When and How to Sell Your Agency with a PROFITABLE ACQUISITION with Amanda Dixon | Ep #563
What do you need to know about selling your agency? Is the market right for a sale or acquisition? What does a successful M&A deal look like? It's actually a good time to sell and there’s no shortage of buyers. If you are prepared and have guidance, an acquisition can be smoother and faster than you think. Today’s guest specializes in mergers and acquisitions in the agency space. In this conversation, she shares how to realistically determine your agency's valuation, two common questions about acquisition deals, and what you can expect when you sell your agency.
Amanda Dixon is the founder and CEO of Barney, an M&A advisory firm for agencies. In her career, Amanda went through a couple of exits as an entrepreneur and describes the experience as atrocious. She saw a need for a company that understands the valuation of digital assets. As a result, she created a firm that has helped over 150 media, marketing, and tech companies through acquisitions.
In this interview, we’ll discuss:
How long does it take to sell your agency?
How to realistically determine your agency valuation.
Answers to 2 common questions about M&A for digital agencies.
Sponsors and Resources
E2M Solutions: Today's episode of the Smart Agency Masterclass is sponsored by E2M Solutions, a web design and development agency that has provided white-label services for the past 10 years to agencies all over the world. Check out e2msolutions.com/smartagency and get 10% off for the first three months of service.
Selling a Digital Agency In an Unrepresented Market
After growing her own business in the digital space, Amanda decided to sell and started looking for a professional valuation. Unfortunately, she found herself surrounded by people who just didn’t understand new technologies and how to value digital assets. She was selling her own, life-changing agency but felt ignored by the market. Since larger firms were not returning her calls, she went with a broker who didn’t have the experience or sophistication to sell a business the size of hers and the results were not quite what she expected.
Through that experience, Amanda discovered a huge opportunity for a niche firm for this kind of acquisition. Businesses valued <$250 million needing national buyers were severely underrepresented. So seven years ago she started her firm to help guide agency owners going through that same process.
How Long Does It Take to Sell Your Agency?
Selling your agency can be a painful and complicated process. Many times, agency owners get into it not really knowing what to expect. It can drag on for a long time if, for example, the buyer keeps coming back with last-minute changes. In these situations, agency owners may be afraid to pull out of the sale for fear of financial repercussions.
At the height of the pandemic, without in-person meetings, the process took around 90 days. With in-person meetings back, this adds a couple of weeks and sometimes months to the process. Overall, in the worst-case scenario, it is currently taking her team around 5 months to complete a sale.
For Amanda, the most eye-opening discovery working in M&A is that it doesn’t have to drag on forever. For starters, one of the things that delays the process the most is finding the buyers. Since her firm is focused on digital-based business, that part of the process is faster. Approved sellers that work with them are referred to several interested potential buyers. This is good because deal fatigue is a very real thing.
Having a buyer pool interested in your particular industry helps to create a sense of competition. With several potential buyers, you can have more control and ultimately choose the one that makes sense financially and fits your team and your culture.
How to Realistically Determine Your Agency Valuation
Agency owners are typically very eager to know their agency’s worth. The multiple of EBITDA formula is a good place to start and is what Amanda’s team analyses first.
EBITDA = Earnings Before Interest Tax Depreciation Amortization
Of course, this doesn't offer a clear picture of the agency’s financial state. For instance, they see many agencies that have grown too fast and have too many team members. In these cases, since their margins may be low, it’s hard to judge financial health with just the multiple of EBITDA. On the other hand, if an agency isn’t staffed enough and are at a breaking point, they may have 50-60% margins which is not scalable.
The next step is determining where the agency falls within Barney's valuation range. They consider factors like client concentration and new client acquisition. Of course, agency owners don’t always agree with the results and believe they’re worth more. However, it is a very efficient formula for determining agency’s value.
Why Agency Owners Need to Execute a Profitable Acquisition Process
Many agency owners are caught off guard when someone shows interest in buying their agency. This results in wasting a lot of time and the sale never happening. Amanda strongly believes most agency owners need representation through the acquisition process.
They need the support to ensure the terms of the purchase are clear and negotiated in a way that protects them. For instance, a buyer may say they’ll pay you $10 million for your agency. In reality, they may intend to pay $5 million and the other half is contingent on what happens post-transaction.
Looking for M&A advisory services can also help you find more buyer options. Amanda’s team is often approached after an agency owner has an acquisition offer. They will guide them through that offer, of course. However, it is more advisable to meeting with other potential buyers, just to see what else is out there.
When to Bring an Accountant or Lawyer into the Acquisition Process
To be clear, an accountant should be part of an agency well before you even start thinking about selling. Having clean financials is crucial to getting through the finish line. If your books are a mess, sort that out before starting the acquisition process.
When it comes to an attorney, the point of bringing them in may depend on the size of the agency. Some prefer to bring them in at the LOI phase. However, most don’t choose to do so until they have prepared the purchase documents.
An important rule of thumb is choosing one with experience representing digital agencies. In general, the terms and specifics are different in the digital space. Like, non-competes average 5 years in the agency business. Retaining an attorney with this type of experience will make sure this doesn’t restrict your ability to form another agency in the near future.
2 Common Questions About Digital Agency Mergers & Acquisitions
How Do Earnouts Work? Acquisition advisors love a deal where the owner gets to capitalize on how the agency continues to grow after the transaction. However, earnouts are tricky. The key is that the earnout shouldn’t be tied to rapid growth. In essence, it is intended to be protection for the buyer in the event of catastrophic implosion. But when you're on the seller side, it's not something you can control so make sure you’re happy with however much you get at the closing table.
Are Agency Rollups a Good Idea? In theory, doing a roll-up is a great idea. Unfortunately, most of the time integration is much harder than people think. Buyers want integrated agencies to become a well-oiled machine with systematized processes. It is possible, however, merging multiple agencies doesn’t increase their value unless you prove cross-selling services to a unified client base. Until you’ve done that and have historical churn numbers on your clients, a rollup doesn’t provide a lot of value.
Why You Shouldn’t Feel Pressured to Sell
Many agency owners may have concerns about what’s happening with the current economy. However, Amanda says the agency space is seeing strong interest from buyers. There are still many more buyers than sellers in agency M&A.
The market isn’t going anywhere so you shouldn’t be pressured to sell. And if you do want to sell, it is not a situation where you won’t find buyers because of the economy. This industry is only growing, so no matter where you are in the process, you’re in a great place.
Do You Want to Transform Your Agency from a Liability to an Asset?
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