Make your selling point

Amanda Merron says there are all sorts of options available for those who are looking to upgrade their consultancy by selling up or merging

There is some evidence that the design market is picking up. Early indications from Willott Kingston Smith’s annual survey suggest that UK design consultancies’ financial performance is improving.

Among the multinational groups there is a consensus that 2004 was a strong year – most think modest growth should continue through 2005. However, anecdotal evidence suggests that the market is by no means easy and it is those consultancies with a strong product and a clear positioning that are reaping the real benefits.

Since 2001, the design market has been extremely difficult and consultancies have had to deal with reduced client budgets, the demands of procurement departments and consequent pressure on margins, as well as fluctuations in fortunes of various design disciplines. Improvements in the industry at least provide an opportunity to look forward and plan where to take the business next.

The merger and acquisition market in the marketing services world has been extremely active, mainly driven by acquisitive mid-tier Alternative Investment Market and fully-listed groups such as Media Square, Creston and Cello, as well as overseas acquirers such as Canadian group Envoy.

Media Square has bought Marketplace Design and Coutts Retail, and Envoy has acquired Parker Williams Design. These groups need to keep buying consultancies to justify their listing, although the ability to do so will be constrained by the money they can raise.

Acquisitions are also becoming more expensive/ the recent surge in activity is likely to push up prices, as a growing number of buyers compete to buy the best companies. If they use their shares to fund part of the acquisition price, these mid-tier marketing agencies don’t have to raise so much cash for the buy, and they can also offer sellers an opportunity to continue to be owners and, often, managers in the acquiring group. This contrasts with a sale to a traditional trade buyer such as Omnicom or WPP, where the sale is usually for cash, with the deal including an earn-out over three to five years and no involvement in the merged group during that time.

Another route to consider is raising private equity to go on the acquisition/merger trail. A good example of this is Loewy Group, which used private equity to bring together Raymond Loewy International, Wilson Harvey, Prescient, Loewy and RiteAngle. This is an opportunity for design businesses to create either critical mass or a better strategic offer, usually allowing owners to recover some of their investment in the business. Venture capitalists usually look for a relatively short term exit of three years, which in turn creates pressure to sell or float.

There is also a growing appetite among marketing services groups to consider public listing. Not since the mid-1980s have so many marketing services groups considered a flotation. Many list as shell companies, with acquisition targets lined up in order to raise funds to buy. Another route is that taken by M&C Saatchi, a very successful advertising group, where the directors saw a listing as a way to fund geographic expansion to meet its clients’ needs and, perhaps, also to release some of the founders’ capital.

Management buyouts are also common at the moment, with a number of underperforming marketing companies buying themselves out from larger marketing groups. The return to real ownership for those teams almost always results in improved performance after the buyout.

Which route is best? A trade sale offers a cleaner exit for those who want to cash-in and cash-out. Private equity finance or a public listing allows owners to build something bigger, while retaining some sort of control over the business. The key questions to answer are: Do you wish keep real control? Do you want to buy and build? Do you want to exit cleanly?

What do you need to do to make your business ready? The answer is the same whatever route you are considering. External investors – whether they are City institutions or venture capitalists – plus trade buyers, are all looking for robust businesses with good management, future growth potential, a good product, an impressive client list and decent profit margins.

Amanda Merron is a partner at accountancy firm Willott Kingston Smith

Cashing in on your consultancy

Possible routes include:

• Selling to new acquisitive groups such as Media Square, Creston, Cello or Envoy

• Selling to an established global marketing services group such as WPP, Omnicom, Interpublic Group or Havas

• Raising private equity to go on the acquisition trail yourself

• Going for public listing on the stock market

• Completing a management buyout