5 mistakes agency owners make when selling internally with Drew McLellan

Speaker 1:

It doesn’t matter what kind of an agency you run. Traditional, digital, media buying, web dev, PR, whatever your focus, you still need to run a profitable business. The Build a Better Agency Podcast, presented by White Label IQ, will show you how to make more money and keep more of what you made. Let us help you build an agency that is sustainable, scalable, and if you want down the road, sellable. Bringing his 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McClellan.

Drew McLellan:

Hey, everybody, Drew McLellan here from Agency Management Institute. Welcome back to the podcast. Thanks for coming back. This is one of my solocasts, so as you know what that means is no guest, just you and me hanging out, talking about something that I want to make sure that you are thinking about. Before I get into today’s topic, I am going to give you just a couple housekeeping things. Number one, remember that at every solocast I give away, through a drawing, a free seat at one of our live or on-demand workshops. And here’s how you qualify, here’s how you need to get your name in the hat. All you have to do is go wherever you download the podcast and leave a rating and review, and then take a screenshot, because your username may or may not give me any clue as to who you are or where your agency is, so take a screenshot and email it to me at [email protected], and your name goes in the hat. And your name stays in the hat until you win.

And as you might imagine, we don’t have 10 bazillion names in there, so sooner or later, odds are good that you’re going to win. So spend the five minutes because our workshops without member discounts and all the other stuff, remember, our workshops are around $2,000. So you can win a $2,000 workshop, two days of complete immersion learning, for free, and all you got to do is leave a rating and review. So that seems super easy to me. So this week’s, or this week’s, this month’s winner is Bob Abate, Bob Abate Marketing out in Connecticut. So Bob, congratulations, thanks for your review. It was a couple, I think, a year or so ago, but thank you for doing that. Congratulations. You have won. I’ll reach out by email as well to let you know that that’s the case. But seriously, everybody, this is easy. This is shooting fish in a barrel easy. Just do it for five minutes and sooner or later, you’re going to get a $2,000 prize. Who doesn’t love that?

So the other thing I want to tell you about is I want to tell you about a resource that we have on the website that actually is related to the topic I want to talk to you about today. So about 15 years ago, I went through an exercise that helped me think about the future I wanted in terms of work and life and all of those things. When I finished the exercise, I looked at it and I was like, “Well, my life doesn’t look anything like that. I must have done it wrong.” And my coach at the time said, “No, you didn’t do it wrong. That’s what you aspire to. Now the question is how do you get from where you are to where you aspire to?”

And I’m telling you, while I would love to tell you I put together a plan and I worked the plan, that’s not actually how that worked. Things just started presenting themselves. Opportunities, new chances, doors closed that maybe I would have pounded on before that I just walked by, and new doors opened that I was like, “I’m going to walk through that door,” because I had a vision of what I wanted, so it was easier to spot these opportunities. And I will tell you today, when I read what I wrote 15 years ago, and I look at my life, they are spot on. Spot on. Some of the names are different. I made up people that I wanted in my world and I named them, and I didn’t get those right. But other than that, I’m telling you, spot on.

And I don’t believe in… I mean, I know there’s The Secret and all of that, and I’m sure there’s some of that involved, but what I honestly believe is once your subconscious knows what you desire, it looks for opportunities to deliver that. That’s exactly what happened to me was I began to be able to create the life that I wanted because I knew what that life looked like. So anyway, I’ve taken and I’ve built an exercise for you, a self-directed exercise, and it’s going to take you maybe four, six weeks to do, if you give a little bit of time in between each question. It’s very thought provoking. You need to kind of soak on it a little, so it’s not something you’re going to do in a weekend. But go check it out. So go to agencymanagementinstitute.com/myfutureself, and we call it a mini course. I think you’re going to really enjoy it. I think you’re going to be astonished at the clarity that you get, if you actually do it and do it well. So I hope you’ll take advantage of that.

All right, let me tell you what I want to talk about today. At AMI, we partner with a lot of agency owners, as they are beginning to think about their exit strategy, their succession plan. We start with that with helping them think about how they want that last chapter to wrap up. Do they want to sell to an outside buyer? Do they want to sell to an internal buyer, to an employee? Do they want to just close the door and use the agency as an ATM machine until they do that? All of those are perfectly fine answers. Absolutely fine. And for each of you, it’s going to be different, but you need someone to walk you through that thinking to figure out what is… To paint that picture. So we do that work.

And then for the agency owners that want to sell internally, they want to sell to employees, we actually have a whole soup to nuts program where we come alongside them, we identify the employees, if they haven’t already done that, we assess everybody to see who’s really qualified, who has the chops, the skill set, the motivations, the behaviors, the desires to actually own an agency, because as we know, that’s not everybody. We then can do a valuation and we not only do the numbers valuation, but the softer side of the valuation, the things that influence the multiplier. And then we put together a plan of how to add an increased value to the agency. We facilitate the conversations with those employees to see if they really are interested. We If they say yes, we start coaching them to get them ready to shift from employee to owner. We work with the agency owner to help them plan the future after they walk away from the agency, because otherwise they don’t walk away, they muck up the deal by not really being able to let go.

And we’ve got it all. We mediate the deal, we’ve got the lawyers, we’ve got the finance people. But my point is, we have seen this over and over again. And there are some mistakes to get made every single time if you’re not careful. So what I want to do in this solocast is talk about the five biggest mistakes that an agency owner makes when they are selling their agency internally. And then my next solocast, I’m going to talk about the five biggest mistakes that the buyers, the employees make when they are buying their boss’s shop. So I want to bookend those for you in this solocast and the next solocast. It would be too long for me to do all of them in one, so I’m going to do them as separate solocasts.

So let’s jump in, the biggest mistake. That’s not true. It’s not the biggest mistake, it’s the first mistake that agency owners make is they gift their employees shares. So that seems like a really nice thing to do. You want to reward them for being a great employee, you want to set the hook to get them to want to own more of the agency. I understand it all. But it doesn’t work. And here’s why it doesn’t work. Someone has to think long and hard about if they actually want to own an agency. This is not a gig for everybody. So you’ve got to be sure that your people really want it, and they have really given it the thought that it requires before they just take the shares. And when you say to somebody, “Hey, I want to give you 2% of my company or 5% of my company,” no one’s going to say no to that. No one’s going to say no to that.

And they don’t actually think about what it means. They might ask about the tax implications or something else, but they don’t really understand it. And they also don’t really understand that owning 2%, while it’s a lovely gesture, doesn’t actually get them any voice at the table or anything like that in a legal way. I mean, yes, they have a 2% voice, but you have a 98% voice. So of course they’re going to say yes, and they’re going to take it, but they have not thought through whether or not they genuinely wanted to own the agency. Got to have skin in the game. They’ve got to pay you something for those initial shares. We can deeply discount it, we can put together a payment plan that makes it super easy. So we can remove all the friction of them buying it, except for the decision.

When I have to write a check, when I have to go home and discuss with my partner that I’m going to write a check for 5,000 or 10,000 or 20,000 or whatever the number is, now it’s a decision. Now I have to decide, am I willing to trade my money for this opportunity? And that triggers the thought provoking conversations and decisions that you really, really, really want your buyers to have on the very front end. Why? Because you want to know from the very beginning that they want this, that they are hungry for this, that they are willing to sacrifice for this, because all of those things are what it takes to actually run a successful agency. We have to want it. Owning an agency isn’t easy. If you don’t want to do it, and you don’t have the chutzpah to do it, and you don’t have the drive to do it, it’s not going to work.

And if you’re not willing to put some skin in the game, whether that’s hours or dollars or whatever it is as an agency owner, on the days and the months when the shop is struggling, you’re not going to survive. So this is the first litmus test to say, “Is this person wired to own an agency? Do they really want it?” And if so, great. Then let’s sell it to them, again, deeply discounted, but let’s sell it to them, let’s force them to hand me a check for those shares so we now know they’re committed. I will tell you, when I think of all the agencies I know that have gifted shares, and what the outcomes of that were, 95% of it, outcome was not great, not great at all, because they took it because it was free and who doesn’t want to own a company, at least part of a company. Sounds great. But somewhere along the way things got sideways.

And in many cases, the buyer ended up leaving the agency. And you know what the owner had to do before the buyer could leave the agency? The owner… I don’t know if you can hear that behind me, but my dog Heather is snoring, so I’m sorry if you hear her snoring, but I’m just going to keep talking over because that’s not going to stop. So here’s what happened. Before the buyer could leave the agency, the owner had to buy back the shares they had given to that employee. Can you imagine? I cannot tell you how many agency owners I had to talk off the ledge when they had to write that check. They’re so resentful and mad. And granted, they did it to themselves, but that doesn’t make it feel any better. So do not put yourself in that position, do not gift or give away shares. Again, we can deeply discount. We can do lots of other things. But let’s not give it away for free. You have worked too hard for too long building your agency for you to give it away for free. So don’t do that. So that’s mistake number one.

Mistake number two is this is complicated stuff. It is complicated in terms of just the nuances of it, the humanity of it, the emotion of it, all of the things that you have to get right. The deal itself is complicated. Do not do this by yourself. Whether you hire us or someone else, I don’t care. But hire someone who does this specifically with agencies who can walk you through the entire process, who can help facilitate all of the difficult conversations, who understands what it’s like inside your shop, who is aligned with making sure that this is a win-win for you and the buyer, that everybody benefits from this. You want to have somebody alongside and you want to have somebody that both sides trust, that can ask questions, that can hold confidences. All of that is critical.

So do not do this by yourself. You want to have not only a facilitator, but you want to have somebody who can guide you, who has the connections to help you make it easier, whether it’s the attorneys or the valuation partners or any of that. There aren’t going to be a lot of companies that can do it all in house like we can. And frankly, some of what we do in house is because we have partners, no doubt, but at the very least you want somebody who understands agency life, who is vested in making this a win-win for everyone, who is willing to have really hard candid conversations with all of you, because sooner or later that’s happening on all sides, and somebody that is willing to say, “You know what? You’re not being fair. Here’s why you’re not being fair. Here’s what we could do to be fair,” and is going to hold all of you accountable to doing this in an equitable and fair and respectful way.

So do not do this on your own and do not do this with a generic lawyer or banker who doesn’t understand agency life and who doesn’t understand how you’re going to evaluate whether or not that person can act… Somebody being able to buy your agency and somebody being able to run your agency as an owner, because odds are, you’re going to have some an earn-out, so you have a vested interest in them being successful. Those are two different things. That somebody can get financed by your agency is one thing. That somebody has the chops to actually run it as an owner and the heart to run it as an owner, that’s a whole different thing. So make sure you have a facilitator that understands that and is going to walk you through all of that and walk alongside you for as long as it takes.

And in most cases, yes, you can do it in a year. For most of you, you’re not ready to move that fast or the buyers aren’t ready to move that fast. So we’ve turned it around in, shoot, six months, at a rapid clip, and I also am working with an agency, we’ve been working with them for three years and we’re nowhere near done. So a lot of it depends on your personal timing, on the buyer’s timing, but make sure you have a facilitator that is in it for the long haul, and is going to be with you the whole time.

The next mistake that I see people make is that after the initial stock sale or gift, there’s no plan about how the rest of the ownership is processed. So you set the hook, you get somebody to say, “Yes, I want to own your shop.” And then what happens is you get back to work and you’re busy and you’re crazy busy, and you don’t have a plan for, “Okay, how much is somebody buying every year, every month? How are we facilitating that? What’s the deal?” A lot of you gift shares or sell shares, but you haven’t even really valuated the shares. The buyer knows what the share was worth when they bought it, but they have no idea how you’re going to future valuate it. There’s no discussion about when they can buy more, how much more they can buy. Do they have to buy more? If so, under what schedule?

So there’s no plan to actually transfer the rest of the agency over, over time to the buyer. And that is dangerous. You need to have worked out the deal, the structure of the deal. And again, the structure of the deal is things like, how are we going to decide what the agency’s worth? What is the formula we’re going to use? Who’s our valuation partner? How often are we going to update the valuation of this is going to happen over time? What are the elements of the deal? So what is the multiplier? How much do I have to put down? How much do I have to pay every year? Is the agency owner’s salary part of the purchase price? All of those things have to be worked out and they should be worked out on the very front end.

And then there should be a timetable that says, “Okay, every year you can buy another 15% of the agency or whatever it is.” And you map out what’s possible. You also map out from the buyer’s perspective, what they are and aren’t allowed to do. Can they skip a year? Can they skip three years? Can they renegotiate price? How long are we locked into the price? So many details. But if you don’t have that plan… Right now I have three agencies in my world that have sold shares to what is now their minority partner, but there’s no plan in place, so the owner has no idea when they’re actually going to get out. And because it wasn’t agreed to on the front end, now they’re kind of in a pickle because they have these minority partners, and what if the minority partner is like, “Yeah, we don’t want to buy anymore,” or, “We’re not going to buy anything for another 10 years,” or, “We only want to buy right now because of COVID pricing because our agency took it in the short, so we want to use that as the valuation year.”

If you don’t have all of those things worked out in advance, it just gets ugly in a hurry. And there’s no reason for this to be ugly. You guys are all from the same family. You love each other. You want them to be successful. They want you to be successful. They want to honor you and take care of you because you built this amazing agency. You want to make sure that you set them up for success, that you don’t drain the company dry. There’s just so many elements to this that you really do have to have a formal plan of how we’re going to do this before that first transaction, before either they hand you a check and they get part of the company, or you just gift it to them, however that is, you got to have a plan.

I’m sorry, but not really sorry to interrupt you because you are going to be as excited about this as I am. The workshop Selling With Strategic Insights with Mercer Island Group is back. So we have taught this workshop twice. I’d say about 70 agencies have gone through it. And the whole purpose of this workshop is to teach you a framework to build your new business pitches for either prospects, or even to upsell clients in a way that provides such great vision into your insights that you will knock the socks off of all the competitors. I will tell you that I have four agencies that have attended this workshop, that since they applied this methodology, they have landed the largest client in their history. Those 70 agencies have already landed more than $50 million of new AGI using this methodology.

I can tell you because I don’t teach much. I’m in the back of the room offering color commentary. This workshop is spectacular. So if you want to start the new year growing your business, if you are tired of coming in second, if you are frustrated that you can’t win that big account that would change the game for you, you need to be at the Selling With Strategics workshop on January 25th and 26th in beautiful Orlando, Florida on Disney property. And I promise you, this can change everything for you. I knew you’d be excited about it. All right, let’s get back to the show.

All right, so the fourth mistake that agency owners make is that they don’t have, for themselves, they don’t have a plan of how they are going to exit the business. So many of you are still super involved in the day to day. And one of the things that the new buyers need from you is they need you to get out. They need you to get out from the day to day. They need to get you out of making every decision. And there’s got to be a schedule or a plan around how we do that. So it starts with what do you want to do when you’re done? And visioning and planning that. And then it’s really about saying, “Okay, well here’s where we’re at now, where you’re 60% billable, and you’re doing the books and you’re doing this and that,” all the way to you want to run a nonprofit for shelter dogs.

We have to figure out a transition plan to get you there. And we have to get the team ready. So this is where our coaching comes in, or somebody’s coaching comes in to come alongside the buyers and say, “Okay, over the next three months, we’re going to start handing all of the financial decisions, except for these three things, whatever those are, to you. So we need to get you coached. We need to teach you this stuff. And we need to be by your side and helping you.” You can do that yourself, if you want, if you have the bandwidth to do that, or you’re going to need to bring someone else in.

But if we don’t have a transition plan for you around why you’re leaving, what you’re going to, you’ve got to have something awesome to go to. Talked about that before. How and when are we handing off responsibilities and to who? So it may not be the buyers, it may be someone else inside the company who’s… Maybe it’s your CFO who’s not a buyer, but needs to take on more of a authority role in some of the financial stuff that you normally are doing. Again, for each of you is going to be different, but you need to think through how you spend your days of the agency and how we eventually get all of that peeled off your plate and onto other plates and people are mentored and coached so that they’re good at it.

And then you need to start scheduling sabbaticals where you are gone more and more of the time, so you’re around for an emergency, you’re the safety net, but that the buyers are really starting to run the agency day to day. That is critical to you being able to actually step away or for them to have confidence to buy it. If they can’t run it while you’re still around, how in the world are they going to run it after you’re gone. So we’ve got to have this whole transition plan of easing the agency owner out of the day-to-day and the agency over time, and that needs coaching on both sides. And again, you can coach your team if you want to, if you have the bandwidth for that. But then the question is who’s helping you think that through? And that gets back to my facilitator thing. That person can help you think that through.

All right, so the fifth mistake is a mistake of the heart, and this is the one that breaks my heart when agency owners make it. You’ve been running this agency for a long time. It’s your baby. And it’s so much a part of who you are and how you self identify and how you spend your days and your nights and your weekends, and what you dream about, what you care about, that even when it’s the time to go, even when you know it’s the right time to go, it’s a loss, and it’s a change, and you need to be prepared for that. So the fifth mistake is not being prepared for that. Not having a plan. Not knowing what you’re going to do as you walk out the door for the last time, or as you start working part time or however the transition is.

You’ve got to have, as the owner, you’ve got to have something you are so excited to do and so passionate about that you are ready to walk away from this huge investment, this big chunk of your heart, which is what your agency is and your people are. To walk away from that, to do something else, you got to be excited about it. It’s got to be big. It’s got to be bold. Has to be something that you’ve wanted to do for a while. And for some of you, you know exactly what that is. You’re going to write a book or you’re going to go on a year long cruise or whatever it is. But for a lot of agency owners, they don’t know.

So what happens when you don’t have something awesome to go to and you’re having a hard time leaving what you’ve built, what happens is by accident, you become a serious pain in the neck to the buyers because they can’t get you out. And frankly, they cannot run the agency really completely until you’re out. That you’re mom or you’re dad to the rest of the team, and even though you’ve empowered the buyers to start running the agency day to day and the rest of your team sees them doing it, they still think of you as the owner. They still think of you as the patriarch or matriarch of the agency. So we’ve got to get you out. Deals fall flat, deals don’t work, agencies crumble when the departing agency owner can’t walk out the door.

So the fifth mistake is that you do not have a plan and you do not have a passion project or passion plan to move into. You’ve got to find something that you’re super excited about and that you can’t wait to get to. Because it’s going to take something with that much emotion to get you to walk away from the baby. Again, intellectually, you’re ready. You’re tired, you’ve had enough, you are 67, whatever it is, you’re ready to go intellectually. But your heart is a different story and we need to get your heart and your head in alignment, and the only way to do that is to give your heart and head something new to focus on and be excited about and something that you are ready to jump into. At least for the first few months after the transition.

Again, so those mistakes are do not give away the store. Sell shares or stock or equity, whatever you want to call it, sell it even at a gross discount. Sell it. Number two, not working with somebody to help you manage the complexity of the sale, both intellectually, both operationally, both financially, but also emotionally. Somebody who’s going to walk alongside you and the buyers and help you guys get it squared away, feel like it’s a great deal for everybody, and then, again, moving right into the third mistake. Have a plan. Know from the very beginning. Before you even exchange dollars for those that first set of shares, you need to have a plan that says, “Here’s how we’re going to do this over the next five years, two years, one years, whatever it is. Here’s how we’re going to do that.

The fourth mistake is not having a transition plan for the owner. In other words, how do I go from what the owner does today to having the owner be irrelevant? Because oftentimes that’s a huge chasm. So a lot of times you’re the only one who’s doing biz dev, or maybe they have the relationship with the biggest client. We have big things to solve in this part of the work, and helping you identify what all those are, and then actually timelining it out and putting action plans against it will make you feel much better, it actually works better, and it certainly encourages the buyer, who in this case is probably still a minority partner, if they’re a partner at all, it encourages them that you are going to get out.

Which leads me right into mistake number five, which is if you don’t have a passion for something new, if you’re not excited about where you’re headed, it’s really hard to leave the baby. And when you don’t leave the baby after you’ve sold the agency, or as you’re leading up to selling the agency, that can ruin the deal. Absolutely, it can ruin the deal. So those are the five mistakes. There are many more mistakes, and there’s also a lot of you are doing this well and right, so I’m not suggesting that everybody’s broken. I’m just saying these are pitfalls that you need to avoid as you begin to think about selling your agency. And by the way, you should be thinking about this 10, 7 to 10 years out, that you have kind of a plan in your head of what it is, and we should be actively working on it five years out. And maybe we get it done sooner. And it’s the royal we, whether it’s us or somebody else. You and your facilitator, maybe you get it done sooner. But you sure want to have more runway, not too little runway.

All right, I’m hoping this was helpful. I am grateful as always that you spend the time with me. Happy to have a conversation about any of this. If you’re in this position and you’ve made some of these mistakes and you want to talk about how to get out of those mistakes or how you course correct, happy to have those conversations. I’ll be back next week with another guest and a huge shout out, big, big shout out to our friends at White Label IQ. As you know, they are the presenting sponsor of the podcast, and also the presenting sponsor of the Build a Better Agency Summit, which I would be remiss to remind you is May 24th and 25th. We’re already one third sold out, so if you want to join us in May, please grab your ticket soon because I’m not sure when we’ll sell out, but I do know we’ll sell out. So please grab your ticket and join us.

But anyway, White Label IQ, presenting sponsor for both the podcast and the summit. And as you know, they work with lots of agencies helping them do web dev, design, PPC, and they just crush it for agencies. So go check out whitelabeliq.com/ami for a special deal, some free hours for you, to give them a little tire kicking. Would love to see you do that. Good, good people and do great work. So hopefully you can check them out and many thanks for me to them for making sure we can come and see you every week. As always, super grateful that you’re here. Thank you for hanging with me today. Hopefully this was thought provoking. And again, wherever you are in the spectrum of this, my goal, my job as a teacher is to help you avoid mistakes. So if I can help any of you avoid one or two of these mistakes, that feels like a really good worthwhile investment of my time and hanging out with you today, so I’m counting on that being the case.

If you’re trying to track me down, you know you can find me on social pretty much everywhere. My username or ID is always just drewmclellan, all lower case, all one word, and then you can always shoot me an email [email protected]. So I’ll be back next week, grateful for all of you and I’ll have a guest, so I’ll see you then. Thanks for listening. Thanks for spending some time with us. Visit our website to learn about our workshops, owner peer groups, and download our salary and benefits survey. Be sure you also sign up for our free podcasts giveaways at agencymanagementinstitute.com/podcastgiveaway.