Episode 420

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Many agency owners want to see 20% growth (or more) year over year while staying profitable. This goal isn’t entirely unrealistic, but the bigger you get, the harder it is to maintain such impressive numbers if you’re not investing resources in the right things to support that growth.

For this week’s solocast, I have some homework for you to do to help you see if you’re prepared to meet your growth goals in 2024. Don’t worry; we will do it together while I walk you through how to crunch the numbers step-by-step.

If you want to follow along, grab your P&L statement and our growth goal worksheet linked below, and get ready to do some math. By the end of this episode, you’ll have a much clearer picture of where your agency is at financially and what level of growth you can support next year based on the numbers we calculate today.

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.

growth goals

In This Episode:

  • The basics of staying at 20% profit while doubling in size
  • The mistakes we often make when setting end-of-year growth goals
  • How to set a healthy growth goal based on your agency stats
  • Why attrition affects your growth goal, and how much
  • Emphasizing the role AEs play in growing clients
  • What your agency needs if you plan to grow more than 15% year over year
  • Which tough decisions agency owners need to make to hit growth goals
  • The importance of niching down to boost growth

“If you want to double your agency's size in about three years, you must increase your new AGI by 25% every year.” @DrewMcLellan Click To Tweet
“A place where we often make our first mistake when setting goals for the year is we forget to factor in attrition.” @DrewMcLellan Click To Tweet
“For most agencies, 10% year over year is a very healthy growth goal. Remember that growth is expensive and not just expensive in dollars. Growth is also very expensive in terms of the burden it puts on the agency.” @DrewMcLellan Click To Tweet
“For a really healthy agency, 60 to 70% of your net new revenue should come from existing clients.” @DrewMcLellan Click To Tweet
“If you're going to grow more than 15% year-over-year, you need to ensure you have a rock-solid new business plan.” @DrewMcLellan Click To Tweet

Ways to contact Drew:

Resources:

Hey, before we get to the show, I just wanna remind you that we have created a private Facebook group just for you, our podcast listeners. There are almost 1500 agencies, agency owners inside that Facebook group every day talking about what’s going on inside their shop, asking for resources, gut checking decisions, talking about everything from pricing to hiring, to biz dev. All kinds of things are happening there. We’re starting conversations. You guys are starting conversations. What I love about it is the community’s coming together and sharing resources, encouraging each other, and just sort of having a safe place to talk about what it’s like to own an agency. So all you have to do is head over to Facebook, search for a Build, a Better, Agency Podcast Group, or Build, a Better, Agency Podcast.

And you’ll find the group. You have to answer three questions. If you don’t answer the questions, we can’t let you in. But they’re simple. It’s, do you own an agency or do you work at an agency? And if so, what’s the U R L? What are you trying to get out of the group? And will you behave, basically? So come join us. If you haven’t been there for a while, come on back. If you haven’t joined, join into the conversation. I think you’re gonna find it really helpful. All right, let’s get to the show.

Running an agency can be a lonely proposition, but it doesn’t have to be. We can learn how to be better faster if we learn together. 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-size agencies are surviving and thriving in today’s market with 25 plus years of experience as both an agency owner and agency consultant. Please welcome your host, Drew McLellan.

Hey everybody. Drew McLellan here with another episode of Build a Better Agency. Super excited to be with you today. It’s a beautiful fall day here in Denver. It’s Crisp Air and fall’s my favorite time of year, so I’m, I’m feeling good. It’s early in the morning and today’s gonna be a day that I just get a lot of things done. We’re teaching Money Matters later this morning, which we love to do. We’re gonna be in a room with about 50 people talking about some of the things that help them run their business so that they make more money and get to keep more of the money they make. So gonna be a great day, hopefully for you as well. So today is one of my solo casts. So what that means if you’re a veteran, you know, but what that means if you’re new, a newbie to the podcast is no guests today just you and me talking about something that probably I’ve been talking to agency owners about for a month or so, or even longer.

And I just wanna get it on your radar screen. But first, before I do that, every solo cast, of course, you know that we give away one seat to an agency owner who has left a review for the podcast. So here’s how that works. Here’s how you get in the drawing. You leave a rating and review somewhere, wherever you download the podcast from. So it could be Apple Podcasts, or it could be iHeart, or it could be Google or anywhere that you get the podcast, just leave a rating and review and take a screenshot for me. And then you’re gonna email that screenshot to me at Drew at agency management Institute dot com. And the reason why I need you to email it to me, we do read every review and I’m grateful for them, but a lot of times your screen name doesn’t tell me who you are.

So you know, I love Hot Tamales 86, I don’t know who that is. And so I need a screenshot so I can identify that it’s you. Your name goes in the drawing and it stays in the drawing until you win a workshop seat. And so, you know, our workshop seats are around $2,000. So pretty good prize just for leaving a rating and review. And sooner or later you’ll win. The universe isn’t that big. So feel free to do that and send it to me. But this month’s winner is Stuart Sby. So Stuart is the founder of Stack Creative. So Stuart, congratulations. I’ll be sending you a note telling you that you won, but in case you hear this first, just know that I’ll be reaching out to you and we can talk about which workshop would best serve you and your agency.

Speaking of workshops, I’m excited. We’re trying a new experiment other than Covid, when we couldn’t do our workshops live, we’ve always done all of our workshops live and I wanted to experiment with an idea I had around a, a shorter, a one day virtual workshop. I know for a lot of you, especially those of you that aren’t in the states, traveling to the US for a workshop is challenging. And for others of you, you have little kids or whatever it may be that getting on a plane and traveling and being out of the office for a couple days is tough. So I wanna experiment with one day virtual workshops. And our first one is coming up in November. It’s November 13th. And the title of the workshop is How to Sell Your Agency Without Regrets.

And we’re gonna talk about what you need to do both in the long term and long term is five to 10 years before you sell the agency. And then as the window gets closer, shorter term, what you need to do if you’re gonna sell your shop. And we’re gonna talk about selling it externally. We’re gonna talk about selling it to an employee and all the things you can do early on to increase the value of your business so that you get top dollar for it when you go to sell it. And then we’re gonna walk you through what the process is gonna be like to sell your agency and what you can expect. We’re also gonna do a backup napkin valuation so you can sort of have a ballpark, a benchmark if you will, of what your agency is worth.

And then one of the things I’m most excited about is, you know, Danielle and I are doing a lot of m and a work and we’re helping agencies buy and sell. And so we are gonna have two guests on the work at the workshop. One is someone who sold their agency and the other one is someone who bought the founder’s agency that they worked at. So the buyer and the seller are gonna kind of give you from their perspective really sort of the lay of the land of what it was like, what surprised them, what they wish they had known in the beginning of the process, those kind of things. And you’ll be able to ask them questions. So super excited about that. So again, that’s Monday, November 13th, if I remember right. I think we’re starting at eight or nine o’clock East coast time and going till about four o’clock East Coast time, four or five East, I think it’s nine to five.

But if you wanna register, just head over to agency management Institute dot com and under the How we Help tab, you’ll find workshops and you will see that workshop there. So anyway, how to sell your Agency Without Regrets, Nove November 13th. I’ll let you know how the experiment goes. I do think we’ll have a smaller crowd. You know, a lot of our workshops have 50 or so people in them and I don’t think we’ll get that many for the virtual workshops. So it’s also an opportunity to be with a smaller group of people and have more time to ask questions and things like that. I’m hoping it’s super interactive. So, alright, let’s talk about this. This month’s solo cast. So this is gonna be a little different.

I haven’t done a lot of interactive solo cast, but this one feels super interactive to me. What I’d like to do is help you set your budget for 24. So set your growth goals for 24 and we’re gonna walk through a process to do that. So you can listen to all of this and then go back and listen to it again and, and do the work with me or wait a second. And I’m gonna tell you what you need to do to do the work while you listen. So if you’re on a treadmill or driving or on the subway, go ahead and just listen and get the kind of the steps that you’re gonna take. But if you happen to be in the office or at home and you can pause and can grab a document.

So you can do the work, the paperwork at the same time. Let’s do that. So if you are gonna grab the piece of paper, gimme a second and then you’ll hit pause. So head over to agency management Institute dot com and under the resources tab you’re gonna see podcast. And in the in the podcast section, you’re gonna see this episode if you’re listening in real time, it’s the week of the 22nd or so of October. I think that’s what Monday is. Hang on. Yeah, the week of the 23rd of October 23rd. So if you’re not listening in real time, you’ll just scroll down until you find this episode.

So go to this podcast and just go to the show notes and you’re gonna see that a goal worksheet, growth goal worksheet, P D F that you want to download. Okay? And I’ll try and describe it to you as well, but this’ll be much easier for you if you have the sheet of paper and you can just fill in the blanks. All right, so let’s talk a little bit about growth goals. So when we ask agency owners, talk to me about what, what your goals are for the year and things like that, oftentimes what we hear are agencies setting a goal of, I wanna double my agency size in three years. Oh, and by the way, I wanna do it while I’m being profitable.

I wanna make 20% profit while I’m doubling the agency in size. And you know, when you’re three or four or five people doubling in size is much easier than when you get to 10 or 15 or 30 or a hundred people gets exponentially harder the bigger you are. And some of you, when your agency was small, you were doubling in size for the first few years and, and that got to be what you felt was normal, which I’m gonna tell you is not normal. But it, it is often common at the startup phase. So if you wanna double your agency’s size in about three years, to do that, you have to increase your new a G I by 25% every year.

So again, to double in size in three years, you’ve gotta grow by 25% year over year. And after the third year you’ll be double in size of where you were the first year. So what I want to do is I wanna make sure we’re all talking about the same number. So I’m gonna very quickly go through what is a G i I promise this will be quick for those of you that are familiar. But as we often know, most agency publications and consultants talk about gross revenue, which is an absolute vanity number. Gross revenue is meaningless because you can have a PR agency and a media agency that both have a gross billings of $5 million and one is gonna be a large shop because they have hardly any cost of goods.

And the other one is gonna be a super small shop because 85% of their gross billings actually go right back out the door to media bills. And those are their cost of goods. So really the number that we as independent agency owners care about is a G I or adjusted gross income. And so to get that number, basically you’re gonna take your gross billings, you’re gonna subtract all of your cost of goods, and what’s left is your adjusted gross income, which is the money you have to spend to run the business and, and you’re gonna spend that money on people overhead and profit. But first let’s talk about what is cost of goods. ’cause there’s a lot of confusion about this.

Cost of goods are any cost that you incur to service a client. In other words, you would not spend the money if it weren’t for a specific client or subset of clients. So that could be printing, it could be media, it could be software that you use specifically because of the kind of clients you serve, like media planning software or influencer tracking. It is, and this is the one that most people get wrong, it’s all contract labor. So anybody that you pay that is not on your payroll, that’s not an employee. So it could be a a, a web dev person, it could be an overseas contractor, it could be any a, a writer.

But anybody that you get a, that gets a 10 99 from you if you’re here in the states or is not an employee that gets a regular paycheck from you if you’re outside of the us, those are all contract labor, those are all contract labor and they’re all cost of goods. And the reason for that is, is you don’t give them money when they’re not doing something on behalf of a client. So for those of you that have an outsourced HR function or something like that, that would be an overhead expense ’cause they’re serving the agency, not your clients, but anybody who’s doing work for you on behalf of a client, whether it’s a company or an individual, those are cost of goods. Some other cost of goods are web hosting, server fees, travel and meals tied to client meetings, things like that.

And then overhead of course is rent and lawyers and professional development and car expenses and your internet utilities if you have an office, client gifts, award entries, credit card processing fees if you accept credit cards, charitable donations, things like that. So again, gross revenue minus cost of goods equals our A G I. And then what, what we do with that a g i is we pay for salaries and benefits and about 55% of our a g I should be spent on salary and benefits, 25% on overhead. And that leaves us with 20% for profit. So let’s assume that you’ve done that math.

So if you have to pull your p and l and crunch what your a g I is because you don’t record it that way now, now it’d be a good time to hit the pause button on the podcast, go grab your P and L and what I’m gonna be asking you to get is your projected end of year a G I for 2023. So again, if you, if you know that off the top of your head, it’s the end of October, you’re already projecting out and you’re like, I’m pretty sure we’re gonna be at $3 million by the end of the year or whatever that number is that great, then you don’t need to hit pause. If you need to go crunch that number or go grab a p and l to look at that, go ahead and hit pause now and get your projected end of year A G I for 2023.

Alright, so I, I’m gonna pause just for a second. So those of you that are not pausing, just hang on until you’re just gonna hear a quick second of silence. And for those of you that need to go now, it’d be a great time to go, alright, welcome back. So hopefully by now you have downloaded the worksheet that’s setting your growth goal worksheet and you have grabbed your adjusted gross income for the end of the year. So if you’re looking at the growth goal or if you’re doing this on just a piece of paper, the first thing I want you to write down is the number of what you think your A G I is going to be at the end of the year. So for our example, we’re gonna say that it is $3 million and this, it doesn’t matter if it’s 3 million or 300,000, it doesn’t matter at all.

But anyway, write down your growth goal, your A G I for the end of 2023. So the next thing we have to do, and this is a place where we often make our first mistake when setting goals for the year, is we forget to factor in attrition. So the reality is very, very few agencies are gonna keep the same clients and the same and all your clients are gonna spend the same money year over year. So attrition doesn’t necessarily mean a client’s gonna go away. We’re gonna talk about attrition in terms of dollars, not in terms of clients. So let’s say I ended the year, I’m gonna end the year in 23 with $3 million of a g i, a typical agency is gonna experience 10 to 15% attrition year over year.

So that might be, we had a client that had a big spend in 23 that they’re not gonna repeat in 24. It might be that a client is went away, we lost a client. It might mean that we have clients who are tightening their belt and they’re just not gonna spend as much money, but we have to assume we’re gonna have some attrition. Now if you’re a project shop and your pipeline is kind of dry or you know that you, you have more attrition, meaning that if you got no new clients in 2024, you’d have far less than the $3 million. So in my example, I’m gonna say my agency is gonna experience 15% attrition.

So 15% of the dollars that we got in 2023 I can’t count on for 24. So that means I have $3 million of a g i at the end of 23 and I’m expecting that I’m gonna lose 450,000 of those dollars that they’re not gonna come back. Which means that if I get no new clients or no new projects from existing clients, which I know is not real, but this is, we’re gonna just do this together step by step, then that means that I’m gonna end 2024 with $2,550,000. So again, I’m, I am, I’m ending 23, having earned $3 million, I’m gonna assume an attrition of 15%, which is $450,000.

So I’m gonna subtract 450 from 3 million, which gets me what we’re calling a new net of $2,550,000. So if you’re, if you’re doing this on the form a line A is your a G I at the end of 23, line B is your expected attrition. So again, what I’m telling you is the norm is 10 to 15%, but you figure out what’s appropriate for your agency. Could be smaller, could be bigger, but whatever that is, calculate that and write it in dollars line B and then subtract B from A.

So I’m gonna subtract my attrition from my year end a g i. So now I’m at $2,550,000, everybody with me so far. So again, my new net is if I get no new clients whatsoever, which of course or or no new business from existing clients, which is probably not gonna be the case, but that’s where we’re gonna get there right now for a second. And then we’re gonna pause. Alright, so I want to grow 25%. So in my example, you may wanna be a little bit more realistic, you may, you know, people will say to me, what’s a healthy growth goal?

Honestly, for most agencies, 10% year over year is a very healthy growth goal. Remember that growth is expensive and it’s not just expensive in dollars. Growth is also very expensive in terms of the, the burden that it puts on the agency. So 10%, 10 to 15% is a manageable amount of growth for most agencies where you’re gonna add the weight of that 10 to 15% onto your systems and your processes and your people. And that’s enough weight that you’re not gonna buckle everything and break it because of the weight. You talk about 25% growth year over year. And especially if you’re doing that in multiple years, understand that a lot of your systems and processes are not gonna be able to bear the weight of the new size of the agency.

And so you’re gonna have to reinvent a lot of different things that you do every day. So I want you to think about what’s a realistic and manageable growth goal for us. So are we, are we actually pretty lean on staff? Would we have to staff up right away if we got some new clients? Are we at a point where we actually have some extra capacity and we probably could take on another half a million dollars without adding staff? Sort of do some consideration of what’s realistic for you and what is reasonable for you in terms of a growth goal. So in online D, what I want you to do if you’re using the form is put the percentage, here’s the percentage of growth I wanna project for over year end 2023.

So this is the percentage of growth I want in 24. So on the left side you’re gonna put the percentage amount, but then I want you to calculate the dollars for the line on the right. So because we’re gonna do math, right? So if we’re, if you’re following along with me, $3 million minus $450,000, which is my attrition, that’s 15% gives me a new net. If I get no new clients of $2,550,000, okay? If I want to grow by 25%, I wanna be super aggressive, 25% of 3 million. ’cause again, remember I wanna grow over my year end a G i 25% of 3 million is $750,000.

The, so that’s my growth goal for the year, but I have to account for the attrition. So I have to add the $450,000 of attrition to the $750,000. So again, if you’re following the form line E is B, which is attrition plus my growth goal D. So four 50 plus seven 50 is actually $1.2 million. So that’s my growth goal plus replacing the lost dollars of attrition. So this is, this is the first clue of why 25% is so aggressive because when you factor in the attrition, my growth goal, my real a g I growth goal is actually 40%, it’s not 25% when I factor in the attrition, right?

’cause it’s 25% plus the 15% everyone tracking with me. So again, let me just give you these numbers. So on my form, if I was filling it out, I’ve now filled out A through E. So it’s $3 million minus $450,000 of expected attrition gives me a new net of $2,550,000 if we get no new business from existing or new clients. But I want to grow by 25% and 25% of 3 million is $750,000. Which means that my go get for 24 when I add the attrition of four 50 to my growth goal of seven 50 is 1.2 million.

Alright, I’m gonna pause for a second and let you guys do that math and then I’m gonna take a quick break and then we’ll come back and I’ll, we’ll fill out the rest of the form because there’s more complication to this growth goal that I don’t want you to miss. This is actually the nuance that is super important. So don’t, don’t think, oh great, I’ve, I’ve got it figured out, I’ve set