Agency M&A basics

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Hello and welcome to this week’s webinar, Agency M& A Basics, where we’ll be talking about all sorts of things related to the buying and selling of your agency or an agency that you might be interested in acquiring. And so we’ll, Go ahead and see if I can bring up the slides. There we go. So we got the slides up now and we’ll go ahead and start talking about some of the housekeeping items first, as I always do at the start of these webinars.

Of course, all of the replays will be available to everybody after the webinar is over. I post them on the SAGA website. You’ll be able to ask questions. Just use the Q& A function that should be at the bottom of your screen. And if you do that, I will keep an eye on them after I’ve completed the main presentation, and I’ll try to get to as many of those as I can in the time that we have available.

If you’d like to tweet about this, the hashtag is agency leadership. And of course, you can always email me with any questions or feedback at chip@sagaimpact.com. Let’s see. The only other thing I have from a housekeeping perspective today is upcoming webinars. We’ve got quite a few here on tap next week for St.

Patrick’s Day. I thought it would be appropriate to talk about podcasting. The gift of gab, of course, is something that those of us with some Irish heritage always like to think about. And well, of course, talk about. So that’s what I’ll do next week. And then we’ll talk about hiring the best employees for your agency, because talent is an ongoing challenge for any business, but particularly those of us in the agency space.

We’re focused largely on getting the best talent that we can to serve our clients. We’ll move on from there to pricing models, because this is something that I get asked about a lot. And there are so many different ways that you can price your services. So we’ll cover as many of those as we can in that hour.

And we’ll follow that up with productizing your agency services. So a new popular way of selling what you have is to take it and make it look a little bit more like a product. So we’ll cover that. And finally. Paid discovery, something that Gini Dietrich and I talk about a lot on the Agency Leadership Podcast.

You know, devote an entire webinar to what it is, how you can use it to both get better clients and generate more profits. So with that, we’ll start talking about today’s agenda. And so when it comes to M& A, we can’t cover everything in the course of a single webinar, so I’m not going to try to do that.

This is going to be a high level overview of the various stages along the way and some of the key considerations that you need to have. But there’s a lot more that you can do to dig into this issue. There are folks out there who are specialists. In M& A in the agency space, people like Rick Gould, who’s a good friend and he’s got a new book just out Exiting Your Business the Right Way.

It talks about a lot of the common questions that particularly sellers might have as they’re approaching the possible sale of their agency. And Rick puts out all sorts of good stuff, but there are plenty of other resources as well. And so we’ll talk about some of those over the course of this conversation.

But what I really want to focus on is, is why people sell. why people buy, as you bring people together, what’s the process that it takes to do that, and then what do things look like all the way through to the post sale period. So let’s go ahead and start diving right in, and we’ll start with the key question.

And the key question for you, if you’re thinking about selling your agency, is why, and you may have your own reasons, but I want to go over a few of them, because There are all sorts of different reasons that people sell, all sorts of different reasons that people buy. And while the reasons don’t matter that much, it really comes down to what it means as far as the price and the structure of the deal.

So let’s take a look at some of the reasons that people buy. And so I’m going to use my little fake whiteboard here that I’ve got. And so we’ll, we’ll talk about some of the key reasons. And the first is frankly, boredom. And by this, what I mean is that sometimes you reach that point where you feel like you’ve done everything that you can with your agency. And you feel like you’ve hit that point where it’s time for a new challenge, time to do something different. And so if you, if you come to that conclusion, if you feel that way, it may be the right thing to do to sell at that point. So that’s one of the reasons that people will sell.

But it’s certainly not the only reason. Another reason that people sell that’s very common is retirement. Or other, and I would include here other major life changes, maybe an illness, an illness in the family, some change in family situation, any of those kinds of things can also drive the desire to exit your business.

And so that puts some particular time pressures on it. that may not be there with boredom. Boredom you have the opportunity to think a little bit about what you want to do and there may be some runway. If it’s retirement or life circumstances that’s driving it, well then that may make for more urgency and of course the more urgent the sale is the less likely you are to get a real premium.

So the reasoning does matter from that perspective. Another reason, fed up. And typically I see this in agencies where they’re struggling. Maybe struggling financially, struggling with client service, struggling with the changing environment. Maybe an old school PR firm trying to, to make the switch into digital decided this is just not for us.

And so that may be tied in with things like retirement. It may be tied in with, you know, boredom. You’re just, you know, you’re not excited about the business anymore. And so any little challenge looks like a bigger one, but being fed up with the business is one of the other reasons that people will often decide to sell.

Another reason is lack of confidence. And this one I think is the most dangerous reason. To sell your agency. Okay. When I talk about lack of confidence, what I mean is that sometimes particularly small agency owners, they feel like they’ve done everything that they can with the business. They feel like they don’t have what it takes to move it to another level.

I talk with agency owners all the time who say, you know, I can handle a team of four or five, but I could never do 10 or 20 or 30 employees. It’s just, it’s not, it’s not. Within my skill set to do that, and I think it’s not that it’s not within their skill set. I think it’s not within their comfort zone and that manifests itself in the form of a lack of confidence.

And so that’s one of those things where you need to be really careful because. There are lots of things that you can do to upscale yourself to get to the place where you can build your confidence and you can be in that position where you can run the business you can run it at whatever size. So I always encourage folks if you’re if you’re looking to exit your agency and it’s merely because you don’t have the confidence that you can take it to the next level.

Make sure that you’re thinking very carefully about that because I would hate to see you lose a growing thriving business simply because you didn’t feel like you could handle the excess burden. Because I can tell you, as you grow, yes, some of the challenges get bigger. Some of the challenges also get smaller because you typically have a larger team.

So more people are shouldering that burden. There are more perspectives that you’re able to take advantage of. So a lot of people surprise themselves with their ability to handle that kind of change. All right, and the final reason that I want to talk about here, and this is, this is the best reason to sell.

And this is the Too good to refuse offer. This is a good one. This is dollar signs. This is the best reason to sell. It’s because someone came along and they were able to hold out in front of you a blank check or a large check and say, look, I am so interested in getting your business that I will pay you what it takes to get you to agree to move on as the owner and instead move into the next chapter in your life.

That is the situation where you get the biggest premium on the pricing that you have for what you’re able to sell your agency for at the end of the day. So that is if lack of confidence is maybe one of the worst reasons to sell. The offer too good to refuse is the best because it means that you’re typically selling at the top of your game.

You typically don’t have as many challenges that you may have in some of the other scenarios. And it’s also a situation where the leverage is all on your side because you’ve been approached by someone else. You’re not trying to sell. So, let’s go ahead and bring the deck back up. And so if those are some of the reasons that you might sell, what are the reasons that someone might buy?

Because a transaction like this requires two sides, a buyer and a seller. And so what’s going to cause them, they’re not going to click the buy now button, obviously that’s not practical, but what is it that, that they can do that will make a difference that will put them in a position where they can deliver on, your desire to sell?

What, what can they do to convince you to sell? And so they first have to convince themselves. And so let’s talk about some of those. reasons here. We’ll go to a sheet of paper for this one. All right. So, the first reason that you’ll typically be acquired is for your revenue. And I guess I would put clients as well.

So this is, this is a typical scenario where an agency is trying to grow and they want to accelerate their own growth by moving ahead with, a plan that says we need to, to get higher revenue and we need to get there quickly. So instead of trying to grow. Simply organically, we’re going to buy other agencies.

We’re going to effectively buy their revenue by their clients. And so it might lean more towards just the raw revenue. They don’t care so much what the composition is. They care more about being able to say we’ve got a million dollars in new revenue or 2 million in new revenue. But it might also be that you have certain logos that there are some clients that you have that a buyer wants to get.

And so if that’s the situation that you’re in. You know, what they’re really looking for is that and we’ll talk a little bit later when we talk about structures of transactions that will drive what the transaction looks like, whatever the reason is that someone is buying that typically dictates what all the terms look like.

So in a case like this where they’re looking to acquire revenue, you’re going to be in a situation where the focus of earnouts will all be on the money. There will be less focus. Probably on things like team retention and those sorts of things, because what they really need, what they really want are those additional clients that they feel that probably that they can already service with their, within their existing structure.

So that’s typically in a revenue transaction, what people are looking for. We’ll talk about a special case of revenue as well in just a moment, but before we do, let’s cover a couple of the other Reasons. And we talked about team. So sometimes it’s about the team that you’ve got. That is terrible penmanship there, isn’t it?

Wow. Look at that. All right. I can’t write. So, I’ve exposed myself. So, sometimes these acquisitions are about increasing the talent pool the agency has. And so this would be the kind of thing where you would do if you said, okay, you know, we’re really growing quickly and we need to acquire as much talent as quickly as we can.

And so you might look for an agency that’s perhaps, you know, got excess time on their hands, maybe an agency that was hit hard by the last year. And so maybe they’ve got a head count that’s disproportionate to their current revenue. And so you can bring them in, they can continue servicing all of their existing clients, but now you’ve got a really able team that hits the ground running, that can help you if you’re on an accelerated growth path already.

It might be because you need particular kinds of talent. And we’ll talk here about one of those things. Sometimes you just want talent in a particular geography. So historically, pre pandemic, there were lots of agencies that were focused on having offices in as many different cities as possible. And the fastest way to get an office In a new city is to go buy another agency.

Well, maybe not the fastest, I suppose you could get a WeWork or a Regis or something like that. But if, if you want to have a real presence there, the fastest way to do that was acquisition. So typically, historically, we’ve seen agencies acquired because someone wanted a Chicago office, or a New York office or a, an LA office, or a London office.

And so geography can be a real driver at times for agency acquisitions and something that really motivates buyers post pandemic, we’re not really sure exactly how much of a driver. This is going to be. It will still be a driver in new markets, right? So it’s the kind of thing where geography where you’re in another country that’s certainly going to be appealing.

from an acquisition standpoint. So if you’re a London agency, you’re appealing to a U. S. agency who’s looking to get a foothold in the U. K. Conversely, if you’re a U. S. agency that’s appealing to European buyers or Asian buyers who are looking to develop a presence here in the United States. So geography can be an important motivation for a buyer.

Let’s see, let’s look at a couple of other reasons. Expertise. And you’d think that this was related to team, but it’s not. Because when I’m talking about expertise, I’m really talking about the specialty that your agency has. So we’ve seen in recent years, lots of acquisition acquisitions of digital agencies.

by non digital agencies, because it’s the fastest way for a traditional agency to increase its digital capability. So just as we talked about, you can accelerate your presence in a new market by buying based on geography. You can accelerate your presence in a new service area by acquiring a specialist agency in that location.

So those are the kinds of things that I’m talking about when I’m talking about expertise. A couple of the hottest areas that we’ve seen lately have been digital and healthcare. Both of those, even pre pandemic, were huge drivers for buyers and those kinds of agencies typically come at a premium as a result.

And then the last reason that I’d like to mention here, this is the one that’s tied to the revenue motivation, but this is roll ups. And so I’m not talking fruit roll ups. I’m talking about the situations where someone, maybe one agency has said, okay, I’d like to sell my agency, but I can’t really get the price, the premium that I’m looking for from a buyer right now.

So I go out and I look for smaller agencies that I can roll up. Effectively combine together that will allow me to become bigger more quickly and therefore in their minds more appealing to a potential acquirer. Now, one of the things to keep in mind here and one of the questions I get asked all the time is how big do you have to be in order to be sold?

And the answer is. I’ve seen and been involved with acquisitions from, single solo practitioner agencies all the way on up to, ones with hundreds of employees and each acquisition just has different characteristics. So there’s no magic size that says that you can sell your agency. There’s no magic revenue number.

It’s nothing like that. It’s really about what the desire is of the buyer in acquiring you. So a solo agency might be acquired and it’s really for talent. Right. If you’re, if it’s solo and you’re not buying for talent, then it, the only other possibility I could think of would be a particular client logo.

But in those cases, the deal tends to look more like a signing bonus for a new employee. Whereas when you start to get into larger agencies, the deals become a lot more complex and have different things that are used in assessing the value and therefore the sales price. And just one note here, since I’ve mentioned value, and we’ll talk about it again a little bit.

Later on in this session, but valuation is extremely subjective. There are some. Appropriate methods to use. And again, Rick Gould and others are skilled at walking you through the steps to give you a formal valuation. However, at the end of the day, what I would say is that buyers and sellers typically agree on a price that works for both of them.

And it’s not so much about evaluation on a piece of paper. It’s more about being able to convince themselves that they’re balancing the risk and the reward appropriately because anytime you’re talking pricing whether you’re selling your services to a client or you’re selling your agency to another agency or other buyer it’s all about balancing out those those two competing forces. Because the higher the risk the more the more that the So the higher the risk, the more that that party needs to get in reward in order to balance it out.

And so those are the kinds of things that folks will be looking at. Let’s go ahead and bring the slide deck back up here. Let’s see if I can do this without writing all over myself. As you’re thinking about selling, for whatever reason, whether it’s the one of the ones that I outlined here or something else that is motivating you, you need to be able to tell a story.

You need to be able to explain to a potential buyer why you’re selling and why this is such a gem that you’ve got on your hands that they can take advantage of. And It really is piecing together all of the aspects of that story. And of course, one of the things that we typically think about in these cases is the financial side of the picture.

And finances are absolutely important. You need to have your books in order. And frankly, a lot of these things that I’m talking about here and preparing to sell, these are things you should be doing with your business anyway. They’re things that will help you have a better business, a more enjoyable business to run.

And oftentimes agency owners who go through the process of preparing to sell realize that they actually like their business a lot more because they’ve put together that story. They’ve gotten ready to tell the story to a potential buyer, but they’ve also internalized that story. And so now they’re seeing the future and the promise of their own business.

So get your finances in order. If you’re thinking about selling, make sure you’ve got at least three years of clean financial records to be able to share with a buyer. That’s typically what people ask for during what’s called the due diligence process or the research process that takes place pre sale to make sure that, the buyer can, identify any potential issues or things like that that might crop up.

And so three years, profit and loss statement, balance sheets, those kinds of things. Make sure you have a professional accountant putting it together. They don’t need to be audited or anything like that in most cases, particularly for the small agencies who are typically watching this kind of a presentation.

But they do need to be, very clear and very well ordered. Now. If you’re able to take that and work with someone, who is, , an M& A transaction specialist, they will also help you do things like normalize those financial records. Because one of the challenges that small agencies typically have is that the numbers don’t reflect reality. And by that, what I mean is that typically in a small business of any kind, but particularly a small agency, the owner is looking to maximize tax benefit to maximize their own financial reward. And so there may be things that you’re doing within your business that are perfectly legal and legitimate, but you can Adjust in the records that you’re sharing with a potential buyer because let’s say you’re, you know, you’ve got a company car or you’ve got other, you’ve got season tickets to some hockey matches or something like that.

Those are things that you could back out of the financial records because those are really more perks of the business that you as an owner have that don’t really go necessarily to the bottom line. And so if you’re working with an M& A advisor, they can help you sort through your expenses and figure out which ones you can extract to be able to demonstrate a more profitable business.

On the flip side, some agencies think they’re more profitable than they are because the owner, you, are undercompensating yourself. And so, in some cases, when you’re working with an M& A advisor, they will actually tell you that you need to put some more cost in there. Because you’re not paying yourself enough.

You need to make sure that your compensation in these kinds of presentations Is normal that it’s the kind of salary you’d have to pay to replace yourself. And so those are the kinds of things that, that I’m talking about when I’m talking about getting your financial house in order. Umext up is, getting the overall agency’s house in order.

Get rid of the clutter. If you’ve got an office, you should actually do this in your, your actual office space because buyers typically like to visit you and you want to make sure that it’s as presentable as possible. But really what I’m talking about is making sure that you have all of the paperwork in place, that you make sure that you’ve got contracts for all of your clients and that they’re up to date and signed.

Make sure you have the same kinds of things with any employment agreements or independent contractors, vendors, because in due diligence, you’re going to be asked to look at all of that. And so you want to just have that ready. You want to have, make sure that you’ve got the processes in place so that you are in a position where post sale you can do the kind of work that you want to do and you don’t get bogged down in sorting through a lot of the day to day details.

Those are things that will also help you get to the kind of role you want in your agency sooner, even pre sale. So a lot of that, getting your house in order from an operations perspective can be very beneficial to the business overall. You also pre sale need to be thinking about where you’re going. So the whole story telling idea is important, but it only works if you’ve got an actual strategy, if you’ve got a vision in mind for your business. So you can put lipstick on a pig and all that, but if you really want to have a business that you can shine up really well and sell effectively, you need to have that vision.

So you need to know where you’re taking your business. You need to know what the next few years look like, whether or not you’re sold. And it’s really important to understand that if you are. Thinking about selling your business. It takes time to do that. It takes time to position yourself. So if you’re in a situation where you have to sell because of life circumstances or something like that, obviously you’re limited in your options and you, you know, there’s only so much you could do.

You can’t turn back the clock, but if you’re thinking about selling, start thinking out three, four years ahead. If you see retirement on the horizon, or if you see some other opportunity or some life change. Think about that ahead. Think about the things that you want to put in place. Think about where you want the business to be.

So that means thinking about the environment. Right now it means, and all agencies should be doing this regardless if you’re looking to sell or not. You should be looking at what is the situation going to look like. As we start to get some form of normalcy back, what are things going to look like at the end of 2021 and into 2022?

Things are changing. Some things will go back to the way they were. Some things won’t. You need to take a position on that. You need to understand what you believe is going to happen. And you need to understand what changes you need to make or want to make in your business as a result. So think about all of those directionality

things will help you tell a more effective story. It will help you make sure that you’re doing the right things to get your house in order. And therefore it will lead you to being able to find the right buyer who’s willing to pay the right price. All right, so let’s talk a little bit about deal structures because at the end of the day, this is what it all comes down to.

You’ve, you’ve done all sorts of conversation getting up to this point, but you know, what is a deal actually look like? And so the first thing I would say is that you have to keep in mind that these deals are not, they’re not simple checkbox affairs. Right. They’re not the kind of thing where there’s a one size fits all deal.

You don’t go to legal zoom and, and download a contract and, and, you know, call it a day, there are different ways that you will structure these kinds of deals, and there are really two major kinds of deals. And so we’ll go back to my notebook here, and so the, the, the two kinds are an equity sale and an asset sale.

And I can tell you that most of the agencies that I’ve seen sold have been done as asset sales. So what’s the difference? An asset sale is, well, let’s start with the equity. An equity sale is where the entire company, the whole structure is being acquired by the buyer. It’s called an equity transaction because they’re actually buying The shares, whether they’re LLC units or it’s actual stock, depending upon your structure, whatever it is, they’re buying actual ownership in the entity.

So if you’re Acme Agency LLC, they’re buying Acme Agency LLC. The more common transaction to take place in these situations is an asset purchase. And in an asset purchase, which what’s essentially happening is they’re going in and they’re saying, okay, this is a list of things that Acme agency LLC owns.

And so we’re buying all of those. So it would be buying the contracts. It would be buying any employment agreements and vendor contracts and those kinds of things. The key difference here is that first of all, it’s not acquiring any of the stock. So you don’t, you’re not dealing with some of the complexities of stock transactions.

And even if you own a one person LLC, there’s still technically stock involved. And so you’re, you’re avoiding that, but you’re also avoiding the liabilities. And so this is the big reason that most buyers want to do an asset purchase agreement. They’re doing it because what they’re able to do at that point is they’re taking in all the good, but if something bad comes along, if you get sued for copyright infringement, or if you get sued by a past client for, you know, a bug you built into their website, or something that you failed to do in distributing a press release or whatever, they’re not acquiring that.

And so you as the seller would still be on the hook for those liabilities. Post sale. So important things to think about. And that’s why you never ever want to do one of these kinds of deals without having an attorney involved who can represent your interests and make sure that you’re dotting your T’s and crossing your i’s from that perspective.

But the other thing that you need to be thinking about in the structure of the deal are taxes. And both sides will be thinking about taxes. Taxes can have a huge impact on how good the deal is for both sides. And some of the key things that you’ll want to be thinking about here are the form of the deal will have an impact potentially because when you’re buying equity that’s typically taxed at least here in the United States and obviously outside the United States are all sorts of different factors to consider.

So I’m going to speak to what I know best, which is the United States. Equity transactions typically become capital gains tax, whereas asset purchase leans towards being regular income. And so those are the kinds of things that you’ll need to work through, because there are ways to structure even an asset purchase so that you can make minimize your tax exposure, and some of that requires agreement with the seller, some of it doesn’t.

And so the, or sorry, the buyer. And so, you know, you just need to work through those issues and you need to make sure that you’re having a conversation so that when someone says, I’m going to pay you a million dollars for your agency, your accountant can explain to you what that really means to you. And a good accountant in one of these transactions will put together a spreadsheet that shows you what you’re going to owe and when, because most of these deals are not done as one shot deals.

And so that’s actually a good segue into the next slide here. Almost no agency deals except for the very smallest ones are done in a single payment. They may have been done that way in the past, but certainly it’s not happening today. Most deals today have a heavy earn out component or a heavy schedule of payments post sale.

So post closing. So you don’t go in there and sign the sale documents and then you get handed a check for the total amount. Typically you’re getting a down payment. at that, and then there will be a schedule of payments over time. Typically, these payments are tied to the performance of certain activities.

They might be things like that, that you’re, you generate X amount of revenue for the buyer over the course of the next 12, 24, 36 months or more. It might be that you get a percentage of it. It might be that if you hit a certain minimum threshold, you get a full payment. Below that, maybe you get partial or maybe you get nothing.

It might be that it’s tied to staff retention. Sometimes part of the year or not will be that, you know, you need to keep 80, 90 percent of your existing team. That would be particularly true if the motivation of the buyer was buying a team full of talent. It might be, based on, other milestones that you mutually agree upon.

It might be that you retain 80 percent of your clients. It may not be so much about the total value of those clients, but simply that you’ve managed to retain most of them. So there’s a lot of different structures here and understanding that schedule of payments has an impact on taxes. It obviously has an impact on the true value of the deal to you, because the only thing that is certain in those cases is the amount of money that you’re paid up front.

If you’re going to be accepting a schedule of payments in the future, you need to be absolutely crystal clear about what the triggers are for payment. And nonpayment. And this is true for both sides. Whether you’re the buyer or the seller, there needs to be no ambiguity over this. And so ask yourself what happens if, and kind of walk through the different scenarios.

If you’re the seller, you need to make sure that you understand that the buyer is in a position where they’re likely to still be a going concern in a year or two or three when they have to pay you. So that means that if you’re doing a deal with an agency that’s of a similar size to you and it’s really a stretch to do the acquisition and it, it really depends upon them making it a successful integration in order for them to have the funds to pay you.

Well, that’s a risk and you need to think very carefully about that. I always advise people and I’m someone who’s been through transactions on both sides. I’ve sold businesses. I’ve bought businesses. Some have gone better than others. So I, I speak from a wealth of experience in this regard, I can tell you that if there are misunderstandings about what those milestones are, if there are concerns address those upfront, don’t let it just slide, don’t just say it’ll work out.

You always need to assume and this is what I always advise people you always need to assume that the only payment you get is that first one. If you only got that first payment, how would you feel? Obviously you’re going to feel cheated to some degree. So I, I’m not, if you sit there and say, ah, I’d be thrilled if that’s all I got, right?

There has to be a level of disappointment beyond that. But, but ask yourself, is it something that would have stopped you from doing the deal altogether? If that was all you got, because it’s possible, chances are you’ll get more than that. Chances are you get at least some of the earn out, but it’s something to really have your, your mind wrapped around.

The other key thing when it comes to earn outs that you need to think about here. is that typically in an agency transaction, the agency owner sticks around for the full period of the earn out. So you have to be willing to commit to doing that. Now you say, okay, well, but I’d like to get out. And in some cases, the buyer will let you out.

However, if you’re not in that business and still running that piece of the business, Don’t agree to an earn out because if you’re not running the business, you have no control over it. And it doesn’t mean that the buyer’s going to do any funny business or anything like that, but it just means that they’re not, that you’re not in a position to control your own destiny.

You want to be in a position to control your own destiny. And so that means earn outs should be used only. You should agree to them only if you are getting an employment agreement along with it so that you can be there and make sure that you are driving that success in the earn out by being part of the team that achieves it.

So lots of things to consider here. And of course, there are all sorts of different permutations. There’s just about, you can come up with almost anything to put in a term sheet. And so it really comes down to just negotiating what’s going to work for the buyer and seller together. All right. So let’s talk about the process.

How do we, how do we get here? I mean, I’ve talked a little bit about the agreements and those kinds of things, but the process itself is an elaborate dance and this elaborate dance is something that involves multiple steps. And I really like to to equate it to the process that you go through leading up to a marriage, at least traditionally.

And obviously we know that there are all sorts of different kinds of marriages, and different ways that you get there, but let’s, let’s look at some of the traditional approaches. So let’s go ahead. And we’ll bring back up my handy dandy notebook here. And so the first part is conversations. And so conversations are a bit like,

dating. So this is what happens when you meet another agency owner who’s looking to expand, and you’re talking with them, and they say, you know, geez, it sounds like you’ve got something great there, Chip, you know, we should really talk about, you know, doing something together, if we can, you know, bring our agencies together, or, you know, maybe it’s a much bigger player, and they come in.

in and they have a conversation and say, you know, you’d be a fantastic team to have as part of our agency. We’d love to have a talk about acquiring you. So is that’s the start of the dance. That’s the conversation that begins and you start to talk with whoever the buyer is. And regardless of which side you’re on, this is, this is the exciting part.

This is, this is where you’re in there and you’re all both thinking about what’s possible, what are all the great things that could happen. And so you have a lot of fun in these conversations. But at some point, if it’s going to move to a transaction, you start getting down to brass tacks and you start having substantive conversations and say, well, what would it look like?

You know, what are, how does a deal. Get done. What are we looking talking about as far as numbers and general terms at least. And so what that takes us to is the next stage, which is the verbal agreement. And a verbal agreement that’s sort of like moving in together. So. At this point, you both have a sense as to what each other is looking for.

You have a sense for what kinds of numbers are going to work. And so you, you sit down over dinner or on the phone or on zoom and you say, okay, well, what if we did, you know, this amount of money, maybe you talk a little bit about earn out here. Maybe you don’t, maybe it’s, you know, maybe it’s just a, a sort of a general conversation around, you know, what the, the basic terms are.

And once you do that, you shake hands and say, okay. We’ve got an agreement. Well, that’s the point now where you have to move on. And so it’s great. We’ve got a verbal agreement. You’re going to buy my agency for a million dollars. What does that look like? And so that next stage is a very important one and that next stage is the LOI and that’s the letter of intent.

And so this is sort of like. getting engaged.

Okay, so the letter of intent is exactly what it sounds like. It’s a letter sent from the buyer to the seller that says we propose to acquire you for a million dollars and it lays out some broad brushstroke terms that are in there. It may say that it’s going to have a three year earn out, that there’ll be a three year employment agreement for the owner, and it’s, it’s typically a relatively simple document.

In most agency transactions this isn’t going to be more than two or three pages probably. Because this isn’t where you get into all the nitty gritty details. This is really just where you’re getting into the big picture. This is, this is what we’ve talked about. This is what we’ve agreed upon. Now, don’t be surprised if the buyer is, you know, put some things in here that weren’t necessarily discussed.

during the verbal part. Part of that’s normal. Part of that may be because they got cold feet, , and so they wanted to put in some more safeguards or something at the letter of intent stage. There’s all sorts of reasons, but do know that it is not uncommon for that letter of intent to have some degree of difference or at least perceived difference from the verbal agreement, right?

Some of it just comes about because now you’ve put it in writing. And so once you put it in writing, you have to put in various disclaimers and things like that. So, so those. The key terms will be in there. There’s there’s typically a place where you can sign as the seller so that you’re agreeing to the terms of the letter of intent.

There’s typically, although not always, some sort of a timeline in the letter of intent that says we anticipate finalizing the deal with all the paperwork done by X date, sometimes it’s not in there, sometimes it’s more general, but you want to try to get as much specificity in a document as possible if for no other reason than you can use that as leverage to try to keep the process moving because the M& A process is not usually a swift one.

It can often take quite a bit of time from conversations just to get the letter of intent. And then after the letter of intent, it still takes a while. Most times you don’t have a letter of intent followed very quickly by an actual asset purchase agreement or other final deal. Those are the kinds of things that still take time to negotiate and get all into writing.

So the letter of intent, that’s the engagement. That’s where you’ve, you’ve set your tentative date. for the wedding, but it’s a little bit more like an elopement where that, that date can fluctuate a little bit. And I’m probably taking this whole wedding thing a little bit too far, but Hey, it works.

It’s a good comparison, I think. And so that will then take us to the asset purchase agreement, often called an APA or whatever the final agreement is. And that is your marriage. Now, None of this addresses what goes on after the sale, because that’s still an important part of it, and it’s still part of the transaction.

We’ll address that in a minute. For a moment, I want to talk about the asset purchase agreement, because this is a really important document. This is the document that really is Real, right? So the letter of intent, you can, you can make all sorts of changes and frequently they do occur. So there will be changes because after the letter of intent, while you’re engaged, there’s a lot of conversation that’s going on.

Think about it in the wedding terms. This is, this is where you meet more of the family and you’re having lots of conversations about the wedding looks like, and it’s a venue and with a guest list, all those things that you end up going through and you learn a lot about your partner in that process. You also learn a lot about each other during the process that goes on between letter of intent to the asset purchase agreement.

And the two key things that are taking place there are, you have conversations about the deal itself. So the negotiations that take place over the legal terms, but you also have what’s called due diligence. And due diligence is where the buyer is asking for the seller to provide all sorts of documents.

The things we talked about earlier when we were talking about getting your house in order, financial records, bank statements, contracts with clients, employees, vendors, there’ll be lots of questions that you get asked. Some of them will be comfortable, some of them will be uncomfortable, some of them you just won’t even know the answer to and you’ll have to either go digging or say, You know, I don’t know, or that doesn’t apply, or whatever.

And part of the, the experience of due diligence will depend upon how the seller, or how the buyer rather, has handled previous acquisitions, if they’ve done any. The more they’ve done, the more refined this process typically is. If it’s their first ever acquisition, which is not unusual in the agency space, to be acquired by someone who’s never done an acquisition previously.

In those cases, you may see that they’ve gone online and they found some questionnaire or documents list that someone said, Hey, you should use this for due diligence. So they send over this, this long list. That’s got all sorts of stuff on it. That really has no bearing on the deal at hand. So it’s going to take time.

It’s going, you’re going to have to pull all this stuff together. , the more work that you did in the pre sale preparation, the easier this will be. Make sure that you’re keeping all of these documents in one place, whether that’s electronically or physical, make sure you’re keeping track of what you’ve sent over, to the, the buyer, the potential buyer still at this point, because a lot of deals still fall apart even at this stage.

In fact, I know people who have sold or been in the process of selling their businesses and it’s fallen apart literally on the day of closing. For whatever reason. So these things can and do happen. And so you want to make sure that you’re as organized as possible. You also need to make sure during this process, that you’re continuing to run your business as if it’s not going to be sold, don’t cash that check in your head.

Don’t make strategic decisions based on the fact that this isn’t going to be my business in six months, because maybe it will, maybe it won’t. You don’t know. Maybe they’re going to put something in that asset purchase agreement that you just can’t stomach. And so you’re going to walk away from the deal.

Maybe they learned something in due diligence that you You know, makes them concerned. And so they walk away. Anything can still happen. So as you’re, as you’re going through this legal document process, understand that there are still risks. Understand that if there’s something in that document that you don’t like, and it’s really meaningful, you should fight about it.

You should argue about it. You should try to get your way. And you need to decide on each of those little battles in that asset purchase agreement that you lose. Is it bad enough to make you walk away or not? Most aren’t, but there’s, there’s going to be a lot of heartburn, a lot of back and forth. I encourage you to use your lawyer talking to their lawyer as much as possible.

It takes a lot of the emotion out of it when you’re going down that path, but there’ll be a lot of back and forth during this stage, but don’t allow inertia to take over. You know, if you listen to me at all, how much I hate inertia as a driver of business decisions. I really hate it when it comes down to doing asset purchase agreements, because typically, the, the seller has in their own mind sold their business. And so everything is about how do I just get to the signature? And so sellers typically make too many compromises in the APA process, simply in the, in the interest of getting the deal done. You don’t want to be in that position because that’s where you end up agreeing to really bad terms.

Make sure that your document, your contract is reviewed by an accountant as well as a lawyer. Okay. Again, going back to the tax consequences, sometimes very small differences in the final contract can make a big difference from a tax perspective. So make sure you get that right. Make sure that the contract, the asset purchase agreement is covering the what if scenarios that you can reasonably think of, you know, it’s, it, doesn’t necessarily have to anticipate another COVID style pandemic, but it should be anticipating all of the things that you can reasonably assume might happen to either you or the buyer over the course of the next whatever period the earn out lasts for.

Make sure you’re looking at things like non compete agreements. Do the non competes continue on past Your employment during the earn out or do they end at the same time? What you know understand what you are and are not allowed to do After the sale and after any period of post sale employment ends. And to that end there will typically be a separate employment contract With you as the owner.

So you’ll have the asset purchase agreement, but you’ll have a separate employment contract as well and make sure that you get the terms that you want in there. Do keep in mind if you’ve been taking a huge amount of money out of your business, you’re not likely to be paid that same amount in salary.

You’ll be paid a salary commensurate with what the buyer would have to pay someone if you left. And that can be a shock to a lot of agency owners. So make sure that particularly as you’re, as you’re planning and deciding that this is the right sale price, make sure you understand what you’re talking in terms of guaranteed salary for yourself going forward, because that can be a big deal.

And if you’re looking to acquire agencies, know that that’s a big driver for many agency owners in the process. All right, let’s bring back the slides again. And so, let’s talk about that, what happens post sale, because a lot of the M& A discussion that you see out there and a lot of the resources are, are focused on getting you up to that closing day where you sign and you get that initial payment from the buyer.

But what happens next? Well, I mean, obviously the first thing that happens is you probably pop a bottle of champagne and say, Hey, I just sold my agency. I sold my business. It’s exciting. And you want to make sure that, that your team is buying into this excitement as well, right? That we can have a whole separate webinar.

Maybe we will about the importance of having your team on board for this process and thinking about when you tell them, you don’t want to tell them too soon because a lot of deals do fall apart and you don’t want them worrying about their future, but you know, at the point where it becomes obvious, you maybe due diligence to start and see.

You’ve got people coming in and out, you know, looking at books or having meetings, uh, assuming that we’re back in our offices when this takes place. Well, those are, those are things that you don’t want to have someone finding out by accident. So you then have to bring the team in, but make sure that the team is excited because most employees have a degree of uncertainty about what the future looks like anytime there’s one of these transactions and you need to make sure you understand during the sales process.

What is the fate of your team? In a lot of cases in agency transactions these days, the team comes along completely, but not always. And, and if you’re, you know, if you’re at say 25 or 30 employees and you’ve got some administrative support, sometimes that doesn’t come along, right? So if you’ve got a full time, accounts person, accounting person in house, that may be something that a larger agency doesn’t need.

And so you need to think those things through and make sure you understand how the new agency is going to treat them. Because If your deal falls apart and your team is, is upset at what they understand the terms to be, then there’s going to be problems, right? You don’t want to be there. And frankly, you got there because of what your team did.

So you want to make sure that, that they are part of, the, not just the celebration, but they actually come out as winners, at least in the short term in this transaction, that will lead to a much better outcome, particularly if you’ve gotten her now. If you have an earn out, it really behooves you to make sure that your existing team is as happy as possible.

But there’s lots of other things that come along with the post sale period. So it starts with the celebration, but then a lot of owners sort of feel like, okay, now I’m on the clock. And for many of you who have owned your own business for 10 or 20 years. It’s, it’s a little bit of a shock that you now have a boss and that boss is not your spouse or other significant other, that boss is an actual boss.

And so you need to, you know, to adjust to that reality. And so that can be frustrating for a lot of agency owners in the post sale period. Now some thrive on it. Some, some sit there and see it as a real opportunity to get to re to meet and work with new smart people that they didn’t have a chance to work with before.

There are all sorts of opportunities you can take advantage of in that post sale period, but you have to be willing to do it. You can’t wait for it to come to you. So these are things that you want to be thinking about. Post sale and you need to be prepared for it. The more that you prepare for it in advance, the less shocking and surprising it’s going to be when it comes along.

You don’t want to be that agency owner who’s sitting there and has been put into, you know, a nice little office at the new agency, but you know, nobody really talks to them. They’re just, they’re just there because that was part of the deal. Make sure that you’re working if you’re the buyer to carve out a good spot for that, that former agency owner that’s now part of your team.

And on the flip side, if you are that agency owner who’s now assimilating into a new agency, make sure that you’re looking for how you can do that most effectively. It’ll be good for your earn out, but it will be good for you just as far as how you’re developing. Because at some point you need to shift and you need to start thinking about what the future looks like for you.

And that future may be in the new agency or it may not be. It may be in the agency space. It may not be obviously in the case where you’re selling because you’re looking ahead to retirement. Well, that that sort of is a done deal, right? That that’s a pretty clear cut case. But if you’re not in the position where you’re looking to stop working entirely, what does that future look like?

And so you’ll be thinking about those things in the post sale period. The other thing that you need to be thinking about in the post sale period is what does it look like for everybody else? A lot of times when we talk about teams, a lot of times these post sale periods involve signing your former employees to new employment contracts and understanding what they want.

Sometimes there are retention bonuses for not just you, but for the team. And so those are the kinds of things that you want to be working with the buyer on and coming up with a good solution. And if you’re the buyer, you absolutely want to be thinking about this. Because even if you’re just acquiring another agency for the revenue to be able to say that you grew by X number of dollars, you need to be able to do that by retaining the existing staff.

Because if you don’t retain them through that transition period, those clients are going to be at much greater risk. By the way, talking about the transition of clients, I, I have to underscore one thing here, and there’s an article on the SAGA website about this. But one of the biggest mistakes that I see in client contracts is that they’re not assignable.

You want to make sure that that your contracts with your clients. Can be automatically assigned in the event of the sale of your agency or all of the assets of your agency. Those are the kinds of things that can hold up that final transaction. And so that’s, it’s a pet peeve of mine. It’s something that I’ve been in a situation where I’ve had the opportunity to renegotiate deals because The vendor that I had was being sold and they were, they had a non assignment clause in the contract.

And so I was able to use that as leverage because they had to get it assigned very quickly in order to make sure that closing went through. And so it was an opportunity. It was leverage. Anytime you have leverage in business, it’s an opportunity to look at terms and see if they still make sense in the current environment.

Don’t put your clients in that position. Make sure that you’ve got a contract that’s easily assignable. Okay. So, Think about these things as you’re thinking about whether you want to buy or sell another agency. Think about these things in terms of how you want to proceed. You know, what are the steps that you want to take?

How can you get ready if you’re a buyer or a seller? And hopefully I’ve given you some good overviews of, The key issues that you need to be thinking about. Again, I’ve compressed a lot down into this hour and I know we’re almost out of time already and normally I try to leave at least half of the hour for questions, but I really wanted to try to cover as much ground here as possible because this is something I get asked about a lot by agency owners who are curious about buying another agency or selling their own.

And so hopefully this lays a foundation about the motivations for buyers and sellers, what the general process looks like, both pre sale and post sale, some of the key considerations, but there’s a lot more that you can do. And if you’re thinking about buying or selling, I would certainly encourage you to work with someone who’s a specialist in M& A, talk to folks who have been through it on either side as buyer or seller, try to learn from other people’s experiences.

I’m always happy to talk about some of my own experiences. Both personally and what I’ve observed, but you want to try to get as smart as possible before you go into this, because it’s the M& A process is not something that you want to go into blind and learn as you go. You really want to have as much knowledge as possible as you’re moving ahead.

So, that brings us almost to the end of the hour here. Let me just take a quick look and see if we’ve got some questions that I can hit on quickly. Let’s see if I can. Figure out how to bring up my screen appropriately is it regular webinar attendees will notice that I’m in a different set that I usually am here I’ve created a new teaching set, but I’m still getting used to the placement of all the cameras and computer stuff.

Alright, so let’s see here is the Q& A function. And, actually I don’t see any questions in here today. I am actually a little bit surprised. Maybe I’ve just done such a good job of covering all the topics, or maybe zoom isn’t working and none of you are actually hearing me and you’re just sitting there hoping that my volume eventually comes on.

But, in any case, that does bring us to the end of this hour here. I really do appreciate all of you who have come in here and listened. Hopefully I’ve provided some useful information that you can use as you’re thinking about this on the future horizon, whether that’s three years or 30 years from now. And thank you for all the people who have said, you can actually hear me.

I did assume that folks could hear me because I wouldn’t have imagined everybody would have stayed here watching if, if you couldn’t, but, but But thank you for letting me know that, in any case, that will bring to an end today’s webinar. Thank you so much. I look forward to having you back here for another webinar or other SAGA event very soon.