Episode 221

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Most agency owners hope to sell their agency someday down the road. If that’s you, understanding how agencies are evaluated today will help you maximize that opportunity whenever it comes. Even if you aren’t interested in selling, you can and should still be beefing up your agency’s value.

Gina Cocking joins us for this episode to provide an investment banker’s perspective on the valuation and sales process. She’ll walk us through the key items investment firms look for in your agency’s valuation and explain the technical numbers-side. She’ll also help us identify ways you can add value in advance.

Gina is managing director and partner at Colonnade Advisors, a boutique investment banking firm that specializes in mergers and acquisitions in the business services industry. Colonnade has helped many agencies buy and sell, so Gina understands what it takes to help agency owners get the most out of their purchase deals.

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: https://www.whitelabeliq.com/ami/

What You Will Learn in this Episode:

  • A glimpse inside the process of selling your agency
  • How Colonnade Advisors represents business owners selling their companies
  • The importance of enterprise value, recurring revenue, and client relationships when you sell your agency
  • How your key employees factor into a purchase deal
  • The various elements that increase or diminish an agency’s value in the marketplace
  • How to approach the numbers-side of selling your agency

The Golden Nugget:

“You know you’re ready for sale when you have a company people want to work with—not just because of you, but because of what your company is known for.” Gina Cocking Click To Tweet “In a people business, it is always challenging to keep everybody comfortable with the idea that we’re buying the company but key team members will continue.” Gina Cocking Click To Tweet “The more recurring revenue and contracts you have in place, the higher your agency’s value will be.” Gina Cocking Click To Tweet “Whether we are working to sell a company or advise them on the buy-side, we always look at the tenure and nature of their client relationships.” Gina Cocking Click To Tweet “In the valuation of your agency, scale yields higher multiples, partially due to the fact that bigger agencies are less volatile.” Gina Cocking Click To Tweet

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Ways to Contact Gina Cocking:

Speaker 1:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits too? Welcome to Agency Management Institute’s Build a Better Agency podcast presented by White Label IQ. Tune in every week for insights on how small to mid sized agencies are surviving and thriving in today’s market. We’ll show you how to make more money and keep more of what you make. We want to help you build an agency that is sustainable, scalable, and if you want down the road, sellable. With 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 with another episode of Build a Better Agency. Welcome back, if you are a regular listener, glad to have you, if this is new to you, our goal with every episode is to speak very directly to agency owners and leaders of agencies that I call small to mid size. So you might have no FTEs or a handful of employees, or you might have a couple hundred employees. Anywhere in between there is sort of the sweet spot of AMI. And by the way, if you are constantly sort of talking about how small your agency is, remember that the average agency size inside the U.S is about eight full time equivalent. So you may not be as small as you think you are, you may be average or even above average.

So a couple quick things I want to think about and talk to you about today before we jump into the interview. Number one, we have some killer workshops in January. Please go to the Agency Management Institute website and check them out. Both of them are focused on BizDev. One is about how to build and nurture your sales funnel, and we’re actually going to make you build out the sales funnel while you are there. So we’re going to show you how to do it, and then we’re going to give you time and coaching on how to get it done so that you leave with a pretty robust sales funnel. You may have to flush it out a little bit after you get back, but I want you to have it at least 80% done so that you can hit the ground running when you get back in the office.

Then the second one is with our friends at Mercer Island Group. They always deliver incredible content. And this is a brand new workshop, brand new content. They have been studying the buyer’s journey that a prospect goes through long before they’re on our radar screen. And they’re going to talk to us about that, and how we can win at every milestone, even when we don’t know they’re out there.

So check those out. Those are both towards the tail end of January in sunny Orlando, Florida, which is not a bad place to be in January. So, would love to have you join us there. Also want to remind you that we are always grateful for ratings and reviews for the podcast. So leave us a rating and review wherever you download the podcast. And make sure you take a screenshot and email it to me so that we can put you in the drawing for a free workshop. So every month we give away a free workshop, either a seat in one of our live workshops, or access to one of our on-demand workshops. Both retail for about two grand. So it’s probably worth it to spend three, four minutes leaving a review and have a shot at winning a free workshop. So we’d be glad to have you at the workshop, and we’re always grateful to hear what you think about the podcast. I promise I read every one and take them to heart, so I appreciate them.

All right, so let’s talk a little bit about what I want to talk about today. So you know those days, and you may have even uttered under your breath, “I would sell this agency for a plug nickel.” There are just some days that agency ownership is challenging, so we think about what it would be like to just hand over the reigns to somebody else. And even on great days, for most of you, one of your goals is to sell the agency eventually. And to do that, you need to understand how an agency is valuated.

So, I have invited Gina Cocking on the show. Gina is a managing director and partner at Colonnade Securities. They are a boutique investment banking firm that specializes in mergers and acquisitions for clients in the services industry. So, they have worked with and helped many agencies buy or sell, and so what I want to do today is I just want to pick Gina’s brain about how we can add as much value to our agency. And again, this is true whether you want to sell it, whether you want to pass it down to one of your kids, whatever your exit strategy is, you always, of course, whether you’re going for a bank loan or anything else, we want our business to be of great value.

So, regardless of what you think the end holds for you in terms of transitioning out of the business what I’m hoping is that I can extract from Gina some real gems so that you can add more value to your business every day, and take full advantage of it in all of the ways that that’s possible, all right? So, without further ado, I want to welcome Gina to the podcast.

Welcome, thanks for joining us.

Gina Cocking:

Thank you for having me.

Drew McLellan:

So, your depth of expertise is in a category that I think is one of the places where many agency owners sort of fret and worry. Part of what I want to do in our conversation is to really pick your brain and to give them some good guidelines so that they really do have a sense of what their agency not only is worth or what they can do today, 20 years, 10 years, five years before they’re even thinking of selling it to make it of even more value. So first, why don’t you give everybody just a sense of your background, and how you have come to have this knowledge and expertise? Then, prepare yourself, because I have a lot of questions.

Gina Cocking:

Okay, great. Well, I am a long term investment banker. So, after from college I went into investment banking and I spent one year as an analyst for a private equity firm. After business school I went back to investment banking at JP Morgan, which we then, a few of us, left and formed Colonnade Advisors. I was with Colonnade Advisors for five or six years, and took a different turn in my career. Became the CFO of a number of companies. One of those was private equity backed. The other was a smaller company that we went out and raised a lot of private capital.

And I came back to investment banking six years ago. And here at Colonnade, we focus on mergers and acquisitions for business services and financial services companies. So, we do a lot of work with companies that are kind of in EBITDA, earnings before taxes of size pretty much from four million to as much as $80 million. Kind of our sweet spot are deals that end up being 75 to $125 million in size.

So, we do a lot of work with companies that are in data analytics, marketing oriented, business services companies, companies that are highly dependent on data analytics for marketing. So, call center type.

Drew McLellan:

So, I’m curious with the range of company sizes that you work with, probably most of the people listening are smaller than that. Is it not an option for them to think they can sell their agency?

Gina Cocking:

Oh, it absolutely is an option for them, it’s just kind of the field that we planned or the size that we planned. But no, if a company has enterprise value, so it is meaning it’s a value that transcends in individual. It absolutely could be of interest to a larger acquirer. When you get to the… you need a certain threshold to get the attention of a institutional investor, meaning a private equity firm. And that really is $3 million plus in EBITDA. But at smaller sizes you’re still going to have a lot of interests from what we call strategics or others in the industry that are looking to acquire [inaudible 00:08:20].

Drew McLellan:

Like potentially selling to employees, selling to another agency in the market, things like that, right?

Gina Cocking:

Exactly, exactly. And as I was stating earlier, it’s important to have that enterprise value. So, does the value of your entity transcend any one into a individual? That’s when you know you’re ready for sell. When you have a company that people are working with, not just because of you but because of what your company is known for.

Drew McLellan:

So, let’s talk about that a little bit. I know you refer to that as sort of an agency owner can kind of create a cult of personality, as opposed to a recognized company that stands independent of the owner. So, talk to us a little bit, like when you’re looking at a company or you’re doing some evaluation, what tells you? Because you know most agency owners are pretty charismatic. They are pretty outgoing, they’re pretty engaging. They’re often the sales engine for their agency. So it makes sense that a lot of people when they think of the agents you think of the owner.

So what kind of things would an agency owner have to do to diminish this idea of this cult of personality to create more value inside their agency for a potential buyer?

Gina Cocking:

Great question. We use a metric. Basically could the owner go away to an island and put away their cellphone for three months, and would the company continue to flourish? If the answer is yes, it is an enterprise. If the answer is no, it’s going to be hard to get full value for the company. What you may end up with is a glorified employment agreement. So, it’s can the company function without you? Does the team around you, can they continue to develop a new business? Maybe not as effectively as we can, but can they continue to develop new business? Can they continue to service the clients that you have?

Drew McLellan:

Okay, so it’s not really about having to have sort of another superstar in the wings. It’s really about, do you have a team around you that on any given day could step in and run the show?

Gina Cocking:

Exactly, exactly. So, I’ve run into problems with companies in the past where it’s a few individuals, and there’s always concern with buyers. If any one of those individuals left the company, would there still be a company?

Drew McLellan:

Right.

Gina Cocking:

Is it really worth paying a multiple of earnings for a company like that? So, getting buyers comfortable with that is paramount in order to get a good value for the company.

Drew McLellan:

So, I know for some agency owners, as they look down the road and they think about maybe selling, they have some key people on their team that they feel play a significant role in not only running the company, but certainly if they were to step away, those people would become even more valuable. So, are you saying they’re correct, and they need to figure out how to kind of in air quotes, handcuff those people to the company? And is a purchase deal often tied to the continued employment of those people? In other words, I’m buying your agency but I also want employment agreements that I lock in the leadership team or the key players along the way.

Gina Cocking:

Yes. The team needs to, not quite be handcuffed in, but be incentivized to stay with the organization. So, when we think about how to do that, if you have employees now, before you even go through a transaction, putting an employment agreement in place that will incentivize them first to be really excited about the transaction. So, maybe giving them, not equity in the company, but perhaps profit’s interest in the transaction would be really helpful to get the deal across the finish line.

Then, post transaction if a buyer sees that, they will help create usually an equity pool for your key employees to participate in. And, they will be able to own 1% or 2% of the company on a go-forward basis. Now, if your employees own, kind of a rule of thumb is maybe 10% of the company, that employee will be subject to a pretty strict non-compete as part of the purchase agreement.

Drew McLellan:

Got it.

Gina Cocking:

Now, keep that in mind with thresholds. It is always challenging in a people business to keep everybody engaged with the company, and everybody comfortable with the idea that we’re buying a company where people are going to continue. So, another way that this is done is through an earn out structure. So if an agency is being acquired, the buyer will say, “Okay, we’re going to pay all in just picking a number about eight times their earnings. We will pay you four times at close and one time per year, each year for the next four years.

Now you only get that what we call an earn-out, if you hit certain thresholds and it could be an earnings threshold or a revenue threshold, and you as the business owner know that in order to achieve those thresholds, you either have to have your current employees still excited and working for you, or you have to be able to replace them and continue to build the team. So that’s usually the way service business is. The deals are structured as multi-year deals to keep everybody aligned.

Drew McLellan:

And typically, how often are they expecting the agency owner to stick around?

Gina Cocking:

It depends on how the deal is positioned. At the outset, if the agency owner says, “You know what? I am not going to stay with this business.” Great. Then they’ll be expected to stay for a couple of months. The value of the agency may be negatively impacted by the fact that the owner will be leaving. Otherwise two to three years. And maybe it’s an earn-out, maybe it’s even longer, maybe it’s even four years. And the earn-out will be tied partially to the owner’s continued employment. So not only do you have to have the threshold, but you actually have to be working there. And we see that a lot with, for example, with insurance agencies.

Drew McLellan:

So what about sort of determining the value? So what are some of the elements that would make an agency worth more or less to a potential buyer? Again, whether it’s an internal buyer or it’s the agency down the street, or for some of the larger agencies listening, maybe it is an institutional buyer, but for most of my agencies who are listening, it’s not likely that a big investment company is going to come in and buy them. They’re just not that big.

Gina Cocking:

Sure.

Drew McLellan:

So nonetheless though, I would assume that the factors are kind of the same, right?

Gina Cocking:

They are. They are. I would say number one, getting back to part of our earlier conversation, enterprise value. Is this a brand name that’s being recognized? Is it a company that transcends an individual? Number two, recurring revenue is valued. And sometimes it’s hard in an agency business because you’re doing a lot of project-based work. So you’re not going to have recurring revenue from the same client. So first of all, if you’re in a type of agency where you’re doing a lot of work, where you have the possibility of having recurring revenue, ongoing engages with clients. You have a retainer that takes you through multi years, the more recurring revenue and the more contracts you have in place, the longer your relationships, the hiring value. If you’re more of a project based agency, the question is how do you get your next client?

And that’s where vertical expertise is really important. Do you have to go out and scramble each time to go find your next client, or are people coming to you? And if people are coming to you and you’re a known brand for that type of client, you have more value. So one way to do that is… And I’m a huge believer in focus, and a vertical industry focus. It’s really, it’s easier to be a Jack of all trades, than a master of none, than to say, “You know what? I am only going to really focus my agency’s efforts on working with wealth management companies. I am going to only take on wealth management companies. I’m going to go to their conferences to advertise my services. I’m going to write articles about wealth management companies, and everybody will know my name.” Now I might not just be local, but I might have a national practice.

Then everybody knows, you call Gina’s agency if you’re a wealth management and you’re looking for advisory work. If you say, “Well, I do wealth management, but I also work with fast food chains, and clothing boutiques, and higher education then your message gets a little convoluted. You can do that when you’re a large company, but as a small company, you’re not conveying a consistent message. You’re not conveying a consistent face to the world. So essential clients aren’t necessarily going to think of you. They’re not going to get that referral base that you need to almost kind of generate what looks like a recurring revenue stream, because you’re the known entity.

Drew McLellan:

So what I’m hearing you say is that is expensive for an agency to be a generalist. And there is great value in being a specialist.

Gina Cocking:

That is exactly it.

Drew McLellan:

And that just like in the medical community, no one’s going to drive by 12 general practitioners to get their flu shot, but they will drive 300 miles to get to Mayo Clinic to see a specialist.

Gina Cocking:

That is exactly right. That is exactly right. And what we see is when we see companies that are becoming successful and scaling up, and they’re becoming companies that are 10, 20, 100 million dollars, what they’re doing is they start with a focus and then they build off that focus into other verticals, or they start acquiring companies that have another vertical expertise. So when you’re a company that’s of size of less than five million in earnings, you are much more likely to have a… You have a broader acquire universe with a focus than as a generalist.

Drew McLellan:

Okay. So because my listeners have heard me say this a million times, I’m going to repeat it again. It’s not just me, Gina is saying the exact same thing which is, that it is very risky for us as agency owners to be the Jack of all trades or in my vernacular, the generalist. That not only can you grow faster, but you certainly are creating a better sense of value. Again, whether you’re going to keep the agency and you’re just going to use it as an ATM machine, or you’re going to sell it to your employees or whatever. But one of the key things is the specialist is able to attract business. And one of the key factors in determining the multiplier of value