M&A advisor Tony Walford explains why timing the market matters less than making sure your agency is genuinely ready to sell.
As the UK tumbles towards the first autumn statement under new prime minister Andy Burnham’s watch, the fears of a hike in capital gains tax are weighing on the minds of many agency founders and stakeholders.
As a result, we’ve seen a significant uptick in enquiries for our M&A services, but the fact is many agencies simply aren’t ready to take to market and thus would be unlikely to achieve the sort of figures their owners aspire to.
The valuation gap rarely comes from market conditions alone. More often, it stems from a mismatch between how founders perceive value and how acquirers assess risk. Many agencies enter sale discussions with strong topline narratives (good revenue stories and forecasts), but insufficient structural readiness, which negatively impacts value before negotiations even begin.
There are several factors that combine to increase an agency’s value and it’s not just financial performance. Proposition and positioning, clients, team, growth strategy and stability all play important parts in roughly equal measure.
That said, one of the most common issues is not ambition or growth, but financial intelligibility. Buyers do not acquire stories; they acquire profitability and cash flows they believe can be sustained and increased.
Revenue growth without clarity on margin quality, not understanding where money is made (and lost) by type of project (and by client) and a lack of cost discipline, introduces uncertainty… and uncertainty is always priced. It’s critical that agencies clearly understand how they make their money and where to mine it. It’s OK to be investing in new areas ahead of the curve, but there needs to be a plan. Where sellers see momentum, buyers may see volatility.
Whilst a clear future growth strategy has a huge impact on valuation, it’s simply a forecast. We all know the only accurate thing you can say about a forecast is that it will be wrong, but predictability (and sensibility) remains a primary currency of value. It’s those agencies without the ridiculous unachievable ‘hockey-stick’ growth forecasts, but with decent planned growth and consistent margin percentages, that outperform faster-growing, but less stable, peers at exit.
That’s not to say acquirers aren’t interested in agencies in rapid-growth mode, they absolutely are. It’s just where growth has happened over a short period (so there’s a lack of historical evidence to back it up, and potentially a lack of future contracted revenue), that most of the value gets pushed to the back end (in an earnout).
Unlike other business models, such as SaaS, agencies are generally project-based and often lack longer term visibility, therefore clarity over pipeline, opportunities and customer loyalty helps demonstrate stability. Financial metrics detailing clients by revenue (top 10) and their longevity with the agency also helps give comfort.
Putting aside the financials, client concentration remains one of the biggest valuation issues. Even strong, long-standing client relationships represent single-point risk, and buyers price this dispassionately regardless of confidence offered by founders. Having a single client reliance doesn’t mean an agency can’t be sold, but it will often lead to a deal structure that reflects the risk. For example, an element of consideration being held back for two or three years with payment linked to maintaining ongoing profitability or named client retention (we always push for the former – you may be able to deliver the same profitability despite a major client loss, so should be rewarded for that). That said, client reliance is a common theme, and we’ve had experience structuring many such deals to arrive at a fair and balanced position for both sides.
Another recurring structural concern is management dependency. Agencies where the founder (or other key member of the team) remains central to client retention, has delivery oversight and makes all commercial decisions suffer from two things. The first is it restricts growth as that person becomes a bottleneck. The second is buyers see this as operational risk. Having any single point reliance – be it a client, founder, key client services head – will be factored into the valuation.
Value increases materially when strength and depth in the leadership team is demonstrated, decision-making decentralized and performance not contingent on continued presence of a few important individuals.
It’s therefore critical that all the value from a sale isn’t going to one or two individuals. Key team members need to be incentivized with some form of equity to ensure they are there for the long haul – the most common being EMI share options, and there are lots of variants of these. Acquirers love to see value being spread with a decent level in the hands of those that will be driving future growth. A popular route we’ve seen, and regularly advise on, is ‘growth options’ where some equity option holders only receive value above a certain threshold. This ensures those that have historically driven value get a larger share of the initial consideration and those taking the business forward can see more benefit in an earnout.
Getting key people clearly incentivized before going to market is critical. We’ve had many situations where agencies want to go to into a sale process, or have been approached, and the equity split (or ‘cap table’) is a mess. The wrong equity in the wrong hands, legacy positions, promises made but not actioned… you name it, we’ve seen it. Buyers are very narrow eyed on ensuring value goes to those that drive it, and heading into negotiations without this core element properly defined not only risks deal delay, or even collapse, but is incredibly tax inefficient.
Scale versus profitability is another fault line in negotiations. We’ve all heard about valuations driven by revenue multiples rather than profit in high-growth tech transactions, but buyers have cooled on these metrics and they never really applied to agencies. Aggressive expansion, particularly through headcount growth ahead of revenue, or service diversification, can dilute margins and introduce risk unless there’s a proper plan or contracted clients onboard. Acquirers increasingly favor agencies with narrowcast propositions and repeatable delivery models, not scattergun jack of all trade offerings, which consistently pivot on perceived client need.
Then there’s timing. A sale often becomes a topic when founders’ energy has reached their limit, when growth has begun to plateau, or if there are storm clouds on the horizon. Again, at this point the shareholders are unlikely to maximize value. While acquirers like stability, they buy for growth and pay a multiple of profit as they expect profit to be higher in the future. If an agency has run out of gas, acquirers quickly sniff this out and the multiple being paid either reduces or disappears altogether.
OK, while the above may read a bit Debbie downer, doom and gloom, it isn’t meant to. What’s been set out is what detracts from value and why it’s important to address any such issues before going to market. It’s the reverse of those points that makes an agency attractive, maximizes price and gives the best chance of a successful exit.
Returning to where we started, the things that drive the best value are having a really clear proposition, an elevated position against your peers, a decent and relatively broad range of clients (with no client more than 20% of revenue), a solid and well-incentivized team, a detailed understanding of the agency’s financials, solid stability and a clear growth strategy. These are all things that can be achieved with the right focus and strategy for getting it right. It just takes some thought and planning. We always say, “If you don’t know where you’re going, you ain’t gonna get there.”
And there’s no point rushing for the exit just because there could be a short-term political increase in the tax you may pay. If your agency isn’t in a good place to sell, the discount you may end up taking could be more than the eventual tax rise.
In sum, the strongest outcomes typically occur when trading is stable, leadership remains engaged and the growth story lies ahead rather than behind. Buyers invest in the future, not retrospective achievement. For advisors and acquirers, the implication is clear. Exit readiness is less about transaction mechanics and more about business quality. Financial discipline, leadership resilience, and strategic coherence reduce friction, preserve headline value, and increase certainty of closure. Where these elements are absent, price becomes the lever of correction.
Quality agencies always sell and, regardless of what’s going on in the world, the market is still incredibly buoyant for the right assets. So, if you’re ticking the right boxes, then now is a good a time to consider a sale as any.
