Due Diligence Checklist for Agency Acquisitions

Agencies are deceptively complex businesses. Revenue can look strong while the underlying fundamentals — client concentration, staff dependency, contract quality — tell a different story. Thorough due diligence separates good acquisitions from expensive mistakes.

Unlike product companies with tangible assets, an agency's value sits in its people, client relationships, and recurring revenue patterns. All three can walk out the door. Your due diligence process needs to stress-test each one.

The Complete Agency Due Diligence Checklist

Financial Due Diligence

Revenue Quality

• Obtain 3 years of monthly revenue data broken down by client
• Calculate client concentration — what percentage of revenue comes from the top 3, 5, and 10 clients?
• Identify revenue that is project-based vs. retainer-based. What is the recurring revenue percentage?
• Analyse revenue trends by client — are key accounts growing, flat, or declining?
• Review pipeline and new business win rate over the past 24 months
• Assess pass-through revenue (media spend, production costs) vs. agency gross income (AGI)

Profitability

• Review adjusted EBITDA for the past 3 years with add-backs clearly documented
• Scrutinise owner compensation and perks — what's the true owner benefit?
• Examine gross margins by service line and by client
• Review freelancer and contractor costs — are they masking understaffing?
• Assess overhead structure: office lease terms, technology costs, insurance
• Check for deferred expenses or accelerated revenue recognition

Working Capital

• Review accounts receivable ageing — what's the average days sales outstanding (DSO)?
• Identify any bad debts or clients with consistently late payments
• Check accounts payable terms, especially media payables
• Assess working capital requirements and seasonal patterns

Client Due Diligence

Contract Analysis

• Review all active client contracts — look for termination clauses, notice periods, and auto-renewal terms
• Identify contracts with change-of-control provisions that could trigger termination upon acquisition
• Check for exclusivity or non-compete clauses that limit future business development
• Review master service agreements (MSAs) vs. project-based statements of work (SOWs)
• Assess pricing structures — are rates competitive or below market?

Relationship Assessment

• Meet or call the top 10 clients (with the seller's involvement) to gauge satisfaction and intent to continue
• Identify which relationships are owner-dependent vs. team-dependent
• Check client Net Promoter Scores or satisfaction survey data if available
• Review client tenure — long-tenured clients signal stability; recent wins signal growth
• Understand the decision-maker at each key client — are they likely to stay in their role?

Concentration Risk

• Flag any single client representing more than 15% of revenue
• Model the impact of losing the top 1, 2, or 3 clients on EBITDA
• Check if any clients have signalled intent to review their agency relationship or go in-house

People Due Diligence

Team Stability

• Review staff turnover rates for the past 3 years
• Identify key person dependencies — who are the 3-5 people the agency cannot lose?
• Review employment contracts for key staff — notice periods, non-competes, compensation
• Check for any outstanding employment disputes or tribunal claims
• Assess the management layer below the owner — can they run the agency independently?

Compensation & Culture

• Benchmark salaries against market rates — are staff underpaid (flight risk) or overpaid (margin risk)?
• Review bonus structures, commission plans, and equity incentives
• Assess employee satisfaction through anonymous surveys or Glassdoor reviews
• Understand the culture — will it survive the transition? What are the friction points?
• Review any planned hires or restructuring the seller has committed to

Organisational Capability

• Map the org chart against client accounts — who serves which clients?
• Identify single points of failure in service delivery
• Assess the quality of the agency's work through portfolio review
• Check for capability gaps that would need investment post-acquisition

Operational Due Diligence

Systems & Processes

• Inventory all technology platforms: project management, CRM, analytics, finance
• Review software licences and subscription costs
• Assess process maturity — are workflows documented or tribal knowledge?
• Check data security practices and compliance (GDPR, SOC 2, etc.)

Intellectual Property

• Confirm ownership of all creative work, code, and proprietary tools
• Review IP assignment clauses in employee and contractor agreements
• Check for any open-source dependencies or third-party IP in client deliverables
• Identify proprietary methodologies, tools, or data assets that add value

Legal & Compliance

• Review corporate structure and any subsidiaries
• Check for pending or threatened litigation
• Review insurance coverage: professional indemnity, cyber, D&O
• Assess regulatory compliance for the agency's sector (financial services, healthcare, etc.)
• Review any existing or previous government contracts with special compliance requirements

Strategic Due Diligence

Market Position

• Assess the agency's reputation in its niche — awards, case studies, thought leadership
• Identify competitive threats and market trends affecting the agency's services
• Review the agency's new business pipeline and conversion rates
• Evaluate cross-sell and upsell opportunities post-acquisition

Integration Planning

• Map potential synergies — shared services, cross-selling, technology consolidation
• Identify cultural integration risks and develop a 90-day plan
• Plan client communication strategy for post-close announcement
• Define the seller's role during the transition period and earn-out

Common Due Diligence Red Flags

Immediate Deal-Breakers

• Revenue cliff: A top-3 client has given notice or is in active review
• Key person exodus: Senior staff are leaving or have been told about the sale and are unhappy
• Legal exposure: Pending litigation that could exceed insurance coverage
• Financial manipulation: Revenue recognised early, expenses deferred, or owner costs hidden

Yellow Flags (Negotiation Points)

• High client concentration (>25% from one client) — discount the valuation or structure with client retention earn-out
• Owner dependency — lengthen the transition period and tie earn-out to knowledge transfer milestones
• Below-market salaries — budget for salary corrections post-close to prevent attrition
• Declining win rates — investigate whether it's market conditions or a capability issue

Typical Due Diligence Timeline

| Phase | Duration | Focus | |-------|----------|-------| | Preliminary review | 1-2 weeks | Financial overview, top-line metrics, deal-breaker screening | | Deep dive | 3-4 weeks | Full financial, client, people, and operational analysis | | Client references | 2-3 weeks | Confidential conversations with key clients | | Legal review | 2-3 weeks | Contracts, IP, compliance, litigation check | | Integration planning | 1-2 weeks | Synergy modelling, 90-day plan, communication strategy |

Total: 8-12 weeks for a typical mid-market agency acquisition.

Key Takeaways

1. Client concentration is the number one risk in agency acquisitions. If losing one client breaks the deal economics, your valuation needs to reflect that.
2. People are the product. Spend as much time on team due diligence as you do on financials.
3. Recurring revenue is gold. Agencies with 70%+ retainer revenue command premium valuations for good reason.
4. The seller's post-close role matters. A clean transition plan with clear milestones protects both parties.
5. Trust but verify. Every number the seller provides should be cross-referenced against source documents.

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Related reading:

• What Is a Quality of Earnings Report?
• Agency LOI: What Sellers Need to Know
• How to Sell Your Digital Agency: A Founder's Timeline
• Free Agency Valuation Calculator