Agency M&A Glossary
Key terms and definitions used in marketing agency mergers and acquisitions.
Understanding the language of agency mergers and acquisitions is the first step toward a successful deal. Whether you are buying, selling, or merging a marketing agency, these are the terms you need to know.
Each definition is written specifically for marketing agency owners and buyers, with real-world examples using realistic agency financials.
A · B · C · D · E · G · H · I · K · L · M · N · P · Q · R · S · T · V · W
A
- Adjusted EBITDA — Adjusted EBITDA is a modified version of standard EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) that removes one-time, non-recurring, or owner-specific expenses to reveal the true ongoing profitability of a business.
- Asset Sale vs Stock Sale — An asset sale is a transaction where the buyer purchases specific assets of the agency — client contracts, brand name, equipment, intellectual property — rather than the legal entity itself.
B
- Break-Up Fee — A break-up fee is a financial penalty one party agrees to pay the other if the deal falls through for specified reasons.
C
- Change of Control — A change of control occurs when a majority ownership stake in a company transfers to a new party, either through a sale, merger, or significant equity restructuring.
- Churn Rate — Churn rate measures the percentage of clients or revenue lost over a given period, typically calculated monthly or annually.
- Client Concentration — Client concentration measures how dependent an agency’s revenue is on a small number of clients.
- Closing Conditions — Closing conditions are the specific requirements that must be satisfied before a business sale can be finalized.
- Confidential Information Memorandum — A confidential information memorandum (CIM) is a comprehensive document prepared by the seller or their advisor that provides detailed information about a business being offered for sale.
D
- Data Room — A data room is a secure digital repository where a seller organizes and shares confidential business documents with prospective buyers during the due diligence phase of a transaction.
- Drag-Along Rights — Drag-along rights allow majority shareholders to force minority shareholders to join in the sale of a company on the same terms and conditions.
- Due Diligence — Due diligence is the formal investigation process a buyer conducts after signing a Letter of Intent to verify all material facts about the target agency.
E
- Earnout — An earnout is a deal structure where a portion of the purchase price is contingent on the agency achieving specific performance targets after closing.
- EBITDA — EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
- Enterprise Value — Enterprise value (EV) represents the total value of an agency as a business, including both equity and debt.
- Escrow — Escrow is a financial arrangement where a portion of the purchase price is held by a neutral third party and released only when specific conditions are met or a defined period expires.
- Exclusivity Period — An exclusivity period is a defined timeframe during which a seller agrees not to negotiate with, solicit, or entertain offers from any other potential buyers.
G
- Goodwill — Goodwill is the portion of a business’s purchase price that exceeds the fair market value of its identifiable tangible and intangible assets.
H
- Holdback — A holdback is a portion of the purchase price that the buyer withholds at closing, held in reserve for a specified period to cover potential post-closing liabilities, indemnification claims, or purchase price adjustments.
I
- Indemnification — Indemnification is a contractual obligation where one party agrees to compensate the other for specific losses, damages, or liabilities that arise after a deal closes.
K
- Key Person Risk — Key person risk is the threat that a business will lose significant value if one or a few critical individuals leave, become incapacitated, or disengage.
L
- Letter of Intent — A Letter of Intent (LOI) is a written document outlining the preliminary terms of a proposed acquisition, including price, deal structure, timeline, and key conditions.
- Lifetime Value — Lifetime value (LTV) is the total revenue or profit an agency expects to earn from a single client over the entire duration of that relationship.
M
- Management Buyout — A management buyout (MBO) occurs when an agency’s existing leadership team — typically senior partners, directors, or long-tenured managers — purchases the business from the current owner.
N
- Net Revenue Retention — Net revenue retention (NRR) measures the percentage of recurring revenue retained from existing clients over a set period, accounting for upgrades, downgrades, and cancellations.
- Non-Compete Agreement — A non-compete agreement is a contractual clause that prevents the selling agency owner from starting or joining a competing business for a specified period and within a defined geographic or industry scope after the sale closes.
- Normalized Earnings — Normalized earnings are a company’s profits after removing one-time, non-recurring, or owner-specific expenses and revenues to reveal the true ongoing earning power of the business.
P
- PEG Ratio — The PEG ratio, or price-to-earnings-growth ratio, measures a company’s valuation relative to its earnings growth rate.
- Purchase Agreement — A purchase agreement is the legally binding contract that finalizes the sale of a business, spelling out exactly what is being bought, the price, how it will be paid, and the obligations of both buyer and seller.
Q
- Quality of Earnings — A quality of earnings (QoE) report is an independent financial analysis conducted during due diligence to verify that a company’s reported earnings are accurate, sustainable, and not inflated by accounting tricks, one-time events, or aggressive revenue recognition.
R
- Recurring Revenue — Recurring revenue is predictable, ongoing income generated from client retainers, subscriptions, or long-term contracts that renew on a regular basis.
- Representations and Warranties — Representations and warranties are formal statements of fact made by the seller (and sometimes the buyer) in the purchase agreement about the condition and legal standing of the agency.
- Roll-Up Strategy — A roll-up strategy involves acquiring multiple smaller agencies and combining them into a single, larger organization to achieve economies of scale, expanded service offerings, and a higher valuation multiple.
- Rule of 40 — The Rule of 40 is a performance benchmark stating that a healthy company’s combined revenue growth rate and profit margin should equal or exceed 40%.
S
- SDE (Seller’s Discretionary Earnings) — Seller’s Discretionary Earnings is a profitability metric that adds the owner’s total compensation — salary, benefits, perks, and personal expenses run through the business — back into net income along with interest, taxes, depreciation, and amortization.
- Seller Financing — Seller financing is a deal structure where the agency’s seller acts as a lender, allowing the buyer to pay a portion of the purchase price over time through scheduled installments after closing.
- Synergies — Synergies are the financial and operational benefits that result from combining two or more agencies, where the merged entity produces greater value than the agencies would independently.
T
- Tag-Along Rights — Tag-along rights, also known as co-sale rights, protect minority shareholders by giving them the right to join a transaction when a majority shareholder sells their stake.
- Teaser Document — A teaser document is a brief, anonymized summary of a business that is shared with prospective buyers early in the sale process to gauge interest without revealing the company’s identity.
- Transition Period — A transition period is the timeframe after an agency sale closes during which the former owner remains involved in the business to ensure a smooth handover.
V
- Valuation Multiple — A valuation multiple is the factor applied to a financial metric — usually EBITDA or SDE — to estimate an agency’s total value.
W
- Working Capital — Working capital is the difference between a company’s current assets (cash, accounts receivable, prepaid expenses) and current liabilities (accounts payable, accrued expenses, deferred revenue).
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Understanding M&A terminology is just the beginning. When you are ready to explore selling, buying, or valuing a marketing agency, we are here to help.