An agency of this size is usually bought with a senior cash-flow term loan or unitranche, sponsor or buyer equity, and some mix of an earnout, a seller note and rolled equity for the founders and key leaders. A revolver against client receivables carries media payables and payroll. Lenders underwrite net revenue after pass-through media and production costs, client tenure and concentration, the notice and change-of-control terms in client contracts, and whether the people who hold the client relationships stay. Earnouts are common and allowed, subordinated to the senior lenders.
- Usual structure
- Senior term loan or unitranche, equity, and an earnout, seller note or rollover
- What lenders size on
- Net revenue and EBITDA, never gross billings
- Cash-flow leverage
- Senior lenders commonly 2x to 3.5x EBITDA; concentrated or founder-led agencies sit at the careful end
- What moves the credit
- Client tenure, concentration, notice periods, key people
- Working capital
- Media payables and client receivables, read side by side
Clients who can leave, and people who can follow them
A marketing agency owns laptops, software subscriptions and a leased office; nearly all of the price is goodwill. What a lender is really financing is a set of client relationships, many on contracts a client can end on short notice, and the account leads, strategists and creatives who keep those clients. The question the whole file answers is whether revenue survives the change of owner.
Buyers at this size are usually sponsors building marketing services platforms, larger agencies adding a capability or a region, independent sponsors backing an operator, and leadership teams buying out founders. Each is underwritten on the same client and people questions. For firms that sell strategy rather than media and creative work, see financing a consulting firm acquisition.
Gross billings are not revenue
Many agencies report revenue that includes money passing straight through: media bought on a client's behalf, printing, production crews, influencer payments and software resold at a small markup. A lender strips that out and looks at net revenue, sometimes called agency gross income, because that is what pays the staff and produces the margin.
A simple case in plain numbers: an agency bills 1,000 in a year, of which 600 is media and production passed through to clients. Its net revenue is 400. If its EBITDA is 80, that is a fifth of net revenue, a healthy agency margin, but only a twelfth of billings, which looks thin. A buyer who prices on billings, or a lender who compares agencies on billings, gets the wrong answer either way. An agency whose pass-through share has jumped may simply have taken on a large media client, which changes its risk more than its earnings.
| Revenue line | What it is | How a lender reads it |
|---|---|---|
| Retainers | Monthly fees for ongoing work | The most valued line; lenders check tenure and notice periods, not only the monthly amount |
| Project work | Campaigns, websites, rebrands | Useful, but it must be re-won; lenders look at how much comes from repeat clients |
| Media commissions and markups | Earnings on media bought for clients | Real, but tied to client media budgets that are cut first in a downturn |
| Performance or incentive payments | Paid if a client's results hit targets | Discounted or excluded unless they recur year after year |
| Pass-through media and production | Costs rebilled to clients | Not revenue for underwriting; it inflates billings and receivables |
| Resold software or licenses | Tools billed through the agency | Counted at its margin, not its gross |
Retention, notice periods and concentration
The most useful schedule in an agency file is net revenue by client, by year, for several years. From it a lender sees how long clients stay, how much of each year's revenue came from clients who were there the year before, and how much depends on the largest few. Long-tenured clients spread across industries read very differently from a book rebuilt every year from new projects.
Concentration is common in agencies, and lenders price it. One client carrying a large share of net revenue is a risk to coverage, and if its contract has a short notice period a lender may run the numbers as if it left. See customer concentration in acquisitions and concentration and debt capacity.
Contracts need reading, not just counting: term, notice period, renewal, and whether the agreement can be assigned or ends on a change of control. Large clients often have procurement teams that must approve a new owner. See change-of-control consents.
Before the lender asks, list every client above a meaningful share of net revenue, who at the agency manages it, and how long that person has done so.
The founder, the account leads and the bench
In many agencies the founder wins the business and holds the senior client relationships. If the founder is stepping back, lenders want to see those relationships already shared with account leads who are staying, and a record of clients the founder no longer manages personally. A founder who still takes every client call is the central risk in the file.
Lenders ask for a staff roster with role, tenure and pay, and look for the people clients actually deal with. Rolled equity for the leadership team, retention bonuses funded at closing, employment agreements with non-solicitation terms, and key-person insurance on anyone essential are common conditions. See rollover equity. An agency that relies heavily on freelancers or offshore contractors is lighter on payroll but more exposed if those arrangements end.
Media payables and working capital
Agencies that buy media sit between two sets of payments. The agency commits to the media, bills the client and pays the media vendor, sometimes before the client pays. If a large client pays late or not at all, the agency can still owe the vendor. That makes receivables and payables larger and more connected than net revenue suggests, and lenders read the AR aging and AP aging side by side.
At closing this becomes a working capital question. The purchase agreement needs a working capital peg that accounts for media payables due soon after closing. After it, a revolver carries the timing. Asset-based lenders typically advance 80% to 90% of eligible receivables, treat receivables more than 90 days past invoice as ineligible, and commonly cap any single customer at 20% to 25% of eligible receivables, so a concentrated agency's line is often smaller than its receivables suggest. See how a borrowing base works.
Earnouts, seller notes and the rest of the structure
Agency sales are often priced with an earnout: part of the price paid only if clients stay and revenue holds. It fits a business whose value can walk out the door, and conventional lenders allow it on their terms. See earnouts and acquisition debt and earnout vs seller note.
| Piece | When it fits an agency | Terms that matter |
|---|---|---|
| Senior term loan | Diversified clients and steady margins | Senior cash-flow lenders commonly lend 2x to 3.5x EBITDA; conventional lenders commonly look for coverage of at least 1.25x |
| Unitranche | Platforms with recurring retainers and a plan to keep buying | One loan that stretches further at a higher rate, often with a delayed-draw facility |
| Earnout | Where the price depends on clients staying | Subordinated to the senior lenders and tested against covenants before each payment |
| Seller note | Bridging price and keeping the founder invested | Subordinated, with limits on when it can be paid |
| Rolled equity | Founders and leaders staying on | Aligns the people who hold the clients with the new owner |
| Revolver | Media payables and payroll timing | Sized on eligible receivables after concentration caps |
Lenders deduct the cost of replacing the founder, whether a new managing director or a buyer's own salary, before measuring coverage, and a quality of earnings review will focus on revenue recognition, pass-through treatment and add-backs. An agency this size has usually outgrown SBA 7(a), which caps at $5 million and prohibits earnouts to the seller.
What goes in the file
The term loan needs the P&L, balance sheet and debt schedule, with a year-to-date P&L and AP aging where available. The revolver adds an AR aging by client with days outstanding and the existing liens. The acquisition adds the target's latest full year of figures, never an older year, and the letter of intent. For an agency, add:
- Revenue by client by year, split into retainer, project, media and pass-through.
- Client agreements for the larger clients, with term, notice and assignment terms.
- A staff roster with role, tenure, pay and which clients each person manages.
- The AP aging with media vendors shown separately.
- The earnout, rollover and retention terms proposed.
Senior bankers run every Midas Partners engagement. Once the documents are in, software builds the financing model, lender presentation, blind teaser and underwriting memo in a day, including the net revenue bridge and client retention analysis a lender would otherwise ask for one question at a time, and a senior banker checks every page before the client approves it. By hand, the same package takes at least a week. Of the 1,800+ lenders in the book, 1,148 write term and private credit. See the package.
Common questions
- Can I get acquisition debt for an agency with no hard assets?
- Yes. Cash-flow lenders lend against earnings, and most agency purchases are almost entirely goodwill. They make up for the missing collateral with close underwriting of clients and people, and with the equity beneath the loan.
- Do lenders use billings or net revenue?
- Net revenue. Media and production costs passed through to clients are stripped out, because they are not the agency's income and they distort margins.
- The seller wants an earnout. Will the lender allow it?
- Usually, in a conventional deal. Senior lenders want it subordinated to them, tested against their covenants before each payment, and counted in coverage when it falls due.
- What if one client is a large share of revenue?
- Lenders test whether the debt still works if that client leaves, read its contract for notice and change-of-control terms, and may size the debt down or ask for more equity or seller paper.
- Can the founder stay to manage key clients?
- Yes, in a conventional deal, and lenders usually prefer it: a founder who stays for a defined period, often with rolled equity or an earnout, makes the client transition more likely to work.