Who will buy my indie agency?

In the latest of our Agency Futures playbook series we delve into the types of buyers for marketing services agencies.

Firstly though, why are buyers even attracted to agencies?

So many owners (myself included) drifted into agency management. It’s what we knew, and we worked up through the ranks. Eventually owning an agency becomes the obvious thing to do. And before you know it, you’re on the rollercoaster journey of business ownership, finding payroll, winning and keeping clients and managing a close-knit team of colleagues and friends. It’s very easy to lose sight of the big picture here.

Let’s step back for a moment to consider the wider industry.

Agencies fall under the professional services umbrella. This sector includes lawyers, accountants, consultants, and many more.

Why are buyers attracted to professional services businesses?

• Low capital intensity. The significant cost being people and IT (even offices are optional these days, at least for the time being)
• People focussed – talent is key and there are a lot of highly skilled entrepreneurs and their teams to choose from across most categories
• Generally it's a low-risk business (compared to say, flying hunks of metal through the air)
• Strong and controllable profitability (over 20% EBITDA to Revenue and you can scale up and down relatively easily – compared to a car factory or a retail chain)
• Clients are happy to outsource as generally they get a better result, and it’s easier to control costs (yes, in-housing is a trend, but as yet it is still dwarfed by outsourcing).
• The professional services industry continues to grow and is estimated to hit $10 trillion in less than a decade.

It is these factors that have also spawned tremendous buyer interest in the marketing services sector. As we’ve seen in a previous post, this is an extremely active space.

Agencies play in a virtuous M&A circle.

It's one that sees independent firms innovating and growing - eventually getting to a scale that becomes attractive to capital-rich organisations who in turn seek growth, but cannot drive innovation and organic growth at pace - and so they acquire.

‘Repeat and rinse’, as the relentless pace of change continues.

So what does the buyer landscape look like?

There are many ways to categorise external agency buyers.

Firstly, a couple of important nuances. You’ll often hear people make the distinction between strategic and financial buyers. The former are interested in a long-term strategic alignment that will create additional value (often they are agencies themselves). Financial buyers are more interested in a shorter-term horizon. Deals are based on hard numbers and a strong predicted return (often this would be private equity firms). In reality, there is a lot of overlap between these buyer types as we’ll see.

Also, capital is less geographically constrained than ever before. The number of cross-border transactions is on the rise and buyers are just as likely to come from outside your country or region than inside it.

6 Main Types of Buyer

1. Holding Companies and listed networks – the traditional heartland of agency buyers. Firms may be acquired into one of the existing operating companies, or maintained as a standalone brand and often left to compete with others in the network. Occasionally as in the recent Dentsu acquisition of TAG Worldwide they will create a new arm of the network. Holdcos tend to be strategic buyers seeking growth via new clients or revenues, geographic expansion or a capability boost. They will typically seek a fairly traditional deal with 50%-70% of the agreed value in cash as the transaction completes, with an earn-out period for founders of 2-5 years.
2. Private Equity – a significant part of today’s market. Private equity and family office-backed?growth players will seek a 2-5X return in under 5 years. ?Often P/E will position as a capital partner sitting behind an existing brand that is earmarked for growth. Dept Agency's well documented and enormous growth trajectory is a good example of this. Backed by The Carlyle Group they have acquired over 30 agencies in recent times.
3. Consultancies – again a big growth area over the last decade with the likes of Accenture and Deloitte acquiring creative services and digital transformation businesses as they seek to extend capability within professional services and scoop up new revenue streams.
4. Indie agencies and networks. The indie agency landscape is certainly vibrant at present, and many successful firms view M&A as essential to accelerating growth. This inorganic growth strategy reflects the great success (aka cash reserves) enjoyed by this sector. Unencumbered, and quick to respond to client opportunities, Indies have also seen growing confidence from the client community and a commensurately bigger share of the marketing pie. Indies are also being provided access to more capital, as the awareness spreads that this is an under-leveraged sector.
5. Media and Publishing Companies: Traditional media companies might acquire agencies to diversify their revenue streams, especially in the face of declining traditional advertising revenues. e.g. acquiring a digital or content agency can help a media company better add value to clients.
6. Client organisations. The pendulum has definitely been swinging towards in-house agencies and there is a growing ecosystem of client organisations playing here across most sectors. Sometimes they will consider buying one of their existing shops to kick things off with.

Which buyer type should you choose?

This is going to come down to your shareholders, their personal goals - and their appetite for risk.

A large factor in this will be how much cash is needed at closing and how long you want to stay. Some owners want a quick exit so that they can retire or chase other opportunities, others are looking for reinvigoration and an opportunity to grow within an extended version of their firm. This can come via a second bite at the apple in the future (we'll cover this in more detail in future post).

Though not hard and fast, most buyers will want you to stay for a minimum of 2 years (one holdco we know will require 7 years). Bottom line, you should go into any process with a clear sense of your ideal scenario, and this will require some careful thinking on your exit plan.

Ultimately it’s going to come down to what terms (both hard and soft) you are offered. In our view way too much emphasis is given to the classic 'multiple of EBITDA' and not enough to the overall terms of the deal. Probably most importantly respective cultures will be a key factor, and we’ll cover our views on Empathetic M&A in an upcoming post.?

As always, hope this was useful and let us know if any questions or feedback.

To your limitless success.