Has anyone considered buying an agency or small/medium consultancy?
October 07, 2020
by a searcher from Indiana University, Bloomington/Indianapolis - Kelley School of Business in Dallas, TX, USA
I'm curious as how you thought about it fitting into your thesis and how you considered factors in terms of valuation. I'm coming across several agencies/consultant shops in the industry niches I'm starting with, and wondering if other searchers have gone in for it.
from Tufts University in Los Angeles, CA, USA
- Usually there's relatively little working capital, so growth is self-funding.
- The cost structure is predominantly labor, so scaling up is not as challenging as it would be for a manufacturing business that needs to adjust facility size.
- Margins can be very attractive, especially when operating in a segment where the services are in high demand. A well-run agency gets tremendous leverage out of its top experts, and can typically squeeze >50% EBITDA margins from each marginal $ of revenue growth.
- Multiples for smaller agencies are often under 5x EBITDA, and sometimes as low as 2-3x.
The challenges are that they are pretty unstable businesses:
- Typically the owner is responsible for generating/servicing a disproportionate amount of the revenue.
- Besides the owner, there's usually very high key person risk at the top of the firm. Most customers are really paying for 1-2 hours a week of attention from those experts, then 20+ hours per week of execution/fulfillment from the junior staff. So if a key person leaves, customers can become unhappy very quickly.
- While the cost structure may appear to be largely variable (people), if a large client is lost and you have to cut expenses you may find that nobody is dispensable. Which forces you to either accept lower margins or invest heavily in biz dev efforts.
I come from an advertising/media agency background, and in order for me to seriously consider buying one I would have to be highly confident that I could leverage my past working relationships to bring in a very large client immediately after closing, thus adding significant $ to the bottom line.
from Georgia State University in Los Angeles, CA, USA