Close-Up: Live Issue - How to make millions out of selling an agency

Agencies are structuring deals that allow the founding partners to have their cake and eat it, Bob Willott reports.

Already this year, some £300 million-worth of deals have been signed for the sale or buy-out of agencies in the marketing services sector.

There are plenty more in the pipeline. But, curiously, the ways agency founders are structuring deals are no longer limited to the bog-standard down payment for 100 per cent of the business, followed by an "earn-out" geared to the next three to five years' profitability.

Is this the start of a trend? Has the earn-out passed its sell-by date?

And how do these apparently new types of deal affect the loyalty of staff and clients?

When Miles Calcraft Briginshaw Duffy sold to the Canadian Cossette Communication Group for a potential £27 million, only 51 per cent of the shares changed hands - the founders and senior staff kept the rest. When Publicis acquired Freud Communications, it was on the basis that Matthew Freud and his colleagues would hold on to 49.99 per cent of their business, for the time being at least. Similarly, another UK public relations group, Next Fifteen, agreed to buy just 25 per cent of Lexis Public Relations, with the right to acquire the remainder later.

More traditional deals are not dead, though: by contrast, Delaney Lund Knox Warren & Partners was happy to sell 100 per cent of the group to Creston earlier this year for up to £38 million, much of that sum being based on a conventional earn-out arrangement.

Much of the reasoning behind the part-sale approach relates to the ongoing commitment of the founders. It's not just that they think this is a better way to retain the support of staff and clients: in many cases, the founders are not ready to contemplate an outright sale anyway. But the offer of turning some of the agency's value into hard cash can prove hard to resist.

"We weren't actively looking for a buyer, although we always talked to everybody," Jeremy Miles, the MCBD chairman, says. In essence, he explains, the approach came too soon: the MCBD partners were not ready to relinquish complete control of the company yet.

Contrast this with the youthful VCCP, which was ready to embrace Chime's offer of up to £30 million for an outright sale, and glue London, which was equally happy to sell out to Aegis.

"The part sale can appeal to those not ready to sell and who see more value growth to come," Jim Surguy, a managing partner of Results Business Consulting, which was involved in both the MCBD deal and in the earlier investment by Hakuhodo in Mustoes, says.

Other than timing, though, what other benefits are there to selling in stages? "This type of deal helps maintain the spirit of entrepreneurial flair while giving both parties a lot more flexibility," Tim Birt, a partner in the law firm Osborne Clarke, observes. "We always want control," Jean Royer, Cossette's chief financial officer, says. "But we also want to allow them to continue to feel they are entrepreneurs."

Miles puts it slightly differently. "There's a massive emotional benefit from retaining some equity," he says. "We still worry about what are the right things for the business."

Therein lies the essential difference between an earn-out deal and a staged sale: the preoccupation of the outright seller is often to maximise personal gain from the earn-out. Those who retain a significant portion of their shareholding are more likely to focus first on what is best for the business.

Most partial sales (one exception being Bartle Bogle Hegarty) are accompanied by an option for each party to sell or buy the balance of the shares during a predetermined window in the future. However, as long as the founders hold some shares, there is always an opportunity to revisit the arrangement if it is likely to suit both parties.

"It feels different when you are still a part-owner," Roger Alexander, a senior partner in the law firm Lewis Silkin, says. He cites the case of Abbott Mead Vickers, which was 51 per cent owned by the US agency Scali McCabe Sloves nearly 30 years ago. Having signed the agreement and run the business for several years, the parties decided there was a better way forward. They were able to tear up the agreement, let AMV buy back some of Scali's shares and then float the company on the London Stock Exchange with Scali retaining a small interest. So for AMV, a part-sale did allow the flexibility to change direction later.

The staged sale certainly appears to preserve a shared ownership culture more than the "them-and-us" relationship that sometimes characterises an outright sale to a global group. All those involved share a common interest in what is paid out in dividend and there's more scope to have a real say about what the acquiring company wants to charge as management fees.

Proponents argue that, at the very least, a partial sale of this sort should help to reinforce to clients and staff the continuation of the existing culture. "That's exactly why we did it," Miles says. "All our staff were reassured we would be here for a minimum of six years."

So why did DLKW and others opt for an outright sale? Don Elgie, the Creston chief executive, says its formula achieves the same end but in a different way. Vendors "buy in" rather than "sell out", by accepting shares in Creston as part-payment for their business.

Barrie Brien, Creston's finance director, has frightening memories of agency founders retaining minority shareholdings among some of IPG's European subsidiaries. The minorities could actually obstruct what is best for the business, he says, particularly if extra capital is required and the founders are not prepared to contribute their share.

For this and other reasons, Alexander does not see the earn-out approach being abandoned. "It was around long before Saatchi & Saatchi turned it into an everyday art form in the 80s," he says.

- Bob Willott is editor of Marketing Services Financial Intelligence (www.fintellect.com) and a special professor at the University of Nottingham Business School.

SELECTION OF UK DEALS THIS YEAR Rank Buyer Seller Maximum price (pounds m) 1 Aegis Group Just Media and others 47.1* 2 Creston DLKW & Partners 38.2 3 Chime Communications VCCP 30.0 4 Cossette Communications Group MCBD 27.0 5 Publicis Groupe Freud 2.0 Holdings 20.0* 6= Aegis Group glue London 15.3 6= Cello Group Navigator 15.3 8 Thomson Intermedia Billetts 13.1 9 Huntsworth Context/BHI 11.6 10 Aegis Group Alban Communications 11.0 11 Next Fifteen Comms Group Panther Communications (Lexis) 10.0 12 Cello Group Value Engineers 7.2 13 Cello Group Leapfrog 6.0 14 Cello Group RS Consulting 4.8 15 Chime Communications Baxter-Hulme 1.0 Source: Marketing Services Financial Intelligence. *estimate.