There is a logic to successful agency deals that both sides sense in advance and that becomes clearer after the dust settles. These deals just seem right. Buyer and seller get along and share a consensus on what’s fair and goals for the agency’s next phases. The buyer understands and respects the seller’s personal and career goals in terms of what happens next, and the seller understands the buyer’s economics and business model. They share an understanding of the industry and what’s needed to succeed in it. The right people at the agency stay on and become part of the next era, whereas the less talented or more contentious people move on. It’s economic recycling.
For an owner first sticking his or her toe in the market, the selling process can be unfamiliar and daunting. Everyone wants to optimize his or her agency’s value.
Here are nine steps to a better deal:
Step 1. Get to know the buyer. Set up a friendly dinner to develop the deal. In a social setting, both sides can learn quite a bit about each other; when the chemistry is right, everyone knows it. Many deal veterans call this a “first date.”
Step 2. Create buzz. As many ad execs and marketing gurus understand, you have to get people talking about your agency. Here are some ways: Create a great updated website. Prepare a credentials presentation deck. Assign your top creative people to your development team. Get yourself invited to keynote industry conferences and speak on panels dealing with trending topics. Offer unique perspectives when you speak. Return any and all calls from trade journalists and advertising beat reporters and columnists. Be your original, captivating, and engaging self when you speak. Get introduced to industry consultants, competitors, and other industry insiders and take them to play golf or to lunch or dinner.
Step 3. Get great clients. Land at least one highly visible, highly coveted account, and do great work for them. Then get a second one.
Step 4. Get great people. Hire the best and brightest and compensate them fairly. A first-class agency has at least two full-time executives on board capable of helming the shop and bringing it to the next level. Recruit and reward them as well as your rising stars. Hire people who have stellar track records and high-caliber personal relationships. Look for people who can book big meetings and help you win big accounts. Recruit top creative people. Identify and hire the best talent available, even if you have to stretch financially.
Cull your agency of dead wood. Identify the people who have been around for a long time and have lost their edge. Reassess their capabilities and reconsider their future at your shop. If it’s time for them to move on, make that happen. The people who brought you to where you are now may not be the people to bring you to the next level. No one likes the severance process, but someone has to do it. That someone may be you.
Step 5. Select clients with care. Anyone who opens their checkbook should not automatically become your next client. Cheap clients, timid clients, clients who don’t really understand their own businesses, cantankerous clients, unethical clients, and clients looking for personal gratification instead of business advantages are clients you don’t need. Show them the door or don’t let them in. This advice pertains to professional services firms as well.
Step 6. Rationalize your operations. Are you taking out too much of the profit? Pay yourself a fair salary and go easy on the perks. Benchmark your own compensation according to norms in your market. Reinvest some of the profits in the agency on a constant and continuous basis. This means compensating your employees fairly; competitive compensation policies reduce the likelihood your rising stars will jump ship. Pay for the licenses you need based on actual use patterns rather than unrealistically low advance estimates. Invest in upgrading the work environment.
Join the appropriate industry associations and regional business networks. Reimburse staff for the professional training and education they pursue and should be pursuing.
Step 7. Assemble an experienced deal team. Get referrals and interview lawyers and advisors before contemplating any transactions. Don’t hire people with little or no deal experience in your industry.
Ask them to elaborate on their experience, and be sure you check all references. Read the trade press regularly. Watch the tombstones—the ads that publicize sales of agencies at completion—to see who’s active in the market. Do this early in the process, around the time you first start thinking about your agency’s valuation and contemplating sale or exit plans.
Step 8. Plan your future with you in mind. Approach the deal with a clear, realistic, and highly detailed plan in mind for the next five to ten years. Most buyers are prepared to offer you a contract that will extend over the next three years at least, covering the period of earnout.
Determine in advance what title and responsibilities you’d like to have at the new company, who you will report to, and your salary and incentives. Pay detailed attention to any and all noncompete and restrictive covenant clauses and any other contractual restrictions such as those limiting who you can do business with, what industries you can work in, what parts of the country and the world you can operate in, and so on.
Step 9. Do great work. This is the most important step, so let me restate that: do great work.
