When considering selling your business, you often think about how to prepare your company for long-term success. Whether you’re interested in selling your business internally or to a third party or retiring from it, it is generally ideal to sell your company when it is profitable to look as attractive as possible to potential buyers.
However, some businesses may hit a difficult period where they lost a major client one year or budgets were reduced and the agency’s profitability was greatly reduced. Outside forces such as an economic downturn or a pandemic may also be the reason for the decline in profitability of a business.
Here’s a guide on why your business could be unprofitable and how that may affect your sale prospects.
Are you interested in getting help from a merger and acquisition advisor? Contact Clare Advisors today to see how we can help you!
Why Would a Buyer Not Want an Unprofitable Business?
When business owners want to sell their companies, many likely imagine selling a financially profitable agency. That is not always the case, seeing as the market, clients, businesses, and economies go through cycles, and sometimes the business or owner is not as profitable at a point in the cycle.
It is easy to understand why a potential buyer would want an already profitable business that is already set up for an even more lucrative future. Buyers do not typically want to buy unprofitable companies as the acquisition carries more financial risk and potential harm to their own profitability. However, some buyers may see a business’s strategic value and be willing to invest their time and money into it to make it grow in revenue and profit.
If someone is willing to purchase an agency that is not making a profit, they are not likely to acquire it at a premium value. The buyer’s acquisition multiple and overall agency valuation would reflect whatever issues the agency may have – whether it is a high burn rate or an inefficient operational structure.
Owners wanting to sell an unprofitable business may have to also accept a lower sum of money at closing and realize their consideration through an earnout, as buyers want to de-risk the deal as much as possible. For a business that is not currently profitable, the buyer paying less up front and more in the earnout means there is less financial risk that the business won’t return to profitability and they wouldn’t get a return on their investment. Additionally, when buyers offer more of the overall purchase consideration in the earnout, both the buyer and the seller benefit more if the seller grows in revenue and profitability after the acquisition.
Why Is An Agency Unprofitable?
Many factors can affect a business’s profitability. Some owners may see that their business takes time to get up and running before seeing a profit. Others may have been profitable for years and experiencing a downturn at the moment. Below are a few reasons why a business owner may not be seeing a profit:
- Decreasing or stagnant revenue paired with increasing costs (personnel, general and admin, sales and marketing, rent and utilities)
- Cyclical revenue
- Owners do not track hours or employee utilization
- Inflated expenses that could or should be cut down
- A big client project that may have required more employees/hours than normal. Once that is over, there are extra employees without the work to give them
- Unforeseen macro events, such as a pandemic. Many marketing and advertising agencies had difficulties making a profit in 2020 at the height of the pandemic.
Analyzing financial and operational reports can often help indicate what is and is not working for the business. This can help business owners analyze which costs they can cut and which products/services/clients are making them money.
Are you interested in how you can find buyers for your business? If so, contact Clare Advisors to learn more!
How Can You Sell Your Unprofitable Business?
So, what if you want to sell your agency when it is not profitable at the moment? There are some ways you can show your company’s potential even when you’re not making a profit.
Buyers sometimes want to acquire an agency for the potential your business has. This can mean highlighting why your products/services/team/clients are unique and valuable. This can also include showing how your business can adapt to changes that would make the business profitable, like operational changes that the buyer may think will help the agency after the acquisition. Additionally, if an owner has a salary that is higher than market value, it can be normalized for the future, thus showing a higher EBITDA and margin.
Your future earnout payments may also depend on how much revenue or profit (EBITDA) your agency realizes once it is acquired. Earnout payments tend to look better when there is both an increase in revenue and profit. So, if the buyer has a plan to restructure the agency’s operations/procedures, the seller may benefit a lot more in the earnout process if the restructuring increases the profit margins.
Some ways that you can increase your agency’s value:
- Increasing your revenue stream by offering new services or gaining new clients
- Switching project clients into retainer clients
- Cultivating a team that can operate without the day-to-day support from you
Something to remember is that much like other sale transactions, you will need to put a lot of time and effort into the process. This can include staying around for an average of three to five years post-closing to help increase business profitability. Depending on a buyer’s level of risk aversion and what they are looking for, they may want a longer earnout period to ensure both parties benefit from the acquisition.
So, yes, you can sell an unprofitable agency, but you are likely to give up more purchase consideration than you would have in your agency was profitable.
How Can Clare Advisors Help You?
The best time to reach out to M&A advisory firms about selling your agency is when you are beginning to consider the sale. From there, you can get expert advice from the outset. If your business is struggling to make a profit that would attract buyers, we can help advise you on how to make your business more appealing.
Clare Advisors is a boutique M&A advisory firm with decades of experience in mergers and acquisitions in the marketing and advertising industry. Our team provides M&A advisory services through every step of the process.
With our service-oriented mergers and acquisitions advisor team informing, guiding, and assisting you, the sell-side M&A process is easier and more effective for getting the results you’re looking for.
Are you ready to get expert advice to help sell your business? If so, contact Clare Advisors today!