Close-Up: Live Issue - How to make millions out of selling an agency

down payment for 100 per cent of the business, followed by an "earn-out"
geared to the next three to five years' profitability.

Is this the start of a trend? Has the earn-out passed its sell-by
date?

And how do these apparently new types of deal affect the loyalty of
staff and clients?

When Miles Calcraft Briginshaw Duffy sold to the Canadian Cossette
Communication Group for a potential £27 million, only 51 per cent
of the shares changed hands - the founders and senior staff kept the
rest. When Publicis acquired Freud Communications, it was on the basis
that Matthew Freud and his colleagues would hold on to 49.99 per cent of
their business, for the time being at least. Similarly, another UK
public relations group, Next Fifteen, agreed to buy just 25 per cent of
Lexis Public Relations, with the right to acquire the remainder
later.

More traditional deals are not dead, though: by contrast, Delaney Lund
Knox Warren & Partners was happy to sell 100 per cent of the group to
Creston earlier this year for up to £38 million, much of that sum
being based on a conventional earn-out arrangement.

Much of the reasoning behind the part-sale approach relates to the
ongoing commitment of the founders. It's not just that they think this
is a better way to retain the support of staff and clients: in many
cases, the founders are not ready to contemplate an outright sale
anyway. But the offer of turning some of the agency's value into hard
cash can prove hard to resist.

"We weren't actively looking for a buyer, although we always talked to
everybody," Jeremy Miles, the MCBD chairman, says. In essence, he
explains, the approach came too soon: the MCBD partners were not ready
to relinquish complete control of the company yet.

Contrast this with the youthful VCCP, which was ready to embrace Chime's
offer of up to £30 million for an outright sale, and glue London,
which was equally happy to sell out to Aegis.

"The part sale can appeal to those not ready to sell and who see more
value growth to come," Jim Surguy, a managing partner of Results
Business Consulting, which was involved in both the MCBD deal and in the
earlier investment by Hakuhodo in Mustoes, says.

Other than timing, though, what other benefits are there to selling in
stages? "This type of deal helps maintain the spirit of entrepreneurial
flair while giving both parties a lot more flexibility," Tim Birt, a
partner in the law firm Osborne Clarke, observes. "We always want
control," Jean Royer, Cossette's chief financial officer, says. "But we
also want to allow them to continue to feel they are entrepreneurs."

Miles puts it slightly differently. "There's a massive emotional benefit
from retaining some equity," he says. "We still worry about what are the
right things for the business."

Therein lies the essential difference between an earn-out deal and a
staged sale: the preoccupation of the outright seller is often to
maximise personal gain from the earn-out. Those who retain a significant
portion of their shareholding are more likely to focus first on what is
best for the business.

Most partial sales (one exception being Bartle Bogle Hegarty) are
accompanied by an option for each party to sell or buy the balance of
the shares during a predetermined window in the future. However, as long
as the founders hold some shares, there is always an opportunity to
revisit the arrangement if it is likely to suit both parties.

"It feels different when you are still a part-owner," Roger Alexander, a
senior partner in the law firm Lewis Silkin, says. He cites the case of
Abbott Mead Vickers, which was 51 per cent owned by the US agency Scali
McCabe Sloves nearly 30 years ago. Having signed the agreement and run
the business for several years, the parties decided there was a better
way forward. They were able to tear up the agreement, let AMV buy back
some of Scali's shares and then float the company on the London Stock
Exchange with Scali retaining a small interest. So for AMV, a part-sale
did allow the flexibility to change direction later.

The staged sale certainly appears to preserve a shared ownership culture
more than the "them-and-us" relationship that sometimes characterises an
outright sale to a global group. All those involved share a common
interest in what is paid out in dividend and there's more scope to have
a real say about what the acquiring company wants to charge as
management fees.

Proponents argue that, at the very least, a partial sale of this sort
should help to reinforce to clients and staff the continuation of the
existing culture. "That's exactly why we did it," Miles says. "All our
staff were reassured we would be here for a minimum of six years."

So why did DLKW and others opt for an outright sale? Don Elgie, the
Creston chief executive, says its formula achieves the same end but in a
different way. Vendors "buy in" rather than "sell out", by accepting
shares in Creston as part-payment for their business.

Barrie Brien, Creston's finance director, has frightening memories of
agency founders retaining minority shareholdings among some of IPG's
European subsidiaries. The minorities could actually obstruct what is
best for the business, he says, particularly if extra capital is
required and the founders are not prepared to contribute their
share.

For this and other reasons, Alexander does not see the earn-out approach
being abandoned. "It was around long before Saatchi & Saatchi turned it
into an everyday art form in the 80s," he says.

- Bob Willott is editor of Marketing Services Financial Intelligence
(www.fintellect.com) and a special professor at the University of
Nottingham Business School.

SELECTION OF UK DEALS THIS YEAR
Rank Buyer Seller Maximum price
(pounds m)
1 Aegis Group Just Media and others 47.1*
2 Creston DLKW & Partners 38.2
3 Chime Communications VCCP 30.0
4 Cossette Communications Group MCBD 27.0
5 Publicis Groupe Freud 2.0 Holdings 20.0*
6= Aegis Group glue London 15.3
6= Cello Group Navigator 15.3
8 Thomson Intermedia Billetts 13.1
9 Huntsworth Context/BHI 11.6
10 Aegis Group Alban Communications 11.0
11 Next Fifteen Comms Group Panther Communications
(Lexis) 10.0
12 Cello Group Value Engineers 7.2
13 Cello Group Leapfrog 6.0
14 Cello Group RS Consulting 4.8
15 Chime Communications Baxter-Hulme 1.0
Source: Marketing Services Financial Intelligence.
*estimate.