I stumbled across an interesting video online the other day. One of the large brokers that acquires agencies had created a presentation to train their people on how to pursue and negotiate acquisitions. This internal M&A strategy has become a growing trend. The buyers are paying for ads to lure in sellers and paying employees deal-bonuses for every acquisition they source and get over the finish line. In many cases, the people trying to source the deals are former principals that sold and are now calling on all their friends. Sounds smart!
As I skimmed through the presentation, a particular slide jumped out. They showed some numbers on the screen and were suggesting a value of 2 x revenue for a $1M revenue firm. That caught my attention because I haven’t seen an agency sell for 2 x revenue in quite a while. And then I remembered that we recently picked up a client that was $2M of revenue who had been solicited direct by a different large buyer offering them… 2 x revenue.
If you look at the number of announced acquisitions last year, over 1,000, and look at the number that involved an M&A advisor, roughly 300, it paints an interesting picture. About 70% of deals come to the buyers directly. Clearly the buyers are doing a better job than the M&A firms at getting in front of agency owners!
It doesn’t take a math degree to figure out why. Buyers pay, on average, 25-33% less for an acquisition by negotiating directly with the owner. I know this fact from numerous sources, including speaking with the buyers themselves and with sellers that sold direct. On an agency worth $10M, that’s $2.5M to $3.3M of savings to the buyer. You can pay for a lot of advertising and hire a lot of people to source deals with that kind of savings!
Let’s run through some real stories.
Story #1 – The friend that isn’t a friend
A little over a year ago, a client came to me that was considering selling his agency. What triggered the discussion was that he received an offer from a top 5 brokerage firm. The company has been one of the leading acquirers over the last few years. A friend of this client had sold to that particular buyer and convinced him to speak to their M&A team. After some back and forth, they presented an offer and it was terrible – a low down payment and lousy earnout terms.
He knew it was lousy but said to me “I think now is the time for me to sell. I have some juice left in my tank to make a hard run for a few years to maximize an earnout.” To fast forward the story, we took him to market, negotiated offers, and landed him a deal that included FOUR times more money upfront than his friend’s buyer offered, and far better earnout terms than anyone else received that sold to that buyer. This client is currently one year into his earnout and – between the earnout and shares he took in the buyer – has already nearly DOUBLED his initial purchase price.
If you do the math, my savvy client is on track to make EIGHT times the amount he would have made going with that first lousy offer…and he has more years on his earnout.
Did I mention that the lousy offer came from a top acquirer after an introduction by a friend that sold to them? I think his friend should have called us before he’d sold, too!
Story #2 – The local buyer that isn’t a real buyer
We recently picked up a client that we had been talking to for some time. She delayed moving forward because an agent contacted her directly about buying her agency. He was local and sounded experienced, so it seemed like a natural fit.
A few weeks later she picked up our call and relayed the offer the buyer had made, which he had convinced her was in-market. It was a terrible offer. We knew it, but she wasn’t sure. We restructured our fee to assure her that we would significantly outperform the offer she had received. After running our process, she landed on an offer TWO times what her buyer had offered her and with THREE times more money paid upfront.
Buyers that solicit agency owners direct are – 99% of the time – doing so to avoid paying market value. The irony is that most of them avoid a competitive bidding process when pursuing acquisitions, but hire an M&A advisor when they are ready to sell!
Story #3 – The professional buyer that isn’t as honest as they say
If you talk to enough buyers, you will hear things like “we close 95% of the deals we put under LOI” or “we do what we say we are going to do”. The point of them saying that is obviously to gain trust and, for the most part, the statements are accurate. The dishonesty though is hidden in the omission – what is left out of the conversation and what isn’t put in the LOI.
When they say something like that, what the other person hears is “they close 95% of their deals.” What you want to know is what percentage of deals do they close at or above the initial offer price? That statistic certainly is not 95% and is probably under 50%. That’s a critical detail conveniently omitted. “We have a 50/50 shot at closing at our offer price after diligence” just doesn’t have the same ring!
The buyers read the same industry news, so they know agency owners have heard the multiples of 8 to 12 x EBITDA. Most buyers today throw out offers showing those kinds of multiples. The articles quoting multiples don’t delve into the nuances of the deals though – and the nuances matter:
- What is paid at closing?
- What are the conditions on the earnout?
- How will EBITDA be calculated?
- How will working capital be calculated?
A 10 x EBITDA offer with only 6 x EBITDA paid at closing is not a 10 x EBITDA offer. That trick has fooled many, many sellers. Additionally, a 10 x EBITDA offer on a padded 30% EBITDA margin is 25% less than the same multiple on a 40% margin. Most LOIs mysteriously leave off material details of EBITDA and working capital calculations, which leads to the seller closing at a lower amount than they expected at the onset. The buyer will be motivated to close the deal but it’s not in their best interest to help you maximize the value.
The Bottom Line
Agency owners are getting bombarded every week with calls, emails, and ads from folks soliciting them to sell. The main motivator is to get in front of agency owners before anyone else does so that they don’t have to pay market value. Despite what they might say, be aware, they’re not in your corner.
There is only one surefire way to maximize the value of your agency while exploring all options: Engage in the ABC Sale Process TM.
We know the market, including the players, and have successfully run our process for over 250 clients. Take advantage of our expertise and realize a 25-33% higher sale price, better terms, faster transaction time, and peace of mind!
Posted by: Michael Mensch, CBI, M&AMI and Partner
Direct: (321) 255-1309