Hindsight, as they say, it’s always 20-20. It’s true in any number of business and legal situations.

The high activity level around agency M&A transactions for the past 24 months – both internal for succession or leadership transition purposes, or to an external party when the owner is ready to retire or move on – has given us a lot of opportunity to develop hindsight around what agencies need to do so that your business is ready for a potential transaction when you are.

Legally ready. We’ll save the financial benchmarking, valuation and operational readiness issues for the experts who specialize in them (ask us if you need a referral – we’ve got them!)

Based on the agencies we’ve helped through this process recently, here are the patterns we see around “legal readiness” for an M&A transaction for your agency. And some steps you can take to get and keep your readiness level high.

Strong Client Contracts, Strong Agency

Don’t be the agency with a terrific book of business, longstanding client accounts, and nothing in writing that’s sufficient to protect it all.

How does this usually show up?

Usually it emerges when, during the due diligence process in a transaction, after Buyer and Seller have decided there’s strong interest and probably also talked numbers, the Buyer learns that none of the agency’s client accounts have written contracts.

Or they do, but they’re loosely or poorly written contracts that don’t protect the relationships well.

Or they have a few, but not enough, comprehensive agreements with the right clients and with strong terms.

Or the contracts can be transferred to the Buyer only with the Client’s permission – which isn’t the end of the world, but which takes time (and good timing) to finesse.

That terrific revenue stream? The Buyer starts to get worried that it isn’t as terrific as hoped. So even strong client relationships feel like potential risks.

The Buyer is also rethinking the valuation and potential purchase price at this point.

How You Fix It Now:

The best way to address this is to do it systemically. Specifically, that means examining the contract templates you’re using today to document your client agreements to make sure they have solid terms like reasonable termination provisions, assignability to a Buyer in the event of a change in control, and effective payment language.

This should be your first step if you have a bit of time on your horizon before being ready to prepare the agency to sell. Putting solid client contracts in place now will make the process of Buyer review later so much easier.

On a shorter timeline? Your first step in this case is to gather and audit all of your current client contracts. Yes, all of them.

If you’re missing agreements entirely with good clients (you know – the ones who have been with you forever on a handshake and a P.O., but also pay the agency well), now is the perfect time to address it with updated documentation.

As for the other client agreements, your simple audit should focus on the client name, billings, payment terms, contract duration, termination clause, and assignability language.

Side note:  You might also benefit from confidentially doing a quick (admittedly subjective) “client health score” based on the length of the relationship, client payment history and how stable the account feels to the agency. Why? If there are vulnerabilities in any of the client relationships or in their contracts, you want to either get ahead of it now, or be ready and able to address it if it becomes a question during transaction due diligence.

Covering Your (IP) Assets

While a significant portion of your agency’s value is wrapped up in its client service revenue, it’s only part of the story.

The intellectual property your agency has developed – including its brands, its proprietary systems or products, its trade secrets (like your methodologies or your email lists) – and the trademarks, copyrights, patents and license agreements that protect them, is one of the agency’s most significant assets.

Having a well-documented, and well protected portfolio of intellectual property can make a dramatic difference in the valuation of the business when it’s time to sell. These assets have meaningful financial value that translates into higher purchase prices realized for the Seller.

The portfolio also gives a Seller a wider array of options when it’s time to consider a sale. Sell the agency and keep the IP as an ongoing licensing revenue stream? Sell the IP now (with a license to keep using it back) and the agency later? Sell the whole enterprise for a bigger multiple? We’ve seen all of these things happen.

But if the IP isn’t well documented, and if the agency hasn’t taken steps to protect it with the appropriate registrations and contracts, you’re leaving value on the table that will not be reflected in the dollars and cents of the deal.

How You Fix It Now:

Take time now, using this simple framework, to assess your IP and take steps to legally secure it:

• Trademark Registrations – For your proprietary agency brands or product or service line names
• Copyright Registrations – For any content-based assets like software, apps, database architecture, content libraries, custom GPTs, digital courses, teaching and training curricula (the options are multiple here)
• Transaction Agreements – written agreements involving any third party contributors to your assets (freelancers, programmers, developers, etc.), as well as license agreements from the agencies to clients or other users of the IP outside the agency

Once you’ve completed your assessment, make a plan to apply for the registrations and document the transactions that secure your agency’s IP assets accordingly.

Keeping It On The (Corporate) Record

This may feel to an agency like a legal version of watching paint dry.

But our experience is that it can take days, sometimes weeks, to acquire or create the missing corporate charter, registration documents, company Bylaws or Operating Agreement, corporate resolutions, and other legal formalities that every agency (actually every business) should regularly maintain to be in compliance with corporate laws.

Transparently, not every Buyer will ask for these. And if you’re engaging in an Asset-only transaction, not every one will matter to a Buyer.

However, most times these are standard due diligence requests. And these documents may be very relevant in an equity transaction. Do you really want to waste time or money playing catch-up when a Buyer asks you to produce them, or have to explain why they aren’t in place?

How You Fix It Now:

This is likely the simplest fix for an agency to make.

First, it’s an exercise in hide and seek – look for and assemble the corporate records that you do have in place.

Next, order copies of any missing government filings such as formation charters, annual reports, state trademark or trade name registrations, licenses, etc., and put them together in one easy-to-find place. Scan them, put them in a binder in your favorite color, whatever works for you.

Then, work with your professional advisors (accountant or lawyer) to update or create your internal legal corporate documents like Bylaws, Operating Agreement, Annual Resolutions or Meeting Minutes, and all of the other missing pieces that create an up-to-date corporate record “book.” Once you’ve got this in place, revisit it annually to make any simple updates.

Finally, watch the Buyer’s lawyer and accounting team rejoice as they tick these off their due diligence checklist.

Fix it “201”:  The advanced version of this, and the most frequently “likely to be missing piece” of the puzzle tends to be when multi-owner agencies do not have in place an Owner Buy-Sell Agreement in place that addresses how they allocate purchase proceeds in a sale transaction. If this is you, there are dozens of good reasons to have this conversation with your co-owners now and to get a written agreement in place that reflects your intentions. This is not a step you want to wait to take while you are in the middle of negotiating an exit strategy as owners with a potential Buyer.

Make a Plan

This seems overwhelming when you pile all of it on top of the other work involved in both running your agency and entertaining potential purchase offers for what is probably your most significant asset as an agency owner.

Make it less overwhelming by creating a plan to start tackling these things while you have the time and space to do so. They’re all important to the health of your agency. They’re critically important to your readiness for an M&A transaction because you’ll have a much smaller window then to play catch-up on them.

If you need help creating a plan, reach out to us today.

And if you would like some timely information on how to get your agency financially ready for an M&A discussion, check out this agency owner Sharon recently co-presented with Marcel Pettipas of Parakeeto.