Episode 315

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At Agency Management Institute, we are often called upon to help agency owners plan their next steps when it comes time to sell. This may lead to the owner wanting to hand the reins to a current employee that has proven to be the right person to take over owning and running the agency. There are challenges that the seller has to contend with, but there are just as many challenges, and mistakes, the potential buyer needs to keep in mind.

As an employee presented with the chance to take over ownership of the agency, it can be a daunting undertaking. To try and offer some guidance, I’ve identified the five most common mistakes that I’ve seen made by employees who are buying the agency from the current owner. We’ll look at the importance of pushing for a clear process and plan for the owner’s exit strategy and how to avoid miscalculating the risks. I’ll share some of the emotional challenges to expect, as well as the importance of tough conversations. Finally, I’ll explain why it’s not only helpful but necessary to put together a team that can help guide you through the transition period, and beyond.

Agency ownership is a thrilling undertaking. If the opportunity presents itself, you should absolutely give it serious consideration. Just be smart about the steps you take. AMI is here to welcome you to the adventure.

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.

Buying an Agency

What You Will Learn in This Episode:

  • The need to push for a process and plan when buying an agency
  • The error in miscalculating the risks
  • The emotional challenges of agency ownership
  • The missed opportunity in tough conversations
  • The need to put together a support team
“It starts with being really thoughtful about what you want and then being really purposeful about moving towards that goal.” @DrewMcLellan Share on X “Is it risky to own a business? Of course. But the risks of owning an agency--especially an agency that’s established, that already has clients, a team, a process--is so much less risky than starting from scratch.” @DrewMcLellan Share on X “No matter how good you are at your day-to-day job, there are new challenges ahead of you as a business owner. You should be excited by that. It’s not scary. But you need to know that you have plenty to learn.” @DrewMcLellan Share on X “There are tough conversations to be had, and if you avoid those conversations or you don’t have them to the depth that you need to, that can be a huge mistake that actually ruins the deal.” @DrewMcLellan Share on X “If you have an agency owner who believes in you, who thinks that you are good what you do, that you have the chops, the potential, the heart, to own an agency--whether you say yes or no--that is a huge compliment.” @DrewMcLellan Share on X

Ways to contact Drew McLellan:

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About the Author: Drew McLellan

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.

  • Leading agency owner peer groups
  • Offering workshops for agency 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 over 250+ agencies every year, Drew 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 several books, including Sell With Authority (2020) and been featured in The New York Times, Forbes, Entrepreneur Magazine, and Fortune Small Business. The Wall Street Journal called his blog “One of 10 blogs every entrepreneur should read.”

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 midsize 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 McLellan.

Drew McLellan:

Hey, everybody Drew McLellan here from Agency Management Institute, and I know it’s going to come as no surprise to you that I am bringing you another episode of the Build a Better Agency podcast. Thanks so much for being with me today. This is one of my solo casts. So if you are new to the podcast, what that means is, on most episodes I have a guest or guests that bring their smarts to us. And my job is to ask the questions that you would ask them and to sort of sit in your seats and grill them so we can learn as much as possible from them. But every fifth episode is what we call a solo cast. So that’s just me and you, no guests.

And it’s really me just talking to you about something that I think is important, or I’m having the same conversation over and over again with a bunch of agency owners so I know it’s important and you need to hear about it. And so that’s what we’re going to do today. A couple of housekeeping things, as the seasoned listeners know, every solo cast we give away a free workshop seat. So that can either be one of our live workshops, or it can be one of our on-demand workshops. And the way you get put into the drawing to win the workshop is super simple. All you do is go to wherever you download podcasts, wherever you get this podcast, go and leave a rating and review.

And then what I need you to do is, I need you to take a screenshot. So before you save it or after you save it, somehow, make sure you have a screenshot that shows me the whole review and your username. And the reason why I ask you to do that, is although we do go, I do go, and read all of the reviews I can find, and I’m grateful for each and every one of them, your username, a lot of times is something personal, like Daviesmom, 907, or whatever it may be, but it doesn’t tell me who you are or what agency you work for.

So I need you to send me a screenshot so I know it’s you. I have your name. I have your email address. I have your agency name. So that when you win, I have a way to get a hold of you and tell you that you won. So it shouldn’t take you more than five minutes to send it to [email protected] and your name then goes into hat, the proverbial hat, and it stays there until you win. So, as you might imagine, we don’t have three bazillion names in there. So, sooner or later, odds are pretty good you’re going to win a $2,000 workshop seat. So it’s totally worth the five minutes. And you can even say bad things about me in the review if you want. I mean, I’m going to cry a little but you can. You still get your name in the hat and you still might win the workshop.

So, leave a review, send it to me, get your name in the hat, and you could be the big winner like Becky Chumley is this month. So, Becky is from Evolve Impact Group. Becky, I’m going to be reaching out to you and making sure that you know that you are this month’s workshop winner and find out which workshop you or someone on your team would like to attend. And that’s all it takes. It’s really that simple. So, we’d love to have all of you participate in that if you are so inclined. All right, one last announcement and then I’ll tell you what we are going to talk about today. We have a brand new workshop that we are unveiling in February of 2022, and it’s called Rethink Innovation. So, probably, I don’t know, about 20 episodes ago, I interviewed a woman named Carla Johnson, and she had just written a book called RE:Think Innovation.

And she has this fascinating premise and data behind it. That basically says, when we’re kids we are born with the ability to create big ideas. And to create them on the fly, on demand, with great frequency. Two boxes and a pot and a pan become an entire city or a vehicle or a spaceship. And what Carla has discovered in her research is that over time, that ability to think big, to come up with big ideas, to connect the dots in ways that create innovation, somehow gets tarnished. And those gears just don’t grind the way they’re supposed to. And after a while, sometimes for some of us, the gears get stuck. And we’re not innovative at all anymore. And for many of you, what I hear you say is, “I’m the only one who can be strategic inside my shop. I’m a bottleneck. I don’t know how to teach my team how to think more strategically.”

So Carla’s book talks all about how to reinvigorate that ability to think strategically, to think big. And when I interviewed her on the podcast, I did something I’ve never done before. We hadn’t even gotten off that recording. And I said to her, I have to get you in front of my people. My people need to know what you know, they need to learn, because she’s built out this framework of how you reteach yourself and your team how to think bigger and how to come up with big ideas and be innovative. And she’s got this whole methodology, this framework, that if you follow it, it really does reinvigorate your ability to think. And so, I said to her, I said, “I’ve got to get your methodology, your framework, in front of my people.”

And we hadn’t met before either, by the way, so this is all happening in an hour. But she was so smart. And what she was saying was so spot on, that I just said, “Would you ever think of doing a workshop with me?” And she said, “Yeah, let’s look at calendars right now.” So we did, literally, while I’m recording the podcast with her, we looked at the calendars and we picked February 17th and 18th of 2022. We’re going to be in Orlando at the Disney’s Yacht & Beach Resort. It’s going to be lovely, still their 50th anniversary. But Carla is going to walk us through two days of learning her framework, her methodology for teaching everyone in your shop how to be a big idea thinker.

This is going to be an amazing workshop. And I want you to know about it. I want you to know about it. And I want you to go register for it right now, because I think it is going to be amazing. And I want you… When you think about it, the reason we get hired is because our clients are expecting us to have different and big ideas. So I want you to be able to do that. And I don’t want the burden to be just on you. I want your entire team to be able to do that. And I know you need that as well. So come on down to Orlando, learn the methodology, bring a team member or two if you want, take it back to your shop and teach everybody. That’s what I’m hoping will happen. So, again, February 17th and 18th, Rethink Innovation, it’s going to be a great workshop. It’s brand new, we’ve never done it before, and I’m super excited to bring it to you.

All right. So that takes care of the housekeeping. So let me tell you what’s on my mind. In my last solo cast, five weeks ago, I talked about the work that we do with agencies around succession planning. And how we come alongside an agency owner and really help them think through how they want the final chapter of their agency to be. Do they want to sell the agency? If so, to an outside buyer, an inside buyer? Do they want to just lock up the doors when they’re done and call it quits? All good choices, nothing wrong with any of them, but it starts with being really thoughtful about what you want and then being really purposeful about moving towards that goal. And so in the last solo cast, I talked about some of the mistakes that agency owners make when they are in the process of selling to an employee or a set of employees.

That’s the work we do. We don’t help a lot in, we can do the valuation and we can do some other things if you’re signed to an outside buyer, but typically they’re going to want a different depth evaluation than you need for an internal sale. So most of our work is with agencies that are selling internally to employees. So we’ve done this lots of times. And so in the last solo cast, I talked about the mistakes the owners make, and in this solo cast, I want to talk about some of the mistakes that the buyers make. So if you are an agency employee, and you’re thinking about buying into the agency, there are some things that a lot of other people in your role, in your position have done that didn’t serve them well. And so I just want to talk about the five biggest mistakes that happen on the buyer’s side of an internal sale.

So if you’re an owner, you still need to listen to this because you can help your buyers not make these mistakes. And if you’re a buyer or somebody who’s thinking about buying, then you want to dodge these mistakes altogether. And the very first one is, that oftentimes in an internal buy, the agency owner will approach the employee or employees that they think might be interested in buying the agency. They have an initial conversation. You, the buyer say, “Yes, actually I am interested in owning the agency.” And you buy or are gifted a few shares of stock or equity, whatever you want to call it, and then nothing happens and nothing happens. And what happens is, you all go back to your day job. And so, you’re running a department or running the whole agency or whatever you’re doing, the owner is busy out probably selling and doing the things that he or she is doing.

And no one is working on the plan of, “Okay, we’ve taken the first step, we’ve gone on the first date, but how do we actually get to being married? Like how do we get all the way through this process?” So mistake number one is waiting for the owner and thinking that they are working on a plan. Because I’m going to tell you a lot of times they’re not working on a plan. They should be working on a plan, but they’re not. So, you, as the buyer need to continue to push and request process and an idea of what is the plan. So, how are we going to evaluate the business? How are we going to decide the timetable of the purchase? How am I going to finance the purchase? What is the purchase? How are we going to determine value? How are we going to lock in a price?

How much can I buy in any one year? There’s all these questions that have to be answered inside this plan that tell you, the buyer, how you are going to acquire this agency. It’s going to take two years, a year, five years, 10 years. Do you have to sell finance all of it? Can you go get an SBA loan? Will the owner finance part of it? Is the owner staying until all the transition is done or are they going to sell you everything, walk away, and then get an earn-out from you? All kinds of things that need to be discussed and decided. But what happens is, when you don’t discuss and decide all of them, you can just get stuck at go. Like we’ve taken this one baby step but that’s all we’ve done. I have some agencies that have sat for three years and done nothing other than the initial purchase or gifting of the shares and nothing has happened since then.

So that’s a problem. So that’s mistake number one. If you don’t know if the owner is actively working on a plan, you need to say, “Hey, I would like to sit down and put together a plan because I need to understand how I’m purchasing this agency. And I need the timeline and the purchase price and all of that stuff. And I want to be prepared and I want to get started now. So can we please sit down and create a plan?” That’s mistake, number one. Don’t wait for that, ask for that. And keep asking for that until you get what you need. All right. Okay. So the second mistake that many buyers make is that they really miscalculate the risks. So a lot of agency owners put this opportunity in front of a potential employees who could be potential buyers.

And honestly, you miss the opportunity. You miscalculate the risk. So, is it risky to own any business? Of course. But the risks of owning an agency, especially an agency that’s established, that already has clients, that has a team that has processed, it’s so much less risky than starting from scratch. And honestly, in a lot of ways, it’s less risky than being an employee. When you own the agency, you get to control what happens. You get to control who comes and goes. And obviously, you’re the last one out the door. So even if you lose a client or something else happens, you’re safe. You and your family are safe. Maybe the agency gets a little smaller. Maybe you have to pivot. Maybe you have to work a few more hours. I’m not saying there’s no risk. Don’t get me wrong. But the risk isn’t as great, I think as sometimes people create it in their head.

And so, I see a lot of people who would be great agency owners pass on the opportunity because they overinflate the risk. And so, if you are presented with that opportunity, you need to find somebody to walk alongside you, to think through the real risk and to look at it objectively. It’s very difficult for you to look at it objectively when you are in the midst of it. But I’m telling you the risks are real, but they’re not insurmountable. And there are ways, and you’ve seen it, you’ve seen it in your own agency, you’ve seen it in other agencies, there are ways to mitigate the risk. And if you run the business well, if you run them based on basically AMI principles and metrics, there is no risk.

Because you’re smart about the money. You’re smart about the numbers. You’re not getting yourself into a hole. So yes, the agency may grow, may ebb and flow, all agencies do, but that’s not risk. That’s just the reality of how agency business works. But the opportunity in terms of the money you can make and the freedoms you can have are unbelievable. So if you get presented an opportunity like this, and you feel yourself going right to the risk, you need to stop and you need to find somebody, a thinking partner, whether it’s a professional who’s helping you evaluate this, or it’s your spouse, or it’s your parent, or whoever it may be, you need to stop and really look at the real risk, because I promise you it’s not as great as it feels in your gut in the very beginning.

Mistake number three is, just because you’re really good at your job today, and I’m sure you are really good at your job today, but just because you’re really great at your job doesn’t mean you’re ready to run the agency. Running a department, even running the whole agency day to day is different than owning the agency. And honestly, it’s not so much the intellectual knowledge, is not the mental stuff. What it is, is it’s the emotional stuff, the courage, the fortitude, the grace and kindness that you offer employees, how you deal with clients, all of that, they’re innate but they’re also learned. And they are learned by exercising that muscle. And so, I have no doubt. Odds are most of you can run the business from the practical, pragmatic, know what to do to make clients and employees happy, that I get.

Really, the hard part of ownership is the, how do I manage the stress? How do I manage the great times? How do I not go crazy and spend when we’re printing money for a season? How do I make employees feel heard and safe? How do I feel about my own core values and how do those align with my agency? Where am I with DEI and how do I feel about that inside my agency? It’s the human stuff, honestly, that’s hard. And you absolutely can do it, but you need to know that you haven’t done it yet. And so, no matter how good you are at your day-to-day job, there are new things ahead of you as a business owner. And you should be excited by that, that’s not scary. But you need to know that you have plenty to learn. And you have plenty to learn around making decisions that impact finances, that impact people.

And so all of that, all of that maturity, all of that trusting your gut, that’s actually a big one. I think it takes all agency owners. So let’s say you’re an agency owner of a day, and somebody else is an agency owner of a decade, it took them a while to realize that their instincts were good, and that they should trust their gut, and that they should forge ahead or not forge ahead based on their intuition. I’ve seen so many agency owners make huge mistakes because they second guessed their gut. You don’t need to do that. And so, again, all of that comes with owning a business is very different than running a department or running a business. And you just need to know that and you need to be open to the idea that you have a lot to learn.

And there are people around you that want to help you learn. Again one of the great things about an internal sale is, everybody is motivated for this to work. The selling owner is motivated. The buying owner is motivated. The team is motivated. Even the clients are motivated, because when it works everybody benefits. So, don’t be shy about saying, “I don’t know how to handle this situation, or I’m really stuck. Or my gut tells me to do this, but intellectually I keep thinking this.” These are all good conversations to have with, again, maybe it’s the selling owner. Maybe it’s somebody else. Maybe it’s someone like us. But these are all soft skills that you need to learn to be a great owner. And I just want to make sure that you know that you’ve done some of it, but there’s plenty more to be learned and perfected. And I want that for you.

So make sure that you’re mindful of that. So, that’s mistake number three. The fourth mistake that buyers make, is missing the opportunity to have tough conversations. So, no matter how much you love the owner who is selling the agency to you, or no matter how much they love and respect you, this is still a business transaction and there are still tough conversations to be had. And there are tough conversations. Sometimes they’re about the money, but a lot of times they’re not about the money. Usually they’re about roles. Who’s going to do what, when? It’s when you guys are getting into each other’s way. It’s when you disagree about how something should be handled. And at this point you are buying in and so you want your way to be honored. They’re on their way out, but they still think they should have their way honored. There are tough conversations to be had.

And if you avoid those conversations, or you don’t have them to the depth that you need to, that can be a huge mistake that actually ruins the deal at the end. Because if there’s a little wedge between you and the selling owner, that gets to be problematic. And so, whatever is going on emotionally, mentally, role-wise, structure, operationally, dollars, doesn’t matter. Whatever’s going on, you need to address it. And you need to address it in a really respectful but really straightforward way. And you need to have a great conversation. If you’ve not read the book Radical Candor, and if you’ve not read the book, Crucial Conversations, I would highly recommend that you read both and that you adopt those methodologies into the way you communicate. Just know you have some tough conversations that are down the pike for you.

And again, this is where a facilitator or an outside advisor can be super helpful because they can help you have those conversations. They can help facilitate them. They can help start them. They can help moderate them. But, the one thing you cannot do is avoid having those conversations. They’re super important. I’ve never, ever seen a deal go through where we didn’t have to have some tough conversations. So, if you haven’t had them yet, and you’re saying in your head, “Well, we’re good. We don’t do that.” It’s like a couple that says, “But we never fight.” Everybody fights. And this is like that. You are going to need to have some challenging conversations. So, number one. You want to be prepared for those. You want to have the skills to have them. You want to do it in the right way and the right time and the right tone.

But most of all, what you don’t want to do, is run away from these conversations. They’re critical. This is particularly challenging if you are buying the agency from a family member, usually a parent. Now we’ve got complications. Now we’ve got Thanksgiving dinner implications. So, again, it’s really easy if you’re buying it from a parent to not have the conversations you need to have because you’ve been brought up your whole life to be respectful. And here they’re giving you this great gift and they’re selling you their agency which they built. And all of those things are true, but it doe