When it’s time to sell/ buy your marketing, public relations, or advertising agency, you may have prepared your agency for the lengthy process, whether you are buying or selling an agency. However, M&A advisors, legal counsel, and tax advisors that regularly work in the deal space may use language that you are not accustomed to. Additionally, if you are selling your firm that a buyer that has acquired agencies before, they may also use certain terms that you may be expected to know throughout the process.
While your M&A advisor will be lead you through the process and provide insight in every big decision you will make, it may be best to walk into the deal process with a general understanding of the vocabulary that is commonly used in the mergers and acquisitions industry. Here’s a guide on 16 terms you should know when considering an M&A deal.
Are you interested in getting assistance through your M&A deal? Contact Clare Advisors to get professional assistance!
Multiples can be used as an indicator of an agency’s market value. They can vary significantly based on whether it’s a seller’s or buyer’s market, the industry space, the size and growth rate of the agency, and the individual needs of the buyer and seller. Understanding the general range of multiples that can be applied to a seller’s company is important, as it will help an owner compare different offers throughout the process.
An earnout is a provision written into a deal that provides additional contingent payments from a buyer to a seller. An earnout is typically achieved if the required agency meets certain financial milestones in a predetermined timeframe after the acquisition closing.
Not every deal structure will include an earnout, but it is fairly common in the advertising and marketing industry.
Closing is at the end of the transaction process, where both parties sign the purchase and employment agreements to finalize the acquisition or merger. If you decide to make a traditional or limited sale, this may occur after a longer sell-side/ buy-side process (up to a year).
Consideration can encompass everything one can receive as payment. It can consist of the following:
- Cash or equity at closing
- Stub payments (cash or equity)
- Earnout payments (cash or equity)
- Notes or selling financing
The valuation is the process and methodology the buyer uses to determine the value of the agency they want to acquire. Three popular valuation methods include: discounted cash flow analysis, comparable company analysis, and comparable transaction analysis.
6. Discounted Cash Flow Analysis
This methodology is one of the most commonly utilized to determine a company’s Net Present Value (NPV). The model is based on forecasted growth and profitability several years in the future, which are difficult to predict with a high degree of accuracy.
This methodology has several practical limitations. However, a DCF Analysis can be a valuable tool to determine valuation when combined with other common techniques and methods.
7. Comparable Company Analysis
This methodology relies on market valuations of publicly traded companies to help determine the value of a competitive private company. While there are several differences between
private and public company risks (size, liquidity, etc.), applying a discounted range of values can often help determine the spectrum of possible values for a similar competition in the industry.
8. Comparable Transaction Analysis
This methodology utilizes publicly available information (often limited) about the deal characteristics of similar businesses that have been acquired. Typically, the multiples paid in other transactions serve as a good benchmark for the market demand and potential appraisal if the company was sold in a similar third-party transaction.
Are you interested in gaining expert help with your M&A deal? Contact Clare Advisors today to learn how they can help your M&A deal.
9. Due Diligence
Due diligence is the process of investigation and verification that a buyer typically goes through to confirm all the relevant financial, organizational, legal, and operational information that the seller offers or provides. It is essentially a process of ensuring that the buyer knows exactly what they are buying.
10. Pro Forma Financial Statements
Generally speaking, pro forma is a method of calculating financial results using certain projections and adjustments. This typically includes “normalizing” owner compensation and removing non-recurring expenses or other owner benefits. This would illustrate what the financials would look like if owned and operated by the buyer.
11. Descriptive/ Confidential Information Memorandum (CIM)
The goal of a descriptive memorandum is to give any potential buyer the adequate information they would need to evaluate the company, make an investment decision, and submit an offer to purchase the company. It normally includes information like:
- Overview of services and capabilities
- Clients and industries expertise
- Financial summary
- Case studies
- Management biographies
12. Letter of Intent
A letter of intent is a written, non-binding document that outlines the major points of an agreement in principle for the buyer to purchase the seller’s business. It allows the seller to understand the buyer’s intent of purchasing the agency and provides some key points that will be up for negotiation in the deal.
13. Purchase Agreement
The purchase agreement is a legal contract specifying exactly what company assets and liabilities are included or excluded in the sale, the specific deal terms, and the representations each party makes through the transaction.
14. Employment Agreement
An employment agreement usually spells out the employer and employee’s rules, rights, and responsibilities. In some cases, select senior employees besides the owner may receive employment agreements as part of the transaction.
An employment agreement is separate of the purchase agreement. Accordingly, an employment agreement may be in effect for longer than the earnout that is laid out in the purchase agreement. Most of the time, a buyer will want the seller to stay for at least the length of the earnout. Within the marketing, public relations, and advertising industry, the owners will typically stay post-transaction for around three to five years.
15. Working Capital
The capital of a business used for day-to-day operations is calculated as Current Assets minus Current Liabilities. Quite often, it is negotiated and referenced as an average of monthly operating expenses over some time, i.e., one to three months.
16. Management Presentations
Meetings are held in the sale process to allow the buyers to learn more about the company and meet the owner or management (as appropriate). These meetings can also occur before the seller receives an LOI as some buyers may have additional questions to ask before writing up a letter of intent.
Why Should You Choose Clare Advisors?
Clare Advisors is an 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. We can help you no matter the sale or buy type and help you get your agency in the best position for a smooth transaction.
The best time to reach out to an M&A advisor is when you’re getting ready to sell or buy an agency. Having an M&A advisor by your side will help ensure that your agency is properly set up for a transaction and support any challenges that may arise. If you’re interested in getting assistance through your M&A process, we can help.
Are you ready to start your M&A deal? Contact Clare Advisors today to get started!