Agency chiefs see earn-outs soar

The agency earn-out is alive and kicking, according to industry adviser Results International, which has revealed four deals it secured in 2007 have seen agency directors trouser a total of £40m.
The company claims the deals, with a combined value of £70.5m, demonstrate that the agency world is in rude health.
Results International managing partner Keith Hunt said: “Despite these earn-outs spanning one of the worst global recessions in living memory, the good news is that the vast majority of the deals we handled in 2007 have delivered stellar financial performances. The sums we are seeing paid should also dispel the lingering myth that earn-outs are rarely paid or pay disappointing amounts.”
He continued: “Earn-outs are as popular as ever as a way of structuring deals and terms remain constant with 80% of them set at three years and most paid in cash. Buyers are, however, increasingly flexible and we are seeing more and more deals with interim payments after one or two years as a means of incentivising and involving agency heads even further.”
It cites four examples, although due to confidentially agreements it cannot name names:
• Company A – a three-year earn-out has delivered just over double the initial consideration paid for the business mainly due to excellent growth in 2010; in other words the earn-out paid represents around 70% of the total amount paid for the agency
• Company B – who sold to a network has received a much higher than anticipated cash earn-out – moreover the parent company has extended the earn-out by another two years – without compromising the original earn-out in any way – to incentivise the management team to stay on and manage a considerable part of the network business
• Company C – performed so well after just one year of its two-year earn-out that the acquirer paid it in full in an effort to fully integrate the business and allow its management to bring its touch to the whole company
• Company D – the earn-out is over twice the original amount paid on completion of the deal and almost five times the earn-out originally forecast
For many agencies looking to sell, one of the biggest issues is knowing when to take that all important step, says Results. They also need to bear in mind that the earn-out payment can be greater than the initial consideration paid if the agency continues to perform well. Results’ advice is never to wait until the end of the growth curve, but to aim to sell at anything from a quarter to a third of a way along the envisaged growth period.
Hunt added: “Aim to sell knowing that you have around three to four years of growth ahead of you but be realistic that the broader economy or micro business issues affecting the industry and/or your own business can all impact performance.”
The earn-outs sync with news from the global networks and others, including Chime, which have all delivered upbeat results in recent months. Many of the agencies currently delivering impressive earn-outs sit within these networks will make a crucial contribution to the financial performance of these businesses as a whole.