So you want to sell a marketing agency? I was originally going to call this blog “Where have all the buyers gone” because, for a certain size and type of agency, selling the business is nigh on impossible right now.
If you’re struggling to find a buyer, you’re not alone. I speak to business brokers up and down the country and the picture is the same in the North, South, East and West. If your revenues are under £2m and you’re in anything other than data-led marketing (programmatics etc), finding a buyer might take 18-24 months. I say might because only 2/10 of all businesses currently on the market will get sold. It’s a grim picture. I decided to change tack with this blog because saying “things suck” isn’t very helpful. I thought it might be better to offer real advice on how to sell your business because selling *is* possible. If you’re prepared to work with an acquirer to adopt an ‘aligned interests’ approach and it’s in good shape, selling your agency is quite easily achievable. I say again, there are buyers out there – buyers like us. But, we are few and far between.
How most businesses are sold
What do I mean by an ‘aligned interests approach’? Let’s look at the opposite of aligned first – the adversarial approach.
A business broker will most likely advise you to adopt an adversarial approach to selling your business. It goes like this. You send a suitor your numbers, but only what they ask for. They analyse those numbers and after a few meetings, emails, calls etc they make you an offer. You don’t like it so you either reject or concede. The point is, you’re starting from opposite poles and hoping to find an agreeable space in the middle. As one business owner explained to me: “I’m sure we’ll find a deal that will disappoint us both, but be equally bearable”.
This approach might work when selling a house or a car. They are assets. They have tangible and verifiable values. And, while property prices may go up and down (ed: not down so often), it’s pretty easy to value a property today and assess tomorrow’s risk. Businesses ain’t so easy, especially goodwill businesses like marketing agencies. They are far more complex. Because agencies generally have no assets, the *only* thing you’re selling is goodwill. To acquirers like us and our investors, that makes transactions risky.
Managing risk by managing dynamic goodwill assets
When we look at agencies, we look at four pillars that underpin value; clients, people, services and operations. The first two are by far the most important and they are dynamic. What do I mean by that? If I buy a house, unless it gets destroyed by fire or an act of God, tomorrow I still have a house. It’s why a property is easy to value; property is a static or fixed asset. But, clients and people come and go all the time – hence they are dynamic. If I buy a business today and the clients and people leave tomorrow, I have no business. That’s the risk.
Even if only a few clients and people leave, the value of the business and its prospects are materially damaged. So, buying agencies – and therefore selling them – has to be done with care. The best way to achieve maximum value for your agency – or to make a sale at all, is to work with your acquirer to demonstrate that the dynamic pillars of your agency are robust.
That is hard to do if you’re being adversarial – how do you enter a dialogue and collaborate if you’re poles apart?
A collaborative approach
Where both the seller and the buyer’s interests are aligned, the sale process becomes very simple. Of course, the variables still need to be discussed and negotiated, but it’s easier to do that if the starting point is mutual understanding. We tend to find retirement sales are a lot more prone towards an aligned interest or collaborative sale and it’s why we like them. The very worst thing we hear when we first meet a business is: “I don’t need to sell my business”. If you don’t need to, don’t. But, if you do need to – or want to – then we should work together to release the value you’ve built in your business.
These are the variables that are normally negotiated in a small company sale.
- Total consideration
- The amount payable on closing and deferred payment
- Deferred payment schedule
- Earn-out schedule and targets
- Consulting agreement
- Option agreements (if applicable)
An aligned approach is where both parties understand that a good result mitigates risk, releases value and achieves an acceptable valuation. Every deal is different, and I’ll look at some scenarios in future blogs, but it all depends on what’s most important to the vendor and what’s finance-able by investors.
The million dollar question: what’s my value?
As a rule of thumb, the value of (or total consideration for) an agency is discussed as a multiple of adjusted EBITDA. There are variations depending on how your balance sheet is structured, but it’s easier to keep things simple. Free cash flow is the critical defining factor for any acquirer and as long as the accounts are clean, EBITDA allows modellers to model that properly.
For small agencies, a valuation of somewhere between 2.5 and 3.5 times EBITDA is the norm if the four pillars are balanced. The total consideration can go up or down depending on the risk inherent in the acquisition. A higher value can be justified if the risk is mitigated, a lower one if it can’t.
Similarly, the amount payable on acquisition is negotiable. With goodwill businesses, there will always be a deferment. How much is paid up front and how much is deferred depends on the strength of the business, the needs of the owner, the total consideration and risk in the deal. Generally speaking, the lower the payment on closing, the more generous a valuation can be because the risk is aligned.
How long payments are deferred for has sometimes been a sticking point in the past. Think one year for each multiple of EBITDA and you won’t go far wrong. Want 3x EBITDA in two years? The earn-out will involve performance related targets to help you achieve your valuation.
Over to you
What I’ve tried to illustrate is that almost any agency is buyable as long as interests can be aligned and buyer and seller work together to shape the deal. Want to sell your agency? Great, we want to buy it, but the deal has to work for both of us. Be realistic and you can sell for a good price.
Our advice? If at all possible avoid adversarial negotiations. You’ll waste a lot of time and probably not get a deal. At least, not one you want.