Edelman's acquisition of technology specialist A&R Partners prompted at least one independent agency CEO to ask, "Are big multiples back?"
Er... you wish. Whatever Edelman paid for A&R, and neither party is saying, this was not a return to the days of Sard Verbinnen's famous buyout by Incepta, where the price tag-to-revenues ratio had many of the firm's competitors, as well as agencies of a similar size, salivating at the thought of early retirement.
Those days are gone, but some agencies, it seems, are reluctant to accept it. Unreasonable expectations on the part of sellers can often kill the deal, notes Rick Gould, managing partner of Stevens Gould Partners, which specializes in agency valuation and acquisition. "Today's seller believes firms are worth what they were five years ago, and that's just not the case," he says.
The market is not the same, either. While there are certainly buyers out there - some, like the Canada-based Cossette Communications Group, non-US companies looking to expand US presence - the needs of the traditional acquirers have changed a great deal.
Revenues and profit determine the price, and Gould says that for agencies with 20% profitability and 15% growth, the seller will typically get one times revenues plus net worth. Profitability and growth in excess of those percentages will obviously increase the value.
While many smaller firms may be fixating on their price tag, they probably need to be focused more on their business model. As Gould points out, there are many firms that are breaking even or muddling along with profits of 10% or less. When an agency in that state puts out the for-sale sign, you can feel the torpor radiating off it, as if the owners just want to get rid of it. "That is why many sellers want to sell," Gould says. "They've had it; they can't grow any more; they need a big firm behind them."
But just like someone selling a house, a payoff is not likely to happen unless the seller invests time and effort into creating a desirable abode. Many firms that survived the downturn did so by adopting more mature and stable business practices, hiring and retaining key talent, and creating infrastructure to deal with accounts, HR, and technology professionally.
Gould says one of the differentiators for firms trying to be acquired is a strong second tier of management. Prospective buyers are looking beyond the CEO to the talent running key pieces of business, and who are poised to take greater leadership positions.
But perhaps the most salient point for firms that are keen to be bought is the need to establish areas of specialization and expertise that will fulfill a need for an acquiring company. The large multinational agencies have got it, but many smaller firms still don't understand - the era of the so-called generalist is declining, if it isn't over already.
Edelman didn't acquire A&R because it lacked an office in Mountain View, CA, but because it needed the technology expertise of this long-established and credible specialist. Small firms that try to do it all will find themselves doing it alone.