If you’re interested in one day selling the firm you’ve created and built, how do you know when you’ve maximized your potential EBITDA multiple and likelihood of success finding a buyer? If you aren’t ready to sell, how do you know what you should be working on? The M&A process can feel like a black box. It’s something most owners only go through once, so it’s not worth an over-investment of time on your part. However, having a basic understanding of what makes a firm “sellable” will make you a stronger decision maker and give you more confidence as you build towards an eventual exit. The sellability of a firm is based on the potential pool of buyers, primarily. Any individual buyer will have their own criteria and will look at you slightly differently. However, here are the big buckets they look at, along with guidance on where you want to be in each bucket. The importance of each bucket can vary, but generally these are presented in order of most important to least.
Magnitude of ProfitsEffectively, you want to be large enough to be worth the hassle of an acquisition and integration. Acquisitions are expensive and time-consuming for both parties. Almost all buyers will be looking at your EBITDA, not your top-line revenue, to assess this. Once you’re over $1mm in EBITDA annually, you’re golden. If you’re below $250k in EBITDA annually, generally you’re not going to be worth someone’s time. In between $250k-$1mm, there’s certainly a market for you, but it’s a smaller pool, which just means the likelihood of finding a great match immediately goes down.
PositioningIt’s always harder to find a buyer for a full-service marketing firm. Why? Many of the buyers are already full-service firms, and are either looking to expand their capabilities or develop deeper skills. The narrower your positioning is, the harder it will be to replicate you. You might think that narrowing your focus makes you harder to sell, but the opposite is actually true. Buyers are looking for expertise, not warm bodies. Yes, being narrow in focus (either in service offerings or industry focus) means you are narrowing your pool of potential buyers. But that pool will be easier to identify, and in general, will be more interested in you. If you aren’t sure if your positioning is narrow enough, try these tests:
- How many competitors and prospects should you have?
- 5 Pre-tests of your company’s positioning
- 4 Back-tests of your company’s positioning
ProfitabilityThe amount of profit you’re hauling in is important, and the percentage of AGI (agency gross income) that is profit is almost as important. You will have a much easier time finding a buyer if your profitability (expressed as a percentage of AGI) is 15-20% or higher. Below that, buyers are going to be concerned about the way you’re running your business and if they’ll be able to increase profitability to match their own expectations without significant effort. The more effort a buyer thinks they will need to put into “fixing” a firm they are looking at, the lower their offer will be. And many will simply walk away entirely.
Client ConcentrationThe percentage of AGI that your largest client accounts for is effectively a measure of risk. Clients are most likely to leave during periods of change, and a change of ownership would certainly qualify. Buyers want to make sure they’ll be able to run a profitable business even if they lose a couple clients. If your largest client is between 15-25% of your revenues, you’re in a solid spot. Between 26-35% and you’ll start to raise some yellow flags. Anything above 35% would qualify as a significant concern. This doesn’t mean you aren’t sellable, but it does mean you are leaving money on the table. Any buyer will price in the risk of absorbing your client concentration issues, usually via a lower EBITDA multiplier and/or more restrictive earn-outs post-sale.
Recurring Revenue OpportunitiesRecurring revenue is rarely an expectation of a buyer in this field, but it is a highly desirable differentiator that can start pushing your EBITDA multiplier past the normal 4-6x range and into SaaS territory. This could take the form of ongoing contracts, AOR (agency of record) status, or a productized SaaS offering. Most firms have very little recurring revenue (10% or less), and because of that it’s a sure-fire way to stand out as a seller.
LocationThe COVID-19 pandemic has changed the way we work, probably for good. That said, location does still matter. It’s easier to sell a firm based in NYC than it is to sell that same firm in Omaha. There are a few reasons for this:
- Availability of desirable clients tends to correlate to the size of the urban center
- Availability of great talent (both employee and freelancer) tends to follow the same pattern
- Accessibility is a factor for all-team meetings, big client presentations, etc.
- Editable Performance Benchmarking dashboard, complete with a proprietary Firm Health Index, so you can track your progress
- Editable valuation of your firm and Sellability Index, along with a crash course in valuation theory, so you know how a buyer would currently look at your firm
- A short list of tailored recommendations to help you maximize your firm’s value over the next 12-24 months