Mirren’s annual New Business Conference is typically focused on business development and growth strategies for agencies.
This year, however, a third of the conference’s sessions on the first day were dedicated ditching adland and selling your agency.
This isn’t because everyone finally figured out how to make money in another industry where you can also wear jeans. It’s just time. After two, three, or even four decades building an agency brand, many are trying to navigate the strange lands of financial evaluations and exit planning. And readying your agency for selling is ultimately about building a better agency, one that is focused on growth and profit.
The Most Important Qualities to Look for in a Buyer
In one session, Adi Ignatius, the editor in chief of the Harvard Business Review, spoke with three agency executives about their paths to selling their agencies.
Anomaly’s Jason Deland described the problems the agency faced during the economic crisis around 2008, when clients were cutting their marketing budgets and they were feeling the strain from relying on one economic market for growht. The company opened up a bidding process and eventually went with MDC Partners.
He said they didn’t choose MDC because it offered the most money. The holding company provided the team with most freedom.
Agencies need to outline what is most important to them, and then fight fiercely for those things through either legal provisions or by understanding what type of buyer they want to work with.
Brad Brinegar, chairman and CEO of McKinney, said that gaining visibility in the industry, having access to global markets, and gaining a presence in New York were drivers of its acquisition by Cheil Worldwide.
Sharon Napier, the founder and CEO of Partners + Napier, and her partners knew they wanted to sell the agency from day one, but she didn’t want to just sell to anyone.
“You are selling your agency, not your soul,” Napier said. “But you still really need to make sure your values are aligned.”
Napier is a member of the strategic leadership team for Project: Worldwide, an employee-owned agency network with 11 agencies. She helped to shape the small holding company’s approach to working with its member agencies.
These ex-independents also gave their advice for how to get the attention of buyers.
“Build the best agency you can possible build -- just be really good,” Deland said.
Brinegar emphasized that the McKinney’s quality of talent, creative awards, new business win rates, and the reputation of the agency made a difference during agency’s evaluation.
It’s a Great Time to Be a Seller
The comment echoed by multiple speakers was on how good the market for selling is right now.
Phil Palazzo, the founder and president of Palazzo Investment Bankers, said there has never been a better time to sell.
Borrowing rates are low, the economy is improving, and there has been a spending redistribution in the marketing sector -- from traditional to digital.
In 2013, there were 1,337 marketing and media deals. In 2014, there were 1,832 deals, and the first quarter of 2015 has seen 450 deals already.
Bruce Biegel of the Winterberry Group echoed Palazzo’s statement and added that interest in the marketing sector has increased because of a few reasons. Digital and especially data-driven marketing spend is increasing and is expected to continue to soar. There is an explosion of marketing technology tools, which means more marketers are struggling to manage and integrate these tools. In addition, the customer journey has become more complex due to omnichannel marketing and device proliferation.
What Buyers Really Want in an Agency
Palazzo explained the mindset of the current agency buyer:
- They are focused on strategic, not financial, transactions.
- They are attracted to growth. Most agencies are growing organically at 4% to 5%. If your agency is growing more than that, it's a head-turner.
- They desire well-run, profitable agencies. Buyers would rather pay a premium for a solid business than spend less on a “fixer upper”.
- They are risk adverse.
Agency owners who want to sell need to begin prepping years in advance. Conditions have to be good, and they oftentimes will need to remain with the agency for four, five, or even seven years after the buyout to ensure a smooth transition for both staff and clients. In addition, they need to be prepared for the amount of due diligence buyers are requiring. They are going to request an enormous amount of financial, legal, tax, and IT information. Palazzo recently had a buyer ask for the agency’s intern agreements dating back five years.
There are six other areas agencies should be concerned when prepping their agency for sale:
The buyer is going to look for a normalization of compensation, meaning the owner doesn’t pay himself $1 or $100 million. Founders need to follow market rates. Buyers will also want to see that bonuses for staff are tied to growth objectives that are both qualitative and quantitative.
2) Client Makeup
Buyers will be looking at the agency’s client revenue compensation. According to Biegel, no client should account for more than 10% to 20% of total revenue.
They will also want to see the retainer versus project-based revenues for the company, and how the agency manages both periods of growth and decline.
3) Margins and Growth
Agencies should target a 15% to 20% profit margin. If the firm hits 30% margins, that signals to an investor that the company is underinvesting in the agency and is stretched thin.
Biegel mentioned shooting for the 20-20-20 balance:
- 20% EBITDA
- 20% annual growth rate
- $20 million in revenue
Having defined, optimized processes is important for investors. They want to know that the agency can manage projects efficiently and efficetively, has documentation of its workflow, and has clear KPIs across different departments. This is about showcasing the maturity of the business.
5) Thought Leadership
A clear path and positioning is also key. Agencies that publish whitepapers or original research, regularly speak at events, write for industry publications, win creative awards, and are covered by the press can present a strong brand with a specific point of view and key points of differentiation to investors.
6) Customer Love
Another consideration is client happiness and customer reviews. Agencies that have previous and current clients who are excited to speak positively about the relationship will have a strong negotiating position.