Are you or your agency looking to make a strategic acquisition in the future? Depending on market conditions and your goals and objectives, you may be on the right track. Acquiring an agency can be an effective way for an owner to position themselves for future growth and enhance their company’s value.
However, buy-side acquisitions can be complex and take considerable time to complete. The process should be strategically driven to increase the likelihood of success in buying an advertising or marketing agency. Hiring an M&A advisor to help you in this process may be advisable, as they can guide you through each part of the buy-side process. Below are things you should consider before you decide to invest the time, effort and resources towards buying an agency.
Are you thinking about a buy-side acquisition? We are happy to answer any questions you may have.
Buy-Side Process Overview
You will want to be more familiar with the buy-side process before you decide to move forward with an acquisition. It is advisable to talk through your goals and objectives with your M&A advisor before heading down this path. An M&A advisor will have insight into ways to minimize the risks of the transaction.
Goals for Buy-Side Acquisitions
In many cases, strategic acquisitions can help an agency:
- Increase revenue growth
- Add or enhance strategic capabilities and services
- Expand and diversify client list
- Improve profitability
- Diversity the management / ownership list
- Penetrate new strategic markets / geographies
Narrow Your List of Objectives
Additionally, while you could achieve any of these goals with a buy-side acquisition, it’s important to narrow down the list. This can be based on what your immediate benefit or opportunity would be with a particular acquisition. However, it is unrealistic to expect to achieve all of the items above through an acquisition. You should have a firm (realistic) sense of your objectives and the associated risk/reward.
Prepare Yourself for the Process
Buy-side and sell-side transactions are rarely fast or easy. They may take a considerable amount of time – sometimes as long as a year, depending on negotiations and the process. Transactions also require substantial time and effort from senior leadership. Moreover, if you’re the sole owner, that means you are required to contribute a significant portion of your time to the deal. If you have never acquired an agency before, you should be committed to investing the time to make sure that you see the process through to the end.
If you have a trustworthy M&A advisor who is experienced in agency acquisitions, you have a much higher probability of a successful transaction. Below are several factors to take into account when pursuing a buy-side process:
It’s important to think about the potential valuation of a company you intend to acquire. In general, the smaller the firm, the lower its overall valuation (total dollar amount) and relative valuation (multiple paid) will potentially be.
However, advertising and marketing agencies vary greatly in size, capability, and ultimate value. Quite often, there is a material difference in market valuation on a profit-multiple basis for firms in the $1-2 million, $2-5 million, and $5 million+ EBITDA range. It is best to consider the transaction structure and how much capital you can commit before you start conversations. You will want to have a clear understanding of the valuation range of agencies you might want to pursue. This will ensure that you don’t waste time and resources on conversations that will not come to fruition.
The buying process is typically lengthy and time-consuming. However, it can take less time if you know the company you are acquiring as there wouldn’t be a search involved in the beginning of the process. Many agency owners and management teams who are not familiar with buy-side acquisitions tend to underestimate the time it will take.
There are several things that need to happen before you get too far into the process. First, as a buyer, you need to establish your criteria for buying a firm:
- What type of agency are you looking for?
- How big or small should the agency be? How many employees?
- What services and capabilities should it have?
- Do you want an agency with owners that are willing to stay for a certain period of time? How long?
- What region do you want to look in?
It is critical to have your M&A advisory team conduct initial research and due diligence before you pursue any transaction. Do not move on to formal discussions with a target company before you decide whether the company is an appropriate fit. This may be based on its financial condition, client composition, capabilities, strategic rationale and culture.
Your advisor should be able to place you in a position to make a go or no-go decision after you both have evaluated each of these factors. Active negotiations begin after you have a clear and concise direction in which you’re heading.
There are many different ways to finance a transaction. Some of the more common would include:
- Paying all or a portion of the purchase price with cash on hand
- Utilizing a line of credit from your lender
- A seller note
- Traditional bank financing (acquisition term loan)
- Raising capital / equity from a new partner
There will be a variety of cash flow and debt implications you will experience depending on the structure of the transaction and which of the above options you decide to use. Dealing with these thoughtfully can improve your chances of a successful acquisition while also protecting your own company’s financial footing.
Your M&A advisor should be able to help you understand the full spectrum of financing options available to you from banking and lending institutions, and equity partners.
4. Transaction Structure
It is critical for buyers to put transaction structures in place that appropriately align the goals of the seller’s company with the strategic goals of the buyer’s company. Buyers should make sure that all critical shareholders and stakeholders are incentivized throughout the entire transaction.
As a buyer, you want to offer and negotiate a payout/earnout structure that will protect your investment going forward. For example, you may want to use a profit-driven model based on EBITDA. This can be used to ensure that you and the seller can participate in the upswing of an agency after you acquire it.
Contrarily, you might choose to structure your transaction as an “acqu-ihire” where you hire all of the employees of a firm. Acqui-hires come with a lot of grey area and are typically structured based on the individual needs of the seller and buyer.
Your M&A advisor should be able to advise you of the implications of each structure, as well as discuss what options would be the most optimal to align both parties.
5. Customer Relationships
One of the most valuable things you are acquiring when you buy an agency is the portfolio of clients. You want to make sure that they stay with the business post-transaction is to minimize risk in a transaction. Clients are often amenable to a new owner, as it allows them to access additional capabilities and services. However, in your due diligence process, you may want the seller to confirm that a majority of, if not all, clients won’t have an issue with the seller being acquired. You should also review the full client list and contracts. This is to make sure there are no conflicting relationships or termination clauses based on a change of ownership.
Acquiring a company has several inherent risks: operational, financial, and cultural/organizational. The financial risk can be lessened by the transaction structure, but there are also added costs to integrating the companies. It is also typically advisable to acquire a strong financial company (as opposed to a “fixer-upper”) for your first transaction.
Cultural and organizational risk is just as significant. It is important to find out if your and the seller’s company cultures are compatible in due diligence and throughout the buy-side process. It would be hard to increase profitability if you and the seller cannot get the teams to work together.
Is a Buy-Side Acquisition Right for You?
Not every company is at the stage to acquire another business, and not all transactions are going to work out the way you expect them to.
Your M&A advisor should be able to answer most of the preliminary questions you have about the process, so that you can make an informed decision. If you decide to move forward, you should expect that your M&A advisory team will guide you and be with you every step of the way.
Clare Advisors, a boutique M&A advisory firm focused on digital advertising, marketing, and media companies, can offer valuable help for owners considering buy-side acquisitions.
Looking to make your first buy-side acquisition? Get in touch with Clare Advisors today to learn more.