Buying or selling a business is just like buying or selling a house. There isn’t a good time to buy or a good time to sell. I know several super smart analysts who sold their houses at the peak of the market in 2008 expecting to be able to buy them back for a snip. It didn’t work out.
And so it is with businesses. Decide what you want to do and then get on and do it. Find a deal that matches your risk appetite, manage it well and don’t look back. As a buyer, we’re open for business and closing deals. We’re not bottom feeding. Instead, we’re looking for the best and brightest businesses we can find. We explained how we’re thinking about the market in this analysis.
Is there an M&A market?
Just like we’re not scooping up Vulnerable Decliners (our most at risk category), good businesses wouldn’t sell now if there wasn’t a ready market. And there is.
There are several acquisitive groups, consultancies and agencies operating in the market this Autumn and the deal parameters seem very similar to pre-Covid for the best of the bunch. Over the last 18 months, we’ve not faced huge competition when talking to agencies in our target zone. Now, that’s different. There are more acquirers out there, but we say (and of course we would), that there aren’t many of quality. Seller Beware.
Why would owners sell?
Like selling a house, selling a business is a complex set of decisions. If you don’t live in the house or work in the business, then your sole aim might be to maximise the sell price. But if you do live and work in a business, your decision making is more complex.
People sell for lots and lots of reasons, but these are the top five positive ones. We’re ignoring death and divorce because they’re not nice subjects to dwell on, but they are often factors too.
- Preserve equity value: as an agency owner, your equity value is tied to the good will in your business. Good will is the intangible collection of processes, skills, attitudes, culture, people and clients combined with the cash flow needed to capitalise on it. If cash reserves are dwindling, agency owners may seek to protect equity value by joining a group with larger cash reserves.
- Capitalise on past achievements: if you’ve worked for years to build an agency, this age of uncertainty may present an unacceptable level of risk so you may seek an exit to capitalise on your achievements. With a revival somewhere down the line, there’s never been a better time to look at earn out structures, particularly if an acquirer is prepared to rear-end earn out deferments to give you maximum opportunity to benefit from a recovery.
- Demographics: there were already many agency owners looking at retirement options. With the average earn-out agreement spanning three years, the pandemic kicked retirement down the road. Now, those owners are speaking to us to create some certainty; both for their own futures, but also for their staff and the next generation of leaders they’ve been grooming.
- Tax: although the November budget has been postponed, there’s an increasing acceptance that the Chancellor may further restrict entrepreneurs’’ tax relief and will probably bring capital gains tax more in line with income tax. Both are disastrous policies that I’ll cover in another analysis, but both also give a time imperative to agency owners looking to keep more of what they’ve sweated to earn.
- Growth: we’re seeing a number of Strong Survivors who are looking for aggressive growth over the next few years. These agencies like our business model where all back-office and many middle office functions are outsourced to service company Drum Horse so that agency staff can focus on client service and creativity. Drum Horse enables a much leaner and more flexible agency model and removes the work that agency staff don’t like doing.
We’ve met or spoken to well over 150 agencies in recent times and while there can be commonalities, no two owners’ circumstances are the same. There isn’t a better time to sell your business than when you’re ready to sell it. And, there isn’t a better time to buy a business than now.