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What strategic steps can localization and translation agency owners take to increase valuation at exit?If you are the owner of a language services business, you likely follow industry M&A news with a keen eye: tracking deals, monitoring buyer and seller motivations, and – crucially – observing valuation trends.In a buoyant international market there continues to be a steady flow of both small and large deals featuring trade, private equity and strategic buyers, all competing to create and capture value across a fragmented commercial landscape.Although transaction details are not always published, a substantial amount of data is available to LSP owners who have not yet set their exit plans in stone and who wish to gauge the market temperature. At the lower end of the valuation spectrum, some agencies change hands for 2-3x EBITDA, while buyers have paid as much as 10-20x in instances where a high level of strategic synergy between buyer and seller was identified.Although not ‘on the market’, and often pursuing short-term goals of growth and profitability, most agency owners have one eye on the future, and are always interested to know what decisions they can be making today to increase their agency’s valuation upon exit.Based on Adaptive’s work representing both buyers and sellers in a wide variety of M&A scenarios within the language services sector, here are some actionable tactics that all LSPs can adopt to raise their exit multiple.  Focus on ‘sticky’ marketsTypically among the major drivers of buyer motivation, building a customer base in a sector with high barriers to entry from competition is a proven method for developing a high-value agency.The industry has seen plenty of high-profile M&A deals done in major verticals such as Life Sciences, IP, legal and financial, but there are plenty of other niche areas available for agencies still looking to define a specialism.Of central importance to buyers is not only that an agency have a customer concentration in a particular vertical, but that this focus be supported by a unique combination of expertise, resources and workflows - making it tough for non-specialist agencies to steal market share.Penetrate accountsDeep and durable client relationships are another significant point in favour of an agency looking to sell. From a buyer perspective, having impressive client names on your customer list is markedly less impressive if those relationships show signs of being vulnerable to attack from cheaper or higher-quality competitors.Agency owners looking to drive shareholder value over a multi-year time-frame are well advised to build strategic penetration and consolidation plans for their highest-spend customers, ensuring that they do everything possible to retain their business. This typically means establishing multiple points of contact, working across multiple client business sectors and prioritizing customer service experience at every opportunity.Build unique workflow solutionsAn additional step to cementing key client partnerships involves anchoring the relationship in the service delivery itself.Many LSPs which sell for market-beating multiples have embedded themselves as an indispensable supplier to top customers via customised solutions, client portals, technology configurations or other bespoke offerings.While enterprise-grade workflow integrations can require significant financial investments to be made by the LSP, smaller gestures nonetheless contribute to solidifying partnerships.Wherever agency owners see opportunity to deepen their engagement with their customers’ tools and teams, it’s usually worth pursuing.Lock in key staffThe stability and commitment of management teams is another item which sits high on a buyer’s priority list.As well as looking for a capable and well-organised team, potential investors will be assessing the degree to which they can depend on that team post integration.Involving upper-tier sales, technology and operational managers in equity plans which are tied to the success of M&A outcomes is a standard method of aligning incentives at this critical time, and owners who identify key personnel within their organisation should waste no time in ensuring they are incentivised to remain with the company through exit and help make that transition as successful as possible. Keep the books cleanThough neat and tidy bookkeeping seldom adds to the value of a company directly, much of the M&A process is about establishing trust and confidence between buyer and seller. First impressions are extremely important and set the tone throughout the rest of the information-sharing and negotiation processes.A company whose accounts are accurate, up-to-date and require minimal explanation is on the front foot when it comes to discussing its overall value as an acquisition target.Conversely, an agency whose finances are inconsistent, unnecessarily complex or poorly presented may be at a disadvantage in other areas of the negotiation process, simply owing to the impression created. Find the right buyerWhile it may seem common sense, it’s a critical factor very often overlooked by business owners in any sector.The single biggest value driver in any transaction is the synergy between buyer and seller. The value of any business is only what a particular seller is prepared to pay to acquire it, and that valuation is largely subjective – based on the additional value that any given buyer believes they can unlock through pursuing the acquisition.With this in mind, it’s vital that agency owners commit as much time as possible (and as early as possible) in forming a comprehensive understanding of where their ideal buyers may come from in the market. Whilst the temptation may be for owners to focus energy on ‘polishing’ their businesses ready for a sale to a generic buyer, that time could be better rewarded in working with a specialist partner to review and engage the market in depth.The ‘right’ buyer will pay more than a less synergistic acquiror, no matter what steps an owner may take internally to tweak business processes.***Adaptive M&A works with the owners of translation and localization agencies to maximize shareholder value at exit by identifying the right strategic match from a diverse network of buyers and investors.You can learn more about our services here.

Many language agencies are turning to ready PE capital to support growth – what impact will it have on your business?Private equity funding continues to make steady advances into the language services domain, with an increasing number of LSPs leveraging investor capital and expertise to springboard their agencies to the next level of growth (Frontier Capital’s exit of IP translation specialist MultiLing is the latest public success story).Unlike sale to a trade buyer, however, selling to a PE firm rarely involves an immediate exit from the business and is likely to be a two-stage process that calls for significant ongoing involvement from the owner.PE companies typically look to acquire a controlling or majority share of the business they are investing in, and work to provide resources that enable the company to pursue market opportunity that was previously out of reach.When things go positively, PE investment can mean phenomenal results for business owners – but it’s a special type of partnership that has to be carefully constructed.As an LSP owner considering growth options, what should you expect if you partner with a private equity group?1. More money to growThe primary asset that PE groups bring to the table is deep pockets that let business owners accelerate their growth trajectory and increase shareholder value. This may take the form of investment in sales, marketing or technology, or may – as is the case with LanguageWire’s recent acquisition of Xplanation – include expansion through M&A.Be ready, however, to justify every penny. PE partners aren’t spending out of their own personal piggybanks, but are beholden to investors in a fund which provides the capital used for their projects. So while a PE partner may offer access to big sums for investment in growth, the ROI of each decision will be carefully scrutinized to calculate the anticipated return.2. No place to hideJust as investment decisions will be analyzed in detail, so will every aspect of business operations. Costs, personnel, customer base – even the performance of the incumbent CEO.Some business owners thrive on this new pressure to deliver results, as privately-owned companies often lack a driving force to spur on aggressive growth beyond the personal ambition of the founder.A new group of motivated shareholders certainly provides this impetus, but business owners need to enter the deal with their eyes open and understand that the PE group’s primary objective is to deliver the best possible return on their investment. When faced with obstacles or indicators that they are falling short of forecasts, they won’t hesitate to act. In worst-case scenarios, this can mean layoffs, office closures or other big changes which can impact and potentially damage company culture.3. A new business partnerOften among the biggest adjustments business owners have to make in selling to PE groups is no longer being in full control of their organization. For founders who have run companies for ten or twenty years, to be bumped down to a minority partner can feel strange, even if the upside potential this creates is greater than anything they could have achieved independently (as is often the case).In real terms, accessing that upside means no more solo decision-making and needing to get along well with a new group of senior business partners. This doesn’t mean, however, that PE firms will be getting under the wheels of management on a daily basis – they are investors, not operators, and though they add experience, financial expertise and ideas, they will not be involved in daily functions and will leave management to do its job.4. An easier sale process‘Easy’ is a relative term in all cases, but there’s truth in the idea that selling to private equity groups can be a more straightforward process than selling to a trade or strategic buyer. PE groups have a mandate to acquire companies, often within a fixed time period (the expiration lifetime of the fund), and need to buy, grow and exit companies within that span in order to provide investor returns.As funds are spread across a portfolio of investments, PE groups accept a certain degree of risk in their work, also.With other buyer categories (for example private sale), it’s likely that a large percentage of the buyer’s personal net worth may be invested in the deal, or that they have a realistic option to simply pull out of the idea of making an acquisition altogether. This can lead to a slower, more ponderous process (often less well structured), which can be draining for the seller and a distraction for the business, especially if it doesn’t result in a deal.5. A new perspectiveAs mentioned, PE groups are not ‘operators’ who will be working actively inside the companies they acquire. In fact, many PE partners have never done anything even resembling the type of work which founders (or 99% of their employees) do on a day-to-day basis.Instead, they bring a different set of skills. Often armed with MBAs and the holders of multiple advanced business and financial certifications, PE professionals are seldom entrepreneurs and perhaps more accurately labelled professional investors.While they may not join you in putting their shoulders to the wheel, they will be highly adept at studying business data, finances and performance reports, spotting opportunities for efficiencies, expansion and guiding where investment capital should best be deployed.In the best partnerships, the analytical skills of the PE team coupled with the market knowledge of management creates a powerful team.6. A fixed exit timelineA significant degree of control that founders give up when selling to PE firms is the ability to dictate time-frames when it comes to exiting the company fully.Although a business owner already takes some chips off the table when selling their initial share to the PE firm to begin with, they are usually then locked in to executing on a growth and exit strategy which will enable the PE to deliver returns to fund investors.With most funds having a life-cycle of 5 to 7 years, this arrangement strips founders of the flexibility to run their companies for a long (or as little) as they wish, as the PE firm will look to sell their investment on for a profit during that window.7. A new set of stakeholdersOn an emotional level, some founders take some time to get used to the idea that their company - often built up with sweat, grit, late nights and plenty of risky moments – has become a vehicle for investment in a larger series of business partnerships. PE groups create their funds with money from wealthy individuals, pension plans, insurance companies and other investors looking to generate a return on their capital, and knowing that these unknown parties are ultimately the ones driving the decision-making within a business can be hard to process.With that said, many founders are able to retain significant degrees of both cultural and creative control of their companies after selling to PE partners, and think of outside investor involvement as simply fuel to power their growth of their company. While they may no longer own a controlling share, they remain the de facto business leader and can achieve personal wealth by leveraging investor funds that far exceeds anything attainable on their own.***Adaptive M&A works with the owners of translation and localization agencies to maximize shareholder value at exit by identifying the right strategic match from a diverse network of buyers and investors.You can learn more about our services here.