Want to Sell Your Digital Agency Someday?
Ever since I sold my agency 5 years ago, a lot of agency owners have asked me tons of questions surrounding this topic. I wanted to put together a quick mind map so you can wrap your mind around what an exit really looks like. Selling your digital agency can seem overwhelming! But here’s the scoop on why you might be thinking about selling, reasons someone would want to buy your agency and how to increase your agency’s valuation to attract the right kind of buyers.
3 Reasons A Buyer Wants to Acquire an Agency
1. Rapid Expansion
If you have a solid reputation for a specific service or skill set, a buyer might be interested in acquiring your agency. The thing is, your processes and systems also have to be totally solid. An acquirer who wants to grow rapidly is only interested in an agency that is running efficiently. They aren’t interested in growing organically (or they’d just do it themselves).
2. Geographic Expansion
Sometimes a great agency is looking to expand in your area. Rather than starting at square one and opening a satellite office in a new location, a buyer will look to acquire an agency that’s already established in their desired location. If you want to attract a buyer like this, just be the best and get known for it!
3. Market Share Expansion
Some buyers might be motivated to purchase based on your client list. They simply want a bigger piece of the pie and they’re willing to pay for it. If you’re equally motivated to exit then there could be a match.
Areas to Help Increase Agency Valuation
Whether you have an exit plan or not, the right time to increase your valuation is now. It takes time and patience to grow into a business worth buying. Here’s a list of the top 5 things an acquirer will consider when looking to buy your agency. Improve these areas now so you can be considered a serious purchase-option later.
Profit: A potential buyer will look at the past three years profit. They aren’t looking at just the numbers, but also the story it tells. Be cognizant of your profitability and the direction it’s headed.
Growth: Buyers will look at the past three years of growth. Ideally you’ll be able you’ll have three years of steady growth. If it’s up and down or flat, that means business is not predictable and can hurt valuation.
Recurring Revenue: Obviously recurring revenue is great, but it needs to be contract-based. A potential buyer will want to know clients are contractually obligated to stick for awhile. No contracts or very short term contracts will be a turnoff to buyers.
Systems & Processes: Most buyers want to jump right in and start steering the ship. A lot times, an acquirer is buying an agency for its reputation in a specific service or skill set. They don’t want to spend time creating the necessary systems/processes.
Client Portfolio: Is your revenue tied up in 1-2 large clients? That’s a red flag to a buyer and can hurt your agency’s value. Sensible buyers want to see that your revenue is spread more evenly across many clients. That way, if one client jumps ship after the acquisition they’ve still got a healthy and viable business on their hands.
What Does an Agency Owner Exit Look Like?
There are actually 7 different types of owner exits. The strategy that works best for you will depend on timing, circumstance and personal reasons for exiting the business.
1- Lump sum cash
This is typically what people envision when they talk about selling their agency. Cash is king after all, and it’s definitely the cleanest way to go out but it’s not the only way make an exit.
You may decide to merge with another agency with complimentary services. The benefit in this strategy is expansion for both parties, however it means taking on a partner or partners which can get tricky.
3- Equity conversion
This is when another business buys your agency and gives you a percentage of equity in the newly merged entity. It can allow you the exit you desire, while still holding ownership of something
4- Employee sale
When an owner is ready for a change but hasn’t been able to find the right buyer, he/she might consider selling the business to the employees. After all, they’ve helped build the business and are your #1 asset.
5- Partner buyout
Partnerships change, grow and evolve. Sometimes one partner outgrows the business before the other; sometimes their personal goals change and it’s time to make it move. It’s can be a very healthy and mutually beneficial decision to sell to a partner.
I listed this second last, because it’s my second least favorite type of exit. Earnouts rarely work because the recipient has no control over its success. An earnout is structured such that the former owner stays with the business for a set amount of time and earns additional funds if certain goals are met. In my experience most acquirers set lofty goals in the hopes they will not be reached.
7- Close the agency
My least fave exit strategy is just closing shop. It happens, but it’s such a shame to see an owner close the doors on something they poured so much blood, sweat and tears into. There are other ways… see above! 🙂
Need Guidance and Support to Grow Your Agency 3X Faster?
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