Article - Building to Sell
READ: 4 mins
AUTHOR: Janusz Stabik
If you want to maximise your profit, not only as you trade, but at the point you sell, you need to be future-proof: ensuring the most profitable end for your business is planned for now.
We encounter a lot of agencies exploring a prospective sale, unsure of what they would be worth and to whom. Unfortunately, this means the valuation of the business will be based on a degree of luck and circumstance in the context of who’s in the market for an agency like theirs at that moment.
The lack of a plan in these circumstances, often means you fail to sell, or sell short of your potential worth.
This week’s blog gives you the rationale for taking a long-term view on selling your business - and guides you through how to best plan for a sale…even if that date is years’ away.
Sale Now On
COVID-stricken 2020 saw a slump in acquisitions with deals in the US in marketing and advertising down 19% in volume and 50% in total value.
Here, the ONS reports the average merger and acquisition deal value in 2021 for the ten highest value deals (£3.3 billion) was higher than the ten highest included for 2020 (£0.6 billion). This suggests that while the pandemic did not necessarily delay deals in 2020, those that did complete tended to be of lower value.
This ties up with our own view on the market. Mergers and acquisitions within creative businesses were rampant in 2021, on both the buy and sell-side. Within three main brackets:
Small P/E backed groups, buying smaller agencies with a view to selling group when targets are hit
Larger independent marketing/integrated agencies buying smaller agencies to add to their service offering
European agencies buying UK agencies to secure a foothold in the UK, shortcut the recruitment crises and increase bottom-line profit by handling the delivery in Europe (where labour rates are lower)
Acquisitions are therefore upticking: people are buying, prompting others to be curious as to their business’ market value.
If this is you, read on and take action now.
Why Sell?
If you’re selling, you need to know why people might buy your agency or consultancy: what needs or wants does your business satisfy?
The reasons people buy businesses fall into two categories: the acquisition is financial or strategic. A financial purchase rewards the buyer with the tangible value of the business, whereas a strategic acquisition pays out in terms that are less concrete…but by no means less valuable.
Let’s dig into this.
Financially Oriented Acquisitions
Here, the buyer purchases the business to add the financials (revenue, profit and assets on the balance sheet)"of that business to their own P&L/balance sheet.
The business may come with contracts in place, guarantee a secure revenue and strong internal leadership to deliver it. There’s a pragmatism to this sort of deal: and an awareness that removing some overheads - IT, HR - will increase profit margins further. Buyers will of course pay more for a business that has strong financial performance, and importantly, can all but guarantee that this financial performance will continue.
In short, the acquirer is buying revenue and profit to bolster their business - so, when they in turn sell, they’ll get more.
Strategically Oriented Acquisitions
In this case, the buyer is in the market for the business because it has something the buyer wants. Whilst it’s likely still to be making money, that’s secondary to the intangible asset, or assets, within the business.
This could look like:
A dominant share of the market
Marquee clients on the books, gaining you an ‘in’ with top global brands or services
IP: an industry tool, or system, which has unique and has intrinsic value
International market exposure - they’re either in, or have strong links to, markets other than yours
Personnel: skills and experience of the leadership team or high fee earners
Accreditation or partnership with a brand or service
In reality, most acquisitions will be based on a combination of both financial and strategic rationale.
Why does this matter if you’re selling your business?
Using the motivations of buyers to help shape and mould your business now will make you more strategic as a seller: NOT AT THE POINT OF SALE BUT RIGHT NOW- even in your business’ infancy. (And, ultimately, this will make you more money when you do come to sell.)
Rather than approach the market, as it were ‘cap in hand’, asking who is out there to buy your business, attract the buyer you want by carving out a business they cannot afford to pass up…or even better, have them approach you with an offer you cannot refuse.
Buyer Aware: carve out the business your buyer craves
Your first step to a strategic sale is to think on the fundamentals of that decision.
Are you selling for financial gain? Or are you seeking to retain involvement in your business, or secure some form of its identity or legacy after the sale?
This will immediately point you toward the type of buyer your business is most suited: for example, a large corporate versus smaller independent may forge a different ongoing relationship with their acquisition.
Then start plotting in the characteristics that make up the buyer company’s profile:
What do they do?
What services offered, markets served?
What are their numbers?
Revenue, size, locations
Why are they buying you?
What strategic element do you have that they do not that will make their business better?
With this persona - and their corporate desires in mind - you can now strategise how best to appeal to them.
What should our business therefore look like?
What clients do we serve?
What services do we provide?
How are costs and fees structured?
2. What will we need to get there?
Resources
Experience
Controls / systems
Innovation
Leadership
3. What might hold us back?
Where are our weaknesses? How can we strengthen them?
What are the risks? How can we mitigate them?
Like any strategising, this process isn’t swift, but if you want to secure a sale - and one worthy of the effort and hours and emotion you’ve invested in your business - planning its end at its beginning, is not as counter-intuitive as it first appears.
Time taken to put an active plan in place to change your business into a business that your prospective buyer wants to buy will pay out in the end. If you're unsure what this form of the business looks when strategising...phone them!
Seriously, pick an agency that matches your persona, take them out to lunch and pick their brains on the kind of agency that would be a suitable target acquisition for them.
Start with the end in mind…decide who your buyer is now and shape your business to be as desirous to them as possible.
