GOOD CEOs: Issue 12

Why do 75%
of acquisitions
not work out?

For aspiring creative entrepreneurs, the ten-year plan can often look something like this.

1. Launch killer agency

2. Become profitable and famous

3. Sell up

4. Or get investment, and grow bigger

Great founders usually have the first two points covered.

Building brands or running agency businesses are things they’ve probably done before. Maybe they’ve headed up a department, led an international expansion, or achieved something weighty that’s given them cause to think they can cut it at the helm of their own ship.

But tasks 3 and 4 take them into waters they’re less familiar with.

There is the jargon – founders must get comfortable discussing things like EBITDA, CAGR and MOIC. There is the culture – suddenly, meetings aren’t about art direction, but growth forecasts. Then there is the internal turmoil, the anguish of questions like: ‘is this the right time?’, ‘are these the right partners?’, and ‘will things change for the better?’.

 
Suddenly meetings
aren’t about art direction,
but growth forecasts
 

Matt Lacey is managing partner at Waypoint, an M&A advisory firm that makes the business of selling up less risky for founders – by dramatically increasing the chance that a deal will end in a way that works for everyone.

We sat down to talk about why founders should resist building businesses purely for acquisition, why growth often matters more than margins, and why the best deals begin with a shared vision rather than a spreadsheet.

And we (almost) made it through the whole interview without slipping into finance jargon.

Ollie Scott: Waypoint offers M&A expertise that lines up closely with the experience that entrepreneurs have. How do you help them through a deal process?

Matt Lacey: When you are doing deals in a space that is evolving or moving fast, there’s lots happening at any given time. There are political and economic challenges that and make trading environments unstable. There’s things like disruption and hyper-growth. So it’s vital to distil down and ask ‘what is the opportunity?’. As well as that clarity, you need to keep that human element. Rather than getting caught up in the minutiae of a negotiation, you’re trying to keep a vision alive.

OS: It’s generally accepted that a high proportion of M&A deals don’t work out in the way partners hope. Depending on which study you believe it could be between seventy and ninety percent. What marks out those that are successful?

ML: The worst thing a founder can do is to compromise their strategy in order to get a deal done. It’s tempting to chase an agreement, to get the thing over the line, then see what happens. But no one is thinking about the future in this scenario. There’s not enough flexibility, structure, or human connection. People might just not get on. Have you spent enough time together? Have you spent enough time talking about the vision and strategy? And you've got to be leading with that. What's your North Star? What's their North Star?

OS: It’s similar in the talent sphere. When a CEO asks me about a role they’re taking interviews for, I talk about the three ‘A’s – ambition, autonomy, and alignment. When these things exist in a partnership, it’s way more likely to end well.

ML: Exactly right. A great example of that happening in the M&A world is with social agency OK COOL and its deal with creative network, Residence. There was chemistry between everyone, and then the deal folded around that. The superstar moment was the principles coming together. Then (you know) advisors help.

OS: I love that. Let’s talk about private equity. We’re seeing and hearing about a flood of PE money making its way into the creative industries. Firstly, is it true? And if so, why is more capital being allocated to this part of the economy now?

 
It’s vital
to distil down
and ask ‘what is
the opportunity?’

 

ML: I think it is true. In markets that are being disrupted, you’ll have winners and losers. Right now, the creative sector is at a point of seismic change. There’s risk, but also huge opportunities in this scenario, which is part of what’s inspiring PE to invest here. Also, a lot of the agencies that offer an entrepreneurial spirit are becoming private equity backed now – challenger brands have gotten the resources to internationalise, to launch new products, to invest in innovation in a business model that doesn’t always make that easy.

OS: Let’s imagine someone has an independent agency growing 20% year-on-year, they’re in seven figures of EBITDA. They’ve internationalised, with two or three offices. You can go to an agency network, a PE firm, or continue re-investing profits. How should an entrepreneur or creative industry CEO weigh up the options of where to go for capital?

ML: First of all, I'd look at that North Star. At Waypoint, that’s our starting point for everything. All three options will provide options that will align to it in some shape or form. Crudely speaking, the difference between a trade (agency network) versus a private equity partner is that with the latter, you are running your own strategy. If you are doing a trade deal, then your business is getting folded into someone else’s existing one.

OS: Are there exceptions to this?

ML: There's nuance in all the above. Some of the networks can be creative enough to provide a great home and flexibility in their structures. Is it the exact same flexibility as with a PE backer? Perhaps not, but it comes down to what the business plan is. First time PE deals are often taking a really strong business that’s growing well, has great clients, and capital is going to unlock that ambition. These founders often have a vision of their own.

OS: Tell me more about the mentality of founders in that position.

ML: It isn’t talked about enough in M&A circles, but a lot of first time founders will have been bootstrapped the entire time. They will have put life savings into launching these things. And the good ones will continue to put revenue that’s generated each year back into the business to expand. Then at some point, you get the chance to take some cash off the table, clear some debt, pay off the mortgage. Taking investment creates an element of de-risk that just allows you to swing that bit harder. And the psychology of that can be huge.

OS: I can really imagine that. When you are scaling an agency business, the mental game is about exchanging today’s gratification for tomorrow’s hope. How do founders respond when they get a big payout after years of being frugal?

ML: The best will always want to go bigger. The other question that’s tied to this is – and we get asked it all the time – ‘when is the right time?’. Often, when an agency is at a point where it becomes investible, the road ahead for it is looking great. Things are going well now, and in twelve months, it’ll be even better. So again, goes back to that North Star – will the right deal shape, and infrastructure enable you to get to that with more speed and security?

 
The best
will always want
to go bigger
 

OS: What are the baseline metrics that a founder needs to hit before considering a deal? Is there a particular compound annual growth rate (CAGR) to hit?

ML: Look at you casually throwing out terms like ‘CAGR’. You’ve spent too much time talking to us at Waypoint.

OS: I know – fuck! This is supposed to be a jargon-free interview.

ML: I think that founders can attach too much importance to some of the metrics that advisors talk up. Useful guide rails are 20% profit margins, 20% growth, one million EBITDA (earnings before interest, taxes, depreciation, and amortisation), but you can overfocus on that.

OS: How is there too much focus on those things – what else is important?

ML: I’ll explain. We've seen some companies come to us with really great EBITDA margins, but with low growth. So the implication there is that if you are making big margins, but with low growth, then you aren’t putting enough back into the business for it to increase in size. So rather than margins it’s better to look at the market scaling, and whether the business is scaling at a rate that’s higher than the general sector. That’s a really good sign, because it means that the company is doing something that others aren’t, or has uncovered a strong niche. What I would really urge people not to do is hamper growth because you're protecting that 20% margin.

OS: Let’s get into your three predictions for the industry. What’s the first one you’ve had brewing?

ML: AI is obviously here to stay, and set to create huge disruption. And in this landscape, human creative intervention is going to be critical. While some will over-index on AI, we’ll see a comeback of real life, experience and human connection. The interesting thing will be how that’s tied to technology, but it is going to be led from this industry.

OS: I like that. We're going to say this is the industry that solves the AI dilemma by making it more human – and there's value in that. Love. Okay, what's prediction two, please?

ML: Prediction two is that we will see a collision of three mammoth markets in talent, entertainment and brand. And we will see increasing numbers of groups like Common Interest groups come together. That is, businesses that combine these worlds under one roof, forming entirely new models for how creative work is made, distributed and commercialised.

OS: I like that, that's a really strong one. What’s your third?

ML: Final prediction is that we’re going to see a new breed of agency. A highly strategic senior-led creative business powered by technology. And that means completely changing the way exactly completely changing the way that agencies work and therefore charge. And again, to me, that's going to require some new deal making approaches from both buyers, sellers and advisors throughout the industry.

See you in a fortnight!

Ollie