What strategic steps can localization and translation agency owners take to increase valuation at exit?
If you are the owner of a language services business, you likely follow industry M&A news with a keen eye: tracking deals, monitoring buyer and seller motivations, and – crucially – observing valuation trends.
In a buoyant international market there continues to be a steady flow of both small and large deals featuring trade, private equity and strategic buyers, all competing to create and capture value across a fragmented commercial landscape.
Although transaction details are not always published, a substantial amount of data is available to LSP owners who have not yet set their exit plans in stone and who wish to gauge the market temperature. At the lower end of the valuation spectrum, some agencies change hands for 2-3x EBITDA, while buyers have paid as much as 10-20x in instances where a high level of strategic synergy between buyer and seller was identified.
Although not ‘on the market’, and often pursuing short-term goals of growth and profitability, most agency owners have one eye on the future, and are always interested to know what decisions they can be making today to increase their agency’s valuation upon exit.
Based on Adaptive’s work representing both buyers and sellers in a wide variety of M&A scenarios within the language services sector, here are some actionable tactics that all LSPs can adopt to raise their exit multiple.
Focus on ‘sticky’ markets
Typically among the major drivers of buyer motivation, building a customer base in a sector with high barriers to entry from competition is a proven method for developing a high-value agency.
The industry has seen plenty of high-profile M&A deals done in major verticals such as Life Sciences, IP, legal and financial, but there are plenty of other niche areas available for agencies still looking to define a specialism.
Of central importance to buyers is not only that an agency have a customer concentration in a particular vertical, but that this focus be supported by a unique combination of expertise, resources and workflows - making it tough for non-specialist agencies to steal market share.
Deep and durable client relationships are another significant point in favour of an agency looking to sell. From a buyer perspective, having impressive client names on your customer list is markedly less impressive if those relationships show signs of being vulnerable to attack from cheaper or higher-quality competitors.
Agency owners looking to drive shareholder value over a multi-year time-frame are well advised to build strategic penetration and consolidation plans for their highest-spend customers, ensuring that they do everything possible to retain their business. This typically means establishing multiple points of contact, working across multiple client business sectors and prioritizing customer service experience at every opportunity.
Build unique workflow solutions
An additional step to cementing key client partnerships involves anchoring the relationship in the service delivery itself.
Many LSPs which sell for market-beating multiples have embedded themselves as an indispensable supplier to top customers via customised solutions, client portals, technology configurations or other bespoke offerings.
While enterprise-grade workflow integrations can require significant financial investments to be made by the LSP, smaller gestures nonetheless contribute to solidifying partnerships.
Wherever agency owners see opportunity to deepen their engagement with their customers’ tools and teams, it’s usually worth pursuing.
Lock in key staff
The stability and commitment of management teams is another item which sits high on a buyer’s priority list.
As well as looking for a capable and well-organised team, potential investors will be assessing the degree to which they can depend on that team post integration.
Involving upper-tier sales, technology and operational managers in equity plans which are tied to the success of M&A outcomes is a standard method of aligning incentives at this critical time, and owners who identify key personnel within their organisation should waste no time in ensuring they are incentivised to remain with the company through exit and help make that transition as successful as possible.
Keep the books clean
Though neat and tidy bookkeeping seldom adds to the value of a company directly, much of the M&A process is about establishing trust and confidence between buyer and seller. First impressions are extremely important and set the tone throughout the rest of the information-sharing and negotiation processes.
A company whose accounts are accurate, up-to-date and require minimal explanation is on the front foot when it comes to discussing its overall value as an acquisition target.
Conversely, an agency whose finances are inconsistent, unnecessarily complex or poorly presented may be at a disadvantage in other areas of the negotiation process, simply owing to the impression created.
Find the right buyer
While it may seem common sense, it’s a critical factor very often overlooked by business owners in any sector.
The single biggest value driver in any transaction is the synergy between buyer and seller.
The value of any business is only what a particular seller is prepared to pay to acquire it, and that valuation is largely subjective – based on the additional value that any given buyer believes they can unlock through pursuing the acquisition.
With this in mind, it’s vital that agency owners commit as much time as possible (and as early as possible) in forming a comprehensive understanding of where their ideal buyers may come from in the market.
Whilst the temptation may be for owners to focus energy on ‘polishing’ their businesses ready for a sale to a generic buyer, that time could be better rewarded in working with a specialist partner to review and engage the market in depth.
The ‘right’ buyer will pay more than a less synergistic acquiror, no matter what steps an owner may take internally to tweak business processes.
Adaptive M&A works with the owners of translation and localization agencies to maximize shareholder value at exit by identifying the right strategic match from a diverse network of buyers and investors.