When Caraline Brown, MD of Midnight Communications, sold her agency in a four-year, £3.5m deal to AIM-listed advertising firm BV Group in 2001, everything seemed right. BV wanted a PR agency, while Midnight, with its £1.6m annual turnover and 40 staff, needed to be part of a bigger group to compete internationally.
But the sale, which took place at the start of the dotcom crash, quickly turned into a nightmare. BV suffered significant losses on unpaid media-buying debts, and by 2003 was looking for buyers for Midnight to help pay its arrears. Brown, who had continued heading the agency, felt she had no choice but to buy it back. ‘BV's slide was spectacular,' she recalls. ‘There was a danger that Midnight could go under. I had to buy it back. I just couldn't walk the streets of Brighton knowing I had let it slip away and let down all those people.'
Deal or no deal?
Brown's decision to stick by her staff reveals that selling an agency is not just a matter of building it up, finding the right buyer, then walking away. In this case, Brown clearly felt she could not live with the consequences of what might happen to her firm.
According to a survey by consultant Willott Kingston Smith and Results International, many agency heads are weighing up whether or not they should sell. In the poll, a third of PR practitioners from 80 marketing and comms companies forecast that acquisitional activity would increase in the second half of this year. Results International senior partner Jim Surguy says that low borrowing rates - and a rising number of agencies with annual fee incomes of £2m-£4m (see the Top 150 Consultancies Report, PRWeek, 21 April) - creates a buoyant market.
For some, such as Robert Phillips and Jackie Cooper, founders of Jackie Cooper PR (which sold to Edelman in 2005), selling is about knowing when it is time to move on.
Edelman, which had failed to replicate its success in the US with consumer clients, had already courted the agency, and this coincided with a feeling that it was time to do something different. Cooper says: We were becoming bored. If you are entrepreneurial, you will always want to change.'
Cooper says that the sale re-energised her, and it is this trait that Don Elgie, MD of marketing group Creston, which recently bought Red Door Communications (see box, right), is looking for when buying PR companies. ‘We're not interested in sellers who want to exit; we want drivers to stay and continue doing well,' he explains.
‘It is more important that agencies can show sustained growth over a number of years, with good profit margins, rather than seek a mythical "right size",' he adds.
Sellers also want the same assurances from their buyer. Adele Biss sold AS Biss & Co to Engine last year. She says she has no regrets because she is confident Engine was the right buyer: ‘Selling is very much like a marriage. You know the groom, but aren't so sure about the in-laws.'
If you are a smaller agency, the market could currently be in your favour. Surguy says that niche agencies are attracting more interest and urges owners looking to sell to court bids from a number of suitors as a way of gauging value. He believes an initial consideration of at least 5.5 times pre-tax profit is reasonable at present.
Establishing the right time and price are just two factors potential sellers have to weigh up. More importantly, though, MDs must also consider whether they can cope with being answerable to a boss again. For those who do not find this a concern, selling is a welcome opportunity to take a back seat.
Charles Stewart Smith, who co-sold Luther Pendragon in a management buyout last year, says he is enjoying a new lease of life as a consultant with the agency, ‘without the management side to worry about'. He adds that his transition from employer to employee has been aided by his attitude of being ‘viciously unsentimental about business'.
Marina Pirotta - who last week announced her retirement as board director at Geronimo Communications (PRWeek, 7 July) - also insists that selling her public sector agency MPC to Tribal Group in 2003 ‘was a positive move'
After having a child last year, she works part-time as a consultant for the agency, which merged with Tribal's other public sector specialists Geronimo and Atlas PR. ‘Selling was a good move for the agency in terms of growth,' she says. ‘It was also a good move for the staff, and has enabled me to concentrate on the job rather than the business side.'
Some agencies will already have a gut feel that the time is not yet right. Cake is one of a number of agencies rumoured to be for sale. But its chief executive, Mike Mathieson, says this is for the future - he knows that now is not the right time: ‘We have had a period of consolidation over the past couple of years. We are coming through that now. We've had approaches, but they look at our books and think "Jesus!".'
Mathieson might well want to refer to PRWeek's and Results International's own ‘when to sell' game.
CASE STUDY - RED DOOR
Name Catherine Warne, managing director
Agency Red Door Communications, a healthcare specialist
Date sold July 2005
Price £6.5m initial consideration rising to a possible £13.5m by 2009, depending on performance.
Buyer Creston (a marketing company)
Why did you sell?
We were at the stage where we had taken a look at our five-year plan and wanted the agency to grow. We wanted to have a consumer offering as well as a healthcare one. We also wanted to do more global work, particularly in the US, and we were looking at a variety of options, such as acquiring an agency ourselves. So selling was merely one of the options. We weren't actively looking to do that, but when we engaged the help of Rupert Ashe of Wall House Consulting it was him who suggested that we meet with Creston.
How did you know it was the right time?
Creston had the same ethos and culture, and promised to be very much hands-off in terms of letting us run the agency. We knew immediately that it would work. We are also confident that we will not be merged and that Creston will not buy another healthcare specialist. The fit has to be right for it to work.
Give us some advice on getting a good deal
Have a business intermediary. The presence of a third party will take the heat out of any negotiations. The financial side of things didn't require much negotiation; that was settled quickly. What required more work was creating an improved remuneration package for staff. Fortunately, this was something that Creston was keen on as well, which helped things run smoothly.
The company came up with a number of options - the deal we eventually adopted sees 25 per cent of the earnout going into a trust, which is to be paid to our staff. It's unique as far as I know, and it's a great deal to offer our employees.