How An Agency Used Acquisitions to Double Growth
Considering buying or selling your digital agency? Acquiring another agency is an excellent growth strategy and it’s might be easier and less expensive than you might think. An acquisition can help improve profit margins, expand your client base, and inherit a skilled team while eliminating the competition. An agency acquisition is worth exploring if you’re interested in rapid growth.
In this episode, we’ll cover:
- Do you need to be a big agency in order to buy one?
- Do you need a lot of cash to buy another agency?
- How to structure an agency acquisition.
- The 4 criteria of a good agency to acquire.
Today’s podcast guest is Brook Schaaf, Co-founder and CEO of FMTC, an agency dedicated to helping advertisers and merchants develop discount and affiliate program with curated data and management. Prior to going the entrepreneur route, Brook got his start at Zappos where he developed his passion for affiliate marketing. Since then, he started his own firm and is on the fast track to major growing by acquiring other agencies and/or their books of business.
Do You Need To Be a Big Agency In Order to Buy One?
Nope! At the time he acquired his first agency, Brook’s firm had just 10 remote employees. The first agency he bought was PartnerCentric, which was of equal size to his agency. The existing owner was burnout and looking for an exit strategy. He said the process was long (it took two years!) and sometimes frustrating, but totally worth it in the end.
Do You Need A lot of Cash to Buy Another Agency?
Nope! According to Brook, an agency is generally worth 50% of its topline revenue excluding media revenue (since that can fluctuate). The problem is most sellers want to build retirement cash into negotiations and therefore expects to get more than it’s worth.
However, once you reach an agreement on the valuation you don’t need all that in upfront cash.
How do you know what your agency actually worth? My formula differs from Brooks somewhat because I factor in a multiple of EBITDA. You can check out my valuation chart here. But it all boils down to this…
Your agency’s value is the amount your willing to sell and which a buyer is willing to buy.
But you don’t need to have a ton of cash laying around in order to buy an agency. Standard funding includes a cash downpayment of between 10-20% with the remainder delivered in one of four ways:
- Cash upfront (which is difficult for most people).
- SBA Loan from a bank (which involves a lot of paperwork and hoops to jump through).
- Third-party funding (which may involve giving away equity).
- Seller-held note that is payable over a few years.
Brook’s acquisition was funded with a cash downpayment and a seller-held note payable over the course of two years. It’s risky for both parties, but it’s the best way to move forward without needing anyone else’s permission.
How to Structure an Agency Acquisition
Advice from both of us who have bought and sold agencies — involve lawyers in as little as possible. The bulk of negotiations can be done without racking up attorney’s fees.
Determine whether it’s an asset sale or equity/stock sale.
- An asset purchase is buying the agency’s book of business, including client contracts, trade name, payables, and receivables.
- An equity/stock sale is buying out the owner(s) interest in the business.
Brook says an asset sale is much clearer and easier to manage. It also creates a cleaner exit strategy for the seller so he/she can move on.
The 4 Criteria of a Good Agency to Acquire
The seller needs to be genuinely ready to sell. A lot of times people put feelers out and then hesitate when it gets real. If you sense any mixed feelings, walk away.
Remember, in most cases, you’re inheriting a team too. (There will be technical stuff about firing and immediately rehiring them, but most sellers will want to make sure their team is taken care of.) So make sure their team’s vibe will gel with yours. After having acquired multiple agencies, Brooks says the team is typically thrilled for the new vibrancy.
How stable is this agency? How profitable are their accounts? It should go without saying, but you need to make sure they’re running healthy books.
Are you confident that the acquired agency and its team can work the way your existing agency works? If you’re acquiring an agency to expand your foothold in the market then skillset is key. If you’re buying to add a service then it’s less important that they match your agency’s skill set instead you want theirs to compliment yours.
Considering selling or buying an agency? Check out more details about the process here.
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