling until the very last minute. The thinking goes ‘I’ll be ready to sell when I decide to sell’ but that’s rarely true. This leads to getting a lower price because they haven’t prepared their agency for sale. They haven't assembled the right team, they don't understand the process, and they don't necessarily understand the reasons why buyers will pay less for an agency that isn't sufficiently prepared.
You need to assemble a good team, which should include people like an advisor, to ensure that you get the right deal terms. A good lawyer is essential, as deals are often paralysed or killed by lawyers who don’t know the business. The right lawyer will know how deals in this area are structured.
Get a tax advisor. Owners don't generally think of the tax impact of how deals are structured. But there are many ways in which deals can be structured for both buyer and seller, in order to make sure that you are as tax efficient as possible. You want tax to be structured in the way that’s as beneficial to you as possible because the buyer will always structure it - not maliciously - in a way that works best for them. Finally, be prepared for how long the selling process takes. One of the effects of the pandemic has been to elongate the process so that it frequently takes around nine months.
Set reasonable and realistic financial expectations
Sometimes when we talk to owners they're informed by reading about deals that private equity firms have done with agencies in the technology sector. The owners are seeing 15 to 20 times EBIT (earnings before interest and taxes) multiples and getting their ideas from there. Those deals are extremely rare. They’re really for data and technology-focused agencies that are bought by private equity, while most agencies simply do not fit that mould. The multiples out there at the moment, globally, are probably an average of six to eight times the EBIT.
It's absolutely critical that an owner starts the process with a valuation. Begin with a valuation through somebody who's qualified, like Agency Futures, who can tell you what you can reasonably expect for your agency. That way, when you get an offer of four million, and you're expecting 10 because you’re unrealistic, it doesn't derail the process.
Set criteria for your buyer
Owners need to know what kind of buyers they want. Legacy is often very important to sellers and only the right buyer can preserve it. Owners, set criteria for the kind of buyers you want and what you want to see happen with your agency. How will your people be dealt with, and how will your clients be dealt with?
Ideally you want to find a buyer who, when you merge with them, brings things to you that you don't have so that you have the opportunity for growth. They bring you the leadership, geographical locations, or clients you don't have, so you can both grow together.
With the agencies we’re working with, we’ll often see seven or eight different buyers making offers - we don't always recommend the highest bidder. In fact, rarely do we recommend the highest bidder, because on a lot of occasions, the highest bidder can be private equity. While there's nothing wrong with private equity per se, their whole focus is money. When they buy an agency, they want it for four or five years and then they want to double their money. That rarely meets the objectives for owners in terms of preserving the legacy of the agency.
Focus on culture
We use the term ‘cultural collaboration’ a lot. Owners have to ask whether the culture of their agency matches with that of the buyer? Owners have spent their whole lifetime imbuing that agency and the leadership teams with a specific kind of culture. Very few owners want to sell and see the following week that that culture is decimated, the leadership laid off, and the clients getting a different kind of service to the one they did before.
Often, deals make sense on a spreadsheet, which is the worst possible reason to do a deal. In practice, when two opposite cultures come together, they can’t work at all and can destroy both companies in question. Take the time to focus on culture, to make sure there is a culture match. We have to bear in mind that six or seven out of ten acquisitions don't work, so understand how you can create a united culture before you decide to sell.
Understand the difference between strategic buyers and value buyers
A strategic reason for a seller to acquire an agency is to position both parties in a better place to grow. We see other agencies or agency networks as strategic buyers compared to private equity, generally speaking, because they understand the underlying dynamics of the business, and they can see how they can acquire an agency to create growth.
The other kind of buyer, one we don't like as much, is a value buyer. Value buyers are really looking to get an asset at the lowest possible rate so that they can add the revenue and the EBIT to what they have already. They really aren't focused that much on the well-being of the people, the agency or the clients - their focus is on the value.
At Agency Futures, we only facilitate strategic deals. We don't want to be involved in deals where owners are either selling their agency for less than they should, or buyers want to buy agencies for less than they’re worth. It's going to end up in a negative outcome for the people in that agency, like mass lay-offs. As former agency owners ourselves, we have zero interest in those deals, even if there's a lot of money in them, as we’d rather not be involved in a negative business dynamic.
Owners who prepare for the sale of their agency using the five main points above will be better prepared for thew process, and will put themselves in a position to secure a better deal from interested buyers.
