As consumer research habits continually shift to the internet, the importance of a strong web presence for businesses continues to grow. With this demand for more traffic has become a lucrative opportunity for service providers offering SEO, PPC and social media marketing services.
What Seperates the Sellable Marketing Agencies From the Rest
Anybody who has a rudimentary understanding of digital marketing can build a website and claim to be an agency. However, agencies are service businesses, and as with all service businesses, their main asset is their reputation. A reputation that is earned through years of transparent service that created value for clients.
In addition to a positive reputation, agencies that can be sold have processes in place to market, onboard, fulfill orders and interface with clients.
A hallmark of executing these practices well is a low customer churn rate. The higher your businesses churn rate, the more clients your business loses annually and has to replace. This is a hallmark of a marketing business that is not firing on all cylinders and will be difficult to sell than a competing business that only loses 10% of its clientele in a given year.
Who Buys Digital Marketing Businesses
Like any small business transaction, the buyer needs to have the skills in order to operate the business successfully. In the case of marketing agencies, this means that other marketing agencies are the most likely acquirers.
In addition to their own marketing efforts to obtain clients, marketing agencies can look to acquire another agency to expand their client book. This is most commonly seen with a larger business acquiring a number of smaller businesses. Although, there are a number of incidences of the minnow eating the whale as well.
Another buyer of marketing agencies could be a career changer from either the IT or tech industries.
Many professionals desire the lifestyle and freedom that small business ownership provides and are often times able to get very favorable financing terms from the SBA to acquire a US based marketing agency. This will likely be the most desirable scenario to sell the business, as SBA loans make for cash closes. However, the business must be based in the US with clean tax returns for the past two years and the buyer must be able to prove that they are a capable business manager.
How Are These Deals Structured?
- Aside from the SBA loan option mentioned above where the seller gets bank financing and is able to make a cash purchase, there are some alternative deal structures that buyers of marketing agencies rely on to help them mitigate risk and have the business finance its own acquisition.
The primary risk from the buyers perspective is that the business they buy will lose its employees and its clients. In order to help insure their risks against these factors, the seller will often use a royalty to decrease the payment if the business fails to meet expectations. Or, a holdback to void a portion of the payment if the business doesn’t perform as expected.
- A hypothetical scenario for this would be: The buyer pays $1M at close for a business with an additional 15% of revenue paid to the seller on a quarterly basis for 3 years.
- The buyer could pay $800K at close for a business with another $250K paid after year one and $250K paid after year two. If however, the business revenue drops by more than 20% in either year, the buyer does not have to make that payment to the seller.