I had a great meeting today with one of my M&A friends, who specialises, as I do, in maximising the value owners get when they sell their agencies. His firm acts as a broker identifying potential buyers, organising seller-side due diligence, and running the sale process (they also do the same for buyers). I help agencies grow fast. We both maximise sale value.
We discussed one of the problems that many agencies go through when they’ve decided they want to sell: how to prepare, and how to make the changes that a buyer wants to see that will drive the price to its maximum possible level. While agency leaders mostly do know what to do, they rarely actually achieve it – and in our conversation over coffee we agreed that it’s actually quite simple…
As an aside, I work with lots of agency owners and leaders to get to the point where they can sell. My work is in the (sometimes long, sometimes short) lead-up to sale, at which point I hand over to a broker, lawyers, tax advisors etc. So this morning we both came at our conversation from slightly different perspectives and engagement points in the process. We don’t compete, rather we collaborate, and it’s interesting to get a view from the person you hand the baton over to. The coffee and conversation was fun.
And to further digress for a moment from the topic of this article, when an agency owner has decided to sell, there’s usually still a lot of preparation to be done. Buyers want to buy a business that is already ready to be integrated into their more mature structure. They want to buy something that is already running smoothly, where the integration won’t be so traumatic as to cause loyal staff to leave in frustration at changes to the culture or ways of doing things. The buyer is buying expertise and resources (so that mustn’t leave), clients (so they mustn’t leave), a reliable sales pipeline (so that must already be in place), and reliable, growing profits (so that must continue). Above all, a buyer is buying the future, not the past. That future needs to be in place and on the way already – not waiting to be created.
Back to our discussion. Leaders of great agencies already know all that. They know they are caretakers of an agency they will be handing over for further rapid growth, whether it be straight away or over a three year earn-out. And more or less they know where the weaknesses and gaps are. My colleague pointed out that he frequently comes across agencies that want to sell but which despite their best efforts still have these gaps in the way of getting the best possible price.
As a rule, buyers discount from a notional perfection. The multiples of EBITDA that you hear about and that you aspire to are based on a perfect model of acquisition-readiness. So for each area that needs fixing – second tier management, reliance on a dominant client, predictable sales pipeline, competitive differentiation (“sexiness”), board and financial processes, margin control etc, etc. – they will discount the purchase price. Rarely does an agency hit the max multiple.
Yet the CEO and senior team know what the problem areas are. They know. And often they have some kind of plan to get these things fixed. However, most management teams struggle to get more than one thing fixed per quarter. Sometimes, it’s one big thing in six months. And that makes the window of opportunity to sell tricky. The confluence of things that have to happen isn’t huge, but it is stark:
optimum sale = desire to sell + trajectory of success + all discount factors sorted + team’s enthusiasm to stay for three more years in earn-out.
So how do you get the changes done at a faster pace than you can get it done in the usual course of running your agency? Having run several agencies myself I know that the day to day gets in the way. We as leaders are exposed daily to the crises of agency life: big pitch, urgent leadgen, senior resignations, sudden client briefs, overwhelming firefights… we know why our team can’t do stuff. We set a strategy at the beginning of the year but we manage our own expectations by lowballing the number of things we believe we can realistically achieve. We create a plan to sort three or four big things this year – and as a consequence we spill outside our perfect window of opportunity and fail to get the multiple we feel we deserve.
We are in fact capable of much more than this. I work with agency leaders all the time helping them get past this problem of perception of what’s realistic. My M&A colleague and I roll our eyes at the normalcy of this; rest assured, it happens everywhere.
So if you want to create an exceptional exit, getting everything done in the time that will make it work, there is a simple solution: get someone external in to keep you and your team on track. It’s imperative that you bring in a non-exec or a board consultant who can provide you with a battle-hardened framework that accounts for all the things a buyer wants. Get them to guide you and your team to both design the solutions and take responsibility for delivering them. Get them to shepherd you through the process. Because believe me, an external person who knows what they are doing will help you double your agency’s size within two years, or fix you up for sale in six months flat.
Why does it work? The brutal answer is that an external advisor, whether it’s me or my M&A colleague, isn’t involved in the daily drama and is only actually asking each member of your senior team to fix one thing at a time. When I come in each month I care only that responsibility has been taken and progress made. Having an experienced advisor who comes in each month is slightly scary for the team, and gets stuff done (the amount of work that gets completed in the last few days before I turn up each month is dramatic!). We don’t do anything you don’t know already (well, some of us have had several agencies ourselves so we can certainly provide expertise on shortcuts and avoiding all the pitfalls), but we do provide an objective, unwavering focal point.
In the end it’s you and your team doing all the work, creating this max value agency that will command the maximum price, just using the power of an outsider to drive action. In the process you will be spinning up a high performing succession team that buyers will pay a premium for. And momentum that will thrash the earn-out targets and give you the proceeds you actually deserve. It’s a fairly straightforward, if counter-intuitive, equation: to deliver the best results you need outside perspective to drive internal progress.