Let’s say you have an employee named Bob. He’s a great employee. Not just great, stellar. You can’t see the agency functioning without him. You don’t want to lose him. So how do you ensure that he’s happy and not being wooed by a competitor?
Or maybe you’re 55 and beginning to think about your exit strategy. What if Bob could buy you out? Or you could still keep a piece of the business but not work so hard?
In both cases, the solution I often hear agency owners come up is, “Why don’t I offer him some sort of equity or employee partnership in the agency?”
Taking on an employee as a partner may be a brilliant solution all around. Or it could be the demise of your agency. This is a huge commitment that involves many more moving parts than you might be considering.
My solocast sheds some light on the issues that I have helped agency owners walk through as they are considering this option, including:
- Why you need think long and hard before making employees partners
- Why partnerships will look different if you’re a C Corp than any other structure (S Corp, LLC, etc.)
- Why you need to make sure someone actually wants to be a partner before you offer them a partnership
- Why you need to sell shares and not gift shares
- Why you should only bring on one partner at a time
- Why — if your employee doesn’t have the skills they need to be a partner — and they probably don’t — you need to teach them
- Why it usually takes about 10 years to groom someone to take over for you
- Why you really need to decide if you’re ready for all of your autonomy to go away
- How to finance partnerships (odds are they can’t afford it on their salary)
- How to start having the conversation about funding your buyout
Drew McLellan is the Top Dog at Agency Management Institute. For the past 21 years, he has also owned and operated his own agency. Drew’s unique vantage point as being both an active agency owner and working with 250+ small- to mid-size agencies throughout the year, give him a unique perspective on running an agency today.
AMI works with agency owners by:
- Leading agency owner peer groups
- Offering workshops for owners and their leadership teams
- Offering AE bootcamps
- Conducting individual agency owner coaching
- Doing on-site consulting
- Offering online courses in agency new business and account service
Because he works with those 250+ agencies every year — he has the unique opportunity to see the patterns and the habits (both good and bad) that happen over and over again. He has also written two books and been featured in The New York Times, Entrepreneur Magazine, and Fortune Small Business. The Wall Street Journal called his blog “One of 10 blogs every entrepreneur should read.”
To listen – you can visit the Build A Better Agency site (https://agencymanagementinstitute.com/drew-mclellan-solocast-episode-16/) and grab either the iTunes or Stitcher files or just listen to it from the web.
If you’d rather just read the conversation, the transcript is below:
Table of Contents (Jump Straight to It!)
- Think Long and Hard
- Does the Employee Really Want It?
- Sell Your Shares, Don’t Gift Them
- Do They Actually Have the Skills to Be an Owner?
- Understand What You’re Giving Up
- How Will the Buyout Be Funded?
- Map it Out, Don’t Go into it Blind
If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Agency Management Institute’s Build a Better Agency podcast, presented by HubSpot. We’ll show you how to build an agency that can scale and grow with better clients, invested employees and best of all, more money to the bottom line. Bringing his 25-plus years of experience as both an agency owner and agency consultant to you, please welcome your host Drew McLellan.
Drew McLellan: Hey there, Drew McLellan here with another episode of Build a Better Agency. Welcome. If this is your first podcast, glad to have you. If you are a regular listener thank you very much for sticking with us and I’m grateful for your emails and notes about the value you find in the podcast.
Today’s podcast is one my solocasts so unlike my normal episodes where I have a guest, this is just going to be you and me chatting about something that’s come up a lot in my conversations with other agency owners and it’s been on my mind and I want to make sure that it’s on your mind as well.
I can’t tell you how many times a conversation with an agency owner starts a little like this: “Hey Drew, it’s … ” so and so. “I want to talk to you because I have this incredible employee … ” We’ll call him Bob. And “Bob is, he’s probably the best account supervisor I’ve ever had and I’m really worried that I’m gonna lose him. I need to figure out a way to get some golden handcuffs on Bob, so what I’ve decided to do, so I’ve decided to offer Bob equity or an employee partnership in the agency,” and at that time I say, “Whoa whoa, whoa. Hang on a second.”
#1: Think Long and Hard
So I get that a lot of you have key employees that, it makes you very anxious to think that they might leave you someday and I get that you want to set the hook so that you can keep them and know that they’re going to stay there because they are part of the glue that holds your agency together.
They probably … Regardless of what role they play in your agency, they have a lot of relationships internally built, they’ve got a lot of trust built, your clients probably love them and you don’t want to lose him. I totally get it but I want you to think long and hard about whether or not partnership is the right way to set that hook.
There are other ways to incent them to make a long-term commitment to you and I’m happy to have that conversation or I’ll do a solocast about that down the road. But today, what I want to talk about is, what you need to think about in terms of if you are thinking about adding a minority partner. Most of you out there listening are S-Corps or partnerships or LLCs. So all of your partnerships are going to look pretty much the same.
If you are the rare C-Corp, you have a different option. You can offer a different class of shares, a non-voting class of shares. That in essence, the only way that those shares are actually of value to the employee are if there is a triggering event, which translates to if you sell your agency they get whatever percentage that they are due to them because of how many shares they own.
But that only is true for the C-Corps. If you’re any other structure, then a partner is a partner is a partner and they get to vote, they get to see the books and so I want you to slow down and I want you to listen to some of the issues that I have helped agency owners walk through as they are considering this.
Let me be very clear. I am not anti-partner. I am not anti-minority partner. I have a lot of agencies in the networks that have a minority partner that contributes in a significant way to the agency. And they are poised to either be the succession plan because often that’s the other reason why you want to make someone a minority partner, is because you believe they are your buy-out. They are your future. And in some cases that’s actually what’s happened.
I’ve walked agencies through that transition. So I know it can work and I know it can work beautifully. But I’ve also seen it crash and burn. So let’s assume that you have an employee that you would like to make a minority partner, either because they are your succession plan or you want to set the hook, or some combination thereof.
#2: Does the Employee Really Want It?
The first thing you need to ask yourself is, do they really want it? The truth is, that until you have sat in the seat you have no idea what it’s like to own a business or own an agency. Think back to when you started the agency. I have often, you’ve probably heard me say it.
When I started my agency, I was the perfect combination of arrogant and ignorant. I was 30 years old and I thought how hard can it possibly be and then all of a sudden I owned an agency and I learned very quickly just how hard it was.
So first of all you have to figure out if they really want it and that starts with, do they really understand what ownership means? Do they understand that if you guys have a bad quarter or a bad half year that they may be writing a check into the business to cover the losses?
Do they understand that they may have to sign legal documents that put their home or their savings at risk? You have to make sure that they really understand the risks of owning a business and that they understand what you are going to expect of them as a partner. They don’t get to show up in the same way as they did the day before they signed the partnership papers. Now they have to show up differently.
Are they already demonstrating to you an ability … Actually just an innate ability, to think in the bigger picture, to think about the agency first and themselves or their department second? One of the things that I think a lot of owners make a mistake in doing, is that they offer to give or gift stock to the minority owner to get them started. Well, okay, let’s think about this.
Unless you really sit down and explain to them that the gift comes with some pretty big strings, the risks, the financial fiduciary responsibility, the fact that they might have to write a check, who’s not going to take free stock? That is not a good assessment of whether or not they want the gig.
#3: Sell Your Shares, Don’t Gift Them
So I’m a firm believer that even if it’s at a discounted price or even if it’s in a payment schedule that is ridiculously easy for them to cover, you want to sell them their shares. You don’t want to gift them their shares. The other thing I want you to think about is many of you have two or three great employees that you think would be good minority partners. I’ve seen agencies struggle with this and I have seen a lot of arranged marriages that have gone very, very bad.
You cannot force people to choose to go into business with each other. You can’t dictate to them who their business partner’s going to be. So if you have multiple employees that you’re thinking you would like to offer ownership to, I’m going to tell you, you’ve got to pick a horse.
You’ve got to pick the one that you think actually, A, has the best shot of actually running your agency well and making it profitable, especially if they’re your succession plan and they’re going to be buying you out over time and B, the one that you think is most serious about ownership. That’s the horse you have to bet on.
And once that person is a partner and they’ve been a partner for a while and they understand what it actually means to be a partner, they understand the kind of decisions that you have to face, they understand the financial reports that they have to look at and understand … They really get what ownership is all about.
Then, I think it’s appropriate for you to say, “Hey Bob, I was thinking that we would offer Lynn a minority partnership too. How do you feel about her as a business partner?” Because remember guys, this is not just a nicety. This is not just something on paper.
This is a … If you offer someone stock, you’re stuck. If you offer someone stock, you are married and just like a marriage is difficult to unravel and unroll if you decide to get a divorce, believe me, I have watched many majority owner partners try and unravel or unroll a minority partner out of the business who turned out to be … Yes, they were a great employee but they were not a great partner and in many, many cases what happens is they end up losing that employee altogether.
And even if they get to keep that employee, there’s a lot of hurt feelings and a lot of damage control and a lot of fixing that has to happen before that relationship is healthy again.
But if you have multiple people, you really do have to do this in a sequential order where you are offering partnership to one person, letting them settle in and then letting them participate in the decision of whether or not someone else also becomes a partner, especially if you think that that group of people, typically they’re 10 or 20 years younger than you, that they are going to form some sort of bond and some sort of a great team that is eventually going to buy you out and then they’re going to continue on with the agency.
Especially in that scenario, that first partner, that best bet partner has a right to decide who they go into business with. This is a pretty complicated and important decision, so there’s plenty more for us to dig into, but first let’s take a quick break.
One of my favorite parts of AMI are our live workshops. I love to teach. I love to spend two days immersed in a topic with either agency leaders, agency owners or AEs in our AE boot camps. But most of all I love sharing what I’ve learned from other agencies from 30 years in the business and all the best practices that we teach.
If you have some interest in those workshops, they range from everything from money matters, which is all about your financial health of your agency to best management practices of agency owners to new business to AE boot camps and a plethora of other topics. Go check out the list and the schedule at agencymanagementinstitute.com/live training.
#4: Do They Actually Have the Skills to Be an Owner?
The next thing you need to think about is do they actually have the skills? You and I both know that it is very different to be great at your job at an agency as it is to be a great agency owner, to have the insight and the ability to mentor people, to go out and sell and get clients, to negotiate contracts. All of the things that you do every day and odds are you’ve been doing for a long time so you take it for granted.
Those are probably not skills you started with. So odds are, the reality is your minority partner-to-be, that prospect of a partner, probably does not have a lot of the skills they need to be a great business owner. So guess what? Now you have to figure out before you offer them a partnership how you’re going to teach them those skills.
Who’s going to teach them? Is that you? Is it a CFO inside your organization? Are you going to have them participate in a young owners’ group? What are you going to do to make sure that they understand what it is to run a business and they learn and develop the skills that it takes? And the responsibilities and the responses that it takes to effectively run a successful financially viable business.
Then the other question inside that you need to think about is, how long is it going to take them to learn? So let’s say your exit ramp is about five years. You want to be out in five years. Do you really think someone can go from zero to 60 in five years and be ready to run a business completely without you in that time?
So if you really do have a succession plan in mind where you want someone to buy you out, be thinking about how far do you need to roll back your plan if you’re going to get out on time. In most cases, 10 years is about the amount of time that you want to be grooming someone. By the way, where they know you are grooming them.
Where you’re grooming someone to take over for you so you can step away, confident that they will be able to keep the wheels on the bus long enough that you get paid whatever it is you sold the agency for. Then the next thing you need to think about is, do you really want a partner? Again, I have seen some amazing partnerships. Partnerships where they literally are the yin and yang of each other and the business is so much better because they’re both there or three of them are there or four of them are there.
#5: Understand What You’re Giving Up
So don’t get me wrong, partnerships, no matter how many people around the table that means, can be a very, very good thing for your agency. But, if you’ve run the joint for a long time all by yourself you need to stop and really think about what you’re giving up by adding a minority partner.
For most of you, again, if you are not a C-Corp, they are a voting member and they get to do and see everything that you get to do and see. That means they get to see the books, all of the books and when owners say, “Well, can I make someone a minority partner but only show them the financial reports that I want to?”
No. You can’t do that. They own the business just like you do. So they get to see the books. They get to share in all of the decision-making. You don’t get to just decide something anymore.
Even if they only own 1%, they still have a voice and I will tell you that my observation is that most minority partners don’t really think of themselves as a minority partner, they think of themselves as a partner. And in some cases that’s awesome because that means they’re bringing 120% and they are growing and driving the agency to new heights.
In other cases, it means even though I only own 5%, I think my opinion should be as important as yours, majority owner, and I’m going to be a stick in every conversation and I am going to slow us down and I am going to debate and I am going to want to be heard and you know what? I have a right to that because I do own part of this business.
So you have to decide if you’re ready for that. You also need to make sure that you’re ready to show them and share the profits.
Are you really, really ready to have all of the autonomy that most of you love as a business owner, are you ready for that to go away and all of a sudden for you to have to share all of that? The next thing you need to think about is if they are going to become your partner, how in the world are they going to pay for it? You know what you pay your people.
Odds are they are not going to be able to stroke of check for a half a million dollars or a million dollars. Or in most cases, $10 or $20,000. So part of what you’re going to have to do is you’re going to have to figure out how they pay for it and guess who gets to finance that? In most cases it’s you. It’s a deferred bonus program or there’s lots of ways to do it.
#6: How Will the Buyout Be Funded?
So I’m not saying it can’t be done but don’t think for a minute that all of a sudden they’re going to come in with a checkbook and write you a check. So how they’re going to pay for it, how is it going to be funded, how are we going to support that through the business? Does that mean that the profits from every year get divided up in a different way?
And how long are we going to have to do that until either I step away and I’m just taking my buyout percentage, whatever that is, or that they own enough shares that we can stop for awhile until that succession plan gets a little more active? One of the things I’ve seen a lot of agency owners do is they move down the finish line of this, is they jump the gun, and there’s a fine line here.
So I had one agency that had had sort of a casual conversation with a couple people in the shop about did they have an interest in owning the shop. And of course they said “Yes, absolutely, I have some interest,” but that was really as far as the conversation went.
So then the owner did her due diligence and she put together the plan of how they were going to buy her out and all of that and she thought it was great. I thought it was very fair, it was very reasonable and she sat down with her employees who were her heir apparents. Once she laid that plan on the table and when they realized what it actually meant to own a business and what they were going to have to come up with in terms of cash, every one of them said, “Thank you, but no.”
And that owner, who thought that she only had a few years left before she was out the door had to very quickly scramble and come up with another solution, and it was not a solution that she was that happy with. So you can’t wait too long to give them specifics but once you start giving them specifics and once you start having that conversation, you’re in it with them.
#7: Map it Out, Don’t Go into it Blind
So I will tell you this, you’ve got to have it mapped out. You can’t expect them to come back to you with ideas of how they might buy you out. You’re going to have to have it all mapped out for them. You’re going to have to invest the money, you’ve got to do the valuation. You’re going to have to have the plan of how you’re going to fund their buy-out, both while you are still active in the business and then how they’re going to pay for the rest of it after you’ve departed the business, if that’s part of your plan.
Then you also have to anticipate all of their questions, because if you don’t know the answers to those, all of a sudden you could find yourself in a really awkward conversation or you could go down a road that is too narrow to turn back around and you can’t get back out but it’s not a road you want to be down.
A lot of this depends on how open you are willing to be with them on the front end because guess what? That’s setting the pattern for how you’re going to be as a partner, as you move through the process. So again, I’m not saying it’s a bad idea. I’m saying it is an idea that is fraught with both opportunity and serious peril for your agency and I want you to think long and hard about it and I want you to plan.
If you are 50 years or older and you’re listening to me, you need to know what your plan is, because let’s say you really do want your agency to live on and you look around your shop and there’s no one there who you believe has the capacity to run a business. Well you know what? You need to go looking for that person. You need to hire that person if you want an internal purchase.
Or you need to start shopping for potential buyers or mergers with maybe some younger partners of other agencies. That’s a whole different podcast. But my point is you can’t wait till you’re 65 to start thinking about this, guys. You need to start planning this out and you need to be thinking about it far in advance of the last day that you want to be in the office.
Partnerships can be a great thing and a minority partner can be a boost of energy and new knowledge and a passionate commitment. It can do all the things that you think and want it to do but I have seen way too many cases where it was absolute disaster because either the shares were gifted and the person didn’t really understand what ownership was about.
The boundaries weren’t clearly defined and so everybody assumed they understood what roles were but a lot of assumptions were made and a lot of feelings got hurt. The owner all of a sudden was trying to have their cake and eat it too by having a minority partner but not really being fully transparent with the books or the profit or those sort of things.
Or poor kid gets in the business, buys in, whether they struck their own check or the company pays for it, and they realize they have no idea what they’re doing and you the majority owner, are too busy to take the time to teach them all the things that you had to learn to be successful like you are today.
So I guess my point is, it’s a fine strategy. For many agencies it was the right strategy, but don’t go into it blind. Don’t go into it quickly and make sure you know exactly what you’re getting into long before you open your mouth and have that first conversation. There are other ways to keep great employees.
Don’t automatically default to a minority partnership or an equity share because that is a lifelong commitment that you are about to make to someone else. So be careful if you open that door.
That’s my thought on the topic. Happy to chat with you about it more if that would be helpful. You guys know how to reach me. I’m [email protected]. If you have not subscribed to the podcast, please make sure you do that so you do not miss an episode.
We come out with a new one every single Wednesday and I will be back next week with a great guest who is going to have something eye-opening to share and hopefully will help you build a better, stronger, more profitable agency that serves you and your family and your team at the office and your clients and your community in the ways that you want it to. Alright? I will catch you next week.
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