If you’re an agency owner contemplating an exit, you’re not alone. The digital marketing landscape is evolving, and many agency owners are considering selling their businesses. However, the process is far from straightforward.
Navigating the maze of legalities, financial intricacies, and strategic decisions is no small feat. It’s not just about finding a buyer; it’s about finding the right buyer who sees the value in your business model, your client base, and your team.
It’s about structuring a deal that safeguards your interests while offering a fair proposition to the buyer. It’s about conducting meticulous due diligence to ensure there are no hidden liabilities or potential deal-breakers.
And above all, it’s about exiting in a way that aligns with your personal and financial goals, whether that means completely stepping away from the business or staying involved in some capacity during the transition period.
In this guide, I present a comprehensive roadmap to steer you through these multifaceted aspects of selling your agency. My aim is to equip you with the critical knowledge and insights you need for a successful, optimised exit.
Understanding Business Valuations
Understanding how your business is valued is a critical step that can significantly impact the final sale price. By understanding these valuation ranges and the key considerations that influence them, you can better position your agency for an optimised exit. Whether it’s improving your client diversification, increasing your profit margins, or scaling your operations, each action you take can potentially move you into a higher valuation bracket.
Under $500k Profit
- There are many different founder journeys of agency owners. One of the common backgrounds is somebody who worked at another agency and then decided to venture out solo. Another frequent career path is somebody who has been successful on Upwork and took many of the clients off the platform to launch his or her agency.
- For agencies sub $2 million in revenues and usually sub $500k in profit, the customer acquisition is done by the founder. There are no real scalable growth channels for the agency yet.
- These smaller agencies are attractive for bigger agencies such as NUOPTIMA or could also be sold to other individuals who are looking to buy an agency. Buyers are likely to offer a valuation that is 2 to 4 times your earnings and oftentimes there is an earn-out structure and a longer transition period involved given the relative higher degree of owner dependency in a smaller agency.
Between $500k-$1M Profit
- If your agency’s profit is under $1 million, buyers are likely to offer a valuation that is 2 to 4 times your earnings or 0.5 to 0.8 times your revenue.
- At this level, buyers are often looking for stability and a proven track record. The lower multiplier reflects the perceived risk associated with smaller, less established agencies.
Between $1M-$2M Profit
- Agencies with profits in this range can expect valuations that are 3 to 6 times their earnings or 1 to 1.5 times their revenue.
- Businesses in this profit range are often seen as more stable and may have a more diversified client base.
Between $2M-$5M Profit
- If your profit falls in this range, you can expect a valuation that is 6 to 9 times your earnings or 1.5 to 2 times your revenue.
- Such agencies are often considered prime acquisition targets for private equity funds and listed agency groups such as WPP or S4 Capital. They are large enough to offer economies of scale and justify the long process and time involved for senior management of the buyer
Above $5M Profit
- Agencies with profits above $5 million can command valuations that are 8 to 10 times earnings or 2 to 3 times revenue.
- At this level, the agency is often seen as a market leader with significant growth potential. Many of the groups with profits above $5 million could become acquirers themselves and often do consolidate the market
Factors Influencing Valuation
Earnings and Revenue
- Earnings: This is essentially your net income. To arrive at a more accurate figure, any personal or one-time expenses, taxes, or interest paid out of the business are added back (sometimes also described as SDE (Seller-Discretionary-Earnings) and often times a proxy for the more common financial metric EBITDA.
- Revenue: This is the total amount your business bills each year, minus any pass-through expenses that you’re covering on behalf of your clients.
Growth Rate
- Year-over-Year Growth: If your business is growing at a rate of 30% or more year over year, your valuation will be based on the numbers from the trailing 12 months. This reflects the business’s positive momentum and can significantly enhance your valuation.
- Steady or Declining Growth: If your business has had steady numbers or even a down year in the last three years, your valuation will be calculated based on the average numbers from the trailing three years. This approach provides a more balanced view, especially if the business has faced temporary setbacks.
Other influencing factors:
- Contract Structure: Businesses with recurring revenue are valued higher than those with one-time projects.
- Niche Specialisation: A specialised focus can increase your valuation.
- Business Type: Industries viewed as recession-proof are more valuable.
- Management Structure: A strong management team can positively influence valuation.
- Scalability: Demonstrated growth potential can significantly impact your valuation.
- Business Development Process: A well-defined process for both inbound and outbound sales can elevate your valuation.
- Client Contracts: Having solid contracts in place is crucial for a higher valuation.
- Client Concentration: A client making up more than 10% of revenue can negatively impact valuation.
- Client Retention: Long-term clients and low churn rates can positively impact your valuation.
- Reputation: A strong market reputation can enhance your business valuation.
- Transition Plan: Willingness for a longer transition period post-sale can positively impact your valuation.
Why Deal Structures Matter
When it comes to selling your agency, the structure of the deal is crucial. A well-thought-out deal structure can maximise your value while minimising risks. Conversely, a poorly structured one can lead to financial losses and legal complications. Understanding the nuances can help you make an informed decision.
Value Optimisation
Different deal structures can yield varying valuations for your agency. For instance, a Share Purchase Agreement (SPA) might be more appealing to certain buyers who are looking for a straightforward acquisition of your entire business, potentially driving up the price.
On the other hand, structuring the deal as an earn-out agreement could align the buyer’s and seller’s interests, as payments are tied to future performance metrics. This could be a win-win, as it incentivises you to help the agency succeed post-acquisition, potentially increasing the total sale price.
Risk Mitigation
The structure of the deal can also serve as a risk mitigation tool. For example, a staggered payment plan can protect you from buyers who are over-promising but might under-deliver on payment. Similarly, a well-crafted deal can protect you from future liabilities, ensuring that once you’ve exited, you’re not pulled back into any legal or financial issues that arise after the sale.
Tax Implications
Different deal structures have varying tax consequences. A lump-sum payment might be subject to higher capital gains tax, while an installment plan could offer tax deferrals. Understanding these nuances can help you keep more of the money you’ve earned from the sale.
Flexibility and Control
The deal structure can also dictate how much control you retain post-sale. Some agency owners prefer to remain involved in some capacity, whether as consultants or board members. The right deal structure can facilitate this, allowing you to gradually transition out of the business or stay involved in its future direction.
Emotional Peace
Last but not least, a well-structured deal can offer emotional peace of mind. Knowing that you’ve secured a fair price for your life’s work, mitigated risks, and perhaps even ensured a legacy for your brand can make the challenging process of exiting far more rewarding
Decoding Minimum and Maximum Purchase Prices in Agency Acquisitions
Price is not just a number; it’s a reflection of an agency’s value, potential for growth, and the risks involved. It serves as a pivotal factor that can significantly influence the dynamics of an acquisition deal. In the agency world, the valuation spectrum is broad, but there are some common trends and benchmarks that both buyers and sellers should be aware of.
The $500,000 to $1 Million Sweet Spot for Bolt-On Acquisitions
There are many more agencies out there that are valued between $500,000 and $1 million than any other valuation range. The big supply drives the multiples usually down, but at the same time, there are many benefits of acquiring smaller agencies:
- Risk Mitigation: Agencies have usually demonstrated a certain level of stability and have a track record that can be evaluated for risk assessment.
- Growth Potential: These agencies are often at a stage where they are ripe for scaling, making them attractive for buyers looking for growth opportunities.
- Operational Efficiency: Agencies valued are typically large enough to have established operational processes but not so large that a new owner would struggle to implement changes.
No Upper Limit: The Sky’s the Limit for Some Buyers
Interestingly, many buyers don’t set a maximum purchase price, especially if they are large conglomerates or investment firms. This lack of an upper limit indicates a willingness and capability to raise the necessary capital for an acquisition that promises high returns. However, it’s essential to note that such buyers are often stringent in their due diligence and may require more robust financials and proven track records.
The Risk of Lower Valuations
Agencies valued below $250,000 often find themselves in a challenging position. They are generally considered higher-risk investments for the following reasons:
- Revenue Instability: Lower-valued agencies may have inconsistent revenue streams, making them less attractive to buyers.
- Client Dependence: Smaller agencies often rely heavily on a few key clients, making them vulnerable to revenue fluctuations.
- Operational Challenges: They may lack established operational processes, requiring significant effort from the buyer post-acquisition.
Type of Deal Structures
Share Purchase Agreements
When it comes to agency acquisitions, SPAs are often the preferred method for agency acquisitions for several compelling reasons:
Complete Ownership
When a buyer acquires all the shares of your agency, they are essentially buying the entire business entity. This includes not just the assets but also the liabilities, making it a comprehensive takeover. For you, as the seller, this can simplify the exit process, as you’re transferring everything in one clean sweep.
Tax Efficiency
Share purchases can be structured to offer significant tax benefits for the seller. For instance, the sale of shares is often subject to capital gains tax, which is generally lower than income tax rates that might apply to asset sales. This can result in a more favorable net proceed from the sale.
Business Continuity
One of the most significant advantages of a share purchase is the seamless transition it offers. All existing contracts, employee agreements, and operational setups continue as-is, ensuring minimal disruption to the business. This can be a selling point when negotiating with potential buyers, as it reduces their post-acquisition workload.
Earn-Out Structures
Earn-outs are increasingly common in agency acquisitions to reconcile differences in valuation expectations between the buyer and the seller. Here’s how they work:
Performance Metrics
Earn-outs are usually tied to specific performance goals that the agency needs to achieve post-acquisition. These could be revenue milestones, EBITDA targets, or even client retention rates. This aligns the interests of both parties, motivating you and your team to contribute to the agency’s success even after the sale.
Risk Mitigation
For the buyer, an earn-out can serve as a risk mitigation strategy. If the agency fails to meet the agreed-upon metrics, the buyer’s financial obligation decreases, making the deal less burdensome.
Retaining Team Members
The success of an agency often hinges on its team. Retaining key staff members post-acquisition can be crucial for the continued success of the business. Here are some strategies:
Retention Bonuses
Offering a financial incentive for team members to stay on for a specified period post-acquisition can be effective. These bonuses are usually paid out at various milestones, encouraging long-term commitment.
Equity Incentives
For key executives or highly skilled team members, offering equity incentives that vest over time can be a powerful retention tool. This not only provides a financial incentive but also gives them a stake in the future success of the agency.
Payment Terms: Striking the Right Balance
Most deals involve a combination of upfront cash and deferred payments or earn-outs. Upfront payments provide immediate liquidity, while deferred payments can be tied to performance metrics, aligning the interests of both parties.
Upfront Cash Payments
In most agency deals, a significant portion of the purchase price—often around 70%—is paid upfront in cash. This approach has several advantages:
- Liquidity for Sellers: One of the most compelling advantages is the immediate liquidity it provides you, the seller. This can be crucial for various reasons, whether you’re looking to invest in a new venture, pay off debts, or simply enjoy the financial freedom that comes with selling your agency.
- Clear Ownership: It often simplifies the transition of ownership. By receiving a significant portion of the sale price upfront, you’re effectively severing most financial ties with the agency, making it easier for both parties to move forward independently.
- Reduced Risk for Sellers: Receiving a substantial upfront payment minimises your exposure to the future performance of the agency. This is particularly beneficial if you have concerns about the buyer’s ability to maintain the agency’s success post-acquisition.
Deferred Payments
The remaining portion of the purchase price, usually around 30%, is often deferred and structured as earn-outs. These are the key points to consider:
- Performance Metrics: Earn-outs are generally tied to specific performance goals or financial metrics that the agency needs to achieve post-acquisition. This can be a win-win for both parties. For you, it offers the opportunity to maximise the sale price based on future performance, while for the buyer, it serves as a form of risk mitigation.
- Alignment of Interests: Deferred payments can serve as a motivation for the existing management or founders (if they stay on). Having a portion of the sale price tied to future performance can serve as a powerful motivator to continue driving the agency’s success.
- Risk Distribution: Earn-outs allow the buyer to distribute the financial risk over a period, making the acquisition more palatable in cases where the agency’s future performance is uncertain.
- Tax Implications: Deferred payments can also have tax benefits, potentially allowing you to spread out your tax liability over multiple years. However, it’s crucial to consult with a tax advisor to understand the specific implications for your situation.
Customising Payment Terms
It’s worth noting that these percentages are not set in stone. Depending on the negotiation skills and the unique circumstances of the agency in question, the ratio of cash to deferred payments can be adjusted to meet the specific needs and risk tolerances of both the buyer and the seller.
Influencing Factors
The choice between upfront and deferred payments isn’t solely a financial decision; it’s often influenced by other factors such as:
- Existing contracts related to the assets may dictate payment terms, requiring either immediate settlement or allowing for deferred payments.
- The buyer’s broader acquisition strategy may influence the payment structure. For instance, a buyer planning multiple purchases may prefer deferred payments to manage cash flow across deals.
- In some locations, the laws may favour one type of payment over the other, affecting the buyer’s decision.
- The financial stability of the agency can also impact the payment terms. A financially robust firm may command upfront payments, while one with less stable finances may have to agree to deferred terms.
- Both buyers and sellers need to consider their long-term goals and how the inventory payment structure aligns with those objectives.
Equity Offers: The Double-Edged Sword in Agency Acquisitions
Equity offers introduce an additional layer of complexity to agency acquisitions. Approximately half of all buyers propose offering equity in the holding company as part of the acquisition deal. While this approach can be advantageous in certain contexts, it also comes with its own set of challenges and considerations.
The Advantages of Equity Offers
Equity offers can be attractive for these reasons:
- It allows buyers to conserve cash, which can be particularly beneficial for those planning multiple acquisitions or other significant investments.
- When sellers become shareholders in the acquiring company, it creates a vested interest in the success of the combined entity, potentially leading to better post-acquisition performance.
- It can be structured in various ways, such as preferred shares or convertible notes, providing flexibility in meeting the financial and strategic needs of both parties.
The Pitfalls of Equity Offers
However, equity offers are not without their drawbacks:
- Issuing new equity dilutes the ownership stake of existing shareholders, which can be a sensitive issue, especially for closely-held companies.
- Equity transactions often require rigorous due diligence and compliance with securities laws, adding to the time and cost of the acquisition.
- Determining the value of the equity offered can be complex and subject to negotiation, potentially complicating the deal.
- Sellers who accept equity may face restrictions on selling their shares, limiting their liquidity options.
Navigating the Equity Maze
Given these pros and cons, both buyers and sellers need to tread carefully when considering equity offers. Key considerations include:
- Sellers should understand the voting rights associated with the equity being offered, as this will impact their influence over the combined entity.
- The terms regarding dividends or distributions can affect the real value of the equity received.
- Both parties should consider how future rounds of financing could affect the equity’s value and ownership structure.
The Critical Role of Due Diligence
Due diligence is not just a checkbox but a comprehensive process that involves examining various aspects of your agency, from financials to legal standing and market position. This process helps identify any red flags or hidden opportunities.
Due diligence is often categorised into several types:
- Financial Due Diligence: Scrutinizes the financial statements, tax compliance, and other monetary aspects.
- Legal Due Diligence: Examines contracts, employment agreements, and potential legal disputes.
- Operational Due Diligence: Focuses on the day-to-day operations, evaluating efficiency and scalability.
- Market Due Diligence: Assesses market trends, competition, and growth potential.
Post-Acquisition Involvement: How Long Should the Seller Stay?
Determining the length of a seller’s involvement after an agency has been acquired is far from a one-size-fits-all decision. It hinges on multiple variables, such as the the buyer’s confidence, the complexity of the agency, and the terms of the deal. While most buyers feel equipped to manage the newly acquired agency independently, some opt for a transitional period involving the seller.
Buyer Confidence
Many buyers, especially those with experience in agency management or acquisitions, are confident in their ability to run the agency without the seller’s ongoing involvement. This approach has several advantages:
- The absence of the previous owner can expedite the integration of the agency into the buyer’s existing operations.
- It allows the buyer to quickly instill their own corporate culture and operational practices without the influence of the previous ownership.
- Not retaining the seller eliminates the need for additional compensation or profit-sharing arrangements, making it a cost-effective option.
Transitional Period
However, some buyers prefer that the seller stays involved for a short transitional period for the following reasons:
- The seller’s expertise and understanding of the agency can be invaluable in transferring client relationships, operational nuances, and other intangible assets.
- The presence of the seller during the transition can help in maintaining employee morale and reducing turnover.
- Some clients may have a strong relationship with the seller, and their involvement can aid in client retention during the transitional phase.
Customised Agreements
The duration and nature of the seller’s post-acquisition involvement can often be customised to suit the needs of both parties. Elements to consider include:
- Some deals include a consultancy period where the seller advises the agency on a part-time basis.
- The seller’s exit could be tied to specific milestones, such as the successful transition of key client accounts or the achievement of certain performance metrics.
Final Thoughts
Exiting your agency is a complex process that requires careful planning and a deep understanding of various factors, from deal structures to due diligence. If you’re looking to take your exit strategy to the next level, consider leveraging data analytics tools for valuation or AI-driven software for due diligence. Your next chapter is just around the corner, but only if you’re well-prepared for it.
By understanding these key aspects, you’re not just preparing for an exit; you’re optimising it. If you’re looking to delve deeper, don’t hesitate to consult industry experts. Your optimal exit could be just a strategy away.
