When Is the Right Time to Prepare Your Business for a Sale

Mergers and acquisitions (commonly known as M&A) is on a lot of people's minds. Post-Covid, money dried up and EBITDA shrank, but today the market for agencies feels stronger than in 2023. Owners who had been sitting on the sidelines are now more likely to put themselves back in the M&A game.

But getting the highest possible EBITDA multiple for your agency is still a long-term play. That’s why I wanted to talk with Phil Daniels of Season Advisors, a former owner of multiple agencies, to find out how he thinks owners can position themselves for the best possible deal.

Phil started his own agency in the early 2000s: “I remember the literal card table I used for a desk and going to the Apple Store to buy my first laptop with my wife. At that point, we were scared to spend $1,000 to start the business and to start my first agency.” 

After building, scaling and selling his own agency in 2013, he shifted to the buying side, giving him insight into both sides of the transaction.

Think about the Post-Transaction Period

Before getting into the nitty gritty of the finance of M&A, Phil advises owners to start by thinking about the post-transaction period – an exercise that will shape the entire M&A process, helping determine the type of buyer they want to consider as well as the deal structure the hope to set up.

“When the deal closes, the payment comes through on a Friday, and it’s all high-fives and celebratory dinners,” Phil says. “But then Monday morning rolls around. Your clients treat you differently. Your team treats you differently. It's not bad. It's just different. The agency is not yours anymore. You're not the head cheese and CEO or founder. You're trying to find your place.” 

There’s so much to get right in an M&A: the financials need to be tight, the team needs to be in good shape, the agency’s story needs to be compelling. “That’s how you maximize value, negotiation, leverage, and everything else,” says Phil. But that happens after an owner works to answer the questions: “What do you want to do? What's your identity after this?”

The answer could be anything. “If you want to ski and fish, that's fine,” Phil says. “If you want to stay around and have a defined role for an additional 2-3 years or beyond and get that so -called second bite of the apple, you can structure that kind of deal as well.”

An owner struggling with burnout may want to exit more quickly, Phil points out: “If you’ve been at this 15-20 years, and we’re in this high-inflation environment where the cost of capital is really high, you might be thinking, ‘Do I stay on and maximize for another two, three, five years, or maybe take a 5% discount today and just go do that next thing?’”

There are other owners who are interested in being part of something bigger. “A lot of folks like the idea of joining a strategic buyer and being part of something bigger, competing in new markets or new geographies or new competencies and then maybe only focusing on the things they want to do.” 

“A lot of owners are really skilled at business development,” he adds. “They're often the sales engine, certainly in the early days. Sometimes that's the role they want to continue with – without the other kinds of management: the team or the back office operation or finances or HR or facilities. They want to work on the thing they're really good at, and that's what their legacy looks like.”

Once you know what you’re aiming for, it’s time to get ready. That’s where Phil recommends the Three Ds.

Ready to Exit? Check These Three “Ds” First

The runway to a successful sale is longer than most people think. To get the highest multiple of EBITDA, you really want to start this kind of planning one to three years pre-sale. Here’s what Phil recommends agencies focus on, as they consider a sale.

1) Durability: A durable agency has a stable customer base and a strong management team to match. Durability is what allows a potential buyer to look at and feel that the past will predict the future. They look at the books and they feel a level of confidence that the bottom is not going to fall out, post-acquisition.

2) Defensibility: A defensible agency competes in a unique way. It might be a proprietary process. It might be serving a vertical or sector in a best-of-class way. It could be a unique IP. Phil calls this a “moat” around the business that ultimately allows you to recruit better people, acquire better customers, and probably charge a premium price in the marketplace. 

3) Direction: An agency with direction has a vision that gets a buyer excited for what the future holds. They see where the agency is currently and see a clear picture of what it is becoming – and they want to go along for the ride. 

As Phil notes, in this competitive environment, “a lot more owners are thinking about the M&A onramp differently. Rather than waiting for an event, hiring a business broker and hoping for a good outcome, they are putting in the work it deserves ahead of time.”

It’s Never Too Early to Plan for an Exit (and Clean Up Your Books)

So many owners think they’re never going to sell, and then all of a sudden, something happens to put an exit on the short-term horizon. People who run a lifestyle business need to be extra attentive and make sure they turn it into a true business with clean books and no personal expenses. 

“Investors will be skeptical of add-backs,” Phil cautions. “If you can eliminate those from your financials completely, it just tells the investor that this is a serious business. You're going to get a better multiple if that investor has solid confidence in your financials.”

Remember, preparation is everything: How clean you are and how fast you can answer questions during due diligence is going to make a huge difference in the amount of money you'll get, because it boosts the buyer’s confidence. 

Final insights from Phil: “You don't want to just say, ‘Hey, tomorrow I want to sell things. You want it to be ‘Okay, I want to sell it in the next two years. These are the steps I need to take. This is the cleanup I need to do because it will pay off.’ When you're talking about a sale, just having clean books and being able to answer questions can save you millions of dollars.” 

So, when is the right time to prepare your business to sell? Right now. 

If you’d like to learn how we help our clients get their financials in proper shape to sell, reach out for a virtual CFO consultation.