How AI Will Revolutionize the Agency M&A Landscape
In our series of three recent mailings on AI, we reported what ChatGPT has to say about the challenges and opportunities that AI presents to agencies and owners. In this final installment, we will explore the possible M&A ramifications for agencies that adopt AI in order to move to an “operating system” model.
AI isn’t just changing agencies. It’s changing what they’re worth.
Buyers have always been concerned about the risks of revenue sustainability and reliance on specific individuals to garner ROI on their acquisitions. AI has sharpened these concerns. As an agency’s production becomes easier to replace, buyers will focus less on what the agency does and more on why its clients must retain it.
Most conversations inside agencies about AI focus on operations. How do we use it? How do we price it? How do we protect our services?
Buyers are asking something else entirely.
How much of the revenue survives after an agency is acquired.
This has always been a key buyer consideration when evaluating and assigning valuation to an acquisition target. AI is changing that analysis.
For many years, agencies were valued as skilled labor organizations. Solid acquisition targets were historically respected, profitable and relationship-driven but potentially difficult to transfer “as is” when the target is acquired. When revenue depends on people and production, buyers see risk. Risk compresses multiples.
AI does not just make agencies more efficient. It rewards agencies that move from execution of strategy and tactics to ownership of outcomes.
We’re seeing four structural capabilities emerge that may directly influence acquisition target valuation.
1. Governance creates defensibility.
Many client organizations are adopting AI faster than they can manage it. This presents those organizations with a myriad of risks including brand exposure as well as legal and operational inconsistency.
Agencies which establish AI policies, approval frameworks and safeguards move from “communications vendor” to operational advisor. Their revenue thus becomes embedded inside how the client company operates, not just how it communicates.
To a buyer, embedded revenue is dependable revenue… and commands higher buyer confidence and higher valuation.
2. Systems create predictability.
Project-based revenue resets every quarter or so. Programs have to be reapproved by clients each year. Operational systems don’t reset. When an 0agency runs continuous testing, operations and performance management, it stops selling campaigns and starts running infrastructure.
Buyers value predictability more than creativity because predictability survives ownership change. The closer that revenue looks to flow from an ongoing operating system, the less it resembles a discretionary spend.
(Please see our previous three pieces in this series to learn how to become closer to an operating system that works for you. Part 1 here, Part 2 is here and here for Part 3.)
3. “Trust” work moves into risk budgets.
As synthetic information expands, client companies will treat credibility as a protection issue rather than a communication function.
Being viewed as a client reputation protector against misinformation, data leakage, public misconception, etc. moves agencies from competing for communication budgets to beginning to participate in stability budgets as a “decision layer”.
This materially alters how buyers categorize the business and how long they expect clients to stay with the firm. Retention drives value more than growth.
4. Intelligence creates transferability.
The most valuable agencies to both clients and buyers will move from selling hours to selling accumulated institutional knowledge that transforms the agency into a strategic operating system.
These agencies will combine their senior judgment, intuition and experience with AI-supported audience intelligence, scenario modeling, performance models, decision frameworks, proprietary benchmarks and more. This combination will create 1) an asset viewed as decision-grade architecture by clients and 2) revenue as well as market advantage that survives ownership transition by buyers.
This translates to a premium selling price in the M&A market. Documented insight is one of the clearest examples of a scalable firm.
Summary
Taken together, these shifts change how agencies are viewed as an acquisition target. Instead of a communications agency, the firm begins to resemble an operational platform with recurring and embedded revenue. Buyers are then not buying earnings alone but acquiring continuity too.
Take this simple test. If tactics were automated tomorrow, would clients still depend on your firm? If the answer is uncertain, buyers will reach the same conclusion.
AI will not automatically increase agency profitability. However, it will widen the gap between those whose value comes from execution and those whose value comes from authority.
Authority is transferable which makes it valuable. For agency owners, the strategic question is no longer how efficiently the firm operates but how indispensable it has become to clients.
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Prosper Group exists to help the owners of independent marketing and communications agencies achieve their ambitions and maximize the value of their life's work.
Our team of former agency leaders and owners focus their deep experience on implementing proven proprietary methodologies across our three practices of agency performance, owner exit planning and M&A transactions in order to drive owner and agency success.
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