What agency owners need to know about buying another agency
BUYING AN AGENCY REQUIRES MANAGING RISK.
Thinking of buying an agency? Here are some important considerations.
Buying an agency to spur your agency’s growth can be a brilliant and exciting strategic move. However, it’s also a very complex process filled with risks and uncertainties for the untrained agency buyer. A mistake could be costly financially and damage your culture. Most independent agencies seeking to acquire another independent agency cannot afford to make a mistake.
As a buyer, you need to apply a proven risk assessment process to maximize the chances of a positive outcome. You must clearly define your goals and the characteristics of the acquisition you seek so you know when to move forward or when to walk away. Once you decide to move ahead, the process can be time-consuming and complicated so having an experienced partner to guide you is important.
HOW TO AVOID THE MOST COMMON PITFALLS OF BUYING AN AGENCY.
Based on our recent experience, here are ten of the most important considerations for buyers:
Why do you want to acquire in the first place? What do you hope this transaction will add to your firm? How strong is the strategic fit? Be honest. Be specific.
Develop clear criteria in advance to help identify the optimal seller. Establishing seller criteria will be very helpful in assessing the strategic fit up front and then during the inevitable stress and emotions of making the offer and negotiating the deal.
Be patient. Understand that buying an agency can be a long and expensive process. Both the buyer and seller have businesses to run in addition to managing the deal. The seller may be involved with other buyers, too. On average, the M&A process takes 8-12 months. Overall costs for advisors, lawyers and CPAs can easily be $150,000 or more.
You must understand how to determine the seller’s fair market value. This is in part a detailed financial analysis best conducted by experienced experts. It’s also an objective assessment of critically important qualitative factors including the strength and stability of the seller’s management team, business development capabilities and more.
Ensure your acquisition can be a going concern without the selling owner. Does the seller’s firm have enough senior talent depth to service accounts, win new business and manage the team should the selling owner exit the business someday? Depth of the second-tier team is the best protection for ensuring an acquisition can survive the eventual departure of its original owner.
Cultural compatibility is a must. Integrating the wrong culture into your agency can be a disaster for everyone. Will the acquired agency be able to excel within the vision, sense of purpose and operations of your organization? Conducting a cultural assessment will help you to identify the right seller. Your future profitability (and happiness) will depend on it.
What’s your plan for integrating the acquisition into your organization? Will it be a free-standing entity retaining its own name or absorbed into your firm? Exactly how will that work? How will you ensure that clients won’t leave from either your firm or the seller’s? Who will be doing what after the deal is done? Are the seller’s most important people locked in?
Don’t limit your options by not having alternative deals to consider. Sellers will have different reasons and levels of urgency for selling. A deeper review of your opportunities can identify a better fit, lower price, or both.
Be painstakingly precise in your due diligence. Ensure that the seller’s client/agency contracts, staff information (especially for key talent) and financial statements are well organized. In fact, you can find out a lot about the seller based on the quality and completeness of their records.
Be just as careful with the transaction documents. The documents required to reflect the transaction and protect you as buyer include detailed sales and employment agreements. These agreements include various provisions that define the rights of both parties, the financial aspects of the deal and many protections to safeguard the buyer’s business.
There are many considerations in buying another agency. At Prosper Group, we help buyers define their personal and stakeholder goals, develop valuation ranges for target acquisitions, find the right seller based on your goals and negotiate a reasonable price.
We do not simply manage a transaction. We will be your partner in helping to preserve your firm’s culture and your personal interest… and never do a deal just for the sake of doing a deal.
We're here to help.
Prosper Group exists to help the owners of independent marketing communications agencies achieve their ambitions and maximize the value of their lives’ work.
Our team of former agency heads focus their deep experience on implementing proven proprietary methodologies across our three practices of agency performance, owner exit planning and M&A transactions in order to drive owner and agency success.
Developed by Alex Halbur, David Bosses, Bruce Bishop and Mark Johnson