Preparing your agency for sale: what to get in order

In short: Buyers pay for confidence, and confidence comes from information that reconciles, a forecast you can defend, clients and people who will stay, and a business that does not need you in every meeting. Start with what the shareholders want, because that shapes everything else. Then work in order: financial substantiation first, organisational readiness alongside it, process preparation last. Some things can be fixed in a month. Others take longer, and their evidence builds over time.

Start with the shareholders

Before you open a spreadsheet, be clear about what the shareholders want from a sale. Price is one answer. Liquidity, timing, how much ownership you keep, your role afterwards, the future of the management team and staff, the legacy of the brand, how much of the price you need to be certain of on completion and what restrictions you can live with are the others.

Where there is more than one shareholder, these objectives often differ. A founder who wants out within a year and a partner who wants to run a bigger business for a decade will favour different buyers, different structures and different timetables. Surfacing that early is part of preparation. A buyer who discovers a split halfway through a process will price the uncertainty or walk away.

Write the objectives down, agree what is essential and what is preferred, and revisit them when offers arrive. They become the test you use in choosing between buyers.

Financial readiness

Agencies do not use the words revenue, gross profit and fee income consistently, and buyers know it. The first job is to define your numbers so that a stranger can understand how the business earns money and how reliably it does so.

Define the top line

Set out four measures with explicit definitions and a reconciliation between them: gross billings (everything invoiced to clients, including media, production and other third party costs passed through), reported revenue (the figure in the statutory accounts), net revenue or fee income (what the agency keeps after pass-through costs) and gross profit (after the direct costs of delivery, including freelancers). Whether pass-through costs sit inside reported revenue depends on whether the agency acts as principal or agent under the accounting framework that applies to it and on the contractual facts, so gross presentation is not wrong in itself. What matters is that the treatment is correct for the framework, applied consistently and reconciled clearly to the net figures buyers use to compare one agency with another. Fee income and gross profit are not the same measure in every agency, so define both. See fee revenue.

Show where the margin comes from

Revenue and gross profit by client, service line and project, ideally over three years, on one consistent basis. Freelancer costs, staff costs and, where the agency tracks time, utilisation and recovery. Project overruns, write-offs, work in progress and the policy for recognising revenue on long projects. Deferred income, client deposits, accrued costs and how reliably profit turns into cash.

Reconcile the EBITDA bridge

Buyers underwrite normalised EBITDA, and every adjustment will be tested. The honest bridge includes adjustments that reduce the figure as well as those that increase it. Founder remuneration is the obvious case: the buyer will replace what you are paid with its own estimate of the fully loaded cost of the leadership needed to run the business without you, which can be higher or lower than your current drawings. Keep buyer specific synergies out of the bridge entirely; they belong in the buyer’s model and have no place in your history.

Working capital and seasonality

Track working capital monthly, ideally over two years or more so that seasonality is visible. Event and experiential businesses with deposits and staged billing, and media agencies with pass-through spend, can show cash swings that look alarming until they are explained. The normal level of working capital will be negotiated in the price mechanism, so you need the evidence before the buyer produces its own version.

A forecast you can defend

A credible forecast is built from contracted work and backlog, named client assumptions, pipeline with conversion rates you have measured, monthly phasing and the staffing needed to deliver it. The most persuasive evidence is historic accuracy: show what you forecast in previous years and what happened. A forecast that has been beaten twice is worth more than a larger one with no track record.

Organisational readiness

Buyers test whether the business will transfer intact. The questions are consistent across sectors, and the answers take time to build.

• Client relationships. Who owns each relationship, how it is contracted, notice periods and any change of control clauses that let a client walk away on a sale. Review the top ten contracts now.
• Leadership depth. A second tier that wins work, runs clients and manages people without the founders. If it does not exist, the buyer will build it into the price or the structure.
• Retention. How the people who matter are incentivised, what happens to share options on a sale and whether anyone expects a payment the buyer does not know about.
• Intellectual property. Ownership of work created by contractors and freelancers, which in content, production and creator businesses often sits with the individual unless the contract says otherwise. Assignment clauses and usage rights need to be in place before diligence starts.
• Contractors and employment status. Long term freelancers working like employees are a tax and employment question buyers will raise.
• Cap table and balances. A clean share register, option schemes documented, related party loans and balances explained or settled, and property arrangements with founders at arm’s length.

Transaction readiness

The last layer is the process itself. Decide who inside the business knows and when, because a leak to staff or clients at the wrong moment costs more than almost any other preparation failure. Choose advisors early enough to shape the information as well as package it. Build the data room in the order buyers will use it: financials, clients, people, contracts, IP, then everything else.

Positioning is buyer specific. The same agency is a capability gap to one group, a platform to an investor and a territory to an overseas entrant. Preparation includes working out which buyers you want and what each needs to hear, which is why understanding how buyers underwrite comes before writing the information memorandum.

A phased plan

The horizons below are planning aids. Nobody has to wait them out. A founder with an approach in hand compresses them; a founder with time uses them in full.

What to do next

Agree the shareholder objectives, define the numbers and build the bridge. That alone tells you how ready the business is. If the answer is “not yet”, the prepare for a transaction page describes how we work with owners through this stage, in four week sprints with no long term commitment. If an approach has already arrived, read what to do next first.

Written by Rick Palmer and Rob Reid, founding partners of Motion Advisory Partners. General guidance, not advice on any specific business or transaction. Legal and tax points vary by jurisdiction and should be checked with appropriate advisors.