6 September 2007 - 10:36am | posted by | 0 comments

Fantasy buy-out league

Hottest agencies money can buy

Over the last few months, The Drum has put together a shopping list of the top 20 hottest acquisition prospects outside London. These are the sort of companies The Drum would like to buy if we were in the business of building a marketing group. So how did we go about compiling our list? The first stop was Pembridge Partners – the consultancy that specialises in the advising, selling and buying of creative businesses – where partner Rose Lewis split the dynamics of what makes a company hot into two, covering financial and non-financial.
“The key financial drivers can be summed up as size, gross profit, operating profit, operating margin, staff costs and the ability to generate profits,” she says. “What really makes a company hot is a superior financial performance – such as high growth, high gross profit, reasonable staff costs and good cash flow.”
But different sectors perform at different levels. What might be a hot performance in one branch of the creative industries may be a dead duck elsewhere. “The various sectors are all growing at different rates,” Lewis says. “For example gross profit in digital is growing at around 20 per cent. Behind that is design and PR. The slowest growth is in advertising which is expanding at just nine per cent
“The profit margin is also different for each sector. The worst performing here is design and digital where 15 per cent could be considered good.
“That is due to the fact that the staff costs are higher, they tend to over service clients, and are not able to charge enough – although there is evidence that this is now changing on the digital front.”
But if you are in a hurry to assess a takeover target, some key performance indicators stand out more than most. “The staff/cost equation is key,” says Lewis. “And that is the total staff cost divided by the gross profit. The percentage of revenue to staff cost should be around 56 per cent.
“Operating profit also needs to be growing by anything over 15 per cent. Size is also key. You need to be producing gross profits of around £1m to be considered hot.”
“And when you think that the cost of doing a deal is £100,000, then it is not really worth doing if the gross profit is any less than £1m. WPP for example will not consider doing smaller deals.”
But there is definitely more to a takeover than money. Specialising in niche markets is certainly a way for firms to realise their investment. “Non-financial factors that can define whether or not a company is hot include a strong brand name, good clients, a good team and of course expertise in a specific area,” says Lewis.
“But the bottom line is that if I was looking to sell an ad agency I would make sure it was about digital – even if it wasn’t – because that would improve my multiple.”
Another individual active in the acquisition market in the regions, who asked not to be named, reminds potential buyers: “What companies are paying for when they buy a business is the past – what they are buying is the future.” He goes on to summarise what buyers really, really want as:
ïA sustainable company that shows three to five years’ potential profits
ïSomething that makes the company different, such as a strong niche
ïSuccession management
ïA strong and stable client list
ïA good new business record
And he says that what sellers really, really want is the chance to realise their investment or an opportunity to achieve a step change in their business, as they have perhaps recognised that they will never win global accounts unless they become part of a global business.
So what agencies would our global group comprise? We applied many of the criteria advised by our two experts, but added a healthy dose of gut instinct. We were slightly handicapped in assessing financial performance – many firms only filed abbreviated accounts – but the information in Companies House did give some clue as to overall financial health. With that in mind, here’s our top 20…

1. Elmwood - Jonathon Sands
Type of Accounts: Full
Latest filed: Year ended December 31, 2005
Turnover 2005: £5m Turnover 2004: £4m
Profit 2005: £426,000 Profit 2004: £220,000
Shareholders’ funds: £1.4m
Highest director salary: £131,556
Elmwood is a hot company on every front, passing both the financial and the non-financial tests. The Leeds-based company – already the largest design firm in Australia – now has its sights set on New York. Founder Jonathan Sands, seems to be putting in place a strong succession management structure with the appointment of the capable Nick Ramshaw as the MD of Leeds, and the well-qualified Jo Coomber as the MD in Edinburgh. Last year the company strengthened its board with the appointment of Brian Child and Lord Newby as non-executives. As well as building excellent retail credentials – thanks to contracts with Asda and Walmart – Elmwood has also turned its expertise to developing its own brands such as Builder Tea, a joint venture with Edinburgh-based Chartered Brands. However, we suspect this company would be happier in the role of acquirer rather than acquiree – Elmwood says it is currently on the look-out for a digital firm to buy.

2. BJL - Nicky Unsworth
Type of accounts: Full
Latest filed: Year ended June 30 2006
Turnover 2006: £7.8m Turnover 2005: £6.8m
Profit 2006: £514,000 Profit 2004: £541,000
Shareholders’ funds: £2.3m
Highest director salary: £122,000
As Manchester’s largest independent agency, this business is ripe for acquisition – if the shareholders are in the market to sell. The company certainly ticks all the right boxes from a buyer’s perspective: it has a dynamic management team where MD Nicky Unsworth plays a high-profile part, it has a developing online capability, which saw the agency launch into Second Life, and it boasts one or two well-defined niches including travel, with British Airways and Eurocamp as clients. BJL can also boast an excellent track record as far as finances are concerned.

3. Brahm - Julie Hansen
Type of accounts: Abbreviated
Latest filed: Year ended July 31, 2006
Turnover 2006: £20.6m Turnover 2005: £19.7m
Profit 2006: £560,000 Profit 2004: £530,000
Shareholders’ funds: £2.84m
Highest director salary: £98,514
Brahm, without a doubt, is a strong agency that is moving into the digital age with the recent acquisition of Swamp. But what really sets this business apart is its commitment to its staff. This runs so deeps, its personnel policies even merited a mention on the directors’ report section of the annual accounts: “We are very aware that we are a ‘people’ business, and during the year we continued the development of Brahm Plus and the Brahm University, the people development unit designed to improve the quality of our major asset, to reduce staff turnover and increase productivity. We believe the quality of our people is second to none in the industry, and we will continue to place great emphasis on improved internal communication, involvement and empowerment.” The only real criticism of the business is that in recent times its profile has been relatively low.

4. Magnetic North - Lou Cordwell
Type of accounts: Unaudited abbreviated
Latest filed: Year ended August 31, 2006
Turnover 2006: N/A Turnover 2005: N/A
Profit 2006: N/A Profit 2004: N/A
Shareholders’ funds: £920,000
Highest director salary: N/A
Boring, snoring. Magnetic North is the first of the top 20 that, by dint of size, is not required to file anything approaching full accounts. However, the information available tells us that the Manchester-based agency is definitely doing the business financially, with a healthy balance sheet showing shareholders’ funds approaching the £1million mark. The business also has a superb client list – boasting the likes of Kelloggs, Diesel and Urban Splash – as well as a reputation for doing the sort of tricky, techy stuff that would make Magnetic North an attractive acquisition for any conglomerate looking to bolster its online expertise.

5. newhaven - Jonathan Shinton
Type of accounts: Abbreviated
Latest filed: Year ended September 30, 2006
Turnover 2006: N/A Turnover 2005: N/A
Profit 2006: N/A Profit 2004: N/A
Shareholders’ funds: £322,000
Highest director salary: N/A
There’s something sexy about Newhaven. Everything – from its website, to its office accommodation – seems to spell funky. However, behind the fluff, is a hard-nosed business, one that has recently picked up Scottish Power and the Scottish-end of HBOS. Its latest accounts show shareholders’ funds growing in value from £201,000 last year to £322,000 this time round. And thanks to some recent wins, that growth seems destined to continue. Almost from the outset, Newhaven’s strong executive board was augmented with the appointment of Jim Faulds – of Faulds Advertising fame – as non-executive chairman. You can’t help thinking that if the agency can consolidate its current client base, keep salary costs under control, and continue its winning streak in terms of awards, it will always be high on the shopping list of those wanting to build credibility, as well as large groups.

6. Story - Dave and Sue Mullen
Type of accounts: Abbreviated
Latest filed: Year ended March 31, 2007
Turnover 2006: N/A Turnover 2005: N/A
Profit 2006: N/A Profit 2004: N/A
Shareholders’ funds: £1m
Highest director salary: N/A
Story doesn’t publish it full accounts at Companies House, but the agency is happy enough to talk about them. Last month the company told The Drum Scotland that its turnover for the year was £4.2million and its gross profit was £2.8million, which represents a 10 per cent year-on-year growth. This is an excellent result for an agency that is still relatively low profile. Launched by founders Dave and Sue Mullen, it initially plied its trade as a direct marketing house, but has successfully repositioned itself as through-the-line, handling, accounts such as Scottish and Southern Energy, Kronenbourg and Glenmorangie. All this makes Story an ideal acquisition for any above-the-line agency looking to boost its integrated credentials.

7. Frame - Graeme Atha
Type of accounts: Abbreviated
Latest filed: Year ended July 31, 2006
Turnover 2006: NA Turnover 2005: N/A
Profit 2006: N/A Profit 2004: N/A
Shareholders’ funds: £344,000
Highest director salary: N/A
This Glasgow-based agency was struck with tragedy when its founder and sole shareholder Alan Frame died suddenly at the age of 44. However, he left behind a particularly strong business with a client list that includes Subway and Bulmers. Also in place was a capable management team that included Graeme Atha on business development, George Cumming on finance and Angus Walker on the creative front. Despite the fact that Frame died intestate – and ownership issues relating to the agency have yet to be resolved – other high-profile directors have joined the business, including Gary O’Donnell, former MD of TBWA in Edinburgh. This business seems to meet all the criteria in terms of being a hot prospect. And, unlike many of the firms on our list, it is really a question of when – not if – this business will come on the market.

8. Rees Bradley Hepburn - Tim Rees
Type of accounts: Abbreviated
Latest filed: Year to December 31, 2006
Turnover 2006: £15.4m Turnover 2005: £17.5m
Profit 2006: £302,000 Profit 2005: £418,000
Shareholders’ funds: £194,000
Highest director salary: £207,000
This is a profitable, solid business with a loyal client base that includes Jaguar, Landrover and TNT – so profitable and so solid, in fact, that it managed to pay its three shareholders – Tim Rees, Debra Hepburn and Ian Bradley – a £1.5million dividend last year, which they used to acquire a new building that will house their 140 staff from 2009. However, if you mention their name anywhere outside their Midlands stomping ground, you are normally met with a resounding: “Who?” Their low profile does not change the fact that they would be an attractive acquisition – but it may hurt the multiple – as will the fact that the business has seen its turnover decline year-on-year.

9. Union - Ian McAteer
Type of accounts: Abbreviated
Latest filed: Year to May 4, 2007
Turnover 2006: N/A Turnover 2005: N/A
Profit 2006: N/A Profit 2005: N/A
Shareholders’ funds: £303,000
Highest director salary: N/A
Anybody seriously looking at buying into Scotland would look here first. The Union was named the Scottish Advertising Agency of the Year and is also seen as one of the country’s most creative – with strong performances in both the Roses and the Scottish Advertising Awards. Originally a break-away from Faulds, The Union has never had the success many people feel it deserves, despite being a particularly well-run company. This might be more down to the tough Scottish marketing market than anything else – which perhaps explains why The Union opened in Leeds several years ago. It has also successfully diversified to bolster its integrated offering and is strong on the digital, direct and sales promotions front. One weakness might be its succession management. Who is the next Ian McAteer? It may have many talented people, but perhaps their profiles are too low.

10. Brilliant - Steve Lane
Type of accounts: Full
Latest filed: Year to March 31, 2006
Turnover 2006: £118m Turnover 2005: £108m
Profit 2006: £1.5m Profit 2005: £538,000
Shareholders’ funds: £303,000
Highest director salary: £1m
Brilliant is a complex proposition. At face value, its turnover and the fact that it is one of the few independent media independents left makes it a very attractive proposition. However, a substantial proportion of Brilliant’s turnover is down to one client, DFS, which is now the largest advertiser on ITV. No doubt the highest paid director – thought to be Steve Lane – justifies his remuneration on the grounds that he was very much responsible for the success of this account. However, potential buyers would prefer that the business was not so dependent on one client. Nevertheless, Brilliant also has a strong team – including a large board – and some excellent clients such as Subaru, Asda and Co-op. But how likely is it to come on the market any time soon? As things stand, the directors look as though they would earn more by running the business themselves, rather than selling out.

11. Principles - Chris Goodwin
Type of accounts: Full
Latest filed: Year to March 31, 2006
Turnover 2006: £14.6m Turnover 2005: £12.6m
Profit 2006: £559,000 Profit 2005: £275,000
Shareholders’ funds: £935,000
Highest director salary: £182,000
Principles is a strong, consistent performer with a loyal client list which includes JD Williams, Dolland & Aitchison, George Foreman Grills and Halewood. Both turnover and profit growth are impressive – no doubt the company’s bottom line has been helped by the fact that it retained its own media-buying department. However, its profile is low and it never quite regained the visibility it had when Phil Hesketh was active on the new business front. The agency might argue this does not affect the day-to-day running of the business, but a low profile doesn’t help when negotiating price with potential buyers.

12. Code - Tony Foggett
Type of accounts: Abbreviated
Latest filed: Year to December 31, 2006
Turnover 2006: N/A Turnover 2005: N/A
Profit 2006: N/A Profit 2005: N/A
Shareholders’ funds: £370,000
Highest director salary: N/A
With clients such as Huggies, HMV, Umbro and Brother, Code Computerlove is one of Manchester's top digital businesses. The fact that the interior of its new offices was nominated for a Roses Design Awards suggests that quality design is very much part of the agency’s culture. Its shareholder fund figure has fallen from £478,000 last year to £370,000 this time round, but this could be down to a number of factors, such as the office move or increased salaries. There is certainly no evidence that its stream of new business is drying up.

13 Propaganda - Julian Kynaston
Type of accounts: Abbreviated
Latest filed: Year to April 30, 2006
Turnover 2006/gross profit: £4.5m
Turnover/gross profit 2005: £5m
Profit 2006: £642,000 Profit 2005: £914,000
Shareholders’ funds: £1.5m
Highest director salary: £195,000
Propaganda may be a controversial inclusion in this list. In recent times it has lost two major accounts – GHD and Foxes Biscuits – but it remains a driven business and has a strong succession strategy in place following a partial management buy-out last year. The agency aims to position itself as a management consultancy as opposed to a marketing agency which, in theory at least, makes sense, but it still needs to prove this can deliver real growth. However, anybody who writes this business off would be underestimating the determination of its founder Julian Kynaston and the strength of its balance sheet. And even as things stand, Propaganda would be an attractive proposition to some.

14. Whitespace - Don Galloway
Type of accounts: Abbreviated
Latest filed: Year to September 30, 2006
Turnover 2006: N/A Turnover 2005: N/A
Profit 2006: N/A Profit 2005: N/A
Shareholders’ funds: £340,000
Highest director salary: N/A
Edinburgh-based Whitespace is celebrates its 10th anniversary this year. It has now has a team of 22 and a client list that includes NHS Scotland, Scottish Executive and Jerzees. What sets this business apart from the pack is its genuinely integrated offering – it really is perceived as an online company you would trust to do corporate identity and a design company you would trust to do online.

15. 999 design - Richard Bissland
Type of accounts: Abbreviated
Latest filed: Year to April 30, 2006
Turnover 2006: N/A Turnover 2005: N/A
Profit 2006: N/A Profit 2005: N/A
Shareholders’ funds: £547,000
Highest director salary: N/A
Launched in Glasgow 25 years ago this autumn, 999 Design now has offices in Manchester and London and has built a client list that includes the BBC, BT, COI and Reebok. With around 40 staff, the agency has a track record of building up an enduring relationship with clients. Said its entry into the 2005 edition of the Recommended Agency Guide: “In an industry where longevity is often measured using the secondhand, we know we are doing something right when so many of our clients stay with us for so many years.” Until recently you may have criticised its founders Richard Bissland and Bill Gaughan for failing to have put in place a successful succession management strategy. However, they have made strides in the right direction with appointments such as that of Gavin Clarke to head the Glasgow office and Andy Helme to run Manchester. The company has also been keen to build its profile. If the founders are looking to exit in the medium term, they are now doing all the right things.

16. Checkland Kindleysides
Type of accounts: Abbreviated
Latest filed: Year to April 30 2006
Gross profit 2006: £2.6m
Gross profit 2005: £2.6m
Profit 2006: £210,000 Profit 2005: £320,000
Shareholders’ funds: £1.3m
Highest director salary: £434,000
Checkland Kindleysides launched 27 years ago and is seen as being one of the best design firms in the Midlands. Its 80-odd staff has a track record for delivering an integrated offering, that includes interior design, and being able to operate on a global basis. Clients include Sony Erickson, Bentley and Levis, which the company famously designed a San Francisco flagship store for. More recently the Checkland of Checkland Kindleysides retired, and sold his shares back to the firm for £1million.

17. Equator
Type of accounts: Abbreviated
Latest filed: Year to October 31, 2005
Turnover 2006: N/A Turnover 2005: N/A
Profit 2006: N/A Profit 2005: N/A
Shareholders’ funds: £223,000
Highest director salary: N/A
Equator was one of Scotland’s first dedicated digital agencies and has built up an impressive list of UK clients that includes Club 18-30, EasyMobile and Accor Hotels. It very much positions itself as specialising in the business-to-business arena, a strategy that appears to be paying dividends. It is also well regarded in the online community for its e-commerce work. Equator has already been the subject of takeover rumours – although they were resoundingly denied by MD John McLiesh.

18. Different - Ben Quigley
Type of accounts: Abbreviated
Latest filed: Year to February 28, 2007
Turnover 2006: N/A Turnover 2005: N/A
Profit 2006: N/A Profit 2005: N/A
Shareholders’ funds: £608,000
Highest director salary: N/A
Based in Newcastle Different positions itself as an ‘ideas’ consultancy. But unlike most agencies, it seems to be actually living the proposition. As well as acting for clients such as SAGE, Tefal, Ariel and Tommee Tippee, the agency has also made several TV programmes for ITV, Channel 4 and Five, including Harry and the Hormones which starred Sean Hughes. As a result, Different seems well placed to develop the expanding advertising-funded programme opportunities which are now materialising. This makes it an attractive proposition for groups looking to buy in that form of expertise too.

19. Robson Brown - Alan Brown
Type of accounts: Full
Latest filed: Year to February 28, 2006
Turnover 2006: £23.7m Turnover 2005: £27.6m
Profit 2006: £73,000 Profit 2005: £458,000
Shareholders’ funds: £2.4m
Highest director salary: £129k
Robson Brown does not fit the financial criteria for being a ‘hot’ company. Profits and turnover are down (once tax is taken into account, the agency made a loss in 2006), but the balance sheet remains strong and it has a fantastic client list that includes Flymo, Bellway, Sealey and Malmaison. The agency has offices in Manchester, London and Newcastle, and employs 120 staff, making it the largest independent outside of London. It can’t be long before the founding directors start thinking of an exit.

20. Unit - David Wilkinson
Type of accounts: Abbreviated
Latest filed: Year to May 31, 2006
Turnover 2006: N/A Gross Profit 2005: N/A
Profit 2006: N/A Profit 2005: N/A
Shareholders’ funds: £462,000
Highest director salary: N/A
Unit Communications has been part of the Manchester landscape for as long as most can remember. Now headed by David Wilkinson, the focus on the leisure market might make it an attractive acquisition. Clients include The Lowry, Stagecoach and the Royal Exchange Theatre, and Unit has experience in the arts, travel and accommodation markets. As well as offering creative services, it also has a media-buying side which continues to flourish partly because of its focus on this niche.

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