Are you considering selling your firm but don’t quite know how to go about it? Would you like to know more? If so, Clare Advisors is here to help. In the following article, you can discover the basics of the sell-side process. Then, our M&A advisor team can help you reach your goals.
Would you like assistance with selling your firm? Then, contact Clare Advisors to start the process.
Prior to Selling
Before you begin the selling process, you need to give it some thought. This will set you on the right path should you decide to sell. Consider the following before you determine whether to sell.
Is It the Right Time to Sell?
Mergers and acquisitions generally happen in every season in every year. However, to get the best results, it is best to choose the time wisely. For example, ideally, your agency would typically need to have the most revenue momentum when you sell.
In addition, you should consider how many more years you are willing to stay in your business. In many deals, the buyer requires an earnout. That is, the buyer expects the owner to stay fully employed and transition the business over an agreed upon period, often several years. Accordingly, the optimal time to sell is often three to five years before you plan to exit the business.
You also want to consider the current market and where it is trending. Interest rates will likely rise soon, which makes right now an ideal time to sell before it becomes more expensive for buyers that plan to finance their acquisition with debt.
Right now, many agency owners have excess cash and working capital on the balance sheet and may find 2022 as a good year to both de-risk and distribute, as opposed to re-invest the capital in the business.
Total Purchase Price
The total purchase price consideration may very well be the most hotly contested negotiation point between the buyers and sellers. Therefore, you should consider your price goals before you begin.
Keep in mind that you may not receive the total purchase price at closing. Instead, what often happens is that the buyers prefer or require an earnout structure in the deal. Earnouts are beneficial to the buyer because they reduce some of the financial and operational risks of acquiring an agency. They can also be beneficial to the seller because an earnout allows the seller to use and capitalize on resources of the buyer.
Beginning the sale process at the right time for you helps you get the best outcome. However, you also need to consider the timing of the transaction.
In 2021, M&A advisors saw a huge year for deals. 2022 also promises to be nearly as big for several reasons. First, with the expected hike in interest rates, agency owners wanting to sell will want to complete a sale before the rates start increasing. Long-term capital gains tax may possibly increase as well.
Because the M&A process can take anywhere from six to twelve months, beginning the process now makes the most sense if you want to have a transaction completed by the end of the year.
What Is the Ideal Kind of Sale Process for My Agency?
As you are thinking about selling, you need to consider what type of sale process would be ideal. There are three main types of processes, and each might may be ideal for different situations, depending on the wants and needs of the buyer and seller.
Traditional Sale Process
In the traditional sale process, your M&A advisor contacts a full universe of potential buyers for the company. Typically, we reach out to 30 or more possible buyers. The traditional process is highly structured. Read on to get a glimpse of the four-part process.
Be aware that the traditional process often takes up to 12 months, depending on the number of potential buyers as well as their unique circumstances.
Limited Sale Process
A limited sale process is similar to a traditional process, but with your merger and acquisition consultant talking to about five to ten potential buyers. Like the traditional process, it fosters competition, but it is not as structured and does not require as many resources on your end.
Exclusive Negotiation Sale Process
An exclusive negotiation sale process is highly customized to meet the needs of both the seller and one buyer. The structure is usually less disruptive to your business and can be completed much faster than the other processes. In these types of transactions, the buyer and seller may already know each other.
Choosing the right sale process can make an incredible difference in your results. If you are unsure about which sale process to choose, talk to your M&A advisor to gain insight before you choose.
The Traditional Sale Process
The traditional sale process, a commonly used sell-side M&A process, is made up of four phases.
Phase 1: Drafting and Outreach
The drafting and outreach phase begins with compiling a list of strategic buyers. The M&A team will perform research on roughly 30 ideal candidates. At the same time, your M&A advisor will start drafting a descriptive memorandum, which contains information about the company that buyers would find relevant in their decision-making process regarding whether they want to pursue a conversation or not.
The M&A firm will contact potential buyers and negotiate confidentiality agreements with them. Once contact is made and the descriptive memorandums are sent out, the M&A firm starts answering preliminary questions potential buyers may have before soliciting and receiving preliminary indications of interest by a set deadline.
Finally, you select the best candidates and invite them to continue into Phase 2 of the process.
Phase 2: Bid Process
Phase 2 of the traditional process is a busy time. During this phase, your merger and acquisition consultant will assist you in receiving bids. You will start conducting management meetings with the buyers who expressed their interest in Phase 1.
At this point, preliminary due diligence begins, where the seller starts to populate the data room with information about their agency for the buyers to review.
Near the end of the bid process, the M&A advisor will begin to receive final offers (letters of intent) from interested parties. Once all the final offers are received, the M&A team puts together an offer comparison that shows how each offer component compares to others.
Finally, you make your selection, choosing the winning bid that best suits your and your agency’s needs.
Phase 3: Contract Review and Due Diligence
In the contract review and due diligence phase, you and your M&A advisor are only working with one buyer and prepare to review and negotiate contracts as well as go through due diligence. First, you receive the Asset Purchase Agreement and negotiate changes you might want to make. If additional contracts are part of the deal, such as an employment agreement, you negotiate those contracts at this time as well.
Simultaneously, as a part of due diligence, the buyer is given access to all of the information in your data room to ensure the financial and legal aspects of the agency are all in order. The due diligence process often covers everything the buyer will ever need to know to successfully operate your business post-transaction.
Phase 4: Closing
During this phase, you satisfy any closing considerations or other requirements. You and the buyer finalize any schedules included as a part of the purchase agreement and sign the purchase agreement. Now, the sale process is completed. However, you will likely have one more element to complete as part of the overall deal, which is the earnout.
Earnout After the Sale
An earnout is typically very important to the buyer from a risk perspective. Accordingly, many buyers will require an earnout as a condition of the sale.
What is an earnout? It is a provision that allows the sellers to realize the fullest and most valuable consideration for their agency. To be specific, an earnout is an additional payment(s) that the seller can earn after the initial closing payment. The consideration earned during an earnout period depends on how profitable the acquired agency is after the deal closes.
One of the most common types of earnouts is a profit-driven earnout. This EBITDA-based earnout typically requires a seller to reach certain milestones or profitability to receive any payments. Due to the flexible nature of an EBITDA-based earnout, buyers and sellers can work closely to align their needs in a manner that allows both parties to participate in the upswing of agency post-closing.
The earnout term may vary depending on the individual needs of the buyer and seller and how those needs are aligned. Depending on the presence of a strong senior management team, the owner’s involvement in the daily operations of the business, and client relationships, buyers may want a longer or shorter earnout period. In most cases, the earnout period for an agency in the marketing and advertising industry is between three and five years.
M&A Advisory Services for Your Agency Sale
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. Clare Advisors is an M&A advisor with decades of experience in mergers and acquisitions in the marketing and advertising industry. Our team provides M&A advisory services before you begin the sale process and through every phase of the sale.
With our service-oriented boutique mergers and acquisitions advisor team informing, guiding, and assisting you, the sell-side M&A process becomes easier and more effective for getting the results you hope to achieve.
Are you searching for an M&A advisor to assist you in selling your agency? If so, contact Clare Advisors for exceptional sell-side advisory services.