In November last year I sold my agency Underwired in a process that took just seven weeks. In the past 21 years I’ve founded and sold several agencies – one of them twice – and been involved in building a multi-agency network.
So I’ve been involved in more agency dealmaking than many, and I thought I would share with you some thoughts about how to get the highest price when you sell. Get the formula right and you’ll have an agency that potential acquirers will fight over.
Buyers don’t like risk. The biggest risk is to your agency if you lose a major client. So any client that, if it were to leave, would cause a structural change has to be balanced: 40% really is the biggest you’ll get away with without it being a discount factor.
Say you have a client that dominates, at 60% of profit. Your multiple (M) will be based on your EBIT for the remainder on the assumption the dominant client is a major risk. So if your EBIT is £1m all in, although you might assume you’ll get M6xEBIT – £6m – fantastic! Actually you’d be offered something more like M3x (for the remaining £400k EBIT), £1.2m. Disappointing.
In fact, it might actually be worth resigning half the dominant client’s business, leaving you with £700k EBIT at M5x, or £3.5m in your pocket.
Once you know what you are trying to achieve it gives you specific sales goals and targets to focus the minds of your account handlers and new business team.
Over the years I have been involved in several agencies that have very rapidly become famous. They all had three things in common:
- They weren’t big, but they were known for doing one thing exceptionally well
- They got on every pitch list for that one thing, and punched above their weight in terms of their client lists as a result
- They attracted lots of buyer attention (my last agency received nine offers when it was put up for sale)
This requires both tested processes and an appreciation that you can’t really be all things to all people. So you have to be courageous in stating what you do and what you stand for, in unambigious terms. This has two effects: you will get the attention of every client that wants what you say you do, and it will attract every buyer who needs to add your skillset to its portfolio.
Timing is of course everything. There is no point doing an earn-out deal at the bottom of your value cycle (which looks like a bell curve). By the time you’ve got your money, there is still fifty percent more growth to be extracted.
Likewise, don’t do the deal at the top; there is no more growth to be done, so your earn-out will add little to your starting price. Roger Martin-Fagg, Vistage’s economist, says that in the UK we run a seven year cycle, and that the bottom was in 2013. Let’s say the half way mark between now and the next dip is 2017. You need to get cracking and start optimising your business for sale right now.
Leadership, especially in the run-up to an exit, takes vision, drive and the bravery to lean on others’ experience. For selling your agency at the highest possible price, there are seven major value creation steps you need to consider. Get in touch with me at [email protected] or connect with me on LinkedIn and I will happily share the rest.