One of the most important things during a business meeting, the almighty first greeting…April 13, 2015 12:57
The big sale
After the appeal of being one’s own boss wears off, the aim of many who have started their own agency is to sell up and retire. Imad Kublawi, regional partner of Results International Group, explains how
January 12, 2009 2:14 by Dana El Baltaji
Once you have decided to sell your agency, you will first want to know what it is worth. There are at least four methods of evaluating a business. Two of them are very common in the marketing and communications industry: price/earnings multiple and revenue multiple. (The other two are return on investment and discounted cash flow.)
The money you will get from a company that buys you out (or partially buys you out, with an earn-out or earn-in factored in) will be worked out as a multiple of your agency’s normalized profits before tax, so one of the most important questions you, as the owner of an agency, want to answer is, “What multiple should we apply?”
This is not an exact science, and there is a whole range of discount and premium factors that will influence the level of the multiplier. I will explain, at the risk of oversimplification, how these factors apply to a realistic assessment of your company’s value, based on experience from more than 220 transactions Results International Group has been involved in.
Let’s begin with discounts. Significant discounts are often demanded to offset increased risk for the purchaser. At your agency, are profits less than 10 percent of the revenue? Is there a lack of succession management, of well-trained and motivated people below you? Is there an exclusive reliance on one principal client? (This is often viewed as a hugely unattractive risk and may result in a heavy discount.) Does your agency have a weak strategy? And, finally, is it poorly positioned? Some of these may not matter as much as others, but they are still likely to be reflected in the multiplier and value to some degree.
On the other hand, of course, there are premiums you can seek for your agency to counter these discount factors. A premium can arise from scarcity. If your agency has particular qualities that have a special value for certain buyers – such as reputation, specific clients, intellectual property rights, lock-in products and proprietary tools, proven management, long-term contracts, or distinctive niche positioning – the premium could ultimately add up to 50 percent of the value of a comparable agency that doesn’t have any of these characteristics.
Goodwill can also lead to a premium. Has your agency built up clear momentum over the years, such that, in a sense, it has a life of its own – regardless of who actually does the work? Longevity of client relationships, and management and key staff retention are other elements of goodwill. They contribute to confidence about the sustainable profitability of your agency, hence enhancing the multiplier and its value.
Good timing can even be grounds for a premium. As shown in the graph, selling when your agency is still getting established will not create much value, as there will be no real track record or reputation. Potential buyers will consider this highly risky. Similarly, selling your agency at the top of its growth cycle may reflect poor judgment and not be lucrative because the business is at risk of going into ex-growth (when significant growth stops), which will severely limit the buyer’s view of the multiple.
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