1. Creating a memorandum about your agency. A memorandum is around 25 pages long and contains key information about your agency: top clients, revenue concentration, historical and projected revenue and EBITDA (earnings before interest, tax, depreciation and amortization), executive bios, competitive differentiators, awards and so on.
2. Identifying potential acquisition targets. Usually, there are two types of acquirers: other agencies and “strategics.” A strategic is a company that needs your agency to improve their business but is not an agency. (This might be a consulting firm, a large business that wants to make you their in-house marketing team or a services business that wants to start offering agency services.)
Creating a list of acquirers really comes down to doing a lot of research: Do these companies have “corporate development” teams (M&A experts)? Have they done acquisitions in the past or publicly stated that they plan to in the future? (If the company is public, they may discuss their acquisition strategy during their earnings calls.) The number of targets ranges, but I’ve seen lists from as few as 10 to as many as 50 potential acquirers targeted at this stage.
3. Reaching out to potential acquirers to inform them of the process. Because your memorandum contains a lot of sensitive information about your business, the memorandum is not mailed to every potential acquirer initially. Instead, a letter or abbreviated version of the memorandum is sent out with top-level information and a request to respond if there is interest in receiving the full memorandum.
If you are using an investment bank (which I will talk about later), it is common at this point to not reveal the name of the agency at all. (The letter might say something like “A fast-growing SEM agency based on the West Coast is considering an acquisition or investment to further accelerate company growth.”)
4. Signing a Non-Disclosure Agreement (NDA). This is to ensure that your financial and client data is not shared with competitors. It is also important to keep the very fact that you are considering an acquisition confidential — competitors can use this to try to poach clients and staff.
5. Sending the memorandum to interested parties. Not all (or even most) companies you contact will be interested in your business; this does not mean that you have a terrible agency (well, it might, but that is not usually the case!). Acquirers have many reasons not to pursue an acquisition: They may not have the cash to do an acquisition, they may be too busy, they may not need your services.
For those that are interested, you may end up sending slightly different memorandums to different acquirers. This may be to customize your story to the specific acquirer, or it may be because an acquirer is a competitor, and you don’t feel comfortable revealing all of your data to the acquirer at this stage.
6. Setting up in-person meetings. Agencies are service businesses, so an acquirer will insist on meeting as many people in the company as possible before buying the company. As a best practice, however, M&A experts recommend against informing your team of an acquisition until it is absolutely necessary to do so. (Team members can draw incorrect inferences, rumors can spread, and if a deal doesn’t go through, the team may think this reflects poorly on the company.)
So instead, the agency management team will usually take one or more meetings with each interested acquirer. In many cases, these meetings will take place off-site to keep the discussions confidential. This is an opportunity to present your memorandum in person, but more importantly, to have a chance for both sides to see if there is a cultural fit between the management teams.
7. Accepting letters of intent (LOI). After in-person meetings, a deadline is usually set for parties to submit letters of intent. A letter of intent is a non-binding offer letter to acquire your company. It will usually spell out the financial terms (cash, stock or a combination of the two), and whether there will be an earn-out (an amount to be paid at a date after the acquisition, based on either company performance or key team members staying at the company for a certain period). It will also detail any other legal requirements the acquirer believes are important to state up front.
8. Signing a “no-shop” with the best acquirer. After reviewing all the LOIs, you have a chance to counter any of the offers to try to get a better deal. Once an offer is reached that is acceptable to all parties, most acquirers will ask the agency to sign a “no-shop” agreement. This is a legal document that prevents you from talking to other acquirers for a specific period — usually 30 to 90 days. This shows your seriousness about the offer you’ve received and sets a deadline for everyone to get a deal done.