You’ve taken the decision to sell. Now, the hard work really begins to present it as saleable.
M&A
You’ve taken the decision to sell. Now, the hard work really begins to present it as saleable.
You’ve taken the decision to sell. Now the hard work really begins to present it as saleable.
When all’s said and done, the initial decision to sell an agency is arguably the easiest bit of any selling process.
Far harder is doing all the stuff that’s then needed to actually make it happen – lining your ducks up, getting buyers interested, and ultimately making your case.
But of all the questions we’re asked in relation to this, the most frequent is how best to present the business as being in an ‘investor-ready’ state. In other words, how to actually make it attractive to buyers in the first place.
At Milestone Advisory we take a ‘Ten Pillars’ approach for assessing how investor/acquisition-ready a business is – ranging from everything including proposition to corporate governance; the people you employ and what your sales and marketing strategy is.
Valuing an agency is about your EBITDA (earnings before interest, taxes, depreciation, and amortization) and then multiplying it (marketing agencies typically gain a 5 to15 x multiple). In the first instance, it becomes crucial CEOs do all they can to build scale and drive EBITDA to get the value they want and this is addressed in the first two pillars. Proving to buyers that the agency can continue to deliver and improve on existing EBITDA levels is assessed in the other 8 pillars. They are interlinked but this is a nice way to understand it. What makes the multiplier lower or higher is how you can convince a buyer that those trends will continue in the future.
So, all the pillars matter, but to begin with, there is absolutely no hiding from the fact that the first two – demonstrating profitable growth and building a strong balance sheet and cash-flow – are the ones that will really give you the gravitas you’ll need for buyers to then dig begin to dig deeper.
Part 2 will examine pillars 2-10 in more detail, and they are designed to strengthen the multiple in the areas that are under the control of the agency, but here we focus on the first two – making the numbers do the talking.
Maximising the EBITDA of your business should be your first priority, and this is driven by profitable growth.
There’s a very good reason for this letting your numbers do the talking. When external factors – such as prevailing market conditions or confidence – cannot so-easily be controlled, it’s agencies with profitable growth at healthy EBITDA % and good cash flow that are perceived as being attractive.
First and foremost, you need a plan. It’s amazing the number of agencies that don’t have a clear three-year growth plan. This is your opportunity to set the agenda and build a robust measurable plan to ensure that it happens. It sets the scene for the business and will indicate what needs to be done before a process is begun to ensure that shareholders expectations are met.
It’s worth remembering too, that in most exit processes, buyers tend to look at LTM EBITDA (last twelve months) or TTM (trailing twelve months). This is why having a rolling three-year plan is even more critical.
So where should you start?
The best plans talk about ‘profitable growth’ – that is the extent to which revenue growth becomes growth that actually builds working profit. It is this that drives value creation for the business and therefore builds momentum and gets the business fighting fit for your exit strategy.
Profitable growth is not, however, a static concept. Buyers will typically prioritise agencies that can demonstrate the ability to deliver it on sustained basis. To prove this, companies will need to quantify their quality of revenue – something indicated by things like the amount of repeat business they get; what their contractual terms look like; their relationship with clients; whether they have a diversified and balanced client portfolio [no client should really represent more than 30% of their income, for instance]. Other elements that contribute to this are the agency’s ability to grow their share of work from clients; how their pipeline of new business looks, and the extent to which new business contributes to revenue.
Sustainable revenue is predictable revenue, and predictability reduces risk. This means analysing your long-term contracts and annuity revenue streams, to ensure – for instance – that a high percentage of your revenue is known about, and contracted long before the financial year even starts. Every agency should seek long-term, profitable revenue streams.
The value of good forecasting shouldn’t be under-estimated. What keeps potential buyers awake at night is when there is difficulty determining the reliability of pipeline forecasts, the sustainability of existing client relationships and whether those client engagements are running at a profit or loss. Our own toolkits will help build confidence in the accuracy of those forecasts, but it should stand to reason that improving the predictability of business pipelines makes for better assessments all-round.
Even something as simple as bill rates (and whether they can easily be increased to increase profits and therefore cash flow), feed into this. It allows you to identify your most profitable customers, projects, service lines and practices – so you can focus on developing business where you’re making most money.
Also relevant is whether there is a strategy in place to grow key clients, and what customer retention and onboarding strategies exist to ensure longevity of business. This allows you to match demand more accurately with resource requirements and the skillsets required.
The #1 game in town is to measure your key KPIs: revenue, gross and net margins, all costs, and the levers you can pull to improve performance. We can help provide an early warning of potential-loss making projects so that you’re ahead of the game in finding fixes to the problem.
All the areas above clearly impact the second of our ‘Ten Pillars’ – which is showing a good balance sheet and cash flow.
The balance sheet is a snapshot of a company's assets and liabilities at a single point in time and contains critical info to enable the buyer to get a general understanding of the solvency and business dealings of a company.
Investors are particularly focused on the strength of the balance sheets. One of the primary areas of focus is the ability for the company to convert profits into cash. The higher the cash conversion rates the better. A strong cash conversion signifies a business that is healthy.
At the end of the day, valuing something isn’t always easy.
There’s a lot of detail in here that matters – everything from adjustments for debt, what the company’s working cash flow is, and even the extent to which debt is efficiently managed (i.e. not costing more than it should).
The sorts of data points that help companies arrive at this include realistic purchase order-to-payment terms (this is typically a good signal of the health of a business); where money is currently tied up; and what your cash conversion rates are. ‘If you give me a £1 of profit, I would expect to see a £1 of cash’
Ultimately price is driven by demand and supply. It is often modified by intangibles, like reputation; awards; who past clients may have been.
But it’s also very much impacted by perceived value and perceived opportunity – things agency bosses can definitely influence.
Some things are obvious: Being in debt decreases a business’s value; having undocumented long term goals shows lack of foresight; while not being able to boost margin, either gaining by new clients, or growing existing ones, is a weakness that will be exposed. Finances are the foundation upon which any valuation sits.
