What Are Drag-Along Rights? | Agency M&A Definition
Drag-along rights allow majority shareholders to force minority shareholders to join in the sale of a company on the same terms and conditions. This provision prevents a small group of minority owners from blocking a transaction that the majority has approved. Drag-along rights are typically established in the shareholders’ agreement or operating agreement well before any sale process begins.
Drag-Along Rights in Agency M&A
Many marketing agencies have complex ownership structures — a founding CEO who holds 60%, a creative director with 20%, and a head of strategy with 20%, for example. Without drag-along rights, the two minority owners could refuse to sell, effectively killing a deal even when the majority owner and the buyer have agreed on terms. In agency M&A, this scenario is more common than people realize. Partners who joined the agency early often hold meaningful equity stakes, and their personal situations or strategic views may not align with the majority owner’s desire to exit. Buyers evaluating a full-service agency will almost always require confirmation that drag-along provisions exist before submitting a formal offer, because acquiring only a partial stake in a marketing agency creates governance headaches and limits integration options. When selling a digital marketing agency with multiple equity holders, establishing drag-along rights early — ideally when the partnership is formed — avoids painful negotiations at the worst possible time. These rights typically require a supermajority threshold, often 66% or 75% of equity, to trigger the drag-along.
How Drag-Along Rights Affect Agency Valuation
The presence or absence of drag-along rights directly affects buyer confidence and, consequently, the multiples they are willing to pay. An agency with clean drag-along provisions in its operating agreement signals a straightforward path to 100% acquisition, which is what most buyers want. Without these rights, buyers face the risk of holdout minority owners demanding premium pricing for their shares or blocking the deal entirely. This uncertainty can reduce the offered multiple by 0.5x-1.0x EBITDA. For a $600,000 EBITDA agency, that translates to $300,000-$600,000 left on the table. Some buyers will structure around the problem by acquiring only the majority stake initially, but this typically comes at a discounted valuation.
Example
A branding agency has three partners: Partner A (55% equity), Partner B (30%), and Partner C (15%). The agency generates $3.6M in revenue with $720,000 in EBITDA. A holding company offers 6.5x EBITDA ($4.68M) for 100% of the business. Partner A and Partner B agree, representing 85% of equity. Partner C, who is five years from retirement, resists selling. Because the shareholders’ agreement includes drag-along rights triggered at a 66% ownership threshold, Partners A and B can compel Partner C to sell on the same terms. Partner C receives 15% of $4.68M ($702,000), the same per-share price as the other partners.
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