Sectors: Creative, Media & Technology

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.

The times we live in will be remembered for many things – a pandemic, war in Europe, 1970s-style inflation, a revolving door being installed at 10 Downing Street – but the rise of environmental and social awareness will not become a memory. The manner in which governments, business and individuals balance short-term economic pressures with long-term sustainability and social justice is arguably the most important challenge for our and future generations. We are seeing more people becoming vocal and active across mainstream politics, as well as other forms of disruptive protest to create awareness and drive change. But while specific industries are now clearly marked as targets for the damage they cause, businesses across all sectors are having the spotlight shone on them as never before. Greenpeace’s protests aimed at WPP at this year’s Cannes Lions was both surprising and innovative in equal measure. WPP agencies won two Gold Lions for work with Greenpeace, but this didn’t stop the campaign group from using guerrilla marketing tactics to storm its private beach at Cannes to highlight its dealings with fossil fuel companies. Whether or not these protests work in the short or even medium-term is not the point. No agency – or client for that matter – can afford to brush off these events and think they are immune from being targeted. Business needs to understand that consumers are getting wise to greenwashing, so brands and their agencies can no longer make performative gestures. ESG (environmental, social and governance) standards must be top of mind for agencies and their clients moving forward. In the past, ESG efforts were primarily viewed as good PR to receive favorable media coverage, please socially conscious employees and mitigate risk. Things have moved on since then: ESG considerations are increasingly viewed through the lens of value creation. Just as high and transparent ESG standards will help brands engage with their consumers and help agencies become more attractive to clients, both existing and prospective, with my Green Square M&A hat on I am certain they will also make agencies that are looking to sell appear much more attractive to potential buyers. Following on from the Cannes protest, Silvia Pastorelli from Greenpeace said: “We have nothing against the creative sector. There is a lot of incredible energy and talent, but we would like to see that used as a force for good.” I speak to entrepreneurs all the time and ESG is high on their agenda. Privately-owned businesses across the marketing and creative sectors often have a strong social conscience and have motivated and committed staff that echo the thoughts of Pastorelli. It is genuinely important to them and the cultures they are creating that positive ESG is part of their DNA. This will uphold their values, help them differentiate from the competition, help them attract the best talent and the most prestigious clients. It will also inform their M&A strategy when the time is right to attract the right buyer. With ESG issues near the top of the agenda for governments and the public at large all over the globe, it is now a tangible factor for private equity houses and institutional investors. It is consequently a driver for transactions – in the form of both disposals of risky assets (for example, fossil fuels) and acquisitions of sustainable assets or assets that will help a company achieve its ESG goals (such as renewables, recycling, waste management, tech and aquaculture), as well as B2C transactions. At the same time, ESG factors are receiving more attention in due diligence and deal terms as their materiality increases. And on a purely practical level, there’s also greater regulatory focus on ESG – reflected in the introduction of reporting requirements across the globe (including in the UK, Japan, Hong Kong and China) and moves in Europe to impose new corporate governance and risk management obligations. While reporting requirements have, to date, largely been targeted at publicly listed companies, they are expected to be extended to large private companies in many jurisdictions. It is important, therefore, in the context of private M&A to consider how ESG risks and regulations may affect a company’s reporting obligations, or any plans to exit an investment in the future, through a subsequent disposal or an IPO. An interesting development in recent years has been the rise of B Corp, a non-profit network that seeks to certificate businesses on their environmental commitments, good corporate governance and transparency. The rapid growth in businesses becoming B Corp-certified demonstrates the commitment of many businesses trying to do the right thing and reflect wider societal views. The ongoing benefits of certification are becoming clearer for all kinds of companies: attracting and retaining staff in the midst of a global talent war, attracting new business and winning public favour. There are now thousands of B Corp-certified companies. A random search using the keyword ’advertising’ reveals that there are almost 300 agencies listed on the B Corp website. But ESG is still often overlooked as a lever you can pull to grow value from M&A activity. It does not replace the importance of Ebitda and a strong management team etc, but it can make your enterprise more attractive. There may be acquirers concerned as to whether they can uphold the standards expected of being a B Corp if they take over a certified company. In time, however, the increasing need for larger businesses to prove that their actions speak louder than words should mean savvy acquirers will seek targets to improve their own cultural and commercial commitments and social perception in the market. It was not so long ago that sustainable investment was confined to a small dedicated corner of the PE market. It’s now moving into the mainstream. Sustainability is permeating almost every aspect of private markets. Private equity firms are now integrating ESG considerations across the investment cycle – proven by the fact one in three general [PE] partners have now hired sustainability officers, which is almost double the number from two years ago. Those that that fall behind are likely to face pressure from limited partners and lenders to up their game. In M&A, negative ESG issues – whether related to environmental impact, board diversity, supply chain management or other factors – may affect deal certainty by impacting target valuations in previously unexpected ways. They may also affect the availability of financing for a transaction as lenders and investors increase their focus on these issues. ’ESG due diligence’ is becoming more important for corporate and private equity buyers in M&A transactions. Buyers and advisers need to be savvy in diligence exercises, particularly as monetary or other traditional ’risk’ thresholds may prevent discovery of some ESG issues, such as human rights breaches in the supply chain. Deal protection provisions are another area in which ESG is impacting on M&A transactions. Buyers may request ESG-related warranties above and beyond the traditional scope of ’compliance with law’ warranties. ESG-specific warranties need careful consideration to ensure risk is balanced and any breaches are objectively identifiable. This is especially important if the parties want to utilise warranty and indemnity (W&I) insurance for the transaction. Sellers may also want to protect their reputation post-closing by conducting diligence on the buyer or seeking post-closing commitments as to how the business will be run by the buyer in future to maintain ESG standards. At Green Square, we have been increasingly focussing on sellers’ ESG credentials, as well as their numbers, as part of our assessment and support in preparing our clients for acquisition; this is because we believe that good practice, governance and being proactive in upholding sustainability will create greater value over time. Entrepreneurs need to take note! Read more

Following the profit warning at S4 Capital, Green Square’s Nick Berry warns growing agencies not to ignore the necessary work of building support systems and infrastructure. The revelations about ‘chaotic accounting’ at S4 Capital last month not only dampened its share price and future growth forecasts, but also delivered a timely reminder to businesses of all sizes that it is worth holding up a mirror to your own systems and operations and asking if they are fit for purpose. S4 has since hired Colin Day as chair of its audit and risk committee and promoted Chris Martin to chief operating officer – the first of several appointments that Sir Martin Sorrell has stated are the first steps to rebuilding confidence. As a youngster building my first company, I was once told ‘business is easy except for the clients and staff.’ This is pretty much spot on, but I would add a further challenge to the mix in the form of systems. Edwards Deming, a renowned American engineer and businessman from the 20th century, claimed “94% of problems in business are systems-driven, but only 6% are people-driven.“ I would argue that is possibly over the top for the people-centric, service-focused marketing sector, but it still highlights that people are often restricted by the systems and processes they are bound by. Within Green Square we are heading toward a hundred years of combined C-suite experience in the hot seat. We all have war stories regarding system implementations and how poor process has inhibited growth at certain stages. This experience is vital as we assist with businesses in considering their M&A options and aiming to attain maximum value. Most businesses work hard to preserve a swan-like appearance, where serenity on the surface is upheld by frantic activity below the water. Things were even more stretched at S4, as the auditors discovered when assessing their finance operations. Consequently, the failure of systems and processes to evidence a robust audit trail and reporting resulted in the late filing of accounts. Many marketing and creative agencies focus all their attention on being brilliant at what they do while ignoring the back-office platform. This can be foolhardy as the former can only scale and blossom based on the latter being robust. Systems and the ability to scale become critical in businesses approaching 50 staff and above. This is when small business finance and resource management tools become inadequate. In The Drum’s recent Independent Agency Census 2022, there are six financial factors on which they assess performance: turnover, turnover growth, turnover percentage growth, turnover per head, gross profit and gross profit growth. These factors are clearly fundamental to the underlying health of any business, but on their own don’t necessarily allow for a view of how sustainable and scalable a company’s operations are. This is often linked to sales processes, account management, service delivery, client experience, commercial practice and staff churn. These factors and many others are all inherently linked to systems and processes being strong and unified from the front to the back of house. As agencies get momentum and start to scale, they often fall into the trap of seeing the solution to every problem as more people. In the words of Michael Gerber, the American Author who is evangelical about processes in businesses, “systems run the business and people run the systems” – so throwing more bodies at a problem as opposed to investing in the underlying systems is rarely the right approach. Entrepreneurs often by their very nature hate the detail and complexity required for building operational systems. They get frustrated and see it as a waste of time and money. But effective process not only reduces reliance on people and removes single points of failure, but it also relieves stress levels and increases the time available for creativity and innovation. From an M&A perspective, strong systems mean the knowledge and ability to ‘get things done’ are not tied up within a few people. This is a huge value driver in the eyes of an acquirer. People are essential, but when blended with quality operations, you achieve a secret sauce that is attractive to buyers and can often differentiate you from the competition. As an example, it is reasonable to expect a business to have access to key management data that ultimately helps to drive decisions and profitability. This includes being able to assess the profit margin of individual clients, projects and service lines. But it is surprising how few businesses have this readily to hand. When analyzing this for due diligence, it often becomes apparent that there are significant imbalances and certain commercial relationships or services that add limited value. Other processes around recruitment, onboarding staff and ongoing management of HR matters should also be systemized in a way that supports your culture positively and makes you stand out from the competition, attracting and keeping the best talent available. There is strong evidence to prove that haphazard approaches to hiring and inducting staff, along with ongoing employee engagement, will reduce the longevity of tenure and increase staff churn. A buyer won’t expect you to have the same systems or approach as they do, but if they see a culture that is underpinned with robust process and data to support effective decision-making, they will view you as a mature outfit with a growth-focused management ethos. On the other hand, when there is a fundamental process issue as with S4, it can take a long time to fix and rebuild reputation. Sorrell has not only admitted the slump in S4’s share price will affect acquisition activity, but also conceded “that clients and potential clients might be less inclined to work with the company in the future, given the chaos,“ according to The Times. Further to this admission and following the new appointments, Sorrell said: “In a way we’re starting again, not from where we were at the beginning, which was zero, but we’re starting again to build that trust and confidence having gone through an unacceptable event.” This proves that internal systems can be as important for success as being on the bleeding edge of a new trend or having a great sales strategy, so investing time and money in systems can yield great returns in the long run, as well as being a powerful lever to pull on when considering M&A. Investment in operations needs to be driven from the top, and those that don’t will suffer in the long run. In the words of the American author Orison Swett Marden, “a good system shortens the road to the goal.“ Read more