Sectors: Creative, Media & Technology

Thinking (or dreaming) of selling a stake in your agency this year? Barry Dudley, a partner at corporate finance and advisory practice Green Square, suggests you ask these questions to find out if you’re ready. When we begin to work with a new client that has reached the stage of looking to sell their business so they can achieve proper reward for all their hard work and/or find the right strategic partner to drive the business to the next level, we ask for two very simple things.

What are your financial and non-financial aspirations?

At a time of year when you have hopefully been with family and friends and perhaps made some New Year’s resolutions, why not see how your aspirations and resolutions might fuel each other? While our clients are exec management with an equity interest in a business, this exercise could equally apply to an employee or freelancer trying to figure out their goals and how they will achieve them. Perhaps it will lead to a career move, striving for an exec position or some sort of equity participation, or possibly the beginning of their own business… What we have learned is that if you don’t know where you’re going, then you’re sure as hell not going to get there. So, if the new year has got you thinking about planning your future, then grab a crayon from that dodgy Christmas cracker and, on the back of some wrapping paper, try these exercises. Exercise 1: If you assume you have all the money you will ever need, set out what you would ideally like to be doing three to five years from now. Perhaps it’s just more of what you do today. It could be a reduced working week, so you have some space for personal projects – that novel you’ve always wanted to write. Or you may want to be free from work entirely and on the beach as soon as possible. You need to be wide-reaching here – in our experience, personal aspirations vary widely from continual global travel through to setting up charitable foundations. Exercise 2: If you know where you would like to get to in three to five years’ time, set out what you think you will need to achieve in each year to ensure it happens. Year one may involve finding ways to delegate parts of your role that you don’t enjoy or know could be done more effectively by someone else. In year two, you could begin the ‘How to be the next Basquiat, Warhol or Westwood’ course with the Open University. And in year three, you may want to have developed and strengthened your second tier of management to take over your role and shift to a one-day-a-month strategic advisory position. In thinking about your non-financial aspirations, and being honest about your own strengths, weaknesses and your business’s ability to deliver these goals, it may help to clarify whether you can achieve these things alone or whether you need a strategic partner to propel your business forward.

Financial freedom leads to non-financial aspirations

It’s more than likely that you don’t have all the money you will ever need! It’s also likely that to have the ability to achieve your non-financial aspirations you are going to need more financial freedom. It’s not uncommon for people to say they would like £2m so they feel like they have had some reward for all their hard work and to de-risk a little bit, right through to tens of millions, because that’s what their share of a £50m+ business would be worth. More often than not, our clients just don’t have a magic number and struggle with the difference between what they want and what the business might be worth – they are often very different things and it’s important to establish your true financial requirements and expectations as a starting point. For the next exercise, it is time to be very selfish. Exercise 3: List out all the things you wish you could afford but are out of reach at present. Put a value against each and total them to get to your magic number. This may be paying off your mortgage; paying off someone else’s mortgage as well as your own; three sets of school and university fees; that second home in Cornwall, Portugal or Miami; a Lamborghini; or a 100ft super yacht. But bear in mind that the total is what you need after tax, so: Based on current capital gains tax (CGT) rates, divide the total number you’ve arrived at by 0.8 to arrive at a pre-tax amount that you will need to have received assuming the 20% CGT tax rate is applied – this is a broadly indicative number if the money you receive is through selling shares in your company. However, if you’re not planning to realize value through a sale, then you need to divide by 0.6 if you assume the money is coming through salary, bonuses and/or dividends. This would give a rough ‘blended’ 40% tax rate as some folks will be looking at salary and bonus, some as dividends. Clearly, the upper tax band of 45% may be more appropriate depending on individual circumstances, but this simply allows you to compare what you will need to get to your ‘net’ requirement under income tax as opposed to CGT. So, if your after-tax number is £5m, for example, then you will need a capital gain of £6.25m (£5m divided by 0.8) or salary, bonuses and/or dividends totaling £8.33m (£5m divided by 0.6) as pre-tax numbers. This math is very simplistic and tax rates and allowances will change.

Understanding the nuances of selling

In the UK, we are fortunate to have business asset disposal relief (BADR), which was previously called entrepreneurs’ tax relief. This means that if certain criteria are met, you only pay 10% on the first £1m of capital gain from selling shares in your business. This is a lifetime allowance but there is much debate as to whether this will remain for the long term, along with whether the current CGT rates will increase. It’s also important to note there will be legal and professional fees, as well as merger and acquisition advisory fees to be deducted (ideally including ours) if you are selling shares. Hopefully, these exercises will be of great benefit to you in planning your next life phase and have outlined why it’s so important to consider the blend of non-financial as well as financial aspirations to establish goals that can motivate and drive you forwards. To quote Eleanor Roosevelt: “The future belongs to those who believe in the beauty of their dreams.” Read more

Amazon has long led the way regarding e-commerce and has been instrumental in the shift from physical retail to online shopping. This space is expanding and changing quickly with a growing number of players opening their online estates to become a marketplace. This has also opened the door for a new breed of agency: e-commerce specialists acting as a bridge for brands to access the increasing range of online retail platforms. These agencies are high on the ‘must have‘ list for global acquirers that need to ensure their arsenal includes such expertise. The increased appetite for online shopping is well-documented. Retail economists stated that the pandemic-led growth propelled the trajectory of e-commerce forward by up to eight years compared with prior forecasting. Internet shopping per capita is more popular in the UK than in any other country. We are a small island with a high population per square mile, high levels of internet connectivity, strong delivery infrastructure and a vast breadth of retailers skilled in online fulfillment. Consumer e-commerce now accounts for approximately 30% of the total UK retail market, with 82% of our population buying at least one product online in 2021 (according to the US International Trade Administration). That’s a huge statistic and, despite our size, we are the third largest adopters of e-commerce in the world – China is the biggest, followed by the US, then ourselves.

Towering above the rest

If we exclude the B2C retailers and focus purely on marketplaces, Amazon remains the UK market leader with approximately 38%, followed by Ebay at 28%. There is then a big drop to the following pack – which includes Wayfair, Etsy and the likes of ManoMano – but even when combined, they don‘t match Amazon’s dominance. Traditional retailers are being forced to react, with many household names now turning their existing online estates into marketplaces, extending the range and reach of products they can market and stemming the flow to specialist online retailers. These include mainstays of the high street such as B&Q, Marks & Spencer, Boots, Next and Decathlon. The impact of increased online shopping on UK high streets has been widely covered and after the pandemic, with several retail giants collapsing, retail space vacancies were at an all-time high of circa 14%. There have been limited signs of recovery since the low point in 2021, but huge uncertainty remains due to the economic situation, the cost of living crisis and the relentless march of online commerce. With the economy in a precarious place and people having less disposable income, FMCG businesses will be looking to focus their marketing budgets on achieving quarterly sales targets. Rebranding and ‘tent pole’ marketing campaigns may be scaled back or delayed with that share of the budget being reallocated towards direct campaigns to push products harder than ever. This is where the new breed of agencies that can navigate the dark arts of online marketplaces can excel by helping brands access mass markets quickly and easily. The models of these agencies all differ but, in many cases, their fees are linked to performance. Therefore, the brands are in a no-lose situation and, as their agency’s core remuneration focus is on client sales, the relationship is completely aligned. These expert agencies also offer challenger brands swift, effective and relatively inexpensive access to consumers without the need to court the all-powerful retailers as has traditionally been the case. Coupled with the rise in social media whereby consumers are influenced to buy products based on sustainability, usability and herd recommendation – as opposed to simply trusting a brand name – this represents a huge opportunity for such brands and, likewise, for those specialist agencies that can platform-market them. Ultimately, online consumers will have a broader choice and faster cross-marketplace comparison capability, further cementing e-commerce as the preferred platform for spending.

There is a space for reinvention

So, is this really the pivot point where traditional retailers turn their backs on bricks and mortar in favor of e-commerce marketplace opportunities? I’m not sure. We are gregarious, social animals that like to visit, congregate and socialize in city and town centers. However, whether the old adage of ‘let’s go to the shops‘ will be the key driver of these visits is questionable. There will be lots of opportunities for experiential agencies that can rise to the challenge of making often defunct retail spaces, such as closed House of Fraser stores, into exciting destinations that hold a broader appeal than shopping alone. Many of these agencies had a tough time in the pandemic, with the smart ones quickly skilling up and expanding their online capabilities and it’s these that may lead the pack in bridging online and offline commerce. So, as we move on from yet another very turbulent year, with everything from the war in Europe, an energy crisis, three UK prime ministers, ongoing strikes and rampant inflation, it’s very hard to predict anything with any certainty for 2023. What we can say is that we are likely to see further growth in e-commerce, the agencies that support it and further transformation in our high streets. With change comes opportunity and we can expect to see the agency landscape continue to morph next year.

An unfit environment for sellers

In terms of merger and acquisition (M&A) activity, changing consumer needs will always present opportunities for agencies that specialize in meeting them. And acquirers across the whole spectrum need to offer that expertise to the brands they represent. So, in turn, the M&A march across the marcomms space will continue. At this time of year, we’re always asked to give our views on likely M&A activity more generally going forward. Putting aside the need for acquirers to continually develop and grow, the obvious cloud on the horizon from a seller’s point of view is a potential rise in capital gains tax (CGT) in the March 2023 budget. If it doesn’t happen then, we think it will if the odds-on change in government occurs in January 2025. While this won’t affect acquirer appetite, a tax hike will certainly make it less attractive for independent owners to sell. It takes six to nine months to sell a business, sometimes longer, and should CGT remain unchanged in the March budget, then those looking to mitigate that future governmental tax-hike risk shouldn’t leave it much past September 2023 before commencing a process. Read more

British agencies are coming off poorly in the global talent war. But equity-sharing schemes could enable agencies to market themselves better to new staff – and keep their current talent happy, argues Nick Berry of Green Square. The advertising sector is facing its worst-ever recruitment crisis, according to the World Federation of Advertisers (WFA). The UK is at the sharp end of this crisis, and in the face of the recent turmoil in the economy and the deepening cost of living crisis, the situation has only been exacerbated since the summer. As agencies search for solutions to this threat, there’s one means of rewarding and incentivising staff that has been overlooked, and can act as an important pillar in longer-term M&A strategy: equity. Before considering tactics to utilise, it is worth recapping why attracting and keeping hold of talent is the biggest challenge for UK agencies right now. Brexit has led to many people to reassess whether they see the UK as their long-term base. Many agencies have established a base in Europe and relocated headcount and relationship management to the continent. Remote working has become the norm in many cases and geographical boundaries have largely been removed. While this increases access to talent, it also increases the competition for talent globally. Most countries are in the grip of a cost of living crisis, and some staff seized the pandemic as a chance to relocate to cheaper and often warmer climes to work remotely while still commanding the same and sometimes higher wages. These factors have resulted in the attractiveness of the UK waning to some degree. Furthermore, employees know their value more than ever. There is greater knowledge of what the competition is paying and a willingness to ‘jump ship’ for a salary hike. Following a prolonged period of almost ‘full employment’ in the UK, people are less concerned with job security, and length of tenure is at an all-time low. A survey by Employment Hero at the start of 2022 showed that 77% of people aged 24-34 were looking to change jobs within the next year, which is a startling statistic. Freelancing is often a more lucrative option than being on staff, while also providing the chance to experience a variety of environments. It is often perceived as less stressful with a better work/life balance. More people than ever are setting up their own businesses, and they are often lured by the excitement and challenge of trying something completely different from their established careers. There are considerable push factors for this in the marketing and advertising world, as highlighted by the WFS’s Media’s Got Talent survey, which noted “systematic industry issues including poor levels of training, poor client behaviour, competition from tech firms, poor work-life balance for staff, a lack of flexibility and opaque career paths” as factors. On top of all this, leaders and managers are stretched and struggle to define and foster thriving cultures in a world where the office is often no longer the centre of gravity for the business, growth is restricted by clients demanding more for less and there is the ever-greater challenge of meeting creative and technical necessities in the ‘always on age.’ That represents a lot of complex inter-related challenges to tackle. But in the brave new world, the innovative and bold will survive and thrive.

Equity participation

Getting the basics right is essential. I’ve written previously about the importance of investing in processes and systems to allow people to be freed from repetitive admin, which in turn will allow creativity to flourish. This can have a huge impact on reducing stress and increasing job satisfaction. But further to having the foundations and tools for individuals to flourish, there’s an array of other operational and cultural actions that demonstrate an underlying commitment to staff. Initiatives such as those listed below will improve the length of tenure and attractiveness of a company to existing and prospective employees…

• Coherent, inclusive and open recruitment policies
• Quality induction for new starters
• Clear training and development paths underpinned by robust, ongoing performance management from team leaders who know how to manage
• Proactively searching for talent from diverse and underrepresented groups
• a strong environmental, social and governance approach to both reflect and uphold what matters to modern-day employees
• Seeing investment in wellbeing as a way to drive performance as opposed to a cost to the business
• Hybrid working patterns that allow for collaboration to nurture junior team members so they can develop and grow as opposed to being isolated and adrift from peers and experienced staff

The points above apply to all businesses, but in creative environments people are fundamental to both differentiation and ensuring innovation and continuity in client relationships. The radical empowerment of key people and aligning them to long-term business objectives is essential. A powerful way to do this is through equity participation. Equity is often regarded as a ‘sacred cow,’ not to be touched by those who have it. But owners and leaders need to think bigger than this and use all the tools at their disposal to drive success in these testing times. When implemented correctly, utilising equity can embed a truly shared and vested interest. At Green Square we see that owners holding on to too much equity can have the opposite effect to that which they are striving for, which is to reduce reliance on themselves, spread responsibility and maximise the value of the business. We are lucky in the UK to have long-established government-approved share option schemes for small- and medium-sized private businesses, such as Employee Management Incentive schemes (EMI). Of nearly 6m businesses in the UK, the vast majority are small. The government recognises the importance that share schemes have for them and it’s currently reviewing EMI rules, saying it aims for “the EMI scheme to ensure it provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively. The review will also examine whether more companies should be able to access the scheme.” As explained simply by Ifty Nasir, chief executive officer of Vestd, with a share scheme management platform, “in a nutshell, when people feel they have a stake in something, there is a greater level of commitment to the success of the business as a whole and their contribution to it. This applies even if they’re not in the office with a manager looking over their shoulder.” Furthermore, and as a key aspect of where we support clients preparing to sell, it has been a long-standing priority of buyers to know the ‘second tier’ of management will share some reward from the initial payment, along with those that founded the business. And even more importantly those people will be incentivised to drive growth in profits post-sale during an earn-out period. This will be alongside the primary owners and shareholders, or as part of a smooth succession plan. Every business is different and there is no hard and fast rule for the level of equity to distribute, but acquirers like to see between 10% to 20% of equity in the hands of the ‘second tier.’ This is a meaningful amount and shows that the business has a trusted layer of resource and expertise beyond its founders. Further to share option schemes there are other approaches to consider. Employee Ownership Trusts (EOTs) are growing in popularity for businesses that wish to retain their independence or don’t fit the profile for acquirers in some shape or form. Employee ownership is achieved when a trust is established to hold shares on behalf of employees. This offers significant tax advantages for those handing over their shares when all the criteria are met. In larger agencies that are part of a network, the group entity is often publicly listed. The share prices of the main networks including WPP, IPG, Omnicom groups have been in steep decline over the past 12 months or so. The dramatic rise and fall of S4’s share value has also been well-documented over the past couple of years. This represents an opportunity and a challenge for these larger groups when it comes to using equity to attract and secure talent. The goal when issuing share options is for the capital gain to be as large as possible for the beneficiaries. Therefore with share prices depressed, this is a great time to consider offering share options to staff. If such options have carefully planned vesting schedules, this could lock in key people and provide much sought stability for the agency and a tangible goal for the employees. This could/should both drive growth and consequently result in significant returns for the beneficiaries over the next five to 10 years. In other situations, groups such as S4 and Next 15 have used equity as a key part of their acquisition strategy through offering some of the value to the sellers as reciprocal shares in the group. In these circumstances the shareholders that sold to the group when the shares were at a much higher value may well now be feeling short-changed. But the benefit of hindsight is a wonderful thing and no one could foresee the current turmoil in the markets – a far more powerful factor on those prices than the performance of those companies alone. Not only does this act as a motivational challenge amongst the businesses acquired to date, but it also means that if future deals utilise a similar structure, the volume of shares required to achieve the required value would be MUCH higher – creating a significant imbalance. The same would apply if other staff within group companies were now offered share options. This could lead to some interesting internal politics, but ‘top-up shares options’ could be offered strategically to iron out inequalities and level the playing field, motivate and drive growth. Distributing equity won’t solve all the problems that businesses are facing right now, but we are in an age where employees expect more than ever, and it is a powerful tool to help encourage and reward commitment, accountability and growth. It won’t be right for every business but when implemented correctly long-term value can increase and can get you to your desired destination faster. So, founders need to warm to the idea of having a smaller percentage of the pie, being outweighed by creating of a much bigger pie, which is good for everyone. Read more

Currency instability may have the public spooked, but agencies can still find opportunities, writes Nick Berry of corporate finance and advisory practice Green Square. The full political fallout from the mini-budget is yet be seen, but there is no doubt that Liz Truss and Kwasi Kwarteng’s dramatic tax cuts have been the catalyst for further economic turmoil and the weakening of the pound.