What is your agency worth? How do you know? What’s involved in an agency valuation? Once you understand your agency’s value, you can decide what tactics you need to take to improve that number.
Staffing, technology, training, expansion and compensation. These are just a few of the elements that play a role in the valuation of your agency. My podcast guest Henry Corona has been providing agency valuations, consultation on M&A deals and coaching agency owners on how to increase the value of their shop for decades. He has an extensive knowledge of agency value and helps owners focus in on what they need to be looking at if they want to sell somewhere down the road.
Henry and I help you make sense of it all with:
- Henry’s transition from the film business to the advertising business
- Mistakes agency owners make that hinder their ability to sell their agencies
- Where agencies need to be investing
- Why tracking hours is critically important
- What to do about employees that cost your agency money
- Why your agency should have a profit sharing system
- Understanding your agency’s value and what it means
- AGI numbers you need to know
- What diminishes the value of an agency
- Charging brain surgeon prices vs. charging nurse prices
- Training clients so they don’t feel like they’re getting the “B Team”
- What agency owners can do right now to improve on the ideas from this episode
Henry Corona graduated from Grinnell College in Iowa, moved to Los Angeles, and earned an MA in Economics from UCLA. He worked as an Economist for the Rand Corporation, and while at Rand, Henry earned an MBA in Finance & Marketing from USC. Upon graduating, he joined the M&A department of a conglomerate.
He went to work for Lucasfilm Ltd. in various financial management positions during the first Star Wars and Raiders of the Lost Ark film series. His experience included cash and investment management, comptroller for profit sharing, merchandising, publishing and music. Following Lucasfilm, Henry worked in various film and entertainment companies including 20th Century Fox and New Line Cinema.
He went into the Advertising business by working for Dave Martin, founder of the Martin Agency, and has worked in financial and transactional management in marketing, advertising, communications technology ever since. His experience in marketing communications has included mergers & acquisitions, business valuation, and serving as CFO for ad agencies, tech start-ups, film and video production companies, and other communication technology businesses.
To listen – you can visit the Build A Better Agency site (https://www.agencymanagementinstitute.com/henry-corona/) 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:
- Agency Owners Underinvest in their Own Agencies
- Understanding Your Agency’s Value Using Metrics
- Tactics for Impacting Your Bottom Line Immediately (Action Steps)
If you’re gonna take the risk of running an agency, shouldn’t you get the benefits, too? Welcome to Build a Better Agency, where we 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 expertise as both an agency owner and agency consultant to you, please welcome your host, Drew McLellan.
Drew: Hey, everybody, Drew McLellan here with another episode of Build a Better Agency. Today’s topic is one that every agency owner is thinking about or should be thinking about. And it’s all about how to build your agency, so it brings more value to you while you own it. And also how to build more value in your agency so that when…if and when you wanna sell it, you have an asset that is worth something to buy to a buyer.
All right, let me tell you a little bit about our guest. So, Henry Corona worked as an economist for the Rand Corporation, and while he was there he earned his MBA in finance and marketing from USC. He then joined the M&A department of the conglomerate. After that, he went to work for Lucasfilm Limited, worked in various financial management positions there, during the first “Star Wars and Raiders of the Lost Ark film” series. I’m gonna avoid all temptation about asking about those things because we don’t have time. But I am sure there are some fascinating stories there.
His experience included cash in investment management. He was the comptroller for profit sharing, merchandising, publishing, and music. After Lucasfilm, he worked in various film and entertainment companies including 20th Century Fox. And then he found his way into our business. So, he went into the advertising business by working for Dave Martin, founder of the Martin Agency. And he has worked in the financial and transactional management for marketing advertising communications technology firms ever since. He has a depth of experience in marketing communication agency finances including…and this is where we’re really going spend a lot of our time today, mergers and acquisitions, business valuation, and has served as CFO for ad agencies, tech startups, film and video production companies, and other communication technology businesses.
What we’re gonna focus on today is Henry’s extensive experience in M&A, the valuation of agencies, and understanding your agency’s value. So, he’s gonna talk to us about how that used to be and how it is today in today’s market. So, Henry, welcome to the podcast.
Henry: Thanks, Drew. Glad to be here.
Drew: So, from film to advertising. Was that a big jump?
Henry: No, it wasn’t. It was an easy transition actually because as in the film business, advertising and communications requires…I would say a singular vision at times from the professionals who provide the service. And they have to believe in what they’re saying, they have to think what they say is right. And if they don’t have a vision, which means they don’t have an ego, their clients aren’t gonna believe them and aren’t gonna wanna follow their advice. So I’ve spent my entire…essentially my entire professional career in the financial management of professional creative services. And there’s a very blurred line between film and entertainment than marketing communications.
Drew: So, what you’re saying is in every agency owner hides a little George Lucas?
Henry: Yeah. And many do and many see the far horizon and are driving for it. And other cases I think there are probably many of these…their vision is more on the near horizon. And they kind of stick to the knitting, do their business and don’t think too much beyond that. And many are very successful with just that kind of limited focus.
Drew: But isn’t the idea of sort of sticking to their knitting as you say, also a little bit risky in terms of if you’re building something for the future?
Henry: I think when you spend too much time on the near-term issues, you lose sight of the long-term options or opportunities. Doesn’t mean you’re gonna make any less money or maybe. But a lot of agency owners that run small profitable agencies are doing very well and they’re quite content with that kind of focus, or that order of magnitude…maybe that’s the way to put it. And so, in those cases the way they look at choices is very different than if somebody…I’ve spoken, I know an agency owner who…just his view is he needs to be a billionaire and he wants to build an agency that can make that happen, literally. And identify…won’t identify him. But he’s driven and that’s what he’s doing.
Agency Owners Underinvest in their Own Agencies
Drew: So, when an agency owner comes to you and they say, “Henry, I’m ready to hang up my spurs, I’m ready to think about selling my agency.” What are the common mistakes that you have seen them make? So, when you dig into their finances, you say either out loud or in your head, “If you’d only come to me five years ago this…” Fill in the blank, “This wouldn’t be the case today.” What kind of mistakes are agency owners making today that will impact the potential to sell their agency five years from now or 10 years from now?
Henry: Many don’t invest in the agency.
Drew: And tell me what you mean by that.
Henry: Well, if you are managing an agency and you wish to be prudently…fiscally prudent, you are going to try to hire behind revenue. You’re trying to get the account first and then you hire the talent. And you are gonna be very measured in the way that you spend your investment dollars within the agency. That means that you keep, you bring more to the bottom line and you take home more. And so, for the time being, in the interim, at the current time, they’re making a very nice living and they’re very happy with the boat, or the house on the lake or at the beach or wherever it is. And they’re content with that because it’s what works for them, so they lose focus. They don’t invest. Now by investing, it’s sometimes you have to buy the talent. That isn’t the panacea. That doesn’t always work, so there’s a lot of risk involved. But if they’re not investing then the agency isn’t growing unless it’s very fortunate. And it stumbles across some large accounts. Because you’re not building…if you’re not getting bigger account, if you’re not building your business then you’re pretty much destined to stay right where you are.
Drew: So, one of my big mantras is that agency owners need to be spending at least 50% of their working hours on new business. I think one of the reasons why that often doesn’t happen is because to your point they’re in essence short staffed. And so they have to be sort of a worker bee as well as the agency owner. And so, what often gets neglected is that sort of long range new business growth and planning. Other than bodies that allow the agency to focus on the things he or she needs to focus on, where else should that the agency be investing if some day the owner wants to sell the business?
Henry: Oh, gosh. I think it depends. I have to stick to generalizations because I think every circumstance is different. I think, you need to be up to date on technology. I think you need to understand sort of where the new directions are going and which directions the new technology development is going. And you have to be measured in the level of investment you make in any one direction. I think there’s much more new…do you remember, maybe it was 10 years ago the term new media?
Drew: Yup.
Henry: And everybody thought…well, let’s say that, all of this new technology was all gonna develop and it was gonna blossom and somehow we’d all grow into it. And so, some of us did and some of us didn’t. So, what I’d say is, you have to be careful in hiring talent because it isn’t easy to make … the ramifications of a mistake when you hire personnel are significant. You have to be careful when you invest in technology. Although those aren’t as big as having hired the wrong creative director, sometimes they are. Now, you’re familiar with software Salesforce, right?
Drew: Sure, yep.
Henry: Okay. The consulting firms that support Salesforce make more money than Salesforce does selling the software.
Drew: Well, I think that’s why a lot of inbound agencies are making hay right now with the HubSpots and SharpSprings and all of that of the world, because they’re doing in essence that, right?
Henry: Yeah, it’s a different form of it. And Salesforce is a magnificent piece of software and I worked in agencies that use it successfully but not everybody knows how to do it, and they don’t understand the ramifications of the commitment they make when they take that on. There’re some kinds of accounting software that make a great deal of sense on a project management basis, but make less sense when you extend them to the general financial books. You know, your general financial statements begin to have a different…have a limitation that you didn’t really anticipate. So, your question was where do they need to invest? And I think first of all we say, they need to invest carefully in technology and anticipate the personnel needs properly.
Drew: Yep. I think another place that agencies under-invest often is in training, and not just for the staff but for the agency owner as well. If an agency owner doesn’t keep sharpening their own saw by surrounding themselves with peers or attending workshops with other agency owners and learning from people who are doing what they do, which is tough in a very secretive confidential business. I think that’s another place where agencies often underinvest, don’t you think?
Henry: Yes, I do. And I think in… Just to extend your point about management, as an agency grows the way that it manages the throughput of the creative product changes. And some agencies grow to a certain point but they’re using an antiquated process, so that it becomes cumbersome and their touch…it used to be … you can’t generalize about this as easily as you used to be able to, but I worked with an agency that preached 10 key points. And basically they ran through it’s how the business…how we do your work, how we produce your work. And it was very clear and I thought that was really admirable. But they actually had about a 125 touchpoints for a piece of artwork for…
Drew: Holy buckets. Right.
Henry: And so, the owner said to me, “All right. I want you to streamline this. I think we’ve got too many touch points here.” And they had grown to a size, they were around 17 million HEI at that point. And he said, “I need to streamline.” And so, I started with the production manager and I said, “I understand you have 125.” No, no, no, we really don’t have 125. And I said, “Oh that’s good news.” He says, “No, we have 147 touchpoints.”
Drew: Yeah, agencies often over-complicate process. I think sometimes we forget that clients wanna see the baby they don’t necessarily wanna participate in the labor.
Henry: It’s a good way to put it, yes. But to put your original question to bed, you make investments, you make careful investments and in personnel, and you have to be very prudent in taking and when you assess them. You have to invest in the right technology and you have to do things that expand your ability to handle larger accounts.
Drew: Before you have the account.
Henry: Before you have the account because they have to believe that you can do the work before they give it to you.
Drew: I think that’s a tough thing for agency owners. They’re so bottom line focused. I think particularly coming out of this recession they’re so sensitive to overspending on staff that oftentimes…they’re basically starving themselves on staff. And unfortunately, then putting an agency owner in the position of having to be a staffer as opposed to the leader.
Henry: Yes. And the other part too is that sometimes they’ll take smaller accounts because they’re used to doing smaller accounts, or they were used to five years ago when they were a smaller agency. But then if they don’t understand their overhead and how much each labor hour has to produce, they can often go ahead and take, so they get the mall account from some larger management company. But then they start picking up the individual tenant retailers, and everything goes to heck in a handbasket because…
Drew: Right, every dollar is not equal.
Henry: No, and so you know, I think that the 80/20 rule sometimes it’s even a 90/10 rule, where 10% of your accounts are generating 90% of your business. Which means that if you lost half of them, if you resigned half of them, you might be much better off.
Drew: Unless it’s the wrong half.
Henry: Unless It’s the wrong half.
Understanding Your Agency’s Value Using Metrics
Drew: Which is why I think a lot of agency owners take on the smaller accounts. It makes them feel less at risk even though perhaps is not the case. So, you were talking about the cost per labor hour and I know that that’s something you work with your clients a lot on. So, talk to us a little bit more about how an agency owner should look at that number and figure out that number? And how should they track it to make sure that they are on track?
Henry: The hourly rates are…for 20 years now agencies have been saying, “We want a value price. We don’t wanna price just on the hours, because we want a price…we wanna be paid on the basis of the value we provided.” And so, there was a kind of a skewing away a little bit from hourly, from time sheets and things and that kind of tracking. But I think that it makes a great deal of sense for an owner to understand clearly what his total non-productive overhead cost is, and to allocate it properly to all of the staff, the productive staff. And then to take a look at the balance, I mean, if he’s got more… what are the numbers? How many people are earning or billing their time, and how many people are administrative or non-billable?
And that’s an issue, that’s a dicey one because you have to have the right kind of administrative backup to support the accounts, the new and bigger accounts that you’re getting. But you have to be careful that you don’t swamp the boat so to speak with an administrative staff that isn’t productive, and it just costs you money and it really drags your profit. So, I look at hourly, at tracking hours as critically important from a cost analysis basis. So that you know if you’ve got three people in a room, how much do those people cost you? And maybe your meetings will get shorter. And that’s not such a bad thing.
Drew: Yeah. As you may or may not know one of the things that we talk about at AMI a lot, is that tracking your AGI per FTE, including everybody, you know that you really need to be that…the target should be 150k of AGI per FTE, that’s sort of the target. And for digital shops it’s higher because people are more expensive. But to your point, every agency probably needs to know exactly what that …. So, that’s for us a generalized number. But what you’re saying is every agency should understand how much AGI do I have to generate to pay for everybody and all my overhead expenses and still come out with a profit at the other end of the day.
Henry: Exactly. Yeah. You’re absolutely right. And the FTE based on…150 it’s a good number in almost every market. That’s the number I use for just on a…to do my sort of quick look … What’s the headcount? What’s the revenue or AGI? That’s actually one of the places where I start when I’m looking at operations.
Drew: So, what other mistakes do you see agency owners making today that will impact, whether or not they can sell their agency or they can sell it for what they hope to sell it for down the road?
Henry: This is a touchy subject. What happens in agencies is they have, they tend to have tenured employees that the owner can trust and they can depend on. But they aren’t as productive as they need to be.
Drew: Yeah, I call those stale employees.
Henry: I try to be a little bit more politically correct.
Drew: Yeah, that’s not my skill set.
Henry: Well, you have a certain value I’ll tell you Drew. But I understand that some people are critical to the spirit and culture of the agency, and I have no objection if people wanna…I commend people, you know what I mean, for their humanitarianism, for keeping people on, because they are the lifeblood.
Drew: Or they have been super loyal through the ups and downs. There’s a lot of reasons why an agency owner…You’re right, this is a very emotional issue for agency owners.
Henry: Yeah. And so, I would never condemn somebody for that. I need to say, “Fine, just great, keep Marjorie, keep Bobby.” Whatever, no issue. But understand that it’s costing you money and that it impacts your profits negatively.
Drew: Yep, yep. Right. Again, you need to understand what the numbers are saying to you.
Henry: Yeah. And there’s an objectivity about it that, that’s really the value of consultants. I’ve worked on both sides of the table where I’ve been the CFO and had to hire consultants for an organization, and I’ve been the consultant that was hired by the organization. And I think you have to be very measured and careful about that you don’t offend somebody, or on the other hand they’re not paying you to be their best friend. They’re paying you to tell them in black and white what’s good and what’s not good. And so, there’s an area, that’s a common area where long term…and you know that salaries are a ratchet. It’s not, they go, click, click, click, click, up, up, up, and don’t go back down. So, I’ve always been a proponent of a profit sharing, an informal and sometimes Aesopian in a more formal way, where everybody gets well if you’re doing well and everybody soldiers through when you’re not doing so well.
Drew: As opposed to the annual everybody expects a raise and a bonus at Christmas time.
Henry: Yeah. And I keep it more on the bonus side if we do well and some of your members…I’m familiar with a few of your AMI members. And they have a minimum profit that the agency has to reach before anybody gets any profits. And I think that’s maybe one of the rules that you teach in your…Yeah. And I think that’s exactly the way to go and that works. It works if everybody’s…if the agency is growing and making money and you begin to get disgruntled employees if it doesn’t, because their income isn’t going up.
Drew: But again, I think this is part of an owner’s obligation to educate their employees about how agencies make money. Because if you’re informing them all through the year, they are tracking with you and they know if you’re doing well or not. So because they have that understanding of your agency’s value, they know what to expect. They also know when they need to put their shoulder into it a little harder, because you know what we’re super close to hitting a goal or a budget, or you know I think we’re sliding backwards in the wrong direction. We really need to gear up the new business, whatever that is. But a lot of agency owners expect their employees to behave that way without having the information that they need to motivate them to do that.
Henry: Yeah. Sometimes they take…they assume the higher qualities than human beings have.
Drew: Yeah. Hey, we’re gonna take a quick break and then we’re gonna come right back because I have a lot more questions to ask you. So, hang on everybody we’ll be right back.
Podcasts are a great way to learn and a great way to educate your staff. Another great way are live workshops and AMI offers many of them throughout the year. If you’d like to check out the schedule go to agencymanagementinstitute.com/live. Okay, let’s get back to the show.
Okay, we are back with Henry Corona, and I wanna talk more about valuation. So, Henry, when an agency calls you in to do a valuation, and I know you do a lot of those. Both kind of…I don’t mean it in a disparaging way but you do more of a down and dirty, let me give you a quick look. And then you do one like, I’m getting ready to sell my business where you really crawl through all of the numbers for years and years and years. But even when you do the quicker version of the valuation, A, I’m assuming that the agencies are often not worth what the agency owner expects. And B, what is it that you see that diminishes the value of an agency? When you’re looking at their numbers, what is it that is a clue to you that maybe the agency is not worth as much as the agency owner would hope that it would be?
Henry: Well, as you know the labor cost is far and away the largest portion of every agency’s cost. So, that’s the first…you take the first quick look at that and say, “Are you closer to 50 than to 70 or…?”
Drew: Yeah, percentage of AGI, yeah
Henry: Percentage of that AGI. And then I split the executives, in some cases it’s the owner. In some cases it’s the owners or the senior management team and I see what percentage of AGI is domiciled there.
Drew: And what percentage do you look for that you think is a healthy percentage?
Henry: Well, that’s hard to say. It depends on the size of the agency. I don’t go by a hard and fast rule but what I find is, if it’s much more than 15%, it’s an issue that needs to be looked at.
Drew: Okay, hang on, I wanna make sure I’m understanding. 15% of the overall AGI or 15% of the salary portion of the AGI?
Henry: Fifteen of the 50 or 55 or 60 points.
Drew: Okay. So, agency owners what you need to be…what Henry is saying is, look at your salary, and remember this is loaded salary, benefits all of that. Look at your salary cost compared to your AGI. And as you all know if you’ve heard me speak before, the ideal target is 55% for most agencies, they’re in the 60s somewhere. But then look at that number and if your management team is more than 15%, give or take because as Henry says we’re talking in broad generalities. But if your management team is more than 15% of your salary portion of your AGI, that is something you should at least look at and figure out why that is. Doesn’t necessarily mean it’s a horrible thing but it means you’re sort of outside the norm. Am I correct Henry?
Henry: Right, right. And being outside the norm is…comes back to that agency ratio model. And you and I have talked about this in the past, you have sort of the general…
Drew: The 55, 25, 20 you mean?
Henry: Yes, sir.
Drew: Yeah, and you have a more detailed one, don’t you?
Henry: Yeah. Well I like to use that as a simple tool to guide an agency into improving its profit. And we take a look at it and add some key items, key line items that I put into it. And then what we do is, we say, “What can we change?” So, we’re making 11% and we wanna make 15% net, pre-tax, or we wanna make 20, or we wanna make 25%, whatever it is. Where in this…. where can I reduce? What makes sense? What can I reduce without costing me the new business or affecting the way I deliver my services? And it’s a kind of a broad and somewhat simplistic because there’s always more to it. Whatever it is there’s always more to it. But it’s a good snapshot and then you go, “Okay, I can make…I’m gonna address these issues, these operating issues going forward because I know the more I can improve on the efficiency of this kind of operating cost, the better. It just drops to the bottom line.
Drew: So give us one or two of those that you look for as a place to make a quick fix.
Henry: I think of it as in conferences, trade shows, those kind of things. That’s an area that pops up often. Not every time, not every agency sends everybody to the trade conferences and they all believe that it needs to be done but instead of sending five people, you can send two or send one. Oftentimes, the biggest numbers are in the, what I call discretionary operating expenses. Which is another way of saying what the owner passes through the business. Oftentimes, those just jump out at you. And my feeling is that small businesses exist for the benefit of the owner. The other thing that I always try to keep in mind is this individual built this business, I didn’t build it. He built it. He may not be doing it exactly right or by the book but he’s been successful. So, I wanna be respectful when I come in. So, my job is not to tell them to give him what’s right or wrong, I just need to point out where the issues are.”
Drew: And give him or options, if they want to correct it.
Henry: And one thing Drew that happens is, when agencies…now remember that 15% has to be all the senior people. So, if you’ve got five senior people, then you’ve got kind of a heavy load up there. The 15% may not cover it. It may be more and it may have to be more because you’ve got four partners and one president…some combination of an executive team that it’s very valuable to you, and so you’re gonna keep them. But then you have to understand and accept that your services have to be priced at a higher level because your cost is gonna be higher. Your cost is higher. And so, you have to somehow get your rates up, which is virtually impossible in this marketplace.
Drew: Well, you’ve got to demonstrate why you’re more valuable than anybody else. So, I think that’s why a lot of agencies are leaning towards niching and specializing, so that they can charge sort of the brain surgeon prices versus the general practitioner prices.
Henry: Or the nurse prices.
Drew: Right, right, right.
Henry: Because that’s actually a good way. The difference between a surgeon and a nurse. I was with an agency, a small agency. He regards himself as a mid-sized agency, it’s a small agency. And he was…we were going over his clients and how scalable, how much upside do we have with any of these clients? And he has a couple of that he has some upside, but he admits that most of the…he has to be on every account because they come to his agency because of him and that’s a trap.
Drew: That’s a very limiting factor.
Henry: And sometimes there doesn’t seem to be any way out of it. But a lot of agencies have surmounted that, and they’ve added key people. And I know that we have a relationship Bob but I want you to meet Chuck here because he’s terrific. And you have to step back and let Chuck take ownership of the relationship, if you possibly can. And then that gives you room to expand.
Drew: Which gets back to your first point in understanding your agency’s value which is investing in the right people, even if they are a little more expensive because they’re a little more skilled, and also making sure that you keep training them to keep getting better so they can step into your shoes and no one feels like they’re getting the B-team.
Henry: With training, yes exactly. And that’s why I admire what you do with AMI, because I think it’s a current issue and you take the input from all of the participants not just dictum. Not like here’s the catechism, boys and girls learn this, memorize these things because this is the book. And I think there’s a lot of organic knowledge that’s gained from the kinds of training seminars that you put on. And now I’m sort of possibly crossing what I said about 15 minutes ago, that you can’t send six people, you can only send two.
Drew: Well, I’m a big proponent though and send a couple of people. If you’re gonna a workshop or training whether it’s ours or somebody else’s, make sure you get the DAC and part of the deal of them getting to go to that training is they have to bring it back in and distill it down for the staff in a lunch and learn or something, to try and spread that knowledge through the agency.
Henry: Absolutely. That’s a great policy.
Tactics for Impacting Your Bottom Line Immediately (Action Steps)
Drew: So, if somebody is listening to us today and they’re thinking to themselves, “Okay, I’m hearing myself in this. I’m probably a little understaffed. I’ve probably under invested in staff. I am living large and living for today, milking my agency for everything I can in the short run.” Which again is not a bad choice, it’s just a choice, “And I need this and I’m 55 years old. And I need to start thinking about the future.” What’s the one fix that you would say, “Here’s the quickest way to impact your bottom line in the next, let’s say 12 to 18 months?”
Henry: Gosh, Drew. You didn’t warn me about this question.
Drew: I love to surprise my guests.
Henry: Yes. Gosh, I would…I’m not sure that there’s any one single fix that fits everybody. In some cases, I’d say your compensation…you’re taking way too much money out of this. You’ve got to stop doing that.
Drew: Through either salary or pass throughs?
Henry: Yeah, through either salary or pass-throughs. And I point out to them this, in a way so you figure out what your market salary is or what your market compensation is for yourself in your area. And anything above that is part of the purchase price, part of the value of the agency. So, you have two choices. You can keep taking all of that and just regard it as I’m taking value out.
Drew: I’ll sell it for less down the road but I’m making part of that sale today.
Henry: It’s I’m willing to take less down the road in order to take this value now. And then just make that conscious choice and live your life. But don’t be deluded into…now what happens with those extras, are you familiar with the term normalizing financials?
Drew: Yes, but go ahead and define it for everyone.
Henry: It’s when you add back all those what I euphemistically call Discretionary Operating Expenses.
Drew: Or pass throughs.
Henry: Or pass throughs. That if you were working for somebody else you wouldn’t be taking. And what we do when we’re doing a valuation for a sale…actually generally it’s for a sale if it depends on the reason for the valuation, is you add back all of those. So, if your wife is on your payroll, if your children are on your payroll, if they’re getting the insurance paid for, if your wife’s car is on the payroll, your car is one way or the other. All of those things that are passed through that maybe they couldn’t be taken if you were part of a larger corporation, are added back to net income. And then that EBITDA, The Earnings Before Interest Tax Depreciation and Amortization becomes the basis for the multiple that’s applied in the…sometimes it’s the final but always it’s the preliminary valuation. So, I’m gonna go four times the EBITDA, I’ve added back all this stuff. I’ve got a bigger number. But that means that after the sale is closed, you will be paying for all of those things that you were passing through with after tax dollars. So you have to be certain that you are getting a big enough payment.
Drew: Right. I had a conversation with an agency the other day who’s sort of wrestling with, “I have certain financial goals personally that I want to get to in a certain period of time but I also want to build up an asset that is of value to sell.” What I said is, some of the choices you’re making are gonna fall into one camp or the other. It doesn’t make them bad choices, it just means that they just come with consequences. And you may have to compromise on some of your short term goals of hitting certain financial metrics by a certain age to be able to keep investing in the business and to build the business in a way that you sell it down the road. Or, you just milk it for all it’s worth and you lock the door when you’re done. And maybe that’s okay too. It’s not about right or wrong choices, it’s about choices and consequences.
Henry: If you’d like, I can give you a quick summary on general size and the value or is that a subject for another time?
Drew: You know what, I do want to have that conversation but we’re running up onto an hour and I wanna be mindful both and respectful of both your time and the listeners time. So, let’s do this, let’s agree that we will schedule another conversation, and we will dig into specifically valuation and some of those kinds of things that I know you have a depth of knowledge about. And let’s kind of wrap up today’s conversation, and just know that the listeners can count on the fact that we’re gonna come back and have a second conversation, does that makes sense?
Henry: Yes. So, I leave you with one thought.
Drew: Great.
Henry: A value of any agency is gonna be about the same using reasonable terms. It’s the structure of the transaction that is the key to taking more out of a deal or versus less.
Drew: That’s an awesome teaser to leave listeners with. So, our next conversation will all be about structuring the deal to make sure you maximize your opportunity. Does that sound like a plan?
Henry: That sounds like a plan.
Drew: Henry, if folks wanna track you down, if they wanna follow up with you, if they wanna read more about your work. Where is the best place for them to find you?
Henry: Well, they can call me at the phone number or e-mail. So, 305 748 0888 or [email protected].
Drew: And spell financesur for everybody.
Henry: Finance like finance, financesur.com.
Drew: Great. And we will put both of those bits of information in the show notes as well everybody, so you’ll be able to get them there. Henry, thank you…
Henry: Thanks Drew.
Drew: …So much for sharing your expertise. You’ve got decades of experience that I’m looking forward to digging deeper into in our next conversation. So, thanks for your time today.
Henry: Gracious of you. Thank you.
Drew: You bet. Okay, everybody. This wraps up another episode. I know that you are going, “No, keep talking to him Drew.” And I apologize but I promised that I would never make one of these more than an hour. So, I’m gonna wrap this up but I do give you my word that I will follow up with Henry, and we will schedule the conversation about how to structure an agency sale so that it maximizes your opportunity. I will talk to you soon. I’ll be back next week with another great guest, in the meantime if you need to track me down you can find me at [email protected]. Thanks for listening.
That’s all for this episode of Build a Better Agency on understanding your agency’s value. Be sure to visit agencymanagementinstitute.com to learn more about our workshops and other ways we serve small to mid-sized agencies. While you’re there, sign up for our e-newsletter, grab our free eBook and check out the blog. Growing a bigger better agency that makes more money, attracts bigger clients and doesn’t consume your life is possible here on Build a Better Agency.
