Should You Grow Your Agency Through Acquisitions?

There are a number of ways to grow your agency. Add a new revenue stream. Grow your sales organically. Form a joint venture. Any number of ways – or combinations of ways – can work for you. However, if it’s a quick win you’re after, and if you are in a position to make it happen, acquisitions top the list, hands down.

This may not be your standard answer to how to grow your agency, but that’s because most agency owners are not in a position where an acquisition even enters their minds. To grow your agency by acquiring another business means having the financial means, the management know-how, and the right business model. If you think you fit the bill, keep reading.

When Should I Look to Acquire Instead of Growing Organically?

Just because you are in the financial position to put some of that stockpiled capital to work in the form of acquisition doesn’t mean that’s what you should be doing. You need to first understand your industry’s dynamics and your agency’s potential before you can make an informed decision. Here are two key factors you need to consider in detail before deciding if acquiring an agency is the right next step for your growth strategy.

Does Your Industry Have a High CLV?

The customer lifetime value (CLV) is the total amount of money a customer is expected to spend on your business in their lifetime. If you are operating in a space where CLV is high, this helps to de-risk your acquisition as customer retention will be less of an issue. In other words, high CLV will not only mean that you get to continue to monetize existing customers but also that the customer acquisition cost (CAC) is offset. Indeed, the higher the CLV, the less you will have to invest in acquiring new customers to remain at existing income levels. This can be especially beneficial if you need some time to financially recover from the acquisition itself.

Two industries that typically display high CLV are insurance and digital marketing. The relationship-intense business that digital marketing tends to mean that there is a significant level of trust that has been built up over years of delivering results. This, in turn, means that there is little reason for customers to shop around for other agencies. This means that not only can you expect customer retention to remain high post-acquisition, it also means an acquisition represents bringing a client portfolio in-house that would otherwise have remained out of reach.

Does One Client Make Up the Majority of Your Revenue?

On that note, if your client roster happens to be well populated and your sales pipeline is filled, then growing organically could be the best way forward. However, if you are heavily leveraged on just a small handful of clients, or even a single one, your exposure to that relationship definitely poses a risk. Especially times of crisis can highlight how quickly even a client who has been nurtured for years could be driven to dial down expenses and drop an agency contract despite a successful working relationship up to that point.

In other words, diversifying your revenue while limiting your exposure to disproportionately large accounts are things that an acquisition could help you solve swiftly. Beyond the snapshot solution for increasing your client roster, you might just find yourself acquiring a sales team that can continue to help you grow organically along the way.

What Should I Look for When Acquiring an Agency?

Once you take the step from consideration to evaluation, and you feel convinced that an acquisition will not only accelerate your growth in the near term but potentially also sustain your growth in the long term, you will want to know what to keep an eye out for in a target business. Here are two things you cannot afford to overlook.

Earnings History

This is the North Star metric for any acquisition. There is no way around using earnings as your point of orientation, and unless you think you have everything needed to turn a poor earnings history around, typically, this needs to be in impressive shape. That means understanding how much money is made every month, how much more of it is being made now than 12 months ago, and what kind of margins you’re working with. The overall financial health of a business, meaning not just the sum total of incoming revenue but also how sustainable the earnings structure generating that revenue is, will be key to making an agency an attractive prospect for an acquisition.

Management Structure

Since you won’t just be acquiring a P+L statement, you will need to consider what it means to acquire a new management structure. How top-heavy is it? How experienced in marketing is it? Is there a cultural fit or a disconnect? It’s important to ensure that the management and the team that created the success that put your acquisition target on the map is able to continue performing, post-acquisition.

How to Properly Acquire an Agency

Knowing what to look for when acquiring an agency is one thing. Assessing what you find is a whole other matter. Due diligence is the answer. Getting a due diligence process right means making sure that, firstly, the business you are buying is not only in good shape but also, secondly, that no surprises will spring up further down the road. Ticking the right boxes and ensuring you can rest easy once the deal is done requires a mergers and acquisition advisor’s experience.

Finding the Right M&A Advisor

The right M&A advisor will make sure that nothing slips past you as you line up your acquisition. The right kind of M&A advisor will have a track record of helping companies acquire new agencies, they will have case studies they can share with you, and they will have experience working with agencies in your industry to bring that specialist knowledge to the negotiating table.

Another added plus is if the advisor has previous experience as an agency owner themselves. For example, Barney, an M&A advisory that helps marketing agencies on both the buy and sell-side, started their advisory because they couldn’t find skilled M&A advisors when selling their own marketing agency. They ended up becoming M&A advisors with a specialty focus in digital marketing, leveraging their knowledge in the sector to provide a detailed, tailored, and expert understanding as part of their M&A services.

Key Takeaways

An acquisition is one option among several to grow your agency. There are plenty of scenarios where it might emerge as your best option, but it requires ticking multiple boxes for it to be the right move for you. Are there enough cash reserves to make a serious bid? Are you struggling to realize other growth opportunities? Are you over-exposed due to a limited client roster? These are among the key questions that would drive you towards considering if an acquisition is the right decision from a strategic perspective.

Understanding what you’re acquiring once you feel like it makes strategic sense is a further key aspect to advancing towards a potential acquisition. Is there a cultural fit? Are the teams and the management complimentary with your existing agency? How has the agency you are considering acquiring been performing, and will they continue to deliver those results post-acquisition?

Especially when it comes to assessing their performance and how this performance aligns with your business goals, you are entering the territory of due diligence. This is when it becomes essential – both for your immediate transactional and your long-term strategical success – to engage an experienced M&A advisor. Take advantage of their experience, their know-how, and ideally, their sector expertise to ensure that your acquisition enhances more than the book value of your business.

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Author: Marcus Cook

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