To gain an edge over their competitors, organizations may merge with or acquire one another to combine forces, assets, and market shares. It is the classic “one plus one equals three,” where two agencies that are doing fine on their own right now have the ability to do even better upon integration and cross-selling opportunities.
Thinking of expanding your business through a merger or acquisition? If so, reach out and contact Clare Advisors today!
Why Consider a Merger and Acquisition?
As an organization, you may want to sell, acquire, or merge for a variety of reasons. Depending on your own business goals and the market climate, M&A provides many benefits to the owner(s), employees, and clients, such as:
- Additional revenue opportunities
- Employee growth and development
- Agency support
- Attractive exit opportunities for the owner(s)
- Opportunities to provide new services or capabilities
We have outlined eight benefits of mergers and acquisitions.
1. Reducing Financial Risk
In many cases, there is a closing payment that the seller realizes once the transaction is complete. Additionally, the seller will also often receive an additional contingent payment(s) if/or when the agency meets certain financial milestones in a predetermined timeframe after closing. With earnout payments, a seller has the potential to maximize their overall transaction consideration for the sale of their business. This structure allows a seller to take some financial risk off the table, while still participating in the growth of the agency.
2. Having an Exit plan
An exit strategy is essential for owners, especially if you’re looking forward to retirement or intend to eventually exit the agency. Selling the agency and staying in an earnout can give a seller the opportunity to phase out of the leadership role before exiting completely. It is important to note that most agency owners go through an earnout period of between 3-5 years in the marketing and advertising industry.
Depending on the transaction and the buyer, a seller may collect all of the transaction consideration at closing or in guaranteed payments, and step away from the business entirely. However, this tends to be a rare occurrence as buyers usually want to have confidence in the business running smoothly and growing beyond the point when a business owner transitions out. Accordingly, a seller normally gets some cash at closing and the rest through an earnout.
In some cases, if a seller is sure about wanting a shorter earnout or employment period, the buyer may decrease the valuation or payment at closing in exchange for a shorter earnout.
3. Bringing in New Clients
Generally speaking, when it comes to getting a job done, two heads are often better than one. If an agency owner sells to a larger organization, the parent company typically offers resources and human capital to help with client or agency work (to a certain extent). As a seller, you’ll likely have more opportunities to target different consumer groups and/or go out and attract bigger clients that you otherwise would not have been able to as a sole owner/operator.
With the support of a larger overall team, you also have the bandwidth to pursue larger client/revenue opportunities.
4. Cross-selling Capabilities
Cross-selling capabilities highlight the “one plus one equals three” statement mentioned earlier. If a buyer acquires an agency for a particular capability, they may now offer that capability for their current clients – expanding their capabilities offering to their current clients. Similarly, the seller may now offer new capabilities/services to its clients under the umbrella of the parent organization.
This can also tie into the seller’s earnout, where if the seller brings clients to the parent organization, the seller may receive a bonus or percentage of revenue received by the buyer in connection to the client won/brought by the seller.
5. Reducing Operational & Administrative Workload
As a seller, you may like to take a step back from operational and/or administrative tasks. In addition, as a buyer, you could help increase growth for the overall bottom line.
For example, to reduce unnecessary operational expenses under the new ownership, the buyer may take over the following tasks typically handled by the seller.
- Human Resources
- Certain operational responsibilities
This typically frees up the seller to focus more on business development or other roles (from wearing many hats to a “chosen” hat). Additionally, since the agency owner’s attention is more focused on biz dev or other chosen roles, there is more opportunity for increased revenue as the operational expenses decrease.
Your overall revenue growth may increase significantly with the parent company’s support. If the parent company also handles accounting, HR, and admin going forward, your expenses may decrease, which in turn increases your earnings before interest, taxes, depreciation, and amortization (EBITDA), thus potentially increasing your earnout payments.
6. Creating More Opportunities for Employees
No matter the size of your company, there are only so many jobs to go around. And within a smaller agency, there are only so many roles an employee may be given before there isn’t enough revenue, client work, or breadth of agency capabilities to foster more growth.
Once a business is acquired, given the potential increase in revenue and work opportunities with bigger clients, your employees may see much more of an opportunity to “move up” within the company as it expands. A few examples of this are:
- Delegating specific tasks to other departments
- Developing a new department
- Creating new employee roles (and expanded responsibilities)
- Giving employees the option to cross-train
For example, what may have been just one person working on social media and one person working on digital design in a small agency could mean entire departments within the parent company.
7. Increased Access to Talent
Under the parent company, if you win a new client and/or need access to more people and talent, the buyer may provide you with relevant employees from the appropriate departments to assist in performing new client work.
8. Alternative to Shutting Down
If an agency owner wants to step out of the business, they can do so without firing everyone, and receive consideration in the agency’s upside at the same time (assuming a 3-5 year earnout period). There are additional costs/steps an agency owner would need to consider when shutting down a business:
- If there is more than one owner, all owners must agree to dissolve the entity
- Filing dissolution documents
- If you fail to legally dissolve your business entity with any state you’re registered in, you may still be exposed to continued taxes and filing requirements.
- Canceling registrations, permits, licenses, and business names.
- Complying with federal and state employment and labor laws when laying off employees.
- Resolving financial obligations
- Handling final tax returns
- Canceling the Employer Identification Number
- Closing the IRS business account
- Notifying federal and state tax agencies
- Keeping the appropriate and necessary business records
How Can a Financial Advisor Help?
If you’re considering selling your agency, merging, or acquiring a business, reaching out to an M&A advisory firm is perhaps going to be your best decision for the entire process.
With expert advice from Clare Advisors, if you’re looking to make a merger or acquisition, our team provides the best advisory services throughout every step of the process. And with decades of expertise and experience, you’re sure to get the advice you need and the results you want.
Are you ready to get expert advice to help you with a merger or acquisition? If so, reach out and contact Clare Advisors today!