Last time, we covered ‘selling an agency’, this time we are addressing buyers, or more specifically ‘would be’ buyers.
What are the benefits and ways of avoiding possible pitfalls of acquiring an agency? Here are ten specific aspects to focus on from the buyer’s point of view:
- Client Base and Relationships – One of the main reasons to acquire is to add turnover and profit to your existing business and diversify into different markets. Also, the profit multiples you buy should be exceeded when integrated into your existing business at eventual group sale. Things to look out for:
- Current Clients: Evaluate the target’s clients’ quality, diversity, and loyalty. Minimal overlap with your agency’s existing clients is good, but more experience in a given sector is also attractive – it can make you an expert in that field.
- Contracts and Retention Rates: Any client contracts or preferred supplier status add stability and value. High retention rates indicate strong client satisfaction, although without any contracts a change in management in a client company can often lead to a change in agency.
- Growth Potential: Assess the potential for upselling or cross-selling in the newly expanded client base.
2. Capabilities and Expertise – Another thing you are buying is talent
- Skill Sets and Talent: Identify key employees and their expertise. The aim is to ensure critical talent is retained post-acquisition. Look at the employment contracts of key employees and focus on notice periods and post-employment restrictions. Examine how remuneration packages compare.
- Service Offerings: Analyse the range of services provided and how they complement or enhance your current offerings.
- Technology and Tools: Review the technology stack and tools used by the target agency to ensure compatibility and potential additional costs for integration.
3. Market Reach. Moving into other markets or service areas brings more opportunity
- Geographic Presence: Consider the target’s locations regional influence and proximity to major client hubs. Evaluate the potential for market expansion. Point of caution, running a remote or overseas business can be extremely challenging especially where time zone differences are present.
- Industry Segments: Determine the industries and market segments the target agency serves. Look for opportunities to diversify or deepen your market penetration.
4. Financial Health – This should probably be number one on the list.
- Revenue and Profitability: Examine financial statements to understand the target’s revenue streams, profit margins, and financial stability. Cash position is important.
- Cost Structure: Identify areas where cost synergies can be realised, such as overlapping functions or operational efficiencies. Make sure that directors’ reasonable salaries are taken into account before valuation and calculate the additional value to the business with rationalisation of costs you have identified. Be sure to calculate the costs of acquisition and be realistic.
- Debt and Liabilities: Assess any outstanding debts or liabilities that could impact the financial health post-acquisition. These must be taken into account pre-valuation.
5. Competitive Position – If you are moving into a new sector, it is important to understand where your target sits in it.
- Market Share: Understand the target agency’s market position relative to competitors and who those competitors are. Examine pitch conversion rates and how the agency attracts new business.
- Reputation and Brand Strength: Evaluate the agency’s reputation within the industry and among its clients. A strong brand can add significant value.
- Differentiators: Identify unique selling points or competitive advantages that the target agency has.
6. Cultural Fit – A sometimes underrated area by the moneymen, but a surefire route to disaster if it isn’t evaluated and plans for integration put in place as a priority.
- Company Culture: Assess the target’s company culture to ensure compatibility with your own. Misalignment can lead to integration challenges.
- Management Style: Evaluate the senior leadership team and their management style. Ensure alignment in vision and operational approach. If cuts need to be made, then they should be made as comprehensively and quickly as possible to ensure minimal disruption and uncertainty. A plan is an absolute necessity, as is good communication within both businesses.
- Employee Morale: Gauge employee satisfaction and engagement. A positive work environment can ease the transition and integration process.
7. Operational Efficiency – Agencies live and die by their delivery:
- Processes and Workflows: Review the operational processes and workflows for efficiency and best practices. Involve your own people in the evaluation.
- Systems and Infrastructure: Assess the robustness of the IT systems and infrastructure. Compatibility with your systems is crucial for seamless integration. Again, involve your own people, they are almost certainly in a better position to evaluate this than you!
- Project Management: Evaluate the target’s project management capabilities and methodologies. Same as above.
8. Legal and Compliance – Lots of paperwork, but an essential area to get right. Warranties may be in place, but knowledge of any potential issues ahead of time is necessary, not least because it could affect value:
- Regulatory Compliance: Ensure the target agency complies with all relevant regulations, client expectations, and industry standards.
- Intellectual Property: Review any intellectual property owned by the target, such as trademarks, or copyrights and any IP owned by others.
- Litigation History: Investigate any past or ongoing legal issues that could pose risks.
9. Growth and Innovation Potential
Another of the top reasons to consider an acquisition
- Innovation Track Record: Assess the target’s history of innovation and ability to adapt to industry changes.
- Future Prospects: Evaluate the target’s strategic plans and growth projections. Look for alignment with your long-term goals.
- AI: Have they integrated AI into their general day-to-day business and is future development in this area being embraced?
10. Integration Potential
The major reason for the failure of an acquisition
- Integration Plan: Develop a clear plan for integrating the target agency into your organisation. Consider key personnel, timelines, key milestones, and potential challenges.
- Change Management: Prepare for managing change within both organisations to ensure a smooth transition. Conduct Senior Leadership meetings to involve key players.
- Communication Strategy: Establish a communication strategy to keep all stakeholders informed and engaged throughout the integration process.
By focusing on these areas, buyers can make informed decisions and maximise the benefits of acquiring another agency to add value, increase profile, capabilities, market share, and profitability, and increase the valuation of the acquirer’s business. These are the main points to look out for, but there are many variations along the way. Due diligence by legal professionals and tax advice are essential along with engaging an agency that has experience in the world of mergers and acquisitions – call us!