I’m thinking about selling my agency: what should I do before speaking to a buyer?

If you’re thinking about selling your agency, some of the most useful preparation happens before a buyer ever sees your documents.

You don’t need to make the business perfect before starting a conversation. But getting the basics in order can put you in a much stronger position when a buyer starts asking questions.

It can also help you identify problems while you still have time to deal with them, rather than discovering them halfway through due diligence with a buyer, timetable and purchase price already on the table.

Here are the areas I’d look at before serious discussions begin.

Check your key client contracts

For an agency, client relationships are likely to be one of the first things a buyer wants to understand.

Look at your most important clients and check what you actually have in place. Are your master services agreements signed? Are statements of work properly documented? Have contracts expired while the commercial relationship has simply continued?

You should also check what those contracts say about a sale. A change in ownership might give a client a right to terminate, require their consent or mean you need to notify them.

This becomes particularly important if a significant proportion of your revenue comes from a small number of clients.

The aim isn’t necessarily to renegotiate every contract. It’s to understand the position before the buyer does.

Make sure you own your intellectual property

For a creative, digital or branding agency, intellectual property can be an important part of what the buyer is paying for.

This is particularly worth checking if you’ve used freelancers, consultants or contractors to create important materials for the business.

Review the agreements covering things such as your branding, website, software, internal tools, designs and templates. Make sure the agency has the rights it needs and identify any gaps.

If your agency’s name or another brand is important to the business, this is also a good time to check what trade mark protection you have in place.

A buyer asking who owns a valuable piece of intellectual property is not the point at which you want to discover that the paperwork is unclear.

Check the company’s shares and shareholders

You need to know exactly who owns the company and what rights they have.

Again, this sounds obvious, but the position can become more complicated as a business grows. You may have brought in an investor, issued shares to an employee, created different share classes or granted options.

Check your statutory registers, Companies House filings, share certificates, articles of association and any shareholders’ agreement.

You should also understand whether another shareholder has to consent to a sale or has rights that could affect it.

Any inconsistencies are much easier to investigate before the transaction starts than during a buyer’s legal due diligence.

Review your employee and freelancer arrangements

For many agencies, the team and the client relationships they hold are a significant part of the value of the business.

Check that contracts are in place for employees, particularly senior people and those responsible for important client relationships.

Do the same for freelancers and consultants. As well as intellectual property, look at confidentiality and the basis on which they provide their services.

It’s also worth asking a commercial question: how dependent is the agency on you?

If most clients deal directly with the founder, a buyer may want you to remain involved after completion. Understanding that early can help when negotiating what your role, if any, will be after the sale.

Think about what you actually want from the sale

Before negotiating with a buyer, work out what a successful exit looks like for you.

Do you want to sell 100% of the company or retain a stake? Do you want the full purchase price on completion? Would you accept some of it later? Are you prepared to stay with the agency after the sale?

A buyer might suggest deferred consideration, where part of the agreed price is paid later, or an earn-out, where part of what you receive depends on the business achieving agreed results after completion.

Those arrangements can materially change the risk involved in a deal.

You don’t need to know the exact structure before talking to a buyer. But knowing your priorities and where you’re willing to compromise puts you in a much better negotiating position.

Don’t try to hide or fix every problem

Preparing for sale doesn’t mean making every historical issue disappear.

Some problems should be fixed before the sale. Others may simply need to be identified, understood and dealt with properly during the transaction.

The important thing is knowing about them.

A buyer will usually conduct legal due diligence before completing the purchase. If their advisers identify an unexpected problem, the buyer might ask further questions, seek additional contractual protection or, depending on its significance, try to renegotiate the deal.

Finding the issue yourself first gives you time to decide how best to deal with it.

Get your documents organised before due diligence

You don’t need a sophisticated data room before you’ve even found a buyer. But getting your important documents organised is worthwhile.

For an agency, I would start with:

·      corporate and shareholder documents;

·      key client contracts and statements of work;

·      important supplier and software agreements;

·      employment, consultancy and freelancer agreements;

·      intellectual property and trademark documents;

·      financing documents; and

·     details of any disputes or significant legal issues.

This exercise often identifies missing documents before a buyer starts asking for them.

It also makes the eventual due diligence process much easier to manage.

Be careful what you agree with the buyer at the start

Some of the most important decisions in a business sale are made before the main sale agreement is drafted.

Early discussions might cover the price, when it will be paid, whether any amount depends on future performance, how long you’ll stay with the business and restrictions on what you can do after leaving.

These points are often recorded in heads of terms.

Heads of terms are commonly intended to be largely non-binding, but they establish the commercial framework for the transaction and some provisions, such as confidentiality or exclusivity, may be legally binding.

Once you’ve agreed a commercial position with a buyer, it can be difficult to reopen it simply because your solicitor later identifies a concern.

Getting advice before the main terms are settled can therefore be considerably more valuable than waiting until the legal documents arrive.

What should you do before speaking to a buyer?

You don’t need to spend months preparing before testing whether there is interest in your agency.

But before serious discussions start, I’d want a founder to understand four things:

1.     What are you selling? Make sure the company’s ownership and its key assets are clear.

2.     Where are the risks? Identify gaps in important contracts, intellectual property and employee or freelancer arrangements.

3.     What do you want? Think about price, how you’ll be paid, whether you want a complete exit and whether you’re prepared to stay involved.

4.     What will a buyer find? Look at the business through a buyer’s eyes before their lawyers do.

You don’t need every answer before speaking to a buyer. The aim is to understand your business, know where the potential issues are and have a clear idea of what you want from the transaction.

That puts you in a much stronger position when a serious offer arrives.

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Frequently asked questions

When should I speak to a solicitor about selling my agency?

Ideally, before the main commercial terms have been agreed. Early advice can help you identify potential issues and consider the proposed price structure, earn-outs, your ongoing involvement and the heads of terms before your negotiating position becomes harder to change.

Do I need to fix every legal issue before selling my agency?

No. Some issues can sensibly be resolved beforehand, while others may simply need to be understood and dealt with during the transaction. Identifying them early gives you more options.

What documents will a buyer want to see?

This varies between transactions, but expect requests covering the company’s ownership, key client and supplier contracts, employees and freelancers, intellectual property, financing and any disputes or other significant legal issues.

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This article is for general information purposes only and is not advice on your specific situation, and does not constitute legal advice.