Episode 360

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When you’re running an agency, you know you will not have it forever. While your goal could be to sell it eventually, you must consider retirement, career pivots, or plain old ownership fatigue as part of your succession planning strategy.

Most of us aren’t thinking about what’s happening 3, 5, or even 10 years down the road in day-to-day agency operations. But, it’s very important to understand how your decisions today could impact the future value of your business. Today’s solocast covers everything you need to know about what you should focus on to increase your valuation and why it matters to start thinking about your succession planning strategy right now.

For 30+ years, Drew McLellan has been in the advertising industry. He started his career at Y&R, worked in boutique-sized agencies, and then started his own (which he still owns and runs) agency in 1995. Additionally, Drew owns and leads the Agency Management Institute, which advises hundreds of small to mid-sized agencies on how to grow their agency and its profitability through agency owner peer groups, consulting, coaching, workshops and more.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev, or PPC work at wholesale prices. Check out their special offer (10 free hours!) for podcast listeners here.
Succession planning strategy

What You Will Learn in This Episode:

  • Why your agency isn’t as valuable as you might think
  • The importance of thinking toward the future when making current agency decisions
  • The recipe to increase your agency’s valuation when it’s time to sell
  • Why profitability and where it’s coming from matters
  • Why you should be making yourself irrelevant as your agency grows
  • How agency culture plays a role in your succession planning strategy
  • Why you should avoid “gorilla clients” that make up too much of your AGI
  • Where else you should invest your money outside of the agency

“If you want to add value and for your agency to be worth more, you must have intentionality around culture. Because you're going to have a culture whether you intentionally created it or not.” @DrewMcLellan Click To Tweet“Every agency owner is surprised and, honestly, disappointed at their valuation numbers. We've yet to show an agency what their agency is worth and have someone say, ‘Oh, that's better than I thought it was going to be.’ ” @DrewMcLellan Click To Tweet“Longevity matters in an agency. So, start to pay attention to how many of your employees stick around for more than three years. Or are you literally a training ground for other agencies?” @DrewMcLellan Click To Tweet“For you, as the agency owner, you are actually the reason why your agency is or isn't worth more down the road.” @DrewMcLellan Click To Tweet“Better choices today mean a better valuation tomorrow.” @DrewMcLellan Click To Tweet

Ways to contact Drew McLellan:


Speaker 1:

Welcome to the Agency Management Institute community, where you’ll learn how to grow and scale your business, attract and retain the best talent, make more money and keep more of what you make. The Build A Better Agency podcast presented by White Label IQ is packed with insights on how small to mid-size agencies survive and thrive in today’s market. Bringing his 25 plus years of experience as both an agency, owner and agency consultant, please welcome your host, Drew McClellan.

Drew McClellan:

Hey, everybody Drew McClellan here from Agency Management Institute, welcome back. Super glad to be with you today. Today is one of my solo casts. So as you know, if you’re a regular listener, I normally have a guest with me and we’re picking their brain on behalf of all of you. But, every fifth episode is me and just me. And, I want to talk to you today about something that we’re spending a lot of time on at AMI and I want to give you some insights into what we’re seeing. But, before we do that, a couple things, one I’ve been telling you about the two workshops that we’re going to hold in January of 23, which is honest to Pete, four or five months away.

So, the first one is build and nurture your agency sales funnel. You will literally leave with a marketing and sales plan for your agency. Who’s going to do what, when you’re going to do it, how you’re going to get it done, all of that. So, we actually make you workshop through the entire two days. You’re actually working on your plan and so that is going to be January 19th and 20th at the Contemporary Hotel at Walt Disney World. That workshop is now live on the AMI website so you can register for it.

And, then the second one is a brand new workshop from Mercer Island Group. It’s all about written proposals, whether that’s you get a referral and they just ask you for a written proposal or it’s a full on RFP and everything in between, they’re going to diagnose good and bad written proposals and all the elements from a cover letter to case studies, to all of that, all the ways that we communicate to prospects, that we are the right fit for them in writing. So, that workshop is going to be Tuesday, January 24th and Wednesday, January 25th, also at the Contemporary Hotel. Also now live on the website so you can go ahead and register for that.

So, just wanted tell you that, cause I’ve been teasing it for a couple weeks, but now we are live on the website so I just wanted to let you know, you can go ahead and register for both of those workshops. So, go ahead and do those before they sell out. All right. So, here’s what I want to talk about today. At AMI, we are doing a ton of work in the succession planning, where we are helping in many cases, an employee or small set of employees by the agency, from the founder/owner. And, we’re also doing some matchmaking where we are introducing agencies to another one that wants to be acquired and one that wants or needs to acquire an agency. And, so part of that work is the valuation and we are doing those for lots of agencies. And, there are two takeaways from that for us that I think are worthy of some discussion.

Number one, every agency owner is a little surprised and honestly, a little disappointed at the valuation numbers. We’ve yet to show an agency what their agency is worth and have someone go, “Oh, that’s better than I thought it was going to be.” That’s not happened. And, I think that’s because you’re so busy in the work and you’re so busy doing the work that sometimes you are not being very thoughtful about how you prep the agency for eventual sale. And, a lot of times you are making decisions three, five years before you’re ready to sell the agency that actually impact in a negative way, the value of your agency. And, so by the time you’re ready to sell, the other truth is, it’s really too late to make decisions that are actually going to alter the value of your valuation.

So, by the time you get to the point where you’re ready to sell, it’s really the decisions that will make you more money and will make your agency more valuable are too far down the road. You can’t make the adjustments fast enough to change the number. And, this is really the focus that I want for the solo cast today. But, the reality is it’s not rocket science. It requires discipline and focus, and it requires you knowing that you’re not going to own the agency forever. And, that’s the reality for all of you. Whether you are going to sell it to an internal buyer, whether you’re going to sell it to an external buyer, whether you’re going to just shut it down, when you’re ready to retire, doesn’t really matter. Even if you don’t sell your agency, the things that you can do to add value to your agency, there’s other perks to be gained by that.

So, I think these are best practices for all of you, but if you think you’re going to sell your agency someday, then you really, really have to be mindful of these things. Now, there are some things that put value into your shop that are just givens. First one is you’ve got to be profitable and you’ve got to be able to show a profit. So, at AMI all of you know that we push for every agency to deliver a 20% profit. All of you can do that. So, we look at about the financials of about 150 to 200 agencies a year. And in 2021, the average profit for an AMI agency was 17.35%. I’m telling you that because what you measure matters and starting to measure your AGI and your profitability and really paying attention to how you move those numbers in the direction you want to move them to is absolutely possible for you to have 20% profit.

Now, how you run your business and perhaps between pass throughs and dividends and other things, maybe at the end of the year, you have 20% profit before dividend distribution bonuses and other things. You just have to be able to document that your agency is profitable, how you spend those profits pre and post taxes, that’s up to you. But, you have to be able to show that your business is a viable business that is capable of dropping profit to the bottom line. You certainly want to show steady growth. So, some agencies, when you look at their growth chart, it’s a nice, steady, upward arrow. And, for other agencies, it’s super spiky. They grow by landing one big gorilla client and then they don’t grow at all for many years. I will tell you this steady growth absolutely wins over the one time spikes.

Another thing that you’ve got to have in place, if you’re going to sell your agency someday, or you want to have maximum value for your agency is you have to have a leadership team that’s really driving the business. It cannot be just you alone as a business owner, running the business and making all the management decisions. Because, obviously, when you sell the business, you’re stepping away, so you need to have a leadership team intact that’s going to continue to run the business well. And if the agency needs you, then you can’t leave. Again, whether you want to sell it or you want to retire, or you want to just close the door down, if you are pivotal to the business and the business cannot run without you, that greatly diminishes the value of your shop. So, the more irrelevant you can become, the better.

And, longevity. Clients and internal team is a golden standard for valuations. So, those are the givens. If you don’t have those things in place, no one’s going to buy your shop. I don’t care how good you are. I don’t care how niched you are or specialized you are. But, beyond that, there are some things that you need to do to increase the value of the shop. So, one of them is you need to define and follow an agency process. So in many agencies, every employee has their own way of doing it. BaBA does it this way. Jack does it that way. But, there’s no codified, documented, scalable, official agency way. And you really, really need to have certain processes defined. So, you start with workflow and traffic, for sure how we get the work done. There needs to be an agency methodology around that.

Needs to be documented. It needs to be something that people can jump in and out of whether somebody goes out on maternity leave or you lose a key player, that workflow has to continue to groove through the shop without hiccups. And, so the only way to do that again, is to have the agency way of doing that. And, once you’ve got the workflow and the traffic system done, there are a couple other processes inside your agency that you need to really define. And, it’s onboarding both clients and team. It’s performance reviews, again, clients and team. It’s your biz dev process. Because again, if you are the biz dev process, you going out and doing networking, or however you get new clients, if it’s contained to you having to do it, it’s not actually a process.

So, you want to be able to create right fit referrals and walk-ins and prospects, how you identify prospects and go after them. That needs to be a process that someone else can execute when you leave, because otherwise there’s no value in it. Of course, you need agency-wide KPIs and shared goals. And, one of the systems that most of you really do not have well defined and it’s critical, but we forget about it because it’s just internal facing, is, how do we as an agency communicate to the internal team, what does that look like? Are we doing weekly status updates, not about work, but about what’s happening in the agency. Are we having once a month, all team meetings, are we physically coming together if we’re remote or hybrid? We’re physically coming together, once a quarter for a couple days, do we have a strategic retreat once a year?

Whatever it is that allows you to run the business better and also to keep the team informed, because I’ll tell you one of the things that we hear every day from your employees, not you, but the Royal you, is they want to know more from you. They want to hear more from the owners. They want to hear more from the leadership team. They want to understand what’s going on in the agency. Speaking of which, the second thing you’ve got to do is you really do have to have a strong agency culture. Culture cannot be an afterthought. If you want to add value to your business, if you want your agency to be worth more, whether you’re going to sell it or not, you really do have to have intentionality around culture because you’re going to have a culture, whether you intentionally created it or not. So, investing the time to really define what you want the culture of your agency to be, and really building it, honing it.

So, it starts with having real mission, vision, and values that are actually woven into the day to day fabric of your agency. Doing consistent employee satisfaction surveys so you know where your team is at and what they’re hungry for, what they want more of or less of. And, then working your way to having consistently steady, and I would say high but realistic scores. So, you’re not on a scale of one to 10. You’re not going to get a 9.5 with your employee satisfaction. That’s just not possible. No matter what day you give your survey, somebody’s going to have their undies and a bunch about something, but having an eight or an 8.5, that’s reasonable, but it’s also having a pretty high and healthy satisfaction score.

You want to be able to manage turnover. If you’re losing a ton of people, even in this environment where lots of agencies are struggling to keep great talent because everyone’s poaching from each other, but you need to have 10% or less, turnover. One of the things that adds great value to your agency is that consistency of your internal team. And again, even if you’re not going to sell it, one of the things that makes an agency healthy and whole is an intact team that stays together for a period of time. So, you want to really manage turnover. Longevity matters in an agency, so starting to pay attention to how many of your employees stick around for more than three years, or are you literally a training ground for other agencies?

Because, if you’re the training ground that is not good for your valuation and it’s certainly not good for… Even if you’re active in the business, it’s not good for your stress. It’s not good for the ease of how work gets done. And, certainly part of your culture needs to be in our business that everybody continues to learn because it’s easy to become obsolete in our business. And, if you’re not continually learning and absorbing new channels, new technologies, new methodologies, the shifts in society and culture on the grander scheme and how that impacts our work, all of those things, we have to keep learning and tracking trends and all of those things. And, if that’s not woven into your culture, then it’s going to be really hard for your agency and those employees that do stick around to keep growing and adding more value. So, culture can’t be afterthought. That’s a really critical factor in your valuation.

So, I want to tell you about a couple more, but first I want to take a really quick break.

Hey, there just a quick interruption. I want to make sure that you are aware that you are cordially invited, not just invited, but cordially invited to join our Facebook group, our private Facebook group. All you have to do is go to Facebook and search for Build A Better Agency and you’ll find the Facebook group. You have to answer three quick questions. You have to put in the agency URL. You have to talk about what you want to learn from the group and you have to promise to behave yourself and that’s it, and then we’ll let you in. And, you can jump into the conversation with over a thousand other agency owners and leaders and there’s a robust conversation happening every day. People are sharing resources and best practices and discussing everything from work from home policies to maternity and paternity policies to biz dev strategies. So, come join us and jump into the conversation. Speaking of conversations, let’s head back.

Okay, we’re back and we’re talking about what do you focus on now so that your agency is worth more in three to five to seven years? Whether you sell it or not, how do you keep building intrinsic value in your agency? So, another one is, it is really difficult for your agency to be worth a lot when you have a giant gorilla. So the gorilla, a client that’s 30, 40, 50, 60 for some of you, 70, 80% of your AGI, you can’t really afford the risk of having a client that’s larger than 20% of your AGI absolutely puts a huge strain and pressure on your shop. And, it really diminishes the value of your agency. So, you have got to, and I understand how hard this is when you have a gorilla client, that’s leading you around by the nose and really making you run your business to make them happy, it’s hard to go find other gorilla clients. It’s hard to balance them with clients that are like sized.

But, if you don’t do that, if you stay disproportionate, then it is really, really challenging for your agency to have value. And, what all of whether you acknowledge it or not is sooner or later that gorilla is going to leave, and that can cripple an agency. I can’t tell you how many agencies that come through our world that are limping through and just trying to stay alive because their gorilla walked out on them. And all of a sudden, a 50, 60 person agency or an agency that’s making 25 or 30% profit is absolutely smothered by the weight of that loss. And, so the best way to avoid having a gorilla crush you is to minimize the gorilla. So, you need to be able to, no matter how big your gorilla is, find a way to go after more business and really kind of put that gorilla into perspective.

So, you want to have, the ideal is to have 20 clients that are each about 5% of your AGI. Now, are you ever going to get that balance? No. But, it’s worthy to work towards that goal where nobody is the dominant player in your shop. And, if anybody leaves, the agency can absorb that loss for sure. But honestly, the biggest risk to your agency’s value is you. And, some of the choices you make about how you work and where you work and where you lean in, that is actually the most critical part of how you add value or diminish the value of your shop.

So, for you as the agency owner, you are actually the reason why your agency is or isn’t worth more down the road, and so here’s the recipe for you. You got to get out of the day to day. You have to be irrelevant to the day to day. And, the more relevant and the more critical you are to the key client, because many of you serve as the account person or the creative director for the biggest client in your agency. If you can’t divorce yourself from that, if you can’t separate out from that, then you have to understand that you are diminishing the value of your shop. You need to be focused on biz dev, mentoring the team, and running the business because those are things that, again, if they’re systemized properly, someone else can step in and do as you are stepping out of the agency.

So, those are the roles that you need to play at the time that you want to sell so that you can be replaced. Because, otherwise all you’ve done is you’ve sold your agency, but now you just have a job and you have a job that you can’t really leave in the way that you want to because the agency is dependent on you.

The other thing you need to do is at the end of the day, whatever you sell the agency for, you need to have already built wealth outside of the business. So, that even if the agency’s valuation doesn’t come in where you want it to be, you’re not going to be eating ramen noodles five days a week because you have wealth outside of the shop selling your agency should be the cherry on top of the sundae. It should not be the meat and potatoes of your retirement plan because as I’ve told you before, in other solo gas, a lot of agencies never sell. This whole solo cast is about you creating more value from your agency and part of that is taking money out of the business while you’re running it. Because again, one of the factors in the valuation is what was the owner’s compensation?

And, so you don’t want to just have a W2 income. You want to have dividends, you want to have pass throughs. You want to obviously max out your 401k and match that. And you ideally want to have a defined benefits program where it’s sort of the private pension plan, but you want to be able to show that you’ve made a great living and a great life by owning your agency. That’s one of the factors in the valuation is, how was the agency owner compensated? And, what you should be doing is building wealth outside of your business with that compensation. So again, I want you to start paying yourself more. More W2 income, better dividends, more robust retirement program, more pass throughs. All of th