Why the devil is in the detail when it comes to selling your ad agency for a good price

Here at MAA we value independent agencies like London’s newest newbie Hello People and the likes of Wieden+Kennedy and Droga5. But, in an advertising world dominated by the big marcoms companies and, increasingly private equity investors, selling out is always an option. Over the past 20 years or so Results International has handled the sale of dozens of agencies. Managing partner Keith Hunt (left) explains what you need to do to get the best price.

Selling your business is probably one of the most important financial transactions you will ever undertake. You wouldn’t leave selling your house to chance so you certainly wouldn’t do so when selling the business which has consumed so much of your time, energy and passion.

In the same way that you wouldn’t put a house on the market that requires lots of remedial work, you’ll want to make sure that your business is in great shape before you contemplate a sale. So first and foremost that means planning in advance. Selling a business shouldn’t be done on a whim. Give yourself at least six months, ideally more, to really scrutinise what you need to be thinking about to add real value in the eyes of a prospective acquirer.

Ensuring that your business is fit for sale means you will command a higher price when the time comes for an exit. It also means that if your house is in order, management won’t be distracted running around in “fixing mode” during the time-consuming sale negotiations and can focus on what’s most important, i.e. steering the business and keeping an eye on profitability.

Be clear on what potential acquirers value in a business and ensure that yours is up to scratch. Without this sort of insight you won’t know where to focus your attention and could easily end up spending time on aspects of the business which are of no interest to a buyer. What we call ‘premium factors’ will vary by company and sector.

Start by conducting a review of your business. Understand its strengths and weaknesses, benchmark it against your competitors and use the outputs to reflect on how a buyer will view it. There are a whole range of tools available to do this including client reviews/surveys, the net promoter score approach or specialists such as Results who can provide tailored support.

Potential acquirers have a clear list of what they expect to see in a successful business. High sustainable margins are absolutely fundamental and it’s an area where you should have the tightest possible control. Closely connected with this is the subject of profits. If you are thinking of an exit, most buyers will require a minimum of £0.5m and ideally anything in excess of £1m.

Look also at how your financial performance compares to other businesses in your sector. Also what growth can your business support based on historic performance. Is your business model scalable? Does it have a robust growth strategy? Have you done the necessary tax planning? Is your growth ahead and not behind the business? These and other financial performance indicators will come to the fore when the selling process kicks in.

A clear succession strategy is pretty high on the list too. Here at Results we have seen transactions lurch dangerously close to disaster as the main shareholder prepares to exit the business having paid little or no thought to succession management planning. Placing equity principally in the hands of key management is a good way of overcoming any potential issues of this kind.

In the same vein, you also need to be sure that key client relationships are spread throughout senior management so that the departure of any one person does not have an inordinately negative impact on the business as a whole. We’ve all heard those stories of key clients who follow a senior agency contact when they jump ship.

Intelligent succession planning is closely connected with the broader issue of talent and retention and agency capabilities. Have you assessed the strength of your second tier management? Is management aligned and performing as a team? Do you have the right incentive scheme in place?

Agencies operating in younger, fast growing marcoms disciplines such as digital, social media and mobile marketing need in particular to ensure that their management skills and capabilities are up to par and that they can scale in line with growth. Any agency needs to ensure that its own business operations run to the same standard as client delivery.

Any potential acquirer will need to see that good solid operational processes are in place. Do you have an organisational structure that you can scale? Do you have the right client engagement model? Do you have a relevant team of specialist third parties in place to advise on M&A, tax and legals? Falling down on client delivery or disaffected staff are warning signs that your agency might not be fit for its next stage of growth and that you need to undertake an organic redesign to match your ambitions.

Culture is an important way for agencies to differentiate themselves in a crowded marketplace. Ask yourself some straight questions. Are you clear on what your culture is? Can you and your staff articulate it? Do you and your team use it and does it drive and support your vision? Do you measure it through engagement surveys? Culture will impact your ability to attract and retain talent and it’s often said that clients buy people. Culture will often be what wins you a piece of new business.

This leads us to the broader issue of client relationships. Every agency aspires to a good mix of sticky blue chip clients, businesses that are deeply embedded into the fabric of the agency and where there is a real partnership-style relationship. The strength, nature and longevity of client relationships is a vital consideration for buyers. Moreover over-reliance on any one client will set alarm bells ringing. Agencies should in any case have a process for monitoring client satisfaction, but this becomes even more vital when preparing to sell the business.

Any agency that can develop proprietary processes and methodologies which are unique and highly tailored to a client’s needs will attract a higher sale value. In the nicest possible sense developing the right kind of IP can lock clients in, build better margins and therefore create a virtuous circle for both parties. It also contributes to having a proposition that is clear and differentiated and ensures that you are best in class.

Armed with knowledge of what adds value to your business in the eyes of potential buyers it’s vital that you draw up a clear plan of objectives with timescales. This allows you to place a stake in the ground and ensure that plans don’t drift. The plan should also include a compelling vision for the business. Identify the main areas of focus, or what we call the ‘strategic pillars’ to achieve your vision. International expansion might be one, building your creative offer another. Ensure accountability by assigning a senior person to own each strategic pillar and report back on progress to the rest of the management team.

Like anything, when it comes to selling your business, the devil is in the detail. A careful plan, formulated well in advance, with ownership of key aspects clearly outlined will stand you in excellent stead. That way, when it comes to the nitty gritty of the actual sale process you can be confident that you have prepared yourself and your team in the best possible way.