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Are Agency Mergers And Acquisitions Important For Agency Growth?

Posted by Mike Lieberman on Oct 24, 2018 8:55:00 AM

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Inbound Agency MergersThe short answer is no. You don’t need to acquire other agencies to grow, but it sure does help. Think about it like this. Would you pay a sales rep $100,000 if they were going to bring you a guaranteed $1 million dollars in new business? Of course.

What about if you could hire 10 highly qualified, amazing, culturally perfect new team members in one afternoon? And you had revenue to pay them all. Would you do that? Of course, you would.

What about filling a gap in your current delivery? For example, what if you’re just ok at paid media and paid search, but by acquiring a company you’re instantly at the top of your game in terms of getting clients results from their paid media programs? Anyone would say yes to this scenario too.

This is what the right acquisition, the right acquisition strategy and the right growth plan can do for your agency.

Finding The Right Agency

In almost all our acquisitions the agencies presented themselves to us. Over the years, we’ve attempted to reach out and ask selected owners if they’d be interested in an exit plan and in almost all those conversations the owners weren’t ready. It makes sense.

The best way to find agencies interested in being acquired is to make it clear that you’re interested in acquiring.

We created a process that starts with an honest and transparent conversation with agency owners interested in selling. We talk about what’s going to happen, how they feel about it, what they want to be doing in 5 years, and what role they might see for themselves in our company.

In the beginning, it has to be all about them. If their goals and vision don’t align with yours, there is no reason to continue.

Assessing The Agency

This isn’t the financial assessment. That comes next. This is about fit. The very first conversation is about the owner’s goals.

The rest of the assessment comes down to gaining a deep understanding of the company’s culture, core values, people, customers, partners, agreements, office situation, and more. It might require spending time with them to get all the information you need.

You might want to also consider meeting their families.  You get to learn a lot about people by spending time with their significant others.

This assessment is part of a no go/go decision for us and if agencies don’t pass this test, we don’t continue on to the financial part of the valuation. We find this is step much more important than the financial review.  

Valuing The Agency

Valuing the agency is one of the easier parts of the process. It’s usually very straightforward. If the agency makes $100,000 year for the past three years, then the agency is going to be worth between 3x and 5x that earnings number.

The difference between 3x earnings and 5x earnings is how strategic the combination of companies. If you do something that the acquiring agency doesn’t, you’ll be worth more.

If you’re thinking $400,000 for my business that does over $1,000,000 in revenue a year that sounds low. This just goes to show you the importance of EBITA (earnings before interest, taxes and amortization).

One other consideration for owners thinking about selling one day is your compensation. If you’re only paying yourself $20,000 a year and your agency is making $150,000 a year, those are NOT really your earnings.

In this case, earnings will be adjusted down to build back in a reasonable salary for you, the owner.

Business valuation is usually a simple match formula. The negotiation starts with the multiplier. To optimize your value, make sure you do something remarkable, unique and extra special compared to all your competitors.

Finalizing The Transaction

Since it’s very likely that neither you nor the other agency is a billion dollar company, keeping the costs of this transaction down are going to be key.

One way to do this is to work hard with the two parties to negotiate all the terms and details of the deal. Put those down in a Letter of Intent (LOI), have both parties sign the LOI and then move to engage attorneys to create the legal paperwork.

This keeps the back and forth negotiation between you and the other agency. This allows you to work out almost all of the details without getting lawyers involved. This also keeps the costs associated with protecting your company down to a minimum.

Planning The Integration

One of the biggest tasks comes after the deal is done. You now have to figure out what you’re going to do with your new agency division. Even if you had a plan going into the negotiations you might find it necessary to change that plan as you get into the details.

We’ve done 90-day integrations and 1-year integrations. You might not want to do any and keep it as a separate operating company. Regardless, make a plan. Get the plan approved by everyone who will have a role and then monitor the progress, be prepared to move to Plan B, if you must.

Include your new agency friends in the planning and you’ll gain their trust and their insights. Keep in mind you have two big objectives when you’re thinking integration.

You want to keep the new employees feeling safe and you want the clients feelings safe. Everything else comes after these two points have been achieved. Keep reminding yourselves that this is the goal.

Almost everything else will come more easily if you achieve the happy team member and happy client goal.

Getting Full Value for The Agency

The hard part of agency acquisitions is not in finding, negotiating or even doing the actual acquisition. The challenge is getting and maintaining full value after you do the deal.

One of the keys, as we have learned, is making sure the owner of the agency you acquire is not distracted from doing what you need them to do—keep their clients happy, keep their team happy and generate new revenue opportunities.

If you give them a new job in your company, which you might be thinking about doing, that sounds great for them. However, who is left to keep an eye on that revenue you just purchased?

The key here is to keep them connected to their clients and that revenue while you leverage their skills in other areas of the company. Since they share your vision for growing the newly combined company, this should not be something you have to force them to do, but something they want to do as it’s a huge benefit to the new bigger company.

Another place you’ll drive value by driving revenue is offering your clients the services the acquired agency offers. Perhaps services you don’t offer, outsource, or only offer infrequently.

Make sure you think this through as it’s a common mistake made in almost every agency acquisition.

Growing your agency is going to be the hardest thing you’ll do as an agency CEO. Yes, you’ll close new clients, but then you’ll lose one or two. Yes, you’ll hire people, but then one or two will quit. Yes, you’ll get clients good results and then you’ll have a client complain about the lack of results.

To grow you sign more new clients than you lose, hire more people than quit and get more clients positive results than those who end up firing you. It’s hard, hard work that takes years.

A fellow Diamond Partner CEO said the secret to success is stamina. I agree. Acquiring agencies allows you to grow much faster than the slog I’ve described above.

However, agency acquisitions come with its challenges. Here are couple of the potholes to look out for if you are considering acquisitions as part of your growth strategy.

1)     Find owners who want to stay. I mean really want to stay. You don’t want owners who tell you what you want to hear and then change their mind three months after the deal was finalized. You can check to make sure owners are on board by making sure they share your long-term vision around everything. If you’re into thought leadership, make sure they’re comfortable with it. If they have a certain type of execution they love, make sure they’re comfortable with your style of execution.

2)     If the acquired revenue is a big reason why you’re buying them, make sure you don’t do anything to distract the acquired team and their owner from protecting and adding to that revenue stream.

3)     Don’t underestimate the effort to keep the acquired team happy, feeling part of the new team and excited about the bigger company’s opportunity. Make sure they all share your vision and mission for your company.

The right agency, for the right reason, at the right time acquisitions can be a smart part of a growth strategy. I’ve done six acquisitions over the past five years. Some big, others small. Most successful, others not so much. If you want to talk about your plans to acquire or be acquired, don’t hesitate to reach out.

New Inbound Agency Mastermind Group. Join Today! Seats are limited.Start Today Tip – If you’re looking for two of the biggest reasons why acquisitions fail, you’re looking at culture and the owner’s long-term goals. When you’re evaluating agencies, check the culture first. If your culture is dramatically different than the agency you’re acquiring—don’t do the deal. If the owner (who you want to stay) doesn’t share your vision, your passion or agree with your strategic direction—don’t do the deal. Most of the remaining details can be worked out, discussed or negotiated, but these two challenges are by far the most important.

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Topics: agency growth strategies, inbound agency growth, Agency Acquisitions

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