Last time we alluded to other viable options. What’s viable to one agency owner may not be so for another. Consider an agency network, for example. There are various types.
- The simplest are the networks which build on one foundation agency and extend into an integrated multi-office holding company operation. These are the core of the Advertising Industry. These are not an option for small cap agencies, unless one has a unique value proposition that differentiates them from the rest or has specific value to the Holding Company that acquires them.
- There are networks that focus on small to mid-cap agencies. The math with these vary, but generally they choose agencies they can acquire at a value driven by 3X to 4X EBITDA and offer cash at Closing at 2X EBITDA or less. The value proposition that the organizers offer is that they will make 10 to 15 such acquisitions and create a larger agency that will command 6X to 9X Multiple at the end of 4 to 5 years of operation. The result is that Sellers are encouraged to accept stock instead of cash because the stock they receive will double or triple in value by the end of the period. Some pay out cash along the way, but generally not before 2 years, and only if the individual agency has achieved all of the milestones (growth) they agreed to meet when they sold.
- The formulas that dictate the conversion of individual agency stock into corporate stock vary. Early sellers have to be careful that the stock they trade for will not be diluted as additional agencies are acquired. The later arrivals have to be aware that if the network grows, the value of their individual agency stock will return them progressively less corporate equity. This scheme isn’t inherently bad. The thing is that the big promise may not come true due to a number of variables out of the control of the selling agency owners. In the end, they may not be able to cash out, because their stock has little or no liquidity. This is especially true if the organizers use debt to finance acquisitions.
- There’s another network strategy that offers to acquire majority interest in a small cap agency, and then provides back office and sophisticated technology services at cost to their agency subsidiaries. They do not acquire to integrate. They maintain the individual cultures in the agencies they acquire. The key requirement is that the Seller be profitable.
You should contact me if you’re interested. In any event, look for the next installment on how to negotiate a higher sales price.
Stay tuned for my next AdBlog on Small Cap Marketing Agencies.
Henry Corona, Financesur
www.financesur.com • 305-748-0888