Marketing Agency Deal Structures: Considerations

A deal structure is a set-up that you’ll base your next steps on when the day comes that you decide to exit from your marketing agency. It includes the terms and agreements for both parties (buyer and seller). It’s important to create a thorough deal structure to ensure that you will not have conflicts long after you’ve sold your business to a buyer. This will also help ensure that the rights and interests of both parties are completely covered no matter what. You’ll find in this article some considerations to make when you start designing your marketing agency deal structures.

Options in Creating the Marketing Agency Deal Structures

You have three main set-ups to choose from when you decide to go for an exit. It’s important to weigh them carefully because they benefit both parties in different ways.

Mergers

If your marketing agency has lots of stockholders, this arrangement may be the best for you. This set-up requires at least two businesses to combine so they can eventually be one entity. The buyer has to gain consent from the majority of your stockholders for merging to push through. Otherwise, they may have to consider another option.

shareholder

Buying or Selling of Assets

For this one, the person buys the assets. Buyers usually go for this choice because they can handpick the assets that they want to obtain. As for the liabilities, they will assume them as well when they purchase the assets. When preparing for an exit, this may not be the best choice because of the higher tax that needs to be paid. This is because each asset will have a specific amount of tax allocated to it. When assets are bought separately, the total amount of tax that you have to pay goes higher. Think of it as buying in bulk versus buying in small packs. You spend more when you do the latter. It’s essentially the same thing for this set-up.

Change in Ownership

In this set-up, someone closes a deal with stockholders to purchase the stock of the company. While the company is retained as it was before, the owner will be the one who bought the stock. If you’re considering this option, you have to carefully review the warranties and representations that the buyer will present. Check if the terms included in the documents are in line with what you plan to do after the exit. From there, take down notes on the important points you want to present to or ask your buyer. Have the assets and the liabilities of the marketing agency in mind when you do this.

Businessman Signing An Official Document

Even if you’re not planning to sell your company, it’s still a good choice to devise an exit plan. Consider this as a plan B for your marketing agency. This will help you improve the entire end-to-end process and have another fruitful goal in mind.

Financial Considerations for the Marketing Agency Deal Structures

Holdbacks

This is a type of financial protection that buyers usually include in the deal structure. The performance of your marketing agency will be relatively unpredictable once you complete the exit. After that, they can only rely on future numbers to see if the business is going well. Consider holdbacks as sort of a partial money-back guarantee in case the venture fails after the transition.

Drafting a holdback agreement with the buyer helps prevent gray areas. These gray areas may be based on subjective observations on the marketing agency’s performance after acquiring the marketing agency. This also protects both the buyer and the seller from problems such as loss of profits because of substandard business-related choices.

You need to review this part (if there’s one included in the deal structure) because you have to define what “failure” is. This is the same way that you have to agree with your buyer what a “successful marketing agency or business” is. Create objective parameters to determine the differences between these two qualities. These parameters may include average profit during a specific time, the number of incoming clients, and the number of output produced by the team during a certain period.

It’s also imperative to set a timeline that you have to follow when checking the parameters. For this matter, a one-year holdback period is enough to see a trend in the profits and expansion of the marketing agency. Only then can the buyer determine if they are satisfied with the performance of the business or not.

Seller Financing

Compared to holdbacks, this may pose a greater risk on your end because it may involve a higher amount. For this arrangement, you have to provide a loan (usually a percentage of the total sale price) to help the buyer purchase your marketing agency. The buyer should also provide a downpayment before exit. To encourage them to completely pay the loan, it is advisable to add interest. Carefully word this when you start drafting the payment system along with the rest of the deal structure. If you’re apprehensive with this approach consider having a collateral agreement with the buyer. In the long run, this decreases the risks related to the loan.

loan agreement

Profit-Sharing

If you’re planning to provide complete ownership to your buyer, this is not a cause of concern for you. Ponder on this consideration if you’re concerned about how the members of the agency will fare after the turnover. Include the profit-sharing terms in the deal structure to encourage consistent positive performance among the marketing agency members despite the approaching transition.

As the term implies, the funds that will be used as incentives for the members will be acquired from the profit itself. You may indicate in the deal the percentage of the profits that will be distributed to the members. The problem will arise if there’s no profit to begin with as this can cause demotivation and doubts among members.

Additional Points to Consider

Creating marketing agency deal structures is one of the most important aspects that you have to consider prior to an exit. This will help provide objective points to ensure a black-and-white transaction for both parties. Aside from that, this will provide you with adequate legal and financial protection if thoroughly thought through. Construct your deal structures carefully by studying the factors involved so you can sell your marketing agency without issues. Consider the viewpoints of the agency members as well.