October 26th, 2012 / Insight posted in

Long-term plans to sell ad firm

CE writes: I own a small advertising agency, which was founded seven years ago with two others. We manage the business between us, but are keen to realise some value and would like to sell within the next two to three years. We are not sure whether we would want to continue working after the sale. Is there anything we should be thinking about at this stage?

You are right to start thinking about a sale early on as planning is essential to maximise the proceeds, writes Esther Bannister, a partner at Kingston Smith specialising in marketing-services companies. When buying a “people business” such as yours, a purchaser is effectively buying an income stream, to whose client relationships executives like you hold the key. You are vital in protecting that income and, therefore, the continuing profitability of the business. Sale agreements often include a clause that may require you to remain with the business for a couple of years. In addition, a buyer will be keen to ensure that you have strong management succession in place to maintain client relationships after your departure. The sale price of a “people business” is usually determined by applying a price-earnings ratio to profits. Many factors affect the price, such as the profit margin (which should be at least 10%), growth rate and quality of clients. Think how you can make your business more attractive in these respects. It can take longer than you think to find someone to buy the business, so start planning now.