Sellers opt for minority stake deals in favourable market

The impact of current market conditions on deal structures.

Current market conditions are creating an increased variety of deal mechanisms and giving agency owners a greater level of choice than they have ever seen before, generating new opportunities for those wishing to partner for growth. 

SI Partners has recently advised on two minority stake deals: Hirschen Group and J. Walter Thompson's partnership in Germany, and Creston’s investment in 18 Feet & Rising in London.  In both these instances, highly creative entrepreneurs have formed partnerships with large, listed marcoms groups, exemplifying the departure from traditional deal structures.  The heated market is enabling sellers to retain control by opting for minority stake deals.

Talent-based businesses in the creative sector are attractive to acquirers (particularly, the larger, less agile networks) because of their unique DNA.  Founders of creative businesses are driven to embed their vision, values and culture into their business, which is what engages staff, wins clients and creates success for the company. This success is what ultimately attracts acquirers.  But that comes with its own challenges.

An acquisition in the very traditional sense, can potentially result in a loss of creative freedom and a dilution of the DNA that initially created success.   Minority stake deals can provide a solution to this potential pitfall, whilst still allowing the parties to exploit potential synergies.

Founders of creative businesses are often driven by a belief in and passion for creativity. Taking a partnership approach to sale enables the entrepreneur to retain control whilst gaining access to scale, infrastructure and finance. Strategic partnerships bring assets, clients, and, yes, cash to help the sellers meet their ambition and de-risk their financial position.  For acquirers, minority stake deals allow investment in a proven, successful business that increases their capability with diminished risk and reduced likelihood that talent will depart directly after earn-out.

Minority deals are based on a desire to collaborate to the betterment of both parties in offering their respective clients the right mix of stability, innovative creative thinking and contemporary skills – and can potentially offer the ideal solution for both parties.

In a market anticipated to remain very active, we are likely to see increasingly innovative deal structures that continue to challenge the status quo and deliver benefits for both sides. Certainly in current market conditions, acquirers that can think flexibly and find imaginative ways to structure deals will be the ones who win over the hottest acquisition targets.

Tristan leads SI Partners’ European business, specialising in trade sales & mergers, private equity investments and MBO’s.  Tristan has worked on a wide range of complex and high profile deals for clients including Hirschen, 18 Feet & Rising and Work Club.  

This post was originally published for the Red Hat Members' Club.