What is a buyer thinking when I sell my agency?

Years ago, when I was still learning how to buy agencies properly, I walked my Chairman through a business I was excited about. He had run one of the most famous agencies in the world; I was a keen and still somewhat green acquirer trying to find diamonds in the rough. I was thinking the agency was amazing, he wasn’t. He looked at me and said, "if it's so amazing, why are there only 25 people in it? Why haven't they grown? Why aren't they 150 people already and still growing?"

I've thought about that question loads ever since.

At the time, I probably muddled through an answer about how not every agency can find unlimited growth. Or that agencies hit natural barriers that they find it impossible to cross. Or that the reason an agency in flatline looks to sell is to achieve a path to growth again.

While these things are truisms in that there are real barriers and that people do sell to join a bigger platform with growth in mind, I missed the point at the time. I pitched the agency to him as ‘amazing’ because of their people, creativity, client book, culture and more. I was thinking like an operator. He was thinking as an asset owner.

Can you handle the truth?

I know from first-hand experience that if you ask an agency owner why they aren’t growing, or suggest that greatness doesn’t come small, you get a frosty response. But, questions like the one in the intro above seek to identify barriers to future success. It’s easy to read them as judgemental about the past or present, but that’s not the point. When you sell your agency, it’s all about the future.

That’s the learning sellers most need to take away. I say this often. Buyers aren't paying for your past achievements, you have already been paid for those. Nope, they're buying what the future promises. Why do I say this so often?

If you present your agency as a finished masterpiece, you're telling them there's nowhere left to go. Sometimes, the ego needs to be checked at the door. As it turns out, the agency I was pitching to my Chair wasn't 'amazing'. It had loads of potential, but it was stuck. As an experienced buyer, I also now know that a stuck agency that thinks it’s a finished masterpiece is going to be tough to work with. They’ll resist change, double down on their existing processes and generally dig their heels in.

Certain sellers (and their advisors) walk into a sale process believing the job is to look perfect. I learnt that the job is to look real and to have a credible story about where the next phase of growth might come from under new ownership.

Let me explain what a buyer like me is actually doing and thinking when your agency teaser lands in my inbox.

Headline numbers first

First things first. I used to filter people out, not in. That's worth ruminating on for a moment.

Every buyer has a different buy box (set of criteria); turnaround specialists want distress, group builders want cookie cutter, solo agencies want complementary capability. I'm in none of those camps, so my first cut is brutal and brief. If the agency's in decline, red line. If it's too unprofitable, red line. Stable and modestly profitable gets you through the first gate, which is a lower bar than most sellers assume.

Here's the bit some find counterintuitive. An agency convinced it has peaked at 13 or 14 percent EBITDA could be highly attractive to the right buyer. Not despite the modest margin, but because of it. The fastest value I can create in a well-run but unoptimised agency is to put proper systems in place and lift profit out of the same revenue base. Whereas, if you've already squeezed every point of margin out of the business, you've removed the easiest reason for me to buy you. Hidden value beats polished value, every time, at least for me.

Then the website, briefly

If the headline numbers pass, I look at the website. I want to see whether this is the website of a professional, progressive agency that knows who it is and where it's going. To see whether the proposition is well explained. To see whether it’s easy to find a reason to buy from it. I’m not that bothered about awards, but a bad website is a red flag, because it suggests an agency that doesn't take its own positioning seriously. It doesn't have to be beautiful; but it absolutely has to be effective.

Then the chemistry meeting

If the numbers and the website pass, I want to be in a room with the owners as fast as possible. The first ten minutes of that meeting is the absolute test of whether I want to do something with the agency. Not the diligence, not the model, not the structuring. The first ten minutes in the room.

There's no scientific answer to what I'm reading in those ten minutes. A lot comes out of the conversation; attitudes to business, to people, to the world. But the deeper signal is gut instinct, which is the distillation of years of experience and knowledge, and it should never be ignored.

Three real meetings I experienced, and which are true stories, will tell you more than any framework.

First meeting. The seller took the call lying on a sofa. He thought he looked cool. I thought he looked complacent. The numbers were fine. I walked.

Second meeting. The owner came across as mean, a bit of a taker. Nothing dramatic, just a series of small signals about how he spoke about his staff and his clients. Numbers were really strong. I walked.

Third meeting. The financial performance was kind of average, but the creative capability was extraordinary. The owners were genuinely good people, the kind you'd want to work with for the next three years and probably the ten after that. I did the deal.

In retrospect, the pattern stares me in the face. Two agencies with the right numbers and the wrong people didn't get bought. One agency with ordinary numbers and the right people became one of the best decisions I ever made. Sellers who optimise for the spreadsheet and treat the chemistry meeting as a formality often misread the transaction (in my opinion of course).

Now turn the camera round

Everything above is what a buyer sees. If you're a seller, what does it mean for how you prepare?

1. Well, it doesn't mean massage your numbers to look perfect. It means tell the true story, including the parts you're slightly embarrassed about. The gap between where the agency is now and where it could credibly go could be the thing that brings buyer to completion. If you close that gap in your own pitch, you might price yourself out of your own deal. Maybe that’s why so many agencies coming to market don’t sell? You and I both want to maximise value, but it has to be at an achievable price.

I was in a meeting just yesterday talking about why M&A volumes are down at the moment. We all know the geopolitical situation means everyone in business is risk averse. We know that agency revenues are more volatile now than they have been. We know that in many agencies growth and strong margin is hard to come by. These aren't reasons. The reason agencies on market aren't selling is because there's a mismatch between price and risk. Everything can be sold today... just not at a price that's attractive. That's why volumes are down. I'll write a blog about this soon.

Back to the point. let's think about the first meeting.

2. You must prepare, but I would advise against over rehearsal. It’s much better to be the person you actually are in the meeting. Be authentic. Gut signals can't be coached, and a buyer with any experience will read through a performance inside ninety seconds. If you're the sofa guy or the taker, no rehearsal will save you. If you're not, no rehearsal is needed. Apart from anything else, actors rehearse because they play roles. You are playing you. So be you.

3. What we’re talking about also means giving yourself permission to walk. If the buyer in front of you isn't someone you'd happily work with for the earn-out period and beyond, the deal will be miserable even if the headline number is good. Buyers walk on gut and sellers should do the same thing.

4. I would say this, but you should be careful about who's helping you prepare. Selling an agency is the most important transaction of your career, and most owners go into it advised by people who've never sat in the chair you're sitting in.
   
   There's a difference between a corporate finance adviser who has run a process before and an operator who has built, bought, run, merged and sold agencies themselves. Both have a role, but only one of them can tell you what the buyer is actually thinking in the first ten minutes of the chemistry meeting. They've been the buyer.

What’s the TL;DR?

What it boils down to is this: only you will know whether you’re emotionally ready to sell. Advisors like me can tell you whether selling now or later might achieve a better value. A few of us we can also tell you what you need to do in order to sell for more. We will help you prepare and will help identify buyers who see more value in you than others.

Of course, you can sell at any stage of a business, but it's always better to sell a growth story. You don't have to have all the answers.

So you need to ask yourself this: who in your life that you trust has actually sat in your chair, sold an agency they built, and can tell you what the buyer on the other side of the table is really thinking? If the answer is no-one, that's the gap to close before you take the next inbound call seriously.