As a former agency owner who has been attending Counselors Academy Spring Conferences since the Reagan administration, I can still vividly recall the cocktail hour “buzz” at my first conference about how a certain owner sold his firm to one of the big UK-based agencies for a multiple of 7.
I was quite impressed, even though, way back then, I had no idea what a “multiple of 7” actually meant. Being naïve in the mysterious mechanizations of M&A deals, I assumed that someday I too would sell out to one of the mega firms, and sail off into the sunset with a boatload of cash.
Some 20 years later, I did sell my business, which had 25 employees at the time — to a key employee!
During the interval, I learned a great deal about exit and succession planning, thanks to some great advice I received from several veteran consultants to our industry, fellow CAPRSA members and extensive research. It was, in fact, a session I attended at Counselors on “Passing the Torch” that explained how it was possible to receive as much, if not more, from a well-structured management buy-out (with proper prefunding mechanisms and adequate time to make the plan work) as from a third-party deal.
I am not writing to advocate MBOs as a cure-all exit strategy. For many owners, selling to a third party may very well be the best path to monetization, retirement, or their next career challenge.
What I am advocating is owners who are even 10 years away from their next chapter in life need to get smart about all of their options!
A frequent lament I hear from owners who have gone through or are currently in the midst of implementing an exit strategy is that it can be as hard to get out of a business as it is to start one. It is not uncommon for agencies to be on the sell block for two years or more. And it could take just as long to structure an inside deal.
That’s because it takes considerable time for all stakeholders — the selling founder(s), remaining partners and management team, legal and financial advisers (on all sides of the transaction) and spouses and family members — to understand and sort through the pros, cons and mechanics of all the options available to them.
Those options include how the business would be valued under various scenarios (and agreeing upon a strike price), financing and payout strategies, tax consequences, risk factors and what-if contingencies, as well as the many leadership, daily management, client relational and cultural issues associated with an ownership transition.
Here are the key options available to owners contemplating an exit strategy:
- Selling to a third party (which could be one of the large holding companies, major independents, a mid-size agency across town, or private equity firm), via either a stock or assets transaction (there’s a difference).
- Selling controlling interest (51 percent) to a third party.
- Enabling a partner or management team to acquire the business through any of a variety of strategies, including the bonusing of equity, investment of personal funds, a bank or SBA loan, a promissory note (payable from future distributions) and stock options.
- Allowing the owner to redeem shares to the corporate treasury over a period of time (which would automatically increase the equity stakes of remaining partners).
- Merging with another agency.
- Establishing an employee stock ownership plan (ESOP).
- Deciding to simply slow down, maintaining control and continuing to receive distributions or dividends (with a strong incentivize plan for your management team to keep your financial engine going).
We have seen many agencies begin the planning process with, say, a third-party deal in mind, only to discover that an inside deal would make more sense—and vice versa.
In addition to taking adequate time to understand their options, it is equally important that owners understand what it will take, and how long it will require, to prepare their agencies for ownership transition.
Few agencies are ready for sale. Owners need to understand what buyers are looking for, whether they have the management team in place to pass the torch to, and get their financial house in order.
And last but not least is the issue of money — i.e., how much the selling owner or owners might receive for their equity stake under the various options outlined above, and the underlying conditions and terms (hint: it’s highly unlikely that it will be a boatload of cash).
The hard truth of the matter is that most owners think their agencies are worth more than they actually are. But with a well-structured plan, and adequate time, they can take proactive steps to enhance the value of their firms — and their exit paydays.
Given that an owner’s exit plan will very likely represent the single most important transaction in his or her business career, it is prudent that all owners contemplating a sale or succession carefully evaluate all of their options before committing to one strategy.
Karl J. Skutski, APR, Fellow PRSA is a partner in The Tobin Group, a consulting firm that offers exit and succession planning, M&A services and strategic consulting to advertising, PR, digital media and related firms. He founded the largest independent PR firm in Pittsburgh, which he sold via a management buyout after turning down several offers from multinationals.
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