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Month: July 2019

12 ways to maximise the value of your agency

Marketing Agency Mentor Gareth Healey outlines 12 ways you can maximise the value of your agency

How do you maximise value when selling your agency?

I’ve spoken to many owners of independent marketing agencies over my 24 year career, and proportionally far more in the last 2 years since I exited my own agency. One of the most frequent topics of discussion is exit planning and how to get maximum value when selling your agency.

Whether they run a small lifestyle business or a larger growth agency, most agency owners want to realise the value in their businesses at some point. Nothing wrong in this of course,  I’m a big advocate of forward planning. Although, I have to admit it does annoy me when I speak to people who have yet to even register at Companies House when they start talking about “being out of this in 5 years time”!

It is difficult to sell a marketing agency.  Whilst there are thousands of great businesses out there, the market is saturated. Agencies are hard to value as they generally have a low asset value.  When selling your agency, its ability to generate cash will be the major driver of value and key to its attractiveness to a potential buyer.

There are a number of options you might consider when selling your agency. You may pursue a trade sale or aim to sell the business on to your management team. In any event, here’s my 12 key drivers – in no particular order – that will bring you a higher valuation and consequently a higher return when the day comes.

12 key drivers that will maximise the value of your agency

1. SPECIALITY – With so much competition, focussed expertise is more highly prized than ever. A specialist is far more attractive and valuable to potential acquirers than a generalist. There is a saying “the sharper the knife, the deeper the cut”. Try and make sure your agency has deep expertise in a particular area or client segment (ideally both!)

2. QUANTITY – To command a premium when selling your agency, you’ll need to reach a level of critical mass. Unless you’re in a particularly specialist channel, or have gained rapid traction in an emerging tech niche, make sure you grow your business to a size that will be attractive to larger acquirers with deeper pockets.

3. SYMMETRY – A major part of the value of an agency is its client list.  The  more relationships you have with bigger brands the better. Easy to say of course, but the value of larger clients is not just in their revenue potential. Acquirers may well view buying your agency as a stepping stone to access large clients they would like to work with. Crucially, a balanced portfolio of clients is vital.  Most agencies have a large key client, but no single client should represent more than 25% of your turnover (ideally less).

4. SENIORITY – Businesses looking to buy your agency will usually want to realise some cost savings (your own employment costs included!) This is ideal for you as the exiting party, so having a senior team already in place and running the agency is vital. Moreover, the better the senior team, the better the opportunity you have of selling your agency to them!

5. LIBERTY – Earn outs are an inevitable part of most transactions and are perhaps one of the most emotive issues for exiting agency owners. Buyers will want you to commit to an earn out in order to hand over key client relationships etc. Be prepared to fulfil your earn out obligations. If you want a quick exit, it will be reflected in the lower price you will ultimately receive.

6. SUSTAINABILITY – Agency revenue is increasingly moving to project work and recurring revenue streams for many agencies are difficult to achieve. Acquirers of cash generative businesses are looking to ensure the revenue has longevity. The more exclusive contracts you have in place and/or subscription based revenue you enjoy, may not just influence the price, but whether your agency is attractive to a buyer in the first place.

7. GEOGRAPHY – Where your business is based is not something you can easily change, but it will be an important factor for acquiring businesses when you’re looking to sell your agency. Naturally, circumstances will differ widely here, but in general agency major city centre locations are preferable and a footprint in London highly prized (as long as it operates client business and is not just a managed office location).

8. PROFITABILITY – The higher the profitability of the agency, the more valuable it will be. Agencies are usually valued using the profit multiplier. The multiplier side of the equation can be highly subjective (and influenced by the other drivers in this list) but the profit figure is more factual and controllable. Aim for at least 20% EBIT. Of course, if you’re running a very profitable agency, you might not want to sell at all.

9. TRAJECTORY – Agency life is often full of ups and downs. For many, looking at the agency’s performance over several years of annual accounts can often mirror the volatile nature of the sector. Buyers on the other hand, want stability and a smooth growth curve (the steeper the better of course). If you can demonstrate consistent year on year growth and profitability, it will be more attractive to a buyer looking to add your agency their business. If you can’t, be ready with a solid reason(s) why a certain year (or years) showed a temporary dip in your agency’s fortunes.

10. TANGIBILITY – The key assets in an agency are generally its talent pool and its client relationships.  Both require constant management and both can leave the agency if they wish.  Tangible assets and IP can dramatically increase the value of an agency (in addition to locking in client relationships).

11. TRANSPARENCY – Some ex-agency owners have pointed out that a “clear track record” helps to increase the value of an agency (or any business for that matter). What they mean by this is the agency has nothing that the due diligence process will highlight as a potential negotiation point for the buyer to reduce the value. Legal disputes that may still feasibly carry a risk of further action, employment law transgressions, financial issues such as the participation in tax schemes to minimise tax liabilities etc. We’re not talking skeletons in cupboards necessarily here, but anything that is not completely straightforward and transparent that might set alarm bells ringing for a buyer. You can’t necessarily sort these things out retrospectively of course, so the best advice is to avoid them in the first place.

12. PREDICTABILITY – An important omission from the original list. The ability of the agency to demonstrate a clear sales process that is predictable and systemised. The agency understands its sales funnel, and deploys an established sales model that creates revenue and business growth based on a formulaic process. Sales do not depend 100% on the exiting owner!

Summary

As much as these drivers are value creators, they can also be value detractors. If you excel in one area this will increase the value when selling your agency. On the other hand, if you have an issue or underperform in one or more of the factors, this could have the opposite effect. Indeed, this could negatively impact the value you achieve becoming a tool for a buyer to use to try and discount the price.

Finally, of course you don’t have to be thinking of selling your agency to utilise these drivers. Indeed, the earlier you address the factors, the better foundations you put in place and the more attractive and valuable your agency will become.

3 lessons for agencies from Gordon Ramsay

chefs-lighting-fire-under-agencies

What can an agency learn from a TV chef? 

I like Gordon Ramsay. He’s a very intense guy, and although he shouts and swears a lot, I love his energy and passion. I admire his high standards and drive for perfection. He clearly wants to be the best at whatever he does.

What has this got to do with agencies I hear you say?

Whilst I don’t think Gordon’s management style (essentially standing an inch from somebody’s face and bellowing swear words at them), would be effective in an agency environment. I do think Gordon has a few lessons for agencies in other areas.

For starters… 

Some years ago, Gordon made a TV series called Ramsay’s Kitchen Nightmare’s. It basically involved him walking into failing restaurants and turning them around within a matter of days.  I used to like watching these shows, but the format became tired quite quickly, probably because it was so formulaic. Essentially, Gordon turned up at a restaurant unannounced, tasted the food and spat most of it out, before proceeding to chastise and antagonise the owner. He then set about telling them what to do. Every other word he uttered generally began with F (and I’m not talking “Food”).

I’d long forgotten about this series until earlier this week when, whilst channel hopping late one evening, I came across a re-run of the USA version. It’s basically the same format,  but Gordon turns up in a poor quality disguise and for some reason everybody calls him “Chef Ramsay” at every opportunity.

The main course… 

Kitchen Nightmare’s followed the same format every episode.  Once Gordon had ruffled everybody’s feathers and got a few people crying, he set to work. 

His recipe for success was very simple and consisted of 3 main dishes. Each contain delicious lessons for agencies in my opinion:

1. REDUCE THE CHOICE – In every single instance, Gordon believed the menu in the restaurant was far too extensive. In EVERY episode he cut down the amount of dishes on offer. Not only that, he introduced a Signature Dish.  A speciality of the house. Something that the restaurant could promote and become famous for.

This approach brought MANY benefits. It made it easier for the customers to buy. It made it easier for the business operationally. It brought more CLARITY to the restaurant proposition. They were clearer on what they stood for and who they were trying to appeal to. Quality improved as they became better at preparing the reduced number of dishes they served. Costs reduced as waste reduced (not as many ingredients were needed and wasted). Supplier relationships and terms improved as the restaurants needed to buy fewer things but in larger quantities more regularly.  I could go on.

2. GET THE MOJO BACK & RALLY THE TROOPS – Gordon ALWAYS had a harsh word or two for at least one member of staff (usually more). Sometimes these people were the owners, sometimes they were employees. In any event they were all UNDERPERFORMING.  Standards were poor. They had often fallen out of love with the job. Confidence was low and it was having a detrimental effect on the whole team.  Gordon did 2 things. Firstly he confronted the individual(s) and gave them some – brutally – honest feedback. After lots of emotional outbursts from both sides (which makes great TV of course), the people either left the business or responded to Gordon’s “tough love” and rediscovered their mojo.  He built their confidence back up by re-lighting the fire in them and praising their efforts. He inspired the rest of the staff by cooking his new menu and getting them to taste it and be proud of it.

3. GIVE THE PLACE A FACELIFT – Most of these restaurants looked unloved and tired. The decor was out of date, branding was poor or non-existent, and the standards of cleanliness were not great. There was very little marketing going on. The production company paid for a complete facelift and overnight the restaurants transformed into a brighter, cleaner, more modern and inviting environments. Regular and lapsed customers were invited to experience the new menu and invariably everybody was impressed with the food, service and decor.  The restaurants were back on their feet again.

To Finish…

I sincerely hope your agency is not failing. I’m sure it’s not a nightmare (although like every business, I bet it has its moments).
 
However, regardless of the current performance of your agency, there are lessons for agencies in these TV shows that are now mostly consigned to the lower reaches of tertiary Sky TV channels late at night.
 
There are things we agency owners can take out of this and even take action on next week in our own businesses.
 
I’m sure you’re already ahead of me, but let me summarise:
 
1. ARE YOU DOING TOO MANY THINGS OR TRYING TO APPEAL TO TOO MANY PEOPLE? – Could your agency benefit from a more refined and focussed “menu”.? Could you develop a greater depth of expertise rather supply a breadth of services?  Could this make you more attractive to CERTAIN clients and even allow you to charge more?
 
2. ARE YOU OR YOUR STAFF UNDERPERFORMING?  – Have an honest look at yourself and your agency. Are standards as high as they were? Are there any weak links in your team? Who has lost their mojo?
 
I’m not advocating shouting and upsetting people here, but I am urging you to consider whether standards have dropped and every member of your team are at the top of their game. If not, they either need to be coached or, for the good of the rest of the business, maybe it’s time for them to move on?
 
 3. DOES YOUR AGENCY NEED A FACELIFT? – Have a look around your office, your website, your social media channels.  In fact, why not review your whole client experience at every touch point? Is everything as good as it was or could be? How do your compare to your competitors?  Have you grown complacent in any areas?
 
I’m not pushing for rebranding here, but I am suggesting that Chef Ramsay has some lessons for agencies in both his TV show and his approach to business. The restaurant sector is highly competitive. Choice abounds and customers can be very fickle. Like the agency sector, you need to continually assess whether you are operating to the highest standards in order to stay relevant and profitable.
 
Why not gather your partners or senior team together on Monday morning and ask them what improvements they would make?
 
PS – No shouting or swearing allowed!

 

 

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