10 things I learned from acquiring an agency
Successfully integrating another business and its people into your PR organisation can be a voyage of discovery…
Given people are involved, acquisitions are always, by definition, complex. M&A is high stakes and hard work but, when approached with rigour and focus, the benefits can far outweigh the risks and the right transaction can propel an agency on its growth pathway.
After 16 years of organic growth, The PHA Group acquired digital agency Red Hot Penny in late 2021 and their group of 14 people became our specialist digital practice. Our first acquisition has been successful but the process was certainly a voyage of discovery. Here is a summary of key challenges and learnings, which we will call on next time and hopefully encourage others to go on a similar journey.
1. Be clear on your strategy
Any good acquisition will fill a gap in your service offering, provide new expertise or expedite growth. There are often many benefits from a single transaction but being clear on those from the outset will make the process smoother for all concerned.
2. Take expert advice
The strategy may seem watertight from your perspective but don’t underestimate the value of expert, third party advice early in the piece. We engaged M&A advisors who sense checked our strategy, asked challenging questions and brought new perspectives we used to refine the approach and tailor our plans.
3. Stress test the financials
Scrutinising the financial health of an acquisition target is essential because no matter how strong the cultural match or complementary the expertise, without strong commercial performance the impact may fall flat. It can be a painstaking process, interpreting performance analysed with alternative metrics, and translating into your own, but a reliable forecast for year one is critical before submitting an offer and proceeding with the due diligence. It will clarify how the acquisition would add to overall performance and also identify any areas for attention or efficiencies.
4. Get the deal structure right
This is another area where external advice can be critical; using the right logic and presenting a fair deal structure for both sides will set you up for success and growth. The approach of applying an industry multiple to average EBITDA [earnings before interest, taxes, depreciation, and amortisation] performance over a series of years is standardised but buyers should look out for big swings in profitability year to year and ensure a sensible baseline is established, as well as a coherent 12 month forecast, before putting forward an offer with confidence.
5. Time is the enemy in due diligence
Getting the deal structure right should help to avoid protracted price negotiations but the real enemy of time in any transaction is due diligence. If those words send shivers down your spine, I sympathise, because without organisation and continual drive, the due diligence process can become protracted, allowing momentum to slow, doubts to creep in and motivation to wane.
Before due diligence begins, and even before you instruct lawyers, you should have a list of questions ready to share, which will gather critical information about the target business and save time (and expense) on legal fees when you could simply start the process yourself and bring in lawyers when technical questions need to be addressed and SPAs prepared.
At this point, a close relationship with the leadership of the business you are buying can be hugely important; we established a rapport very quickly with Red Hot Penny’s MD, Dave [Schulhof], and forged a close bond of trust allowing us to tackle the due diligence together, sharing any questions or challenges regularly to keep up momentum. Without that, the transaction would have taken twice as long and all the enthusiasm would have been at risk of ebbing away.
It was also a quick learning curve for us all, given neither I, nor my co-MD Shelley [Frosdick], nor Dave, had ever been involved in an acquisition before. No doubt the shared experience brought us closer together.
6. Prepare a clear vision
When speaking to the target company, it’s important to share a clear vision and explain in detail why working together will bring mutual benefits. Also explain how you operate day to day, the culture of the agency and the plan for successful integration. Of course, there are different types of acquisition but our decision to take a very hands on, collaborative approach proved beneficial long term because the same vision we gave in the initial chemistry meeting was repeated and amplified throughout the due diligence and integration phases.
7. Be flexible and frank
A key part of that vision is to show respect and awareness of someone else’s business, how they operate and the culture they have built, while at the same time being very candid about where change would be necessary to work together effectively. Merging processes and cultures really is a balancing act with compromises required on both sides, so addressing this up front is a good move.
8. Take time with each person
We were fortunate in that our acquisition was relatively small, so we could take dedicated time with each person once the deal was agreed, talk through our vision and answer any questions. We were not so lucky that this happened during the pandemic, so those conversations were virtual rather than in person, which would have been so much more valuable.
9. Present the benefits to clients
Once a deal is complete, external communication is as critical as internal. Write a note to each existing client explaining the benefits of joining forces and opening their minds to new expertise you now offer, and spend time with inherited clients to reassure them of a smooth transition and added value. In reality, most clients will see the positives and embrace positive change but there may be some, particularly longstanding clients of the acquired business, who need more time and reassurance to adjust, so it’s important to set aside plenty of time in this phase.
10. Finally, don’t expect integration to happen overnight
‘Post merger integration’ is a lofty phrase but often means stress, pressure and uncertainty as everyone adjusts to new colleagues, methods, clients and cultures. Preparation of a clear integration timetable for at least six months is important, covering introductory meetings for each aspect of the new company, training on new expertise, adjustments to client accounts, and arranging social and cultural events so people can get to know their new colleagues outside of the new, shared workplace.
In our experience, it took nine months for integration to reach a stage where it didn’t need to be co-ordinated, it just happened – in fact, the digital team told us to stop integration meetings because they were unnecessary. That was the point when we knew the process had been worthwhile and we could look forward to enjoying all the benefits.
Stuart Skinner is group managing director at The PHA Group.