Agency M&A: Seller Beware

Small and mid-size agencies putting themselves up for sale are like winners on Let’s Make a Deal. Behind door number one or two, they can choose cash or an unseen prize – could be a Lexus, could be a live llama. 

For shops with annual revenue in the $10 million to $15 million range, the first consideration – even more than price – is the size and type of the acquiring firm. Selling to a multinational, such as a WPP, is a very different process and outcome from striking a deal with a smaller agency or a private equity firm.

Take an entrepreneur, maybe in middle age, who wants some extra financing to get to the next level without taking a lot of personal risks. Private equity could provide that funding, while also letting the founder take some money out of the business yet retain ownership. If the owner sells to a big agency, however, probably, within a year or so, he or she would be gone. This, incidentally, might be the best outcome for the owners at some smaller firms—take the money and run, unless you negotiate a relatively free reign to run the business. 



Keep in mind, too, selling to private equity may be more of a challenge for agencies   that are staffed heavily with creative types. PE funds often come in with a lot of controls aimed at professionalizing an agency, which can mean tightening down a lot of bolts that may cramp some styles. Some creative people might depart. 

Private equity has become more interested in recent years in the marketing agency space, perhaps because it is not as crowded or competitive as other sectors. They also are gaining a reputation for paying high valuations. How long this will last, however, is anyone’s guess. Meantime, if a PE firm is willing to overpay for your business, my advice is simple: Let them. 

Alternatively, if someone a bit older wants to cash out and retire, luring a takeover by a giant marketing or technology multinational looking to fill a gap is another possibility. Just make sure your beards-and-flannel creative talent doesn’t bolt when battalions of suits show up in the office. Surprisingly, perhaps, creatives often are better understood – and left alone – when a big advertising, media or technology conglomerate acquires a company. One reason for this, perhaps, is because the IBMs of the world over the past five or ten years have come to realize that they already have the tech talent but lack the creatives, particularly digital creatives. 

As for selling to a slightly bigger agency, that’s a strategy for owners looking to park their staff somewhere or to expand geographically, a few years prior to retirement. Often these firms are attractive because they have a special niche. These kinds of transactions often resemble a merger more than an acquisition, unless the takeover firm is substantially larger, possibly publicly traded, but not in the global agency category. Again, in this scenario, you’re looking at whether personnel will stay and if the cultures will fit. 

Bottom line: No matter who your suitor might be, know your motivation, your personnel, your personal financial goals, and make sure they all align with a potential buyer. Make sure your balance sheet is in good order; three years of steady growth is critical. Make sure your client roster is diversified; don’t be a $10 million agency that has $6 million in revenue coming from two clients. Highlighting unique intellectual property can help close a deal, too.


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