Have you ever considered selling your digital agency sometime in the future?
If so, exiting a marketing agency is much like starting and growing any company – a complex venture that involves lots of moving pieces.
Get most of them right, and you will be well on your way to Happyland.
But the sad reality is that most agency owners get them wrong majority of the time (including yours truly).
All the blood, sweat, and tears poured into building your agency might go down the drain and the master plan to reap the rewards in the form of a successful agency exit may amount to nothing.
As an entrepreneur, I’ve built and sold multiple businesses in the past.
One of them was my digital agency, which was a deal that eventually went south a few years later.
At the same time, I’ve also met a number of other agency owners who have also exited to the larger agency networks, and their deals ended up turning sour as well.
Such mistakes happen because there isn’t a lot of useful information out there for agency owners to know when exiting their firms.
Here are several tips and important factors to know if you ever consider selling your agency or merging with another agency.
1. Perform Your Due Diligence – on Everything
One of the biggest factors that will haze your decision during your agency exit process would be your emotions.
It’s inevitable to feel a sense of excitement – especially with thoughts of you leaving your pesky clients and the highly competitive industry.
While it can be challenging to keep your emotions out of it entirely, it’s crucial to have the hard facts and figures with you.
It would be helpful to first start by understanding why the potential buyer is interested, and what kind of value your agency can bring to them.
In most cases, if the potential buyer comes from one of the larger agency networks such as WPP, Publicis or Omnicom, they would likely be interested in your clients and your agency’s offerings.
In other cases, the potential buyer could be a brand, and it might make sense for them to acquire your agency to fit into their future plans.
Most agency owners, however, make the mistake of simply stopping right after they hear about the potential buyer’s future plans.
This is where further due diligence needs to be conducted.
Consider asking for your potential agency buyer’s financial statements.
Numbers don’t lie, and a savvy financial professional can tell from their books if they even have the resources to carry out such expansion plans after acquiring your business.
Sometimes, you may be surprised by the answers you will be provided with.
Some agency owners may also contract a broker during the exit process as well.
Often times, brokers can be a double-edged sword.
They may help to look for other potential buyers, which brings further leverage to you in the negotiation process. However, their interest may also lie in other areas, which may lead them to persuading you to take a deal that you shouldn’t.
This is why you’ll also need to perform due diligence process on your broker.
2. Have a Business Partner? Address That Elephant in the Room
When I exited my agency, there were several deals presented to my then-partner in the agency and me.
All of them came with a lock-in period, which meant that the owners of the agency (i.e., my business partner and myself) had to be employed within the company for a certain period of time.
While we were discussing the deals on the table, my then-partner mentioned in passing that he never saw himself working for anyone else in his life.
I made the mistake of brushing that remark away as we were both overly excited for the exit to go through, and thoughts of sipping a margarita by the Bahamas resorts were already clouding my mind.
A few months after our agency got acquired, my then-partner decided to leave well within our lock-in periods. That led to a bunch of bigger challenges with the new people within our management.
What I’ve learned in hindsight was that my then-partner was alluding to his frustration working for other people, no matter the rewards we would reap.
Over time, I’ve learned that such post-acquisition stories are very familiar in a lot of merger and acquisition deals.
While you may feel hyped up and ready for the acquisition, your partners may not feel the same way.
This is why partners and board members should always have that difficult conversation prior to entering negotiations with the potential buyer.
This process might extend over several days, even weeks, but it will be worthwhile to iron out everyone’s concerns before entering the agency exit process.
3. Making Sense of Post-Acquisition Plans & How You’ll Be Acquired
Most agencies within the industry exit with a valuation of four to eight times price-to-earnings ratio.
For example, if your agency has an average net profit of $1 million across the last three years, a valuation of eight times would mean that you would sell your agency for $8 million (calculated by taking $1 million multiplied with a price-to-earnings ratio of eight).
While that valuation may seem attractive to you, and perhaps your partners as well, you will need to understand how the deal will be done.
- Will it be an all-cash deal?
- Or both cash and equity?
- Or perhaps, could the deal be done in the form of an earnout?
In most agency acquisitions from what I’ve observed, it typically involves an earnout, which would make the deal far less attractive for agency owners.
You will also need to consider the post-acquisition plans that the potential buyer would have for you.
Because most agency acquisitions involve an earnout, it would only make sense for your agency to get support from your potential buyer in the form of financial and account acquisition resources.
Every Deal Is Unique
While exiting an agency may be part of your future plans, it’s important to recognize that not every deal is done exactly the same way.
But if you approach it right, you could be well on your way to be sipping that margarita by the Bahamas resorts.
For what it’s worth, I wounded up never having the opportunity to see through my agency exit fully, nor have I had the chance to sip that margarita, but I’ve learned some very valuable lessons.
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