How to build value in your agency – if you build it, the sale will come

How to build value in your agency – if you build it, the sale will come / Pixabay

There are some hard and fast principles that every agency head or management team needs to know when looking to build value in their business. While financial performance is as important as ever, buyers are increasingly focusing in on people and culture when they assess acquisition targets.

Our insight is based on 30-plus years in the sector and our quarterly analysis of global marcoms deals. Last year 900 deals got over the line, and while that might sound like a lot, many agencies will simply never get themselves to a point where they are attractive to a potential buyer.

But the good news is that building a commercially successful agency will usually tick the buyer attractiveness box too.

Here is our run-down on what’s on the buyer check-list in today’s market; some of the softer indicators might surprise you.

The buyer universe

The buyer pool is wider than ever and recent entrants come with new expectations and ways of doing things. They also often have different agency targets in their sights:

• The holding companies – while their focus is mainly on streamlining and consolidating, they are still buying businesses that generate good profits and provide new capabilities. Publicis and IPG added to their data offer with the acquisitions of Epsilon and Acxiom respectively.

• The smaller networks, e.g. Stagwell, You and Mr Jones, Next 15 – are pretty acquisitive; they too are focused on profitability. They tend to be collegiate places, and businesses that find themselves selling to such groups get to work with the key people pretty quickly

• The management consultancies – while they started out acquiring tech-driven agencies, any doubt that they were serious about creative has now been dispelled, following the acquisitions of Karmarama and more recently Droga5 by Accenture.

• PE money continues to show good interest for quality, high growth assets. BrainLabs is a good recent example of the type of asset they are looking to invest in.

What buyers look for

Here’s what is hot at the moment:

• Specialist vs. integrated - both types of agencies are in demand. The management consultancies and PE houses are generally looking for specialists to fill in gaps in their portfolios, while foreign buyers coming to the UK planning a broader European expansion are looking for more integrated businesses to build their footprint

• In-housing – a strong agency offer here allows a powerful entry point to the client organisation and a means of identifying new revenue streams that are attractive to any acquirer

• Technology – many agencies have fallen into the trap of burning money fast trying to develop technology. However, if you can develop bespoke tech that makes agency processes vastly more efficient or that services a client need, then it can be a powerful differentiator and value-add. Bear in mind that developer teams are expensive and in demand and freelance costs can quickly spiral out of control. So much so that we are seeing the rise of acqui-hires, or the buying-in of specific teams and capabilities.

• Data vs creative – while analytics and optimisation are key, they are worth very little if the creative being delivered is untargeted and of poor quality. As a result, we are seeing resurgence in interest, especially from overseas buyers, in creative agencies able to deliver good quality work in this context.

Building up your client base

Making sure you build a strong client base is fundamental to selling your agency well, and you should count a couple of trophy clients on your list. These are classic blue-chip global brands that have deep pockets and use a broad range of services, indicating additional revenue potential to the acquirer. Your value will be tied to your ability to land a couple of trophy clients every year as well as to retain them. You should also ensure you hold these client relationships at the C-suite level.

Yet no one has a full room of trophy clients, so your next tier should focus on the high growth, agile brands we call ‘gazelles’ and who have the potential to become bigger players. Their spend with you will typically be growing year on year.

At the other end of the scale, you need to weed out stagnant, non-growth clients. It can be hard in practice, but don’t be afraid to walk away from clients that drag you down, destroy morale and don’t deliver commercially.

Your potential buyer will also be looking at your ability to grow clients. How well do you walk the corridors to drive revenue within the client business?

You should also demonstrate an ability to win business beyond the low-hanging fruit. When you get to the £5m to £15m revenue mark a buyer will expect you to have a structured business function with a targeted approach, employing new business professionals and a lead generation team.

And aim to avoid the issue of over-dependency on any one client. Anything beyond 20/25% gets into the danger zone and diminishes the value of your agency. That said, it’s a brave agency that will turn away work from a key client that might take it into that zone. Take the work but exercise prudence.

Your buyer will want to get a feel for the nature of the client relationships that exist and will want to speak to key clients directly to assess the stability of the relationship and what their intentions are in terms of future spend. Don’t wait until you plan to sell to do this; instead build it into how you manage client relationships from day one. At Results we often see successful clients regularly reviewing relationships at all interaction levels and this can be useful in highlighting any weaknesses before they become an issue.

Talent

Now more than ever, without great talent, you don’t have a business.

Competition for great people is hot with more agencies chasing after a smaller pool of people than ever. Technical talent in particular is getting harder and harder to access.

It might be a cliché, but millennials are much more invested in concepts such as your core purpose and mission, as well as inclusivity and diversity and being part of an always-on feedback loop.

It’s very easy to throw buzzwords around, but you have to be serious about these things. It’s only by putting these things at the heart of your business that you’ll get great people and retain them.

Remember too that different types of talent are motivated by different things. Technical staff like enjoy working in solid, tight teams, learning constantly and being exposed to new platforms. It’s about doing interesting work that builds their experience.

Ways of working are changing fast and agencies have to offer agile, flexible, remote and other approaches. As well as helping retain brilliant talent, some of these new models can demonstrate margins of up to 40 or 50%. And generally, clients are focused on quality and agility of work.

Being able to offer opportunities internationally is also a great recruitment and retention tool. A chance to work in New York or Singapore across a great range of clients will attract great talent.

Buyers rarely have people sitting around waiting to run your business, so it’s never too early to focus on building and incentivising a strong management team who can continue to drive growth three to five years post-acquisition. And while management aspirations are not always aligned, you can build flexibility into a deal, e.g. different exit dates for different people.

International expansion

While overseas offices are often on the agenda as you grow, like technology development they can burn cash fast if you get things wrong or move away from client centricity. While clients might want to see international capabilities, that doesn’t necessarily mean opening overseas. To that point, many growing agencies partner with bigger companies as way of shortcutting their way to international expansion.

There may be other ways to service your trophy clients internationally, e.g. by hiring foreign nationals in the UK or by hiring people with language skills.

Client centricity should be your byword, with a focus on delivery not geography. Clients are more concerned about quality and agility as well as how rather than where the work is serviced.

If you do decide to open overseas you need to consider the following:

• Will your overseas office represent revenue or cost? Many agencies have execution offices, comprising developers etc. who do the work but do not generate revenue. Buyers are usually OK with this as they tend to be low risk and enhance margin.

• Much more challenging is the revenue-based office. Do you open in New York, Berlin or Singapore because you think you can win business there? Doing so is very high risk, although it can be successful.

To make an overseas office work you need a cornerstone client that will give guaranteed revenue from day one. Make sure your office is located somewhere where people want to go and work. Think hard about the leadership team and replicating the core culture overseas.

Make sure you have a reasonable amount of time to commit as it can take several years to generate a profit. Opening up overseas shortly before entering a sale process can be a challenge as the drag on profitability will need explaining and you may not capture the growth trajectory of these newer offices in any deal. Sadly, we do see agencies open up and then close quite fast when they see how tough it can be, and that can be hard to explain away to a seller.

• If you do open overseas, keep it tidy. Try not to open too many small offices in too many different places. That can make it difficult for a buyer that then needs to do its due diligence in lots of different jurisdictions. Moreover, the different regions might not correspond with the buyer’s overseas footprint, making things double complicated. Stick to the ever-popular locations such as the East and West US coasts, Asia (Singapore and Hong Kong), Germany and the Nordics. These are places where there are lots of opportunities and where trophy clients often have their HQs.

What buyers measure

The core measurement pillars have moved on in recent years. A lot of the networks used to look for 20% growth and margins. While that’s still important, buyers now also focus on issues such as sustainability of margins and visibility of revenues, alongside softer metrics.

We have already alluded to client attrition and growth and how buyers will scrutinise both. They will also want to know whether your team would be able to scale to service some of the buyer’s biggest clients once your agency comes on board.

Staff attrition rates and mix of skillsets will also come under scrutiny. Deals were traditionally done with an earn-out component, but now the consultancies in particular are likely to pay 80% upfront, holding the rest back so they can integrate your business quickly and get you working as part of the overall structure. Profit is a little less relevant to them, focusing instead on capabilities and how you can scale.

Consultancies traditionally tend to hang onto their people longer than agencies, and are still nervous about attrition rates over 20%, which equates to a five-year tenure. For the London agency scene that’s really good going, so these different expectations need to be addressed. As a result, some consultancies have been known to build attrition rates into deal structures, meaning there is a very definite link between your people and the value of your business.

Equity is precious and it can make things hard for buyers when it’s held too widely, or in the wrong hands, for example by people who are no longer part of the acquired business and cannot add value. This means you have a lot of cash paid out to those not driving growth on day one of the sale. It’s important to be mindful of how you deploy equity to incentivise the team and ensure that their interests remain aligned up to and post-acquisition with the performance of the overall business.

James Kesner is a director of Results International

Get The Drum Newsletter

Build your marketing knowledge by choosing from daily news bulletins or a weekly special.

Come on in, it’s free.

This isn’t a paywall. It’s a freewall. We don’t want to get in the way of what you came here for, so this will only take a few seconds.