Does ‘Due Diligence’ Uncover an Agency’s True Worth?

Simon Quarendon | June 18, 2021

One of the joys of integrating agencies into the Selbey Anderson network is finding the agencies that my business partner Dom Hawes has brought in aren’t just good agencies but, in most cases, are great agencies.

Why the dialling up in hyperbole? Because the due diligence process – as it currently exists -doesn’t capture the true value of an agency. The true value remains hidden from view during the entire acquisition period and does not surface until well after the integration phase has taken place.

The trouble is this process was designed a while ago to determine the value of companies which produced ‘stuff’ rather than clever people delivering creative ideas.

That’s not to say that our due diligence process is flawed or is in anyway inferior to those used by other agencies. If anything, after eight acquisitions, ours is pretty finely tuned and is largely still based on an industry standard that most people would recognise.

Let me focus on the three areas where there is the biggest disparity between what companies are obliged to disclose during the due diligence process, and what we subsequently uncover following the integration process.

Staff

During the current due diligence process, target agencies disclose their staff’s employments contracts along with information on salaries, bonuses, contractual benefits offered, job titles, reporting lines, length of service and so forth.

But what the current disclosure system doesn’t allow us to see (yet) is far more interesting.

Like how highly skilled the agency’s staff are; what qualifications they hold, what experience they have (both in their current job and with former employers) and what other non-work-related skills they have that may be of benefit to us.

What’s also not disclosed (and how could it be?) is how motivated the agency’s staff are, their work ethic, how ambitious they are and what their characters are like.

Similarly, we won’t know until after the acquisition has gone through is how strong their management is, what their leadership style is like and whether and how they work as a team.

Clients

Full disclosure usually consists of seeing contracts and written agreements with existing clients and spreadsheets showing breakdowns of revenues by clients, services provided (as line items) and, if we’re lucky, the length of an individual client contract.

But like an iceberg, the real substance here is hidden beneath the surface. What we’d really like to understand is the strength of those relationships; if they are particularly strong, are they referenceable and how high up the client organisation do they go?

A strong relationship with an assistant brand manager should count for less than having a Group Marketing Director’s number on the MD’s speed dial.

Amongst other ‘nice to knows’ would be the growth potential that each client offers, particularly for upselling or cross-selling other services to them and, if they’re brave, a weighted pipeline of potential clients.

But what about those previous or lost clients that might return under new ownership? Even better, what about previously loyal clients that have moved on to new employers but might be rekindled?

Services

Given that the agency’s services are how they earn their corn, this area is the one where we glean (sorry) the least amount of information prior to purchase.

But wouldn’t it be great to learn more about the quality of the services provided, whether they are priced appropriately, ie, competitively, how much price elasticity there is, how much value the client attaches to them and finally, where each service sits in the agency’s overall service portfolio?

It goes without saying that tired, commodity-like services nearing the end of their useful lives are less valuable to us than ’must haves’ that fly off the agency’s shelves.

Other Stuff

All agencies will willingly list their technology assets including software licenses, equipment and even photocopier lease agreements. But what we’d really like to know is; how are they using it? For instance, have they developed a particular capability that can’t be bought elsewhere? Does their IT adoption provide them with a competitive advantage or efficiency saving against their competitors?

What about the agency’s reputation in the market or its brand strength? These factors, together with the agency’s pitch to win ratio, social media network reach and website traffic numbers would tell us everything we need to know.

Designing a due diligence process that incorporates all of these factors would be a huge challenge, and the time involved in collecting this information would divert management attention even more than is currently diverted under the existing due diligence system.

All this at a time when the management team is trying to deliver both a strong financial performance and keep the entire due diligence process as a secret firmly hidden from both their clients and staff.

The management teams of those agencies we have acquired to date have told us it’s one of the most stressful periods of their lives – so adding yet more stress would seem to be self-defeating.

Ultimately, our focus is on finding and unlocking hidden value in agencies, which is why we’re happy with the existing due diligence status quo for now.

 And finding and unlocking hidden value after an acquisition makes this one of the most satisfying aspects of my job, so thanks, Dom!