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There are some marcom agencies where growth in their early years is nothing short of spectacular. Often—though certainly not exclusively—they’ll be in emerging, ultrafast-growth disciplines. This was once the case for “social” or even “digital” back in the day; now, it’s more likely to apply to areas such as influencer or the metaverse.
For buyers looking for their next deal, they can present a seemingly irresistible opportunity. Yet on the flip side, agencies that have gone from a couple of people to several hundred or more in just a few years can trigger alarm bells as well as excitement—that febrile growth often comes with downsides, as no one has yet built a perfect 360 agency at that pace.
As with any opportunity for great reward, there is the potential for great risk, and buyer mindsets often need a bit of encouragement to adapt accordingly, especially in a market where all the focus is on risk rather than upside. The secret in securing a successful transaction is in how to tell the story of that growth—not glossing over the issues that inherently come with stratospheric growth but putting them into a context that explains how they sit within the particular growth narrative of the business in question. It’s also about knowing a buyer well enough to have a gut feel for their tolerance for different kinds of risks—what is a red flag to one buyer might well be a selling point for another.
Understanding red flags and how to manage them
Superfast-growth businesses usually have a founder—sometimes, two or three people—who first saw the opportunity and ran with it. Even in these more enlightened days, our industry still refers to “key man risk”—rightly or wrongly, success to date and into the future is seen as tied to these individuals.
It’s terrific when those individuals carry on running the business post-acquisition—something earnouts are designed to ensure—but it’s not always the case. A founder who’s made $10 million at the age of 35 (and increasingly in their 20s rather than their 30s) may or may not be motivated to continue. There has to be succession planning in place to mitigate that risk, and more than succession planning, there has to be a credible “parachute in” plan in case the business leader decides to step out in circumstances other than a structured transition over time.
Specialisms and client concentration—good and bad
Some of these agencies can often be buried deep in a particular niche within a specialist sector or have found success with a specific formula or service model. A dollar of revenues from a tobacco producer or arms manufacturer has never carried the same value as a dollar from healthcare, but acquirers also assess quality of earnings through the lens of their own clients and teams. Agencies with clients in certain geographies may not be welcomed, just as we see buyers nervous about petrochemical clients and those at odds with ESG and DEI imperatives.
Buyers looking for consistency of revenue will also want to know that the source of that income isn’t going to dry up because the business is so deeply focused on a single area of expertise. Which leads to another potential red flag: client concentration. Some buyers will get twitchy when an acquisition target has more than 15% of its revenue tied up with a single client, where the loss of that client could wipe out most of the profits. But on the other hand, some turbo-charged businesses actually make their name by working with a particular brand that in some cases may account for as much as 60-70% of revenue.
It’s an interesting dilemma, because some clients translate as “crown jewels.” A business that saw massive growth because it worked with the likes of Google, Coca-Cola or Nike might only be attractive to buyers because of that household name. Or an extreme dependence on a specific global client might actually present such extraordinary synergies and growth opportunities for the right kind of acquirer that it becomes the key deal driver.
Where growth can destroy margins in the short term
The next red flag is where the founders or leadership teams were probably so busy taking advantage of huge revenue opportunities they didn’t have a chance to introduce cost controls and structures to manage it—meaning margins were negatively impacted in the short term. Even where cost controls are in place, they might appear not to be. Most significant account wins need upfront “investment” from the agency to onboard the client, and that investment will hit results before revenues are running at full tilt, even if the payback on the client investment happens over several years in the future.
A focus on international growth, for example, might see a collection of international offices opening up, each of which has its own finance function with all the associated inefficiencies and duplications. Costs can spiral simply because the leadership team never had the time, ability or inclination to stop to assess the implications of key decision-making. That spiraling might appear to be borne from a lack of control but equally might be a deliberate investment strategy with a short-term hit for long-term gain.
That negative can be presented as a positive; a suite of international offices run by senior teams locally mitigates against a perceived overdependence on the founders in the home market and ticks the succession planning box.
Are we moving up or down the growth curve?
A buyer will want to know where a target business finds itself on the growth trajectory—is it still soaring skyward or is it slowing down?
It can be difficult to price deals when growth to date has been so explosive. But if you take the example above of a business that has gone for international expansion early on, investing ahead of revenue, a future acquirer will be able to take advantage of the growth that should follow that investment.
When it comes to revenue projection modeling, most buyers will be unimpressed by what are often unrealistic assumptions about how much new business an agency thinks it can win. The historical pipeline might tell a better story if it shows how the business built and converted its client portfolio in the past; unfortunately, most agencies tend to be poor at keeping this kind of data. Much better to focus instead on showing that the agency has a clear plan and track record of expanding revenue from its existing client base, rather than unsubstantiated aspirations to break into new sectors.
The skill in understanding a buyer mindset
Potential acquirers of fast-growth businesses want precedent and industry benchmarks to work with. What they don’t need are second- or thirdhand insights.
It’s also important to understand just how receptive the buyer actually is to risk—because every fast-growing business will probably have at least one of those red flags waving. Some buyers want steady income and low-risk acquisitions, but others are more prepared to push the boat out.
There are many factors to consider that create a story worth telling. Does a U.K. buyer understand the nuances of margin performance for a U.S. agency, where margins of 40% are commonly cited, in sharp contrast to what they’ll be used to? To be honest, it can even be where the founders seem “too coached” when they meet with a buyer team looking for honest, unguarded conversation.
In the end, it comes down to whether an acquirer wants an agency with scale and growth, and if so, understanding that it inevitably comes with risks attached. Most of those challenges can be mitigated by identifying the nature of the buyer’s appetite for risk and matching it with the right kind of business. That’s where the magic happens.