There are a few elements to consider if you are interesting in purchasing an established business. Does the target agency have issues with cash flow, client retention, revenue concentration, or profitability? In every transaction, regardless of the target agency, there is always some level of financial, operational, and industry / economic risk. Accordingly, buyers tend look for strategic acquisition targets that both maximize the potential return on the investment and minimize as much of the transaction risk as possible. Ideally, an acquisition target runs like a well-oiled machine, generates profit, has low revenue concentration, and shows growth in revenue and margin going forward. However, few firms can meet these standards consistently on their own.
Many agency owners sell when they need additional support and resources to continue running the agency and maintain / grow it in the future. Once an agency gets to a certain size, it is difficult for the average agency owner(s) to scale individually / to address the following:
- Issues brought forward by employees
- Recruit new employees
- Business development
- Strategic planning
- Ongoing operational needs
In this blog, we will detail a few reasons a buyer could potentially acquire a declining and / or unprofitable business.
Do you need advice or help in determining if a business is worth purchasing? Contact Clare Advisors today to see how our professional team can help you understand the risks and benefits of purchasing a declining business.
Should You Buy a Declining Business?
Buying a business that is currently unprofitable may seem like a significant financial risk for you and your company. However, depending on what your agency’s needs are, there are a few reasons why acquiring an unprofitable agency might be worth the overall risk.
New Industry or Capability
If a buyer is interested in an agency that is currently unprofitable and/or has other issues but also has a specific capability that the buyer would like to offer to their current or future clients, a transaction could be an efficient way for the buyer to immediately add those services and capabilities. Additionally, a target agency could potentially do work in a niche or growing industry that the buyer may want to expand. Instead of the buyer having to take the time and effort to work their way to get the industry expertise and clients they want, an acquisition would give them an immediate presence through the acquired agency.
Existing Client Base
An established business will already have an existing client base and brand awareness that has been developed over time. If a buyer is interested in certain (or all) clients of a declining agency, it is possible to acquire the agency for the existing client relationships. If the clients are in an industry you would like to expand to or are already within your industry expertise but don’t do work with, it may be easier to acquire an agency that already has those relationships (instead of responding to RFP’s or pursuing the clients through your own outreach). However, you should make note of whether the clients you are interested in doing work for are comfortable and/or accepting of you acquiring the agency they are currently working with. Some clients may not want to work with a different agency. There should be a cohesive plan between the buyer and seller on how to transition clients as part of the sale, and minimize client defection. The earnout period will give you time to develop your own relationships with the clients as well.
According to new research from WFA and MediaSense, “Nearly half (48%) of all advertisers, agencies, ad tech companies and media owners think the industry is facing its ‘worst-ever crisis’ when it comes to talent.” If agencies are having difficulty finding talent for specific capabilities or industries, they can acqui-hire, buying out a business primarily for the skills and expertise of the staff. The acquired staff may have more opportunities for growth and development within a larger organization, and the buyer does not need to go out and recruit new employees.
Lower Investment Price
A closing multiple is generally based upon an average of the last two or three years of EBITDA or trailing twelve months EBITDA. Accordingly, if an agency’s EBITDA (profitability) is low and/or has been low, the closing valuation may be lower than what it would have been if the target agency had been growing, for example. To minimize the financial and operational risk for the buyer, as well as maximize the transaction value for the seller of a declining or unprofitable agency, oftentimes, much of the overall transaction value is weighted more heavily on the earnout portion. In doing so, the buyer does not have pay a significant portion at closing for an agency that could, potentially, decline over the earnout period. If the acquired agency increases revenue and EBITDA over the earnout period, then both the buyer and the seller benefit from the acquired agency’s increased profitability.
In some cases, rather than valuing an agency owner’s agency on a multiple of EBITDA, a buyer can instead offer the seller a percentage of revenue or EBITDA going forward (which may be subject to thresholds or requirements).
How Can an Advisor Help With the Acquisition of a Declining Business?
Navigating the sale of a business in decline can be a tricky process. But working with a financial advisor that specializes in acquisitions can be one of the best investments you can make during the deal. Experienced acquisition advisors can check the temperature of the failing businesses for you and help you to determine whether the risk is worth it.
Clare Advisors has been providing help with business acquisitions for decades in the marketing and advertising industry. The experienced professionals at Clare Advisors can help walk you through every step of the process if you’re looking to acquire a business – from doing preliminary research and assessing financials to helping with due diligence and negotiating the agreements.
Are you ready to get help assessing your business purchase? Contact Clare Advisors today to see how our professional team can help you get the best deal on purchasing a business.