‘Past Performance Is No Guarantee of Future Results’

So says the warning label that financial institutions must display when encouraging retail customers to invest in their funds.

Thankfully, would-be agency sellers don’t have to do this, but they do focus (heavily) on their agency’s performance to date and use it as the basis on which to put a valuation on their business.

Would-be agency buyers are happy to go along with this viewpoint too. After all, they’re buying the agency’s future earnings stream, not it’s past one, so if the agency has made consistently good profits over a long period of time, then, all other things being equal, it should mean it will continue to do so in the future too. Right?

Well, yes and no.

Hands Up All Those Who Say ‘Yes’

Yes, because past behaviour is the best predictor of future behaviour.

Humans are essentially creatures of habit and if an agency has done something in a certain way over a period of time, then its unlikely to change that behaviour unless something forces it too.

(That something is usually an external catalyst; see below)

That behaviour could include the leadership’s management style, or how the teams work within the agency.

It could be, informally, translated into the agency’s culture (‘it’s how we do things around here’) or more formally codified into things like Agency Operating Procedures that stipulate things like service levels, response times, complaint procedures, mark-ups to be applied, etc.

Collectively, it all adds up to what makes the agency tick. And what makes it successful. And so valuable.

In short, most agencies work on the maxim, ‘if it ain’t broke, then don’t fix it’ and will happily continue to do what they do best; service their clients and make money. Buyers of these agencies aren’t so much buying a business as buying a cash machine. ?

?Hands Up All Those Who Say ‘No’

The problem with selling an agency is the amount (or level) of change it creates and the impact that can have on the agency’s management, staff and clients.

Much of that change can be anticipated, planned for and addressed in a way that minimises the level of risk. But heh, we’re talking about people here.

Newly enriched former owners that begin to mentally check out or start to go AWOL, disenchanted (or disillusioned) senior management teams that start looking elsewhere; junior team members unhappy with their new employment contracts: before you know it attitudes – and then behaviours - are changing such that the agency’s previously winning formula begins to break down.

This can spell disaster for both parties. Sellers fail to achieve their earn outs and buyers face some hard questions from previously supportive Investment Committees.

The impact of senior team members leaving an agency post-sale should not be underestimated.

Financial institutions are acutely aware of the detrimental impact that a star fund manager leaving has on the fund’s performance, not only on the amounts immediately withdrawn by the star fund manager’s loyal followers but the drag effect caused as the new fund manager finds their (stock picking) feet.

[A research study* carried out by four academics using ‘a…database of UK fund manager changes over the period from 1997 to 2011’, found “a significant deterioration in the benchmark-adjusted returns of funds that were top performers before the manager exit”]. ???

Admittedly, senior agency team members are not fund managers but they do own senior client relationships, inspire and lead staff, and bring their experience and creativity to bear on the agency’s service delivery.

And as much as everybody signs up to the management mantra ‘nobody’s indispensable around here’, the reality is; some are and that fact has to be accounted for.

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What are the steps then, that a selling management team should take to ensure that agency-wide behaviours remain unchanged post-sale?

(On the basis that this will help ensure that future performance levels will remain similar to past ones).

1.?????? Introduce succession planning sooner rather than later

Look. If you’re going to go, then be upfront about it. Build a succession plan into your corporate strategy. Ensure your role becomes a little bit more redundant every day. Don’t go to client meetings on your own. Invest in recruiting people better than you.

(To quote David Ogilvy’s maxim, “if each of us hires people who are bigger than we are, we shall become a company of giants.”) ?

2.????? Lock-in the equivalent of your star fund managers

?Your senior management team, if properly looked after, will probably stay on. After all, the sale may represent a career opportunity for them. But don’t leave it to chance. And don’t leave it to the buyer to cut them a deal.

Presale, invest in a compensation scheme that is motivational – and fair.

3.???? Don’t Kill Sacred Cows

Overly generous Christmas parties, free Friday drinks and all expenses paid long weekends in Ibiza for the staff may look like expensive fripperies ripe for cutting, but they’re not.

They’re actually sacred cows and you kill them at your peril! They helped recruit the agency’s staff in the first place and removing them will set off alarm bells in their heads. Ringing alarm bells leads to CVs being updated.

London-based specialist digital marketing recruitment agency, Herd Digital, in its latest report entitled ‘The UK Digital Marketing Job Market Breakdown – Q3’ estimates there are 1,266,000 job vacancies in the UK digital marketing industry right now. In a crazy market like that, if the current agency norm involves picking up the drinks tab on a Friday night then don’t’ stop it!

4.???? Avoid Tinkering at The Edges

It’s natural for new owners to tinker. (Think how you kept moving the furniture around in your first house). But all that sofa repositioning is actually quite destabilising for those that are used to sitting on it where it was.

My point is, leave everything alone unless and until it’s strictly necessary. Staff (and clients) are hyper-sensitive to even small changes post-sale, which they believe are harbingers of bigger things to come. (‘today it was the coffee mugs but soon it will be our pension scheme’).

5.???? ‘Culture Eats Strategy for Breakfast’

This is probably one of Peter Drucker’s most insightful comments. In this context, I take it to mean that an agency’s culture, if strong enough, can trump most things, including the loss or departure of agency owners, senior staff or long held clients, moving offices, adopting new systems or anything else that gets thrown at it. ?

In the same way that Manchester United can regularly lose former star players and constantly replace them with new ones (Anyone remember David Beckham? Or Christiano Ronaldo?) so only those agencies with truly strong cultures can deliver consistently good performances whilst being regularly beset by change.

Some people would call this resilience and although it’s virtually impossible to quantify, perhaps now is the time to try?

In summary, if, pre-sale, agency owners focus their attention on things like succession planning and building a super strong agency culture and if, post-sale, ?agency buyers promise not to change those things that are already working well, then yes, perhaps past performance can guarantee future results.

*‘What impact does a change of fund manager have on mutual fund performance?’ Andrew Clarea,? Nick Motsona,? Svetlana Sapuricb,? and? Natasa Todorovica

?This article is one of a series aimed at agency owners considering the sale of their business. The other articles can be found on my LinkedIn page.