Episode 52:

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.

 

 

What you’ll learn about in this episode:

  • 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
  • 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

 

The Golden Nugget:

“Small businesses exist for the benefit of the owner.” – Henry Corona Click To Tweet

 

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Speaker 1:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits to? Welcome to build a better agency, where we show you how to build an agency that can scale and grow with better clients, invest in 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 McLellan:

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 want to 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. 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 am going to 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 and 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 and 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 to 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 going to focus on today is Henry’s extensive experience in M&A and the valuation of agencies. He’s going to talk to us about how that used to be and how it is today in today’s market. Henry, welcome to the podcast.

Henry Corona:

Thanks, Drew. Glad to be here.

Drew McLellan:

From film to advertising, was that a big jump?

Henry Corona:

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 going to believe them and aren’t going to want to follow their advice. I’ve spent essentially my entire professional career in the financial management of professional creative services. And there’s very blurred line between film and entertainment and marketing communications.

Drew McLellan:

What you’re saying is in every agency owner hides a little George Lucas.

Henry Corona:

And many do, and many see the far horizon and are driving for it. In other cases, and I think there are probably many of these, the 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 McLellan:

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 Corona:

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 going to make any less money or, well, 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, he needs to be a billionaire and he wants to build an agency that can make that happen. Literally I won’t identify him, but he’s driven and that’s what he’s doing.

Drew McLellan:

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, 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 Corona:

Many don’t invest in the agency.

Drew McLellan:

And tell me what you mean by that?

Henry Corona:

Well, if you are managing an agency and you wish to be 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 going to 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 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, 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 accounts, if you’re not building your business, then you’re pretty much destined to stay right where you are.

Drew McLellan:

One of my big mantras is that agency owners need to be spending at least 50% of their working hours on new business. And 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 be 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 owner to focus on the things he or she needs to focus on, where else should an agency be investing if someday the owner wants to sell the business?

Henry Corona:

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, in 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.

And I think there’s much more new … Do you remember? Maybe it was 10 years ago where the term new media. And everybody thought, well, let’s see, that all of this new technology was all going to develop and it was going to blossom and then somehow we’d all grow into it. And so some of us did and some of us didn’t. 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 the software Salesforce, right?

Drew McLellan:

Sure. Yeah.

Henry Corona:

Okay. The consulting firms that support Salesforce make more money than Salesforce does selling the software.

Drew McLellan:

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 Corona:

Yeah. It’s a different form of it. And Salesforce is a magnificent piece of software. And I worked in agencies that used 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 are 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. Your general financial statements begin to have a different, have a limitations that you didn’t really anticipate. So your question was where do they need to in invest? And I think, first of all, we say, they need to invest carefully in technology and anticipate the personnel needs properly.

Drew McLellan:

Yeah. 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 under invest, don’t you think?

Henry Corona:

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 a very clear, and I thought that was really admirable, but they actually had about 125 touch points for a piece of artwork, for graphic-

Drew McLellan:

Holy buckets, right.

Henry Corona:

And so the owner said to me, “All right, I want you to streamline this. I think we’ve got too many touchpoints here.” And they had grown to a size, they were around 17 million AGI 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.” He goes, “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 McLellan:

Yeah. Agencies often overcomplicate I think. I think sometimes we forget that clients want to see the baby, they don’t necessarily want to participate in the labor.

Henry Corona:

It’s a good way to put it, yes. But to put your original question to bed, you make investments, you make careful investments 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 McLellan:

Before you have the account.

Henry Corona:

Before you have the account, because they have to believe that you can do the work before they give it to you.

Drew McLellan:

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 the agency owner in the position of having to be a staffer as opposed to a leader.

Henry Corona:

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 hand basket

Drew McLellan:

Right. Every dollar is not equal.

Henry Corona:

No. And so I think that the 80-20 rule sometimes is 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 McLellan:

Unless it’s the wrong half.

Henry Corona:

Right, unless it’s the wrong half.

Drew McLellan:

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 that’s not the case. You were talking about the cost per labor hour, and I know that that’s something you work with your clients a lot on. 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 Corona:

For 20 years now agencies have been saying, “We want to value price, we don’t want to price just on the hours because we want to be paid on the basis of the value we’ve provided.” And so there was kind of 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 is total non-productive over head 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? I mean, how many people are earning, are 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 cost you money and it really drags your profit. 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 of those people cost you. And maybe your meetings will get shorter and that’s not such a bad thing.

Drew McLellan:

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, that you really need to be … the target should be 150K of AGI per FTE, that’s sort of the target. And for digital shops it’s higher because those 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 Corona:

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 just to do my sort of quick look, how many, what’s the head count? What’s the revenue or AGI? And that’s actually one of the places where I start when I’m looking at operations.

Drew McLellan:

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 Corona:

This is a touchy subject. What happens in agencies is 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 McLellan:

Yeah, I call those stale employees.

Henry Corona:

I try to be a little bit more politically correct.

Drew McLellan:

That’s not my skillset.

Henry Corona:

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 that people want to … I commend people, I mean for their humanitarianism, for keeping people on, because they’re the lifeblood.

Drew McLellan:

Or they’ve 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 agents.

Henry Corona:

Yeah. And so I would never condemn somebody for that. I’d just 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 McLellan:

Yeah. Right. Again, you need to understand what the numbers are saying to you.

Henry Corona:

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 I you have to be very measured and careful about that you don’t offend somebody or you … 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 the salaries are a ratchet, they go, click, click, click, click, up, up, up. They don’t go back now. I’ve always been a proponent of a profit sharing, an informal and sometimes ESOP 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 McLellan:

As opposed to the annual, everybody expects a raise and a bonus at Christmas time.

Henry Corona:

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 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 McLellan:

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 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 what, 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 Corona:

Yeah. Sometimes they assume the higher qualities than human beings have.

Drew McLellan:

Yeah. Hey, we’re going to take a quick break and then we’re going to come right back, because I have a lot more questions to ask you. 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, our 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 want to talk more about valuation. 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 isn’t as worth as much as the agency owner would hope that it would be.

Henry Corona:

Well, as you know, the labor cost is far and away the largest portion of every agency’s cost. That’s the first, you take the first quick look at that and say, “Are you closer to 50 than to 70?”

Drew McLellan:

Yeah, percentage of AGIs-

Henry Corona:

Percentage of AGI. And then I split the executives, in some cases it’s the owner, some cases it’s the owners or the senior management team. And I see what percentage of AGI is domiciled there.

Drew McLellan:

And what percentage do you look for that you think is a healthy percentage?

Henry Corona:

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 McLellan:

Okay, hang on, I want to make sure I’m understanding you. 15% of the overall AGI or 15% of the salary portion of the AGI.

Henry Corona:

15 of the 50 or 55 or 60 points.

Drew McLellan:

Okay. So agency owners, what Henry is saying is, 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 yield target is 55%. For most agencies, they’re in the sixties 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 salaried 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 Corona:

Right. And being outside the norm is it comes back to that agency ratio model. And you and I have talked about this in the past, so you have sort of the general.

Drew McLellan:

The 55, 25, 20, you mean?

Henry Corona:

Yes, sir.

Drew McLellan:

And you have a more detailed one, don’t you?

Henry Corona:

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 I have some key line items that I put into it. And then what we do is we say, what can we change? If we’re making 11%, and we want to make 15% net, pretax, or we want to make 20, or we want to make 25%, whatever it is. Where can I reduce? I mean, what makes sense? What can I reduce without costing me and you the new business or affecting the way I deliver my services?

And it’s kind of a broad and somewhat simplistic because there’s always more to it, just whatever it is, there’s always more to it. But it’s a good snapshot and then you go, “Okay, I’m going to 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 right to the bottom line.”

Drew McLellan:

Right. Give us one or two of those that you look for as a place to make a quick fix.

Henry Corona:

I think of it as in conferences, trade shows, those kinds of things. Surprisingly 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. Often times the biggest numbers are in what I call discretionary operating expenses, which is another way of saying what the owner passes through the business. And oftentimes those will just jump out at you.

And my feeling is that small businesses exist for the benefit of the owner. And the other thing I always try to keep in mind is this individual built this business, I didn’t build it, he built it. And he may not be doing it exactly right or by the book, but he’s been successful. I want to be respectful-

Drew McLellan:

Of course.

Henry Corona:

… when I come in. My job is not to tell him, to give him what’s right or wrong, I just need to point out where the issues are.

Drew McLellan:

And give him or her options.

Henry Corona:

Exactly.

Drew McLellan:

If they want to correct it.

Henry Corona:

Right. 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 got four partners and one president. Some combination of an executive team that it’s very valuable to you. And so you’re going to 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 going to be higher, your cost is higher. And so you have to somehow get your rates up, which is virtually impossible in this marketplace.

Drew McLellan:

Well, you’ve got to demonstrate why you are more valuable than anybody else. And 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 Corona:

Or the nurse prices, right.

Drew McLellan:

Right.

Henry Corona:

That’s actually a good way, it’s the difference between the surgeon and the nurse. I was with an agency, a small agency. He regards himself as a mid-size agency, it’s a small agency. And 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 that he has some upside. But he admits that he has to be on every account because they come to his agency because of him and that’s a trap.

Drew McLellan:

Yeah, that’s a very limiting factor.

Henry Corona:

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 will 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 McLellan:

Which gets back to your first point, 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 Corona:

Well, training, yes, exactly. And that’s why I admire what you do with the 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 McLellan:

Well, I’m a big proponent though and send a couple people, if you’re going to a workshop or training, whether it’s ours or somebody else’s, make sure you get the deck. And part of the deal of them getting to go to that training is they have to bring it back and distill it down for the staff in a lunch and learn or something to try and spread that knowledge through the agency.

Henry Corona:

Absolutely. That’s a great policy.

Drew McLellan:

Yeah. If somebody’s 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’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 Corona:

Gosh, Drew, you didn’t warn me about this question.

Drew McLellan:

I love to surprise my guest.

Henry Corona:

Gosh, 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 McLellan:

Through either salary or pass throughs.

Henry Corona:

Yeah, through either salaries or pass throughs. And I point out to them this, in a way, so you figure out what your markets salary is or what your market compensation is for yourself in your area. And anything above that is part of the purchase price, that part of the value of the agency. You have two choices, you can keep taking all of that and just regard it as I’m taking value out.

Drew McLellan:

I’ll sell it for less down the road, but I’m making part of that sale today.

Henry Corona:

It’s I’m willing to take less down the road in order to take this value now. And then that’s just make that conscious choice and live your life. But don’t be diluted into … Now what happens with those extras, are you familiar with the term normalizing financials?

Drew McLellan:

Yes. But go ahead and define it for everybody.

Henry Corona:

Well, it’s when you add back all those, what you euphemistically called discretionary operating expenses.

Drew McLellan:

Or pass throughs.

Henry Corona:

Pass throughs. That if you were working for somebody else you wouldn’t be taking. And what we do when we’re doing evaluation 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. 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 pass throughs that couldn’t be taken if you were part of a larger corporation are added back to net income.

And then the 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. I’m going to go four times, 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. You have to be certain that you’re getting a big enough payment.

Drew McLellan:

Right. I had a conversation with an agency under 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. And what I said is some of the choices you’re making are going to fall into one camp or the other. That doesn’t make them bad choices, it just means that it’ll 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 at the end 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 Corona:

If you’d like, I can give you just a quick summary on general size and the value, or is that a subject for another time or?

Drew McLellan:

Yeah. You know what, I do want to have that conversation, but we’re running up onto an hour and I want to be mindful both and respectful of both your time and the listener’s time. Let’s do this, let’s agree that we will schedule another conversation and we will dig into specifically valuation and some of those kind 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 going to come back and have a second conversation. Does that make sense?

Henry Corona:

Yes. I leave you with one thought.

Drew McLellan:

Great.

Henry Corona:

The value of any agency is going to 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 McLellan:

Oh, that’s an awesome teaser to leave the listeners with. Our next conversation will all be about structuring the deal to make sure you maximize your opportunity. Does that sound like a plan?

Henry Corona:

Yeah, that sounds like a plan.

Drew McLellan:

Okay. Henry, if folks want to track you down, if they want to follow up with you, if they want to read more about your work, where is the best place for them to find you?

Henry Corona:

Well, they can call me at phone number or email, so (305) 748-0888, or [email protected]

Drew McLellan:

And spell Financesur for everybody.

Henry Corona:

Finance like finance, F-I-N-A-N-C-E-S-U-R.com.

Drew McLellan:

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 Corona:

Thanks, Drew.

Drew McLellan:

… so much for sharing your expertise. You’ve got decades of experience that I’m looking forward to digging deeper into our next conversation, so thanks for your time today.

Henry Corona:

Gracious of you. Thank you.

Drew McLellan:

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 promise that I would never make one of these more than an hour. I’m going to 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.

Speaker 1:

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