Moore Kingston Smith
Moore Kingston Smith
Introduction to Moore Kingston Smith 360
How to maximise the value of your agency #1
Media Corporate Finance Partners, Paul Winterflood and Dan Leaman, sat down with Chris Matthews, Principal at Sutherlands, to discuss how to maximise the value of your agency.
They focus on the drivers of value and how these key elements help to maximise the value of your agency to ensure it grows, increases profitability, and is ultimately in a position to sell for the maximum value in the future.
00:00:00 Chris
Thank you both for giving up your time, because
00:00:01 Chris
I know you're busy.
00:00:02 Chris
One thing I find when helping companies that want to sell is they tend to think
00:00:09 Chris
one dimensionally. It's all about profit. And to an extent, that's true. But if I make the observation to them that two companies with the same profit number, I can get different multiples. They're a bit puzzled by that.
00:00:22 Chris
And occasionally I speak to people who say I'm not intending to sell, not for at least five or six years or something. But what I do want to do is
00:00:30 Chris
make our business
00:00:31 Chris
better, they don't really know where to
00:00:34 Chris
start. And one of the things I was very impressed with was your 360 process, because it seemed to me that this atomised the drivers of value in a very logical and practical manner.
00:00:50 Chris
But out there there's a sort
00:00:51 Chris
of lack of understanding
00:00:53 Chris
of this.
00:00:54 Chris
And without you giving away your intellectual property.
00:00:57 Chris
What I'd like to do is just talk about some of the elements of this, whichever other ones you think are particularly worth highlighting. So just to start, could I ask you to introduce yourselves in turn?
00:01:11 Dan
Yeah. OK, I'm Dan Leaman. I'm a Corporate Finance Partner of Moore Kingston Smith. I've got about 14 years experience doing M&A and probably about another 10 years experience being sort of CEO and CFO of
00:01:26 Dan
SME's, including marketing agencies.
00:01:29 Chris
So you've seen it from
00:01:30 Chris
both sides?
00:01:31 Dan
Correct. Yeah. So I think what that means is I bring quite a practical and experienced filter to the advice that we give.
00:01:41 Dan
So that hopefully it's actually achievable and realistic.
00:01:46 Chris
And Paul, do you want to introduce yourself?
00:01:48 Paul
Yeah, sure. So I'm Paul Winterflood. I'm one of the media specialist M&A Partners at Moore Kingston Smith.
00:01:57 Paul
I joined the firm in 2010 and worked very closely with Mandy Merron and Nicola Horton until they retired a couple of years ago.
00:02:08 Chris
What we're here to talk about is drivers of value and whether a company is thinking of selling or just improving. My experience is they sometimes don't quite know where to start and even if they they've identified a weakness themselves in their business, they're not fully aware of all the drivers of value that
00:02:28 Chris
there are in a
00:02:29 Chris
business and Moore Kingston Smith does something called a 360 diagnostic. Is it still called that?
00:02:35 Dan
It is indeed.
00:02:36 Chris
And I went through one of those with you for a client that sold very successfully. And I wonder if you could just take us through the sort of the bare bones of what goes into a 360 diagnostic that explains the drivers of value in a company.
00:02:51 Dan
It's probably worth
00:02:53 Dan
stepping back from that question for a second, and just thinking more broadly about what drives value.
00:03:01 Paul
Hmm, definitely. So I think
00:03:04 Paul
from our experience of working in the marketing services sector in particular,
00:03:10 Paul
we've built up
00:03:12 Paul
a lot of data and experience over that time.
00:03:15 Paul
We speak to buyers, we know what they want, we know what they value. We speak to sellers, we know what they are ideally looking for and
00:03:28 Paul
for a transaction, we know what normally makes transactions work and what the risk areas are.
00:03:37 Paul
I think one of the mistakes that a lot of people selling make is that they overemphasise looking at the profitability and don't actually think about the value as a whole.
00:03:50 Paul
So you could have an agency making half a million a profit, which is more valuable and more sellable than a business making a million.
00:03:58 Paul
So we like to focus on enterprise value, which is typically a earnings times by a multiple. And so we wanted to build up a programme that help people
00:04:11 Paul
focus on that and analyse that and be able
00:04:16 Paul
to make gets the required steps to improve that and make the agencies as attractive as possible and as sellable as possible.
00:04:24 Paul
What the 360 does, is it really really focuses on a multiple. Therefore, I think when we're working with people in advance of an exit, they're focusing on the drivers of enterprise value. They're working on the drivers
00:04:37 Paul
of multiples generally.
00:04:41 Paul
I think agencies that are focusing on just improving their profitability, the underlying value of that business, if they're just focusing on profitability, is probably just gonna be growing at the level
00:04:52 Paul
the profitability is growing at. Where you get the massive swings in or the big swings in value, it's when we're working with agencies that focus on both the
00:05:01 Paul
profitability, but more importantly on the drivers of multiple. And those things in tandem can lead to a big increase in the level of profitability.
00:05:14 Paul
And in particularly with agencies, there's probably two main reasons why agencies fail to sell or agency owners don't get what they're looking for.
00:05:25 Paul
It's due to owner alliance, so the buyer thinks that they'll pay their consideration on day one and then the goodwill
00:05:35 Paul
in the business is at risk of walking out the door with it.
00:05:41 Paul
It's probably the number one reason that a good agency doesn't sell. In the best case scenario, a owner alliance causes a drag on the amount of cash that someone's going to get up front, so it impacts the deal
00:05:53 Paul
value. At the worst case, it can put buyers off completely if they don't find ways to mitigate it.
00:06:01 Paul
Secondly, it's client concentration. So having too high proportion of revenues from one, two or three clients. So I guess they're two areas that we focus on as part of the exercise, as well as more positive factors.
00:06:06 Chris
OK.
00:06:21 Paul
Looking at how strong the value proposition is, if they got any tech enablement. They're both factors which increase valuations. So the exercise is very much trying to look at ways
00:06:39 Paul
that we can help analyse and diagnose the valuation of a business.
00:06:48 Chris
And you do it, if I'm right, under five main headings: clients, people, operations, finance and then vision and strategy.
00:06:55 Chris
And within each of those, there is something like half a dozen subheadings as well, I think.
00:07:01 Dan
Yeah. So the key thing is we've got 36 characteristics that we look at in an MKS360 (Moore Kingston Smith 360).
00:07:05 Chris
OK.