Business management information (MI)

How to maximise the value of your agency #3

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.

Transcript

00:00:00 Dan 

I think MI (management information) is a really interesting point in the widest possible sense. There's loads to cover there. I think the very first thing to say is every transaction will have something called financial due diligence. Financial due diligence is a painstaking exercise, whereby as pay people to look at their financials, 

00:00:21 Dan 

turn them upside down. Give them a good shake and see what falls out. They ask for a huge amount of information. 

00:00:28 Dan 

And I'm going to overlay over that with another factor, which is that for deals to happen, they need something called momentum. 

00:00:36 Dan 

Transactions are long and difficult processes sometimes, and if you lose momentum you only increase the risk that something happens during the period of the transaction that changes things 

00:00:49 Dan 

fundamentally, and can either reduce value or eliminate it entirely if it makes a deal not happen. So the first and most important thing about MI, I'd say is 

00:00:59 Dan 

before starting on the journey of a sale, you need to be in a position where your MI is produced. 

00:01:08 Dan 

It's accurate, it's timely and it covers the right things that buyers are gonna want 

00:01:14 Dan 

to look at. 

00:01:15 Dan 

So that's the very first thing. 

00:01:17 Paul 

I think in addition to that as well, when you're going through a sale process, when people are talking about high multiples. A multiple is the expectation of that valuation. The valuation is based on the expectation of future earnings of the business. 

00:01:35 Paul 

For the majority of owner managed businesses, the reason why historic figures are used is because the past is the best guide to the future. Businesses that are growing and are performing at a very high level against enterprise value drivers and are consequently 

00:01:54 Paul 

growing at 20, 30, 40% 

00:01:57 Paul 

a year. Pretty often can evidence why they're growing. They've got KPI's which are showing lead indicators rather than lag indicators. 

00:02:07 Paul 

So when we're going through a sales process and we're speaking to acquirers, we can be evident, we're pretty confident about what the numbers going to be doing, because 

00:02:17 Paul 

we can see that the metrics are all green rather than finding out at the end of six weeks after every month end, when the management accounts tell how the business is performing. And so I think that has one of two impacts. The first is 

00:02:32 Paul 

that you could be confident at how you are, how you are trading and can make changes accordingly in real time. 

00:02:41 Paul 

Secondly, particularly if you're growing, it means that the numbers that you are valued off, at the deal completion, can be as close to close as possible rather than on your last financial year 

00:02:52 Paul 

when you're likely to be smaller. So it's a real deal and real value cash in pocket impact of good MI. 

00:02:59 Dan 

Well, yeah. I mean, if you actually unpack what a multiple is. 

00:03:04 Dan 

The reality is people are never really, when people hear these big, high double digits, sometimes multiples, let's say 10 times earnings. 

00:03:15 Dan 

Buyers are never really paying 10 years worth of profits to a vendor for a business, for the kind of businesses we're talking 

00:03:23 Dan 

about which is 

00:03:24 Dan 

small-medium enterprises. When they're paying those 10 times multiples, they're really paying a much lower multiple of something that they're certain will be a much higher profit number in the future. 

00:03:38 Dan 

So the more your MI supports that growth story, it can make them feel comfortable about the quality of income and the prospects of the 

00:03:46 Dan 

business. The more chance you've got of getting that high multiple, because you're giving them certainty about the future. 

00:03:53 Chris 

So MI isn't just historic accounts, monthly or annually. 

00:03:57 Chris 

It's to do with 

00:03:58 Chris 

having the right sort of lead indicators to help you drive the business. 

00:04:02 Chris 

And be able to say with authority to a potential buyer. These are our lead indicators. But if you do look backwards, 

00:04:09 Chris 

you'll see that you're correct, we 

00:04:11 Chris 

successfully predict what's going to happen. 

00:04:13 Dan 

PR firms are very good at this. They normally got pretty good indication a year in advance of what 70-80% of their revenue. 

00:04:24 Dan 

So if you then look at the churn that they have and the new business activity that they win, and you layer that over, you can get a very accurate read, probably of a 2-3 years out of 

00:04:37 Dan 

what they should be doing. And get quite comfortable with those forecasts and if those forecasts are delivering significantly higher 

00:04:44 Dan 

profit numbers in the future than in the past, 

00:04:46 Dan 

then you've probably got a much better view and a much better chance of a higher multiple, than a business that is stable or even at risk of shrinking. 

00:04:57 Paul 

I think the other thing as well is being able to deliver that information in a very timely manner. Nothing slows processes, or potentially derails processes as Dan says, 

00:05:07 Paul 

is a lack of momentum. So if an acquirer is asking you for your-- 

00:05:13 Paul 

We're on the 3rd of May now. If somebody asks for your numbers till the end of April and it takes you to the middle of June to be able to deliver them, then an acquirer is gonna get pretty bored pretty quickly, unless there's a really good reason for them not to. 

00:05:29 Chris 

I remember being told by our lawyer at the time, Joe Evans of Lewis Silkin, who said don't forget that due diligence is in part a test of the management. 

00:05:37 Chris 

And so we had myself and another partner taken off of day-to-day work, and someone from the accounts department taking off day-to-day work. 

00:05:47 Chris 

All we did was due diligence and it paid off, because we were told that we 

00:05:51 Chris 

were responding amongst the fastest they were 

00:05:53 Chris 

used to and that was good. 

00:05:55 Dan 

Yeah, I mean, 

00:05:55 Dan 

I completed a deal 

00:05:57 Dan 

in March, where we went from heads to completion in six weeks. And got through DD (due diligence) in six weeks, which is 

00:06:04 Dan 

ambitious, but can be achieved. The one thing I'd say though, in response to that, is there is a risk if you are having to pull people off day-to-day business to do due diligence. There's a real risk in that, what we call, taking your eye off the ball and getting distracted by the transaction, and then trading suffering. 

00:06:24 Dan 

And then that then opens up potential for buyers to come back and go well, why is your trading off? 

00:06:30 Dan 

Are you not gonna perform as well as normal? Do we need to adjust value for this? It's much better, rather than being at that point and having to do it, than actually doing the preparation in advance, so that we already know I could tell you today. 

00:06:30 Chris 

OK. 

00:06:43 Dan 

For what buyers would ask you in a year's time about your business and what they'll look into a due diligence. So there's no reason that can't be prepared today.