Selling Your Marketing Agency

How To Sell A Marketing Agency

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.

Due to this increase in demand and low barrier to entry, many new entrants see that building a digital marketing business is a ripe business opportunity and set their sites on building a small marketing business.

What Separates the Sellable Marketing Agencies From the Rest

While 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 sign that a marketing business is not firing on all cylinders and will be difficult to sell when compared to another marketing business that only loses 10% of its clientele in a given year.

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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. When one business buys out another business in the same industry, they are called a strategic buyer.

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.

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If you are entertaining selling your marketing agency and want an idea of its value, have a look at out marketing agency valuation calculator.

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.

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  • 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.
Or,
  •  The buyer could pay $800K at close for a business with another $250K paid after year one and $250K paid after year two. However, if the business revenue drops by more than 20% in either year, the buyer does not have to make that payment to the seller.
In both of these scenarios the buyer and sellers interests are aligned and they benefit from a seamless transition and future business growth.

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Marketing agencies are typically valued on a multiple of their sellers discretionary earnings. To find this number, we take the net income line from the income statement, add in the owners salary and benefits and then subtract any non-recurring expenses. 

When Should You Sell Your Agency?

There is both a qualitative answer to this question which is “how much profit does my agency need to make before I sell it?” And, a more qualitative or quality of life question of “do I really want to part with my agency?” that only you can answer.

The answer to the first question is one that I can help with. Marketing agencies and other service businesses should have:

  • A positive growth trajectory for at least the past 12 months
  • Should be at least 3 years old.

Note: Most agencies are still small and somewhat undesirable at this stage.

  • Should have clean financial statements and operating procedures
  • Should have account reps to handle 90% of the sales work and client work
Note: this holds up the majority of agencies we see from selling for top dollar.
  • Should be automated to the point that the seller can run it on less than 10 hours per week.
  • Should make at least $250K in annual profit (other brokers and marketplaces will still take you if you’re smaller)
 

If your agency does not check ALL of these boxes, don’t worry. you can still sell your agency, but it will likely hurt your valuation some. Generally speaking, buyers aren’t going to pay a premium to: buy themselves a 40 hr./wk job, buy a diminishing business or buy a business where the financials and operations are not clear.

I’ve found that the answer to the quality of life question is somewhat simple; If you still love working on your business, the answer to this question is simple…Don’t sell it.

You have invested years of your life building your business and it may feel a bit like selling your first born. However, you have likely heard of “agency burnout” and may even be feeling it. Since you made your way to this article, the chances are that you, like most entrepreneurs have reached a point where you would rather move on to your next project. 

It’s an entrepreneurial right of passage to build a business, see a greener pasture and sell your current project and pursue this new venture. Building new businesses, getting tired of them, selling and starting again with a fresh slate.

Selling Your Agency to a Strategic Acquirer or Financial Buyer

Broadly speaking, the buyer of your marketing agency will fall into one of two categories. Financial buyers and strategic acquirers. 

While the vast majority of businesses sell to financial buyers, it is worth noting that the marketing agency business model is one that lends itself to roll-ups and strategic acquisitions. This means that there are many agencies out there that look to buy other marketing agencies. They already understand the business, have the people, the systems and the processes needed to make it a success.

While these buyers may be interested in taking on your agency, it is our experience that your agency will either need to be: A. large enough to have account reps and salespeople. Or, B. You will need to stay on for up to a year as part of the acquisition plan.

If your business is reliant on you doing the sales and account rep work and you don’t plan to stay on to run it for a new owner, don’t expect to have a large exit. It may still be sellable, but you will likely have to accept a royalty as a percentage of profit as part of the acquisition.

Selling to A Strategic Acquirer

Strategic buyers are interested in a company’s fit into their own long-term business plans. Their interest in acquiring a company may include vertical expansion (toward the customer or supplier), horizontal expansion (into new geographic markets or product lines), eliminating competition, or enhancing some of its own key weaknesses (technology, marketing, distribution, research and development, etc.).

Strategic buyers are often willing and able to pay more for a company than financial buyers. There are two main reasons for this. First, strategic buyers may be able to realize synergistic benefits almost immediately due to economies of scale that may exist through the combined purchasing power of the new entity and the elimination of duplicate functions. The better the fit (i.e., the more realizable the synergies are), the more they will want the business and the greater the premium they will pay. Second, strategic buyers are generally larger companies with better access to capital. They often have another currency available to them in the form of stock. Strategic buyers often offer stock, cash, or a combination of the two in payment of the purchase price.

A strategic buyer could be your manufacturer who would now be vertically integrated. Another competitor in the e-commerce space or a larger entity that wants access to your IP or your customer list.

Selling to A Financial Buyer

Financial buyers can generally be classified as investors interested in the return they can achieve by buying a business. They are interested in the cash flow generated by a business and the future exit opportunities from the business. They are typically individuals or companies with money to invest, and who are willing to look at many different types of businesses or industries. Their goals may include growing cash flow through revenue enhancement, expense reductions, or creating economies of scale by acquiring other similar companies. 

Financial buyers will carefully scrutinize the financial statements of the company. Most are looking for a well-managed company with a history of consistent earnings, and preferably, earnings growth. The transactions of financial buyers are often leveraged. It is common to see financial buyers use as much as 80% or more debt to finance an acquisition. By using high leverage, the financial buyer is effectively partnering with someone who is willing to accept a level of return (a lending rate, perhaps augmented by “kickers” to augment returns) that is generally lower than that required by financial buyers.

How Long Do Agencies Take to Sell?

You can look up the average time on market for a business in your town, the average for a marketing agency and the average for an agency in your niche and you’ll come up with three wildly different answers.

The truth is, only an expert who keeps a close eye on the market and the various driving factors can give you an accurate assessment of how desirable your specific agency is to buyers and how long it will be on the market. Even then, we will give you a fairly broad range in terms of a timeline. 

Even though we have our eye closely on the market for agencies and other digital businesses as this is the only industry that we work in and we talk with dozens of capable and motivated buyers each week and have a very good pulse of the market, we still won’t be able to give you an exact timeline.

Many marketing agencies sell to other agencies in strategic acquisitions. If both you and the buyer are based in the US, this means that the business transaction will likely be funded by an SBA acquisition loan. This is good for you as you will get a higher valuation and more cash paid at close. And, it is good for the buyer because they get very favorable lending terms.

The one downside to SBA deals is that they take 90+ days. The saying “time kills deals” really is a true statement in our experience. The chance of the buyer (or you) having a change of heart while waiting for the acquisition to get financed by that bank is all too high.

Do I Sell the Business Assets? Or the Equity (stock)?

Long story short…it depends.

The rule of thumb is that small businesses will typically be asset sales, NOT equity sales. This is largely because the buyer is not interested in buying the equity of your business due to the fact that they will be assuming contingent liabilities. This means that you could owe taxes, get sued by a former employee or have defrauded one of your previous clients and there’s a possibility that the buyer who now owns the business would be liable for all or some of these issues.

With marketing agencies and other digital service businesses, asset purchases are even more frequent. This is because many transactions with digital businesses happen across borders. There are many legal complications that come into play when you sell an American LLC to a Danish citizen that lives in Colombia. Each deal is different, but broadly speaking, it is an easier deal for all parties if the assets are purchased as opposed to the stock.

What are the Benefits of Selling Stock vs. Assets

While it is still unlikely for the opportunity to present itself with any agency or business under $5M in purchase price, we work with a number of agency owners that sell for $10mm or more. For these business owners there is occasionally an opportunity to sell the stock in the business as opposed to the assets.

The reason that stock sales start to become more common with these larger M&A transactions ($10mm – $100mm) is because the buyers are typically US based. Moreover, these can sometimes be investment firms such as search funds or private equity firms that target digital marketing agencies for acquisition. 

The buyer may make an offer to purchase the stock of your agency at a lower price than if they were to offer to acquire the assets. You may be thinking “why would I take an offer for LESS money just to sell the stock vs. the assets in my agency?” Well, you may just pay about half as much in taxes.

If you are a US citizen, when you own your business for over 1 year and sell the equity in it, you get long-term capital gains tax treatment. This means you pay a much lower tax rate than if your were to sell the assets or sell the equity in under 1 year. Not only will you pay about half of the federal tax rate, some states will tax you at a lower rate on this money as well. All of a sudden, that stock deal for $18mm will net you more than an asset deal at $20mm.

In this scenario, the benefit to the buyer is that they buy the agency for a lower amount.

Most people are familiar with long-term capital gains tax only as it applies to real estate or securities such as stocks and bonds. However, it applies to all assets, including your business.

Please note that we are not accountants, CPAs, tax attorney, legal or tax advisors. We are sharing the regulations as we understand them, but this should not be seen as legal or financial advise. Always seek council with a capable legal or tax advisor.

What Is A Business Broker?

You may have heard the term “broker” before, but didn’t completely understand what it means. Brokers exist in several industries. You may be familiar with a freight broker. A freight broker acts as an intermediary for you as the customer and finds the best freight carrier to work with for your unique needs and budget. You typically don’t pay the broker directly, nor do they act as a freight carrier for you. The broker is just someone who is familiar with that industry, knows all of the key players in the business and is able to orchestrate the transaction.

Another common example that you may be familiar with is a real estate broker or agent. Again, you are not buying a house from or selling a house to this broker. They are acting as an intermediary and get a percentage of the deal. for bringing the parties together and facilitating the transaction. It is the brokers job to advise you, work in your best interest and to orchestrate all of the operational hurdles that go into successfully buying and selling your home.

As specialty business brokers, we at Upward Exits only work with sellers and only sellers of digitally native businesses. This means that we don’t sell restaurants, tax practices or construction companies. We only work with sellers of successful E-commerce, SaaS, Content sites and digital service businesses like your marketing agency. We go through the steps outlined earlier in this article to put together a financial statement and business summary, find a buyer, negotiate a structure and migrate all of the business assets and capital.

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