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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.

12 ways to maximise the value of your agency

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