How to maximise your exit value
Let me just manage your expectations about this article.
I want to share some secrets that no normal agency acquirer will tell you. I’m doing this because I was an agency founder and CEO. I sold a bunch of agencies. I scaled a ton of agencies. Then I started buying agencies, and now I scale the ones we buy. And I wish I had known what I now know when I was building my first agency. So if you want to sell yours, you might find my story interesting.
The journey
In 1994 I had blue hair and no job, so I started an agency. Hyperinteractive was one of the world’s first digital agencies. I sold it three years later. My second agency, HEAD, became the digital arm of Lowe Worldwide. Over twenty-one years I co-founded six agencies and was CEO of four of them. I eventually became CEO of a small agency group. I ran that for three years until retiring, heading off on a tour of festivals, and ending up at my first Burning man. Just another agency founder.
When I eventually floated back to earth I realised that if I wanted to have a portfolio career, I would have to do something different. Like agencies, consultants need clear competitive differentiation. And ideally a distinct competitive advantage.
My differentiation (long-gone blue hair aside) was that I’d founded, led and sold more agencies than pretty much anyone else. Now, some of that was because I had screwed up. I made some catastrophic errors of judgement and had to find a buyer to rescue one agency. Some I’d been able to exit because our people had done extraordinary work. We were almost always a Drum Elite Agency, and HEAD was the world’s most awarded digital agency at one point. Or we’d achieved stellar growth.
Having done so many deals I was an old hand. And each of the sales, no matter what drove them, were successful. My M&A lawyer, the brilliant chair of Lewis SIlkin, Jo Evans, has worked with me for over twenty years. Jo helped me fashion some remarkable exits.
I realised I had too many brilliant competitors if I were to become a consultant. So I became an agency chair, helping agencies prepare for sale. That was eight years ago. And while I’ve mostly moved on to buying agencies, the secrets of which I will talk about in a sec, my profile address remains linkedin.com/in/agencychair.
How do you prepare an agency for sale?
Over the years I had countless conversations with pretty much every agency broker in the book. I came to understand that there are a rules to selling your own agency. Everyone in the business will tell you what they are: sort out your discount factors, build a track record of profitable growth for three years; create fame.
I was already good at the fame bit – I have a bit of a passion for differentiation. And reputation, an essential part of fame, is incredibly important; integrity opens all the doors. So I would find a niche, build an agency in it and make the agency famous somehow. Then my network would find us buyers who really wanted to fill the gap the agency addressed and we’d set them competing for it to drive up the price. I thought I was the bees knees when it came to doing deals. But it wasn’t until I crossed to the buyer’s side that I really understood how critical having both a plan and a track record is.
In the meantime I was gaining a nice reputation as an agency chair. They were using a growth framework I had developed. They’d win agency of the year awards and then two years in they’d sell for a significant premium. The growth framework took shape really quickly, a reliable process for scaling an agency fast. The framework became the 2Y3X programme.
Programmatic scaling
2Y3X® (two years, triple the revenue) is built around a very simple set of ideas. These include well established science, the rules of selling an agency, and an insight that had become clear in my new career as a chair. My insight? As chair, you are not in charge. It’s not your business. You don’t manage people. So you cannot tell anyone what to do. And yet you are hired to help them scale and exit.
So 2Y3X works on the basis of establishing a growth team, helping them create a plan of action, and holding them to account to make sure they follow the plan. Classic chairing.
The starting point for the plan of action was to address a potential buyer’s discount factors. It turns out there is a more or less universal list of these. Every broker you go to will do a quick evaluation of where you stand against each item in the list, to establish how much a buyer will be likely to pay.
Here is the basic list:
Business plan
Profitability
Scale
Growth path
Client security
Succession
Fame
I’ll come back to this list in a while. But first let me explain why this list is so important. Every item on it, except the last one, are really about risk. The reason it’s called a discount factor is not because that’s what it starts out as. It’s called a discount factor so brokers can manage your expectations and hopefully sell you some consultancy services. It starts out as a measurement of risk.
Not having a business plan is risky, because it indicates you’re flying by the seat of your pants and don’t know what’s going to be happening in two years’ time. Lack of scale is risky because if an important team member leaves thaty could lead to a cascade of staff or clients. Lack of client security, which may include client concentration, is risky. Lack of succession is especially risky, because as nobody founded their agency to have a new boss, owners frequently bail post-deal.
Why does the buyer want to reduce risk? That would seem self-evident. They are going to pay you a lot of money to acquire your agency. Quite naturally they don’t want to buy something that could be worth less than they paid for it. Or worse, they could lose their investment. But it turns out that’s not the whole story.
Going to the dark side
2Y3X grew, establishing an incredible track record of successfully doubling or tripling revenue. After a while I wrote a book about how 2Y3X works. Scale at Speed: How to Triple the Size of Your Business and Build a Superstar Team was published worldwide by Hachette. It’s now in its second edition.
Many of the agencies in the programme had gone on to sell. We’d gained even more experience helping them do so. We became adept at introducing them to the best brokers, lawyers and tax advisors and holding their hands as they went through the sale process.
And then I got an email from Austin, Texas. Peter Lang wanted to have a call. Now, Peter is an agency M&A genius. Using his own agency as a starting point he had built up his own knowledge of the mechanics, risks and financing of acquisitions. He actually wrote the playbook in the US; his Digital Agency Business M&A course is (I think) the best in its field. Peter wanted to join forces and combine programmatic M&A with programmatic scaling. We brought in an extraordinarily talented CEO. Tom Shipley had built up The Foundry, an Amazon aggregator, as well as a couple of billion-dollar consumer brands. And eighteen months ago we set to work.
I went to the dark side. We became a buyer of agencies.
Why does risking investment matter so much?
Here’s the thing. It’s not so much about how much capital you risk on acquiring an agency, though that is of course hugely important. It’s important for your reputation. It’s important that you are seen by investors as a safe bet. Of course you can’t fail. However…
Say your agency is doing £400k EBITDA. In the UK that might translate – for the very best agencies – to a multiple of 4x. (In the US it’s at best half that, partly because there are a huge number of small agencies for sale at any given time).
Your acquirer might have £10 million in EBITDA. And because the risks are diversified and maybe they’re listed on the stock market, they might command a multiple of 20x. So your value at 4x £400k is £1.6 million. The second they acquire you, your EBITDA gets aggregated with theirs, and your EBITDA’s multiple goes from 4x to 20x. Your hard-fought sale value of £1.6 million has become £8 million the moment you signed on the dotted line.
That’s why they don’t want any risks that could reduce your value post-deal. Yes, we definitely do not want to have any failures because they are very hard work and they make it more difficult to attract investors. But we don’t want to suddenly find we lost £3 million in value because the founder left without a succession team in place. Or your biggest client decided they preferred an independent agency and went out to pitch.
So if you want to sell, you need to understand quite how deep the motivation is to mitigate risk. If you can successfully address every item on the discount factors list, you can make the sale of the century and everyone will be delighted. You as the seller, and yes, the buyer too.
The 2Y3X programme was designed around addressing the discount factors. And by addressing risks, you’ll quickly build confidence and morale. By empowering your team you will also build a fantastic culture of high-performing superstars.
As buyers at Scale at Speed Group we want great performers. And in the US if we acquire an agency that isn’t already doing it, then we apply 2Y3X to it post-deal. The results for everyone, the teams, the buyers, the investors – and the agency founders – are stellar.
