The Hidden Risks in your Digital Agency Investment

Private equity (PE) firms and strategic acquirers are increasingly eyeing digital agencies as attractive investment or acquisition targets. Whether it’s niche specialists like Shopify-focused agencies, AI-native firms, or full-service creative shops, the digital agency landscape offers significant growth potential. However, while financial and operational due diligence are standard practice, many investors overlook a critical component: the client portfolio.

A digital agency’s client relationships are its lifeblood. Yet, traditional due diligence often fails to assess the client portfolio in sufficient depth, focusing primarily on financial metrics like revenue concentration, recurring revenue, and retention rates. While these metrics are important, they don’t tell the full story. A deeper, more nuanced analysis is needed to uncover risks, identify growth opportunities, and truly understand the value of an agency’s client base.

The Limitations of Traditional Due Diligence

Traditional due diligence approaches often miss key insights because they rely too heavily on quantitative data. Here’s where they fall short:

1. Over Reliance on Financial Metrics

Metrics like client concentration, recurring revenue, and retention rates provide crucial data points, but they don’t necessarily reveal the underlying health of client relationships. For example, a high retention rate might mask dissatisfaction among a small but highly profitable segment of clients.

2. Limited Assessment of Decision-Maker Relationships

Due diligence often fails to assess the strength of relationships with critical stakeholders—both decision-makers and detractors. It also rarely identifies who holds these relationships within the agency. If key account managers or client services leaders leave post-transaction, the risk of client attrition increases significantly.

3. Overlooking Client Advocacy

Satisfied clients are good, but advocates are invaluable. Traditional due diligence often fails to assess how well an agency has built and activated advocates who refer new business, expand their own engagements, and function as positive influencers on behalf of the agency.

4. Ignoring the Client Services Team’s Role

The client services or account management team is the backbone of client relationships. They are the day-to-day contacts, often forming tight bonds with clients. Their capabilities, morale, and retention are critical to client satisfaction and growth. A weak team may mean limited relationships with key stakeholders, hidden detractors, and missed opportunities to strategically develop accounts. Conversely, a strong team can identify and realize growth opportunities, ensuring long-term client retention and revenue expansion.

5. Missed Growth Opportunities

A client portfolio might appear stable, but without a deeper analysis, investors might miss opportunities to upsell, cross-sell, or improve service delivery to drive growth.

The Value of a Deeper Client Portfolio Assessment

To truly understand the value and risks of a digital agency’s client base, investors need to go beyond spreadsheets and financial metrics. Here’s what a more in-depth assessment should include:

1. Client Relationship Dynamics

• Are client relationships tied to the agency’s brand, or are they dependent on specific individuals?

• How strong is the agency’s rapport with key decision-makers at client organizations?

2. Client Sentiment and Advocacy

• Beyond satisfaction, how many clients are true advocates who actively refer new business?

• Has the agency successfully activated these advocates to create a virtuous cycle of growth?

3. Operational Insights

• How efficient and scalable are the agency’s service delivery processes?

• Are there bottlenecks or inefficiencies that could impact client satisfaction during periods of growth or integration?

4. Growth Potential Within the Portfolio

• Are there untapped opportunities to expand services within existing accounts?

• How well-positioned is the agency to upsell or cross-sell to its current client base?

5. Risk Assessment

• What are the risks associated with the client portfolio as a whole or with specific high-value clients?

• How resilient is the agency to the loss of a major client or key account manager?

Real-World Examples

Consider these scenarios where a deeper client portfolio assessment made a critical difference:

• Case Study 1: A PE firm acquired a digital agency with a seemingly strong client portfolio. However, a deeper analysis revealed that 60% of revenue came from clients who were dissatisfied with recent service changes. This insight allowed the firm to address the issues proactively, avoiding significant churn.

• Case Study 2: During the acquisition of a professional services spin-off, it became clear that the primary client relationships were held by the parent company, not the team being acquired. This dependency risk was flagged early, enabling the investor to develop a transition plan to secure client relationships post-acquisition.

• Case Study 3: An agency with a diverse pricing model (hourly rates, revenue share, and percentage of media spend) presented operational challenges. A detailed assessment helped standardize pricing, improving predictability and profitability.

The Role of Experienced Operators in Due Diligence

While traditional due diligence teams excel at financial and operational analysis, they often lack the hands-on experience needed to fully assess a digital agency’s client portfolio. This is where professionals with senior client services and sales backgrounds can add immense value.

These individuals bring:

• Firsthand Knowledge: They understand the nuances of client relationships, service delivery, and account management.

• Operational Insights: They can identify inefficiencies and risks that might be invisible to traditional due diligence teams.

• Strategic Recommendations: They provide actionable insights to optimize the client portfolio and drive growth.

By complementing traditional due diligence with this expertise, investors can gain a more comprehensive understanding of the agency’s value, mitigate risks, and unlock hidden opportunities.

In the fast-paced and competitive world of digital agencies, a thorough assessment of the client portfolio is not just a nice-to-have—it’s a necessity. Financial metrics alone cannot capture the full picture of an agency’s strengths, weaknesses, and growth potential.

Investors who take the time to conduct a deeper, more nuanced analysis—often with the help of professionals who have walked in the shoes of agency leaders—are better positioned to make informed decisions, mitigate risks, and maximize the value of their investments. In an industry where client relationships are everything, this approach can be the difference between a successful acquisition and a costly misstep.