Proactive Legal Foundations Maximize Agency M&A Value

The hidden costs of legal oversights can derail agency M&A deals, significantly impacting valuation and deal timelines. This conversation with agency law specialist Sharon Toerek reveals that foundational legal hygiene--robust client contracts, clear employee agreements, and protected intellectual property--is not just a prerequisite for selling, but a critical driver of agency value and operational resilience. Agencies that proactively shore up these legal elements, often overlooked in the pursuit of creative spontaneity, gain a distinct advantage, smoothing the path for smoother transactions and maximizing financial returns. This episode is essential for agency owners, whether they plan to sell soon or simply aim to build a more sustainable, valuable business.

The Foundation of Value: Why Legal Readiness is Your Agency's Best Negotiating Chip

In the often-turbulent waters of agency mergers and acquisitions, the most critical preparation isn't always about financial projections or client acquisition strategies. As agency law specialist Sharon Toerek explains, the bedrock of a successful, high-value transaction lies in meticulous legal hygiene. Many agencies, driven by a culture of creativity and spontaneity, overlook the foundational legal documents that, when neglected, can introduce significant complications, inflate costs, and even scuttle deals entirely. This analysis delves into the layered consequences of neglecting these legal fundamentals, highlighting how proactive preparation creates a durable competitive advantage.

Client Contracts: The Unseen Asset (or Liability)

The most immediate concern for any acquiring agency is the book of business--the client relationships that fuel revenue. However, the contractual framework governing these relationships is often a blind spot for sellers. Toerek emphasizes that the first step in due diligence is always scrutinizing client contracts. The critical question: do these agreements address assignability or transferability? Without clear provisions, or worse, in the absence of any contracts at all, a buyer faces uncertainty about revenue continuity. This contractual ambiguity can significantly depress valuation, as the perceived value of the client base diminishes. The consequence of this oversight isn't just a negotiation hurdle; it directly impacts the financial outcome of a sale.

"What do your client contracts actually say? Do you have the rights to sell them? Yes, that's the first thing is what does the agreement do about addressing assignability or transferability of that client account to an acquiring agency?"

-- Sharon Toerek

The ripple effect of this is profound. Agencies that have operated on handshake agreements or long-standing, informal client relationships, while seemingly stable, are inherently vulnerable. A buyer cannot rely on goodwill alone; they need contractual assurance. This lack of formal documentation creates a cascade of problems: delayed negotiations as parties scramble to rectify omissions, increased legal fees to draft new agreements or seek client consent, and ultimately, a diminished purchase price due to the perceived risk. The immediate discomfort of formalizing client agreements, a task often postponed for being "unsexy," translates directly into a lasting advantage--a more secure, verifiable asset that commands higher valuation.

Employee Agreements: Protecting Your Talent and IP

Beyond client contracts, the documentation surrounding an agency's talent is equally crucial. Buyers assess not only the existing team they might inherit but also the risk of key personnel departing, potentially taking clients with them. Inconsistent or missing employee agreements, confidentiality clauses, and non-solicitation covenants create significant vulnerabilities.

"First of all any buyer is going to want to understand a couple of things they're going to want to know how vulnerable would we be if we didn't bring the talent over are the people who we don't hire from the selling agency going to be in a position to lobby those clients to work directly with them..."

-- Sharon Toerek

The downstream effects of inadequate employee documentation are multifaceted. Without clear covenants on fair competition and intellectual property ownership, an agency risks losing its proprietary work product or facing competitive threats from departing employees. This not only erodes the agency's value but can also introduce costly legal battles post-acquisition. Furthermore, the absence of documented policies and procedures can signal to a buyer a lack of operational maturity, potentially impacting their confidence in the agency's long-term stability. The effort required to establish consistent, well-documented talent agreements, including those for 1099 contractors, pays off by securing the agency's intellectual capital and talent base, thereby safeguarding and enhancing its valuation.

Intellectual Property: The Undervalued Asset

Intellectual property (IP) is a significant, yet often undervalued, driver of agency valuation. Toerek outlines a three-pronged approach to assessing IP: brands, content, and transactional agreements. Brands, whether of the agency itself or its productized services, have inherent market value. Proprietary content--methodologies, research, software--represents applied expertise that can be a key differentiator. Finally, transactional agreements govern how this IP is licensed or transferred.

The consequence of neglecting IP protection is direct: a buyer cannot acquire what the seller doesn't legally own. If an agency has used third-party developers or freelancers to create proprietary software or content without explicit assignment agreements, that IP may not belong to the agency. This oversight can lead to a significant downward adjustment in valuation during due diligence, as the buyer realizes they are not acquiring the full asset they anticipated. The immediate pain of securing IP ownership through proper contracts, especially when engaging external talent, prevents the far greater pain of discovering ownership gaps during an M&A process, which can be a deal-breaker or lead to costly renegotiations.

Corporate Governance: Preventing Deal Drag

Finally, the internal governance structure of an agency, particularly for multi-owner businesses, can become a significant drag on M&A transactions. The absence of clear bylaws, shareholder agreements, or co-owner agreements means that disagreements between owners on critical deal terms--such as sale price, structure, or post-closing involvement--can halt progress.

"What do your corporate governance documents look like? First of all do you have them... and what is the relationship or the understanding that the agency owners have with one another about decision making and what hinges do we need to be looking for as a buyer if the owners are not agreeing or if one wants to sell and the other doesn't or they have different ideas about terms and things like that..."

-- Sharon Toerek

The consequence of this is not typically a reduction in valuation, but rather a significant delay and increase in professional fees. Negotiating these foundational documents under the pressure of an impending sale is far more contentious and costly than addressing them proactively during periods of amicable agreement. The "pre-nup" analogy is apt: establishing clear decision-making frameworks and exit strategies when relationships are strong prevents intractable conflicts later. This proactive governance ensures that when a sale opportunity arises, the agency can move forward with a unified front, minimizing friction and accelerating the closing process.

Actionable Steps for Legal Readiness

• Immediate Action: Conduct an audit of all client contracts. Centralize them in a secure, accessible location and identify any missing agreements or provisions related to assignability.
• Immediate Action: Review all employee and contractor agreements. Ensure they clearly define IP ownership, confidentiality, and non-solicitation clauses. Identify any inconsistencies.
• Immediate Action: Inventory all intellectual property assets (brands, proprietary content, software). Verify ownership and ensure all necessary assignment agreements are in place, especially for work created by third parties.
• Immediate Action: For multi-owner agencies, gather and review all corporate governance documents (bylaws, shareholder agreements). If they are outdated or non-existent, schedule a meeting with legal counsel to update or draft them.
• Over the next quarter: Develop and implement a standardized client contracting process to ensure all future agreements are robust and include clear transferability clauses.
• Over the next quarter: Establish a consistent process for onboarding new employees and contractors, ensuring all necessary legal agreements are signed and stored centrally.
• This pays off in 12-18 months: Proactively seek client consent for contract assignability where possible, or begin discussions with key clients about future transition plans, building trust and de-risking the client base for potential buyers.