How to sell your agency: tales from the front line
With a mergers and acquisitions bonanza going on in the marketing services sector, owner-manager agencies thinking about selling need to get prepared. Dominic Mills finds out how, for the seller, it is an intensely personal experience.
Wow. Including the mid-May acquisition of content agency John Brown by Dentsu Aegis, there've been at least 50 M&A deals involving marketing services and data analytics providers so far this year, many of them owner-managed entities. Who knew, eh?
Yet this is no surprise to Julian Davies, a partner in financial and HR consultancy RedFin, who has worked on some 20 deals in his time. A benign economic climate, a stable political landscape, and cash-rich buyers keen to capitalise as marketing budgets continue to grow, he says, combine to make it an opportune time for those looking to sell.
It was to tap into this trend that Davies and Louisa Pau, founder of Otherboard, a consultancy that provides help and advice to senior managers in marcomms agencies (and herself a successful entrepreneur) teamed up for a practical session on how to sell an agency in mid-May.
Their timing is clearly spot-on. About 25 owner-managers attended, and a post-presentations Q&A session ran for 45 minutes.
If there's a key first step, it's to get prepared to sell long before you actually do. This means, says Pau, "you need to run your business as though you are selling it, even if that may be two years away. Get your finances sorted, simplify your corporate structure, put in place proper processes, work out where you as the owner-manager actually add value, and make sure you have an engaged and incentivised management team.
"Of course, it's what you should be doing anyway, but it will be difficult to make a sale without adopting these disciplines."
When you plan for a sale, make sure other shareholders want the same, and lock in your key staff so they share the vision." - Julian Davies
For Davies, it's also important to understand what motivates buyers. "Some will simply want to increase their profits, or they need to acquire to show growth. Others may want to buy you to improve the quality of their management. Or there may be strategic reasons, such as developing a new client base, building out new service offerings, acquiring skills, or simply looking for economies of scale."
Sellers, he says, should figure out how much money they want to make in cash before any earn-out consideration, tax and costs of sale, and whether fellow shareholders share their vision. "If you want to make £1m in cash, then ask yourself: 'What does my business need to look like - income and margin - to generate that?'."
Among the issues that sellers need to address are: income and margin levels, bearing in mind that it is better to sell a smaller turnover business with a higher margin than vice versa; the client base; and the offering the services that will attract both the right sorts of clients and the right buyers.
P/e ratios and all that
The core of any valuation is the p/e (price: earnings) ratio the buyer is prepared to pay - expressed as a multiple of annual pre-tax profits usually over the last three years - and currently between four and eight, with some exceptional businesses achieving higher.
This, plus the value of any cash in the business, determines the amount of upfront money - which can be structured as a mix of cash, loan notes or share options in the acquirer - sellers receive before any earn-out.
But, warns Davies, watch out for two things: one, owner-managers typically pay themselves less than if they were an employee, so the acquirer will want to 'normalise' their salaries, which could depress profits; second, they will want to leave some cash in the business as working capital so sellers cannot guarantee to monetise every pound in the bank. "How much you need to retain as working capital," he says, "is a matter for negotiation."
Prepare for the long haul
But even getting to this stage requires patience on the part of the seller, says Davies. "The process can easily take nine months."
Stage one, assuming the business is ready for sale, is to appoint a broker who then approaches 30-50 possible buyers with a one-page memorandum, without disclosing the identity of the seller. That is whittled down to chemistry meetings with five to ten possible buyers, with the aim of soliciting at least three offers.
Be savvy about life after the sale. You're no longer an owner, but an employee." - Louisa Pau
At this point the negotiations start, but "no offers will be the same," says Davies, "so you cannot always compare like with like." Variables include the amount of cash upfront, non-cash payment terms, and the details of any earn-out.
As the deal nears completion, a buyer will want to sign a 'heads of terms' agreement which guarantees them exclusivity for a fixed period during which to conduct due diligence.
It's personal: a seller's experience
For Louisa Pau, the sale in 2007 of Woolley Pau, the healthcare agency she co-founded 14 years earlier, proved to be an intensely personal experience.
Ten years into its life, everything looked hunky-dory. Woolley Pau was growing in size and reputation. But 2004 turned out to be an annus horribilis. "We lost nine pitches in a row and our two biggest clients. My husband gave up his high-status job, and my agency partner's father died."
But three years later, she and Dean Woolley sold the agency to Gyro. How did she turn it around?
"We never lost confidence in ourselves," says Pau, "but we took a deep breath, decided to go back to our core values, get new people in, reinvent ourselves and put in place all the processes and structures that you would find in a bigger agency. In a sense, we acted bigger than we were."
Pau herself found a mentor who would help her focus on her leadership, and the agency brought in a part-time finance director who helped them run the business as though it was for sale.
Ironically, says Pau, just as this was happening, they received an offer to buy the agency. "But it wasn't the right time."
Three years later - Pau says agencies thinking of selling should write a three-year plan to take them to that point - and they were ready.
After the buyer, Gyro, came on board, Pau stayed on in a strategic role piloting her agency through further growth and working with the new parent.
But, she says, she learned one key lesson: "I wish I'd thought more about life after the sale. It's like organising a wedding. All the effort goes into that, and little into what married life will be like. I should have been more savvy about post-sale life."
The big difference, she says, "is that suddenly you're an employee. You have to understand your new position."
Things were further complicated by the departure of the individuals who had negotiated the deal soon after. "We managed to renegotiate our earn-out after a year because things had changed so much," says Pau.
Build your agency's profile during the run-up to the sale. Fame matters. Buyers think you're in demand." - Louisa Pau
Despite that, she did not enjoy life in the new structure, and left in 2012. "I thought I'd love being part of a larger group, in a more senior, international role - and some people would - but I didn't."
And it's true that not every sale works out, longer-term, for the seller. But rather like marriage, it's best to go in prepared - and eyes wide open.
Failing that, here are ten tips from Pau based on her own experience:
1. Run your business as though you are selling it well before you wish to. Introduce better processes, write a three-year plan, bolster your management team, and produce famous work. Fame makes your agency more desirable. All this is good for your business anyway and there will be less to do when you come to sell.
2. Get experienced help, perhaps with a mentor, and be honest about where you bring most value. Most agency leaders spend money developing their staff but very little on themselves. The more you understand what you have to offer the more chance you have to develop that before a sale. Bring in experienced financial, management and HR help to allow you to focus on what you do best.
3. Put yourself in the buyer's shoes. Ask why they would want to buy your business. As part of the process you will put together an 'Information Memorandum'. This is your sales pitch document and includes your business plan, your financial information and your creative work. Be creative here, you're in sales mode. But don't be greedy; there has to be something in it for the buyer.
4. Choose advisors you trust and feel you can work with and only agree to things you understand. Interview potential lawyers, brokers and financial advisors before you start the sale process. Be prepared to negotiate with them on fees. Make sure they understand what you want out of the process and that you, and your sale, are important to them.
5. Make sure someone is still running the business. The sale process can go on for months. It is both time-consuming and distracting. Ensure your management team is solid, and know their roles and responsibilities. Think about incentivising them in the run-up to the sale, but share options will dilute your stake.
6. Have a story. Your team will notice if you are suddenly having lots of meetings in and out of the office that are out of the ordinary. Decide what you are going to tell them before and after the sale so they are reassured and staff changes are minimised.
7. Do due diligence on the buyer. They're doing it on you, so make sure you want to work with these people. Talk to people who've sold their businesses to the same buyer. If you like, send them a questionnaire.
8. Talk to people who buy businesses. They don't have to know your sector. You'll probably only sell one or two agencies in your life but buyers do it for a living. You will gain great insight and bargaining power if you understand their point of view.
9. Think about the earn-out period. It may feel as though the sale is the end of the process. It's not. A new life begins. It's like the difference between a wedding and married life. Get a real understanding of what your position will be like in the new company and try and factor in some flexibility in the sale agreement if things change (which they always do). Make sure you want to work with these people. Talk to people who've sold their businesses. Be suspicious of what they tell you will happen. If it doesn't, your earn-out is affected.
10. Don't spend the cash until it's in the bank. Remember both parties can pull out at any stage until the documents are signed.