Don’t exit, accelerate: how independent mindsets will change the M&A landscape

We are also seeing a change in behaviour of those at the helm of these businesses – leaders who are willing to consider alternatives to the traditional exit story of selling their independent agency to the usual suspects. They don’t just want a buyer. They want the right buyer.

This expanding buyer pool is nothing new – it’s well-trodden ground to speak about ‘new entrants’ in the form of management consultancies, technology firms or publishers. But very little attention has been given to the increasing depth of the larger buyer pool, and the impact it’s having on the industry.

What does this new breed of leader look for?

Traditionally, if you asked an independent agency founder ‘At what point did you decide to sell?’, almost all of them would respond: ‘Once we cleared the basic buyer hurdles.’ The £10 million revenue mark. Amassing £1 million EBITDA. All are financial goalposts that clearly state, ‘You’ve made your money, now exit.’

This outcome was probably born from years of turbulence that usually comes with agency ownership. As a result, they’ll likely only have a couple of years ‘left in the tank’. Let’s call it three – basically, the length of an earn-out.

For this reason, the word ‘sale’ has become synonymous with ‘exit’. Founders strive to maintain independence as long as possible before selling, completing an earn-out, then leaving. The brave sometimes repeat the cycle.

But now we’re seeing more entrepreneurs wanting to scale their businesses at pace and explore all of the various avenues open to them – and these leaders are here to stay. While parallels with millennials are undoubtedly overdone these days, it’s true to say that the common characteristics of the emerging leader tend to mirror this cohort: 44% of up-and-coming millennial leaders intend to run their companies for longer than their older counterparts (29%). This is an entire generation of entrepreneurs who want to grow their businesses to scale fast, and keep growing without compromising their vision.

This shift in focus, from a sale to long-term growth, means leaders are now looking beyond the numbers in an offer, giving more attention to the qualitative measures. A strong cultural fit has always been given lip-service as part of M&A activity, but now it’s essential. What we’re talking about here runs deeper than a few words on a term sheet – it’s a genuine alignment. So what exactly does this amount to?

Firstly, a suitor with a clear strategic need: a gap in their existing business model for the independent to fill or enhance.

Secondly, shared vision, values and behaviours: not all businesses will seamlessly slot together on day one, but with shared values and behaviours, these gaps can be easily bridged.

Thirdly, a deal structure that fits the bill: something that retains alignment and incentivises cohesive behaviour from both sides.

When done correctly, these new leaders can benefit from the above when joining up with a larger organisation – an elevated platform, improved back-office functionality, global reach and client access, being just a few of the upsides. But the independent ambition of accelerating long-term growth still remains – it’s not just about sprinting to the finish line.

The seller is now brought into a new growth story that focuses on this enhanced, combined offering: an exciting proposition for many. The emergence of newer, smaller groups of buyers offers independent leaders even more options, depending on how far down their growth plan they are. Even if it means a lower day one ‘cash-out’, that doesn’t matter – in these instances, both parties increase respective growth potential from collaboration alone.

What impact does a deeper buyer pool have on the market?

Buyers need to be conscious of their approach to M&A. Those with rigid investment criteria and deal structures will likely lose out in the long run – they require a strong emotional quotient and a genuine desire to make the transaction work. Waypoint’s deal with Oliver Wyman and its acquisition of digital transformation agency Draw is a case in point. It successfully merged two different worlds – consulting and creative technology – through dedication and bridging the process and culture gaps.

That’s not to say the usual suitors have no place at 2018’s M&A negotiating table. They do, and there’s still much to gain on both sides. Acquired agencies can play a vital role in enhancing the capabilities and talent pool for buyers, both of which continue to be common growth inhibitors for independents, networks and consultants.

It’s integral that both sides know what they offer the other. Sellers need to show that their specialism is invaluable to a buyer and will fit into the bigger scheme of things without being adversarial; and buyers must assure sellers that they’re not going to be sucked into a vacuum, but will instead be integrated in a way that provides an obvious incentive for clients.

Sir Martin Sorrell’s S4C is one player to watch. Having founded and led WPP in its current form for 33 years, he’s now approaching things differently, signing a no earn-out deal with MediaMonks’ leaders. Other businesses such as US consultancy ICF and European agency group Dept, along with a host of supportive private equity and growth capital funds will all be looking to offer a similar route. A compelling, and increasingly popular, option for leaders who no longer buy into what’s on offer from the larger tier of buyers.

The likes of Accenture, Deloitte, McKinsey, IBM and Bloomberg are all potential heirs to the throne currently held by traditional advertising networks. However, as brands increasingly open up to the attractions of specialist providers, there are also newer, better-informed and more cohesive groups in the ring now.

Matt Lacey is director at Waypoint Partners