Selling a Creative Agency: What Buyers Look At

What a buyer is paying for

A buyer is paying for the profit the agency will keep producing after the sale. In an agency that profit comes from the gap between what clients are billed and what it costs to staff the work. The buyer will look at utilization, meaning how much of each person's paid time is billed to a client, because an agency with strong revenue and a bench full of idle designers earns far less than it appears to.

The mix of revenue matters nearly as much as the total. Recurring retainers for ongoing work, such as social content, paid media management, or a standing design and production arrangement, are worth the most because the buyer can predict next quarter. Project work that has to be sold again every few months is worth less, and a year that was carried by one large campaign will be treated as a one-time event. Buyers will adjust for it, and they will do it without telling you how much until the offer comes in.

Pricing power gets a look too. An agency that has raised its rates every year and kept its clients tells the buyer something good about the work. An agency that discounts to win projects, or that quotes a fixed price and then absorbs endless rounds of revisions, shows up in the margins sooner or later. If you have been giving away hours to keep a client happy, a buyer's accountant will find it when they compare the time sheets to the invoices.

The founder and the relationships

In most agencies the founder is the best salesperson, the creative director, and the person the biggest client calls on a Sunday. A buyer reads that as a single point of failure and prices it in. The fix is slow. You introduce a second senior person to each major client, you let them lead the next presentation, and you stay in the background for a while to see whether the client is comfortable. Our post on owner dependency goes through how to do that before you list.

Clients tend to be loyal to a person more than to a firm, which is always more true in creative work than in other service businesses. A buyer will ask who the client's day to day contact is, who approves the work, and whether anyone at the client knows the founder personally. If the honest answer to all three is the founder, expect a larger part of the price to be held back until the clients have stayed for some period after closing. We cover how that works in our post on earnouts and holdbacks.

The team a buyer will meet

Buyers usually insist on meeting the senior creatives, the head of accounts, and whoever runs production. They are checking two things. One is whether these people understand that a sale is coming and are willing to stay. The other is whether the agency's talent is deep enough to survive losing one of them.

An agency with a strong creative director, two or three experienced designers or writers, and a producer who keeps projects on schedule is worth more than the same revenue run by the founder and a rotating group of freelancers. Freelancers are fine and common, but a buyer will ask how many of them are used every month, whether they have signed agreements assigning the work to the agency, and whether any of them also work for a competitor. The assignment point comes up again in the records section, because it can stop a deal.

Key employees often want something for staying. Buyers may offer retention bonuses or equity in the new structure, and sellers sometimes set aside part of the proceeds for that purpose. It is better to have the conversation early with your top people than to have a buyer bring it up in the second meeting.

Client concentration

Almost every agency has a client that is larger than the rest. A buyer will want to know how much revenue it represents, how long the relationship has lasted, whether there is a signed agreement, and how the work is awarded. A client that renews on a handshake every January is a different risk from a client under a multi-year master services agreement with a notice period.

Be ready for the question of procurement. Some larger clients put their agency roster out for review every few years, and an agency that has been on the roster for a decade may still be rebid. The buyer's question is when the next review is. Our post on customer concentration explains how buyers think about this, and it applies to agencies with very little change.

If one client is most of your revenue, you have two choices. You can try to grow the others before you list, which takes a year or more, or you can accept that the buyer will structure the price around the risk. Neither is wrong, and which one makes sense depends on how soon you want to be done.

The records a buyer will ask for

Expect requests for business tax returns, monthly profit and loss statements, a balance sheet, and an accounts receivable aging report. Agencies often carry large unpaid invoices because clients pay slowly, and a buyer will want to see that the money is collectable. They will ask for revenue broken out by client and by type of work, and for the time tracking data that shows how staff hours were spent against what was billed.

The client contracts come next. A buyer reads the master services agreements, the statements of work, the retainer terms, and any clause that lets the client terminate on short notice or requires consent to assign the contract. They look for who owns the work product, which is the point many agencies have not thought about. If your agreements say the agency keeps the intellectual property until the client pays in full, or if there are no written agreements with some clients at all, the buyer's attorney will want that fixed.

The same attention applies to the people who make the work. Employees and freelancers should have signed agreements saying that what they create for the agency belongs to the agency, and that work done for clients can be passed to those clients. Where a freelancer made a logo or a piece of code years ago with nothing in writing, the ownership may belong to the freelancer. Rules vary by state and your attorney confirms what applies, but a buyer will not close over a cloud on the ownership of work the agency has already delivered.

Buyers will also want a list of software subscriptions and licenses, including design tools, stock imagery, fonts, and project management systems, because some of these are tied to the person or the entity that bought them. Font and stock licenses in particular are often written for the original purchaser and do not move cleanly to a new owner. Our post on getting your financials ready for a buyer covers the bookkeeping side of this.

What has to transfer

Most agencies are structured so that the buyer purchases the assets, which makes the contract assignments and consents a main part of closing. The lease, if there is an office, needs the landlord's consent, though many agencies now work in shared or flexible space and the issue is simpler. Our post on the lease as part of the deal covers the usual issues for those who do have one.

Client contracts may require the client's agreement before they can be assigned, and some clients will use that moment to renegotiate. This is one reason that a plan for telling clients matters, and why we are careful about the order in which people are told. The same goes for vendor and platform accounts, such as advertising accounts that sit in the agency's name but spend the client's money. Those accounts, the credentials to them, and the admin access to client social media pages and analytics all need to move in a controlled way, and a buyer will check that they are held by the agency and not by an employee's personal login.

Domain names, the agency's own website, and any proprietary tools or templates the team has built need to be in the company's name. It sounds like a small matter, and it tends to be small right up until a former employee turns out to be the registered owner of the main domain. See asset sale versus stock sale for how the structure changes what has to be assigned.

What tends to sink a sale

Several things go wrong in agency deals more often than others. The founder was the whole relationship, and the biggest client left when the sale was announced. The senior creative lead gave notice during diligence. The books showed profit that the time sheets did not support. A freelancer turned out to own work the agency had already sold. The largest client's contract had a termination clause that nobody had read for years.

Confidentiality matters here as much as it does anywhere. Employees in a creative business tend to hear rumors quickly, and a competitor that learns the agency is for sale will use that in a pitch. We market an agency without naming it, and buyers sign a nondisclosure agreement before they see anything that identifies it. Our post on how we market a business confidentially goes through the steps.

How to get the agency ready

Start a year or more before you want to close, if you can. Put the senior people in front of the clients and see who the clients turn to. Sign written agreements with every freelancer and employee covering ownership of the work. Review each client contract for termination and assignment terms, and try to move the larger clients from project work onto retainers with a notice period. Make sure time tracking is used by everyone, so utilization can be shown from records and not from memory.

Clean up your books so that owner expenses are separated and the add-backs a buyer will accept are documented. Our post on add-backs goes through what counts. Move the domain, the software accounts and the social and advertising logins into the company's name.

When you are ready, Business Advisors of America starts with a valuation built from your own numbers, prepares the materials a buyer and lender will expect, and screens buyers before they hear the agency's name. If you want to see how buyers are likely to look at your firm, our page on selling a creative agency is a good place to begin, and a short call with us is the next step after that.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.