Episode 415

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There’s more M&A activity amongst agencies than ever before. As agency owners get older and running the business becomes more stressful, many owners are running out of gas and looking for a reset. This means there has never been a more perfect time if you’re looking to buy an agency. And if you’re looking to sell, it might go faster than you anticipate.

We know that M&As are stressful on both sides of the deal, no matter how much you plan ahead. So this week, we’re taking a deep dive into the whole process — how far in advance to plan your sale, valuation, succession planning, dealing with the emotions behind it, and much more.

Even if you’re not planning to sell your agency right now, eventually, this will become a reality, and it’s always better to be ahead of the curve. So don’t miss this longer episode packed with tips for passing the torch and preparing for the future of your agency.

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.

M&A

What You Will Learn in This Episode:

  • Why M&A activity is so high right now
  • The strongest factors that will determine agency valuation
  • How to assess your agency valuation
  • Preparing 3-5 years in advance for an M&A
  • Passing the torch to a new owner and being the buyer’s cheerleader
  • Giving your employees the opportunity to be an internal buyer
  • Preparing for an M&A for both a buyer and a seller
  • Expenses to expect when preparing for a sale on both sides

“We're seeing more fatigue in agency owners of the 40+ age group, and they feel like they don't have as much gas in the tank as they used to. And for many agencies, we're seeing energy around the idea of resetting and reinventing.” @DrewMcLellan Click To Tweet
“If you do an initial valuation three to five years out, you can identify some of the weak spots in your agency that diminish the value of your shop. Now you have three to five years to fix that.” @DrewMcLellan Click To Tweet
“Most of the owners thinking of selling tend to be the people that drive the new business for the agency. So what adds value is for you to be irrelevant in that.” - Danyel McLellan Click To Tweet
“The buyer has to understand we're asking the seller to change decades of habit, muscle memory, and where their heart is. Being understanding and compassionate around that makes a huge difference.” @DrewMcLellan Click To Tweet
“Our best advice to you is do not go at it alone. You need someone beside you who's done this before and who will help you see the big picture. They'll hold your hand and talk you off the ledge.” @DrewMcLellan Click To Tweet

Ways to contact Drew and Danyel:

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.

It doesn’t matter what kind of agency you run, traditional digital media buying, web dev, P r r brand, whatever your focus, you still need to run a profitable business. The Build, a Better, Agency Podcast, presented by a White Label IQ will expose you to the best practices that drive growth, client and employee retention and profitability, bringing his 25 plus years of experience as both an agency owner and agency consultant. Please welcome your host, Drew McLellan.

Hey everybody. Welcome to another episode of Build a Better Agency. We’re super excited to be back with you. As you know, if you’re a regular listener, every fifth episode is a solo cast. That’s where I or Danielle and I together come and just chat with you about something that we know is on your mind and that happens to be this episode. So if you’re new to the podcast, have no fear, we’ll be back with a guest next week. But you get just the two of us today and we’re gonna talk about a topic that we’re being asked about quite a bit. So one of the great things about a solo cast is I get to remind all of you that you have the opportunity to win a free seat at one of our workshops. And the way you do that is super simple.

You go to wherever you download the podcast and you leave us a rating and a review. So you can say one star, they suck. You can say five star. They’re awesome. They make me cry every week or anything in between. But

All you need dancing, dancing would be better. They make we dance every week.

Oh, I like that. I like that. Yeah, okay. Dancing or crying, whatever we evoke in you. But you need to take a screenshot of the review and email it to me, because even though we read all the reviews, everybody has usernames and we have no idea who you are. So you know, if you’re biker babe, 1 0 2, I don’t know actually that that’s, you know Bob who owns an agency in Milwaukee. So you need to take a screenshot. I

Wanna meet biker babe. Bob,

Who’s Bob? Yeah, I think we all do. Anyway, send us a screenshot of the review and we’ll put you in the drawing and your name stays in the drawing until you win. So sooner or later, it’s gonna be your lucky week this year, this week it is Colleen Gallagher’s, lucky week. So Colleen, congratulations. I will shoot you an email and let you know that you are the lucky winner, but any a m I workshop that you wanna attend, you’re welcome to join us for no cost other than coming to see us in Denver. So super excited about that. Alright, so what we’re gonna talk about is it’s 2023, if you’re listening to this in real time, it is September of 2023 and there is more m and a activity in the agency space than ever before.

And so we’ve been asked a lot to talk a little bit about what’s happening in the m and a space, why it’s so active, and what you need to be thinking about if you are either in, in the position of wanting to sell an agency or buy an agency. And you might want to be buying an agency because you already have one and you wanna add to your service line by having in something new. Or you might be a, an employee who’s looking to buy out a founder, or in many cases you are an agency owner who is ready to sell. So let’s talk a little bit about why all of this is going on. So, you know, when you think about it, most agency owners are probably a little north of 50 in their mid forties, early fifties.

And so they’ve gone through a lot in their, in the time that they’ve owned an agency, they’ve survived nine 11 a great recession covid. And honestly, some of them are just like, you know what? It is time I am ready to cash out. So we’re seeing more fatigue in some agency owners of that age group and they just really feel like they don’t have as much gas in the tank as they used to. And for many agencies we’re seeing a lot of energy around the idea of resetting and reinventing,

Right? So even if you’re not thinking about buying or selling, I think that we’ve all been so reactionary going through Covid and then having, you know, the great exodus of employees and fighting for talent that is of a higher, higher salaries. And so we’ve been reacting and also if people are gonna be working remote or if they’re gonna be working in office, and there’s been so much we’ve been dealing with as agency owners, it’s been reactionary in this time period just to keep the doors open just to, to get by. So this new reset is really important. And again, some people decide that the reset means that I don’t wanna be in the agency space anymore.

For some people it’s like, okay, now it’s time for us to grow. We’ve just been surviving and we want to grow. And, and merging or acquiring another agency is an awesome opportunity to do that.

Yep, for sure. So, you know, another reason why I think we’re seeing a lot of the activity is, you know, many agency owners have really had a great run over the last three to five years, super high profitability. And that combined with the fact that they’ve, they’ve been smart about pulling money outta the business, investing in other things. And the fact that things are getting harder is a combination that go, you know what? I have had it great and maybe it’s time to tap out as I look over the horizon and go, yeah, I don’t, those new challenges don’t sound that interesting to me. I’m in a good position, my family’s in a good position, it’s time to go. You know, I think another reason why there’s a lot of activity right now is because of the things that we just talked about.

People who are interested in buying an agency can sort of smell that there is opportunity in the water and in some cases desperation. And so you’re seeing a lot more, and many of you have seen this and I think we’ve talked about it in newsletters and other podcasts, but you’re all getting emails every day from somebody who’s telling you that you can be a bazillionaire if you sell your agency. So not only are agency owners more prone to be interested in thinking about selling, but there’s a lot more sharks in the water swimming around telling you how great it is to get in the water. So you gotta be a little careful about some of those offers and we’ll talk a little bit about what a typical offer looks like so that when they are telling you about the ridiculous multiples that we’re hearing people talk to you about, you’ll know you, you know, your meter will go off a little bit and say, well, maybe it’s probably not that great.

Another reason why there’s a lot of buying and selling right now is ’cause there’s a lot of cash in the marketplace. Many agencies or other businesses still have idle money if they’re from the US and so they are feeling cash rich, they can invest in something else like buying another agency rather than building say a PPC or s e o department, right? They just buy a small shop. S b a loans are very easy to get right now the interest rate keeps going up, but actually qualifying for an s b a loan is, is pretty easy. And so a lot of buyers are feeling confident that they can finance the purchase of an agency. And we’re also still seeing a lot of roll up activity. So a lot of big, big box agencies or you know, $5 million agencies wanna roll themselves up into something bigger that gets to a 10 year, 10 or $20 million mark because they know that they can command a premium price at that size.

So lots and lots of reasons why we are seeing more activity and why you’re seeing it too as agency owners and leaders,

Right? And a lot of the rollups that are happening are industry specific or, or actually service specific. So I know we’ve, you’ve all heard many times about the importance of how specializing and, and having a niche and those seem to be the ones that are much more attractive in the rollup options Yeah. And serving a certain industry. So that’s one thing we’re seeing a lot of and continue to see a lot of for sure. So a lot of you have been talking about the importance of what makes a difference in evaluation and there’s a few things that really will continue to have your numbers be where they need to be. And the first thing is the higher owner compensation.

So if you have been giving yourself a great salary, you’re taking dividends from the profits regularly, you are doing a lot through your pass throughs, be it the standards, you know, cars, cell phones, but also allowing yourself for travel and really taking a lot of the perks of ownership that reflects back into your, your compensation. So anybody who’s looking to buy, you will know that that’s gonna get rolled up to either them or they’ll be able to reinvest partial parts of that into the agency. So that’s very attractive and it looks great in evaluation. So

One of the reasons why it’s important to understand what adds value now is a lot of times when we deliver a valuation to an agency owner, they’re disappointed by the numbers. And at that point it’s too late to change the numbers, right? So we’ll talk in a little bit about sort of what you should be doing five years out and three years out, but understanding what Danielle’s talking about in terms of what increases the value of your business, understanding that today, and really seeking to make some changes in your business so that when you go to sell two years, three years, four years down the road, you have done the hard work that actually increases the value of your agency. And one of the places that I think agency owners really hurt themselves is how they compensate themselves.

We tend to be very generous with everybody else on the team, right? If anybody’s gonna kind of take it in the shorts, it’s the agency owner, we lower our salary, sometimes we don’t take a salary. And while in the short run, that seems to be a very generous thing to do, or a way that you don’t have to lay somebody off in the long run. What it says is, a, you’re not running your business by the numbers, but B, whoever buys your agency isn’t gonna make much money. Right? And nobody wants to buy a business where they’re not gonna make money. Right?

Exactly. And this really comes up a lot, especially in internal sales because your internal team looks at your numbers and says, well, what am I doing with buying this agency or taking this big loan if I’m not actually getting compensated or have any of the benefits that an owner would have? Right? I don’t wanna be buying myself a job when, especially when I could go to another agency and be making just as much money with a lot less risk and a lot less stress. So, and even if you’re not thinking about selling, this is something that we preach early and often, that you should be looking at your compensation first when you’re growing your agency. So even if you’re in your twenties and thirties and you’re not thinking about selling right now, really focusing on how you can add that value will keep those numbers where they need to be.

So you don’t have to retroactively try to catch up when you’re ready to actually sell.

So, and that’s a great point because again, we’re talking a lot about buying and selling agencies, but the truth is, for many, many agencies, they are never afforded that opportunity. You don’t build something that somebody wants to buy or you’re not in a position to buy something else. So you’ve really gotta build your wealth while you own the business. And, you know, money matters. We talk a lot about, you know, thinking of your a, your agency like an a t m and you have to make regular withdrawals so you can invest in other things outside of the business to grow your wealth. So to your point, Even, if you never sell your agency, thinking about your compensation package early in your agency owner career is really to your advantage.

Absolutely. Another thing that really drives value is your area of expertise. What you specialize in, again, it just gives the buyer some additional faith that their, their business is gonna be running well, that they can see you in the mix. and it really drives the bottom line and shows your, your uniqueness and your differentiation that with a balanced client list with annual contracts. So if the retainers that we can get and if the balance of clients that there is no big gorilla. So if the big gorilla leaves, then the value of the business plummets pretty significantly. So trying to get your client list very balanced.

So if you do have a gorilla, you should be looking to get a few more gorillas in the sense of, or, you know, having turn

’em into monkeys.

Exactly. Turn ’em into monkeys or take your existing clients that aren’t the gorilla and push to grow them. So you are a lower risk for somebody who’s coming to buy you because they know that the revenue’s gonna be there And, if you lose one client, it won’t be detrimental to the bottom line. Right.

Well, and you know that one of the things we’ll talk about in a little bit are the multipliers, which is a topic everybody cares about. But to your point about specialty and niching, it’s really tough for a generalist agency to get a buyer at all. But it’s really, really tough to get a lot of value outta your business when you sort of serve the local butcher, baker and candlestick maker, right? So not only are you differentiating yourself, but you are demonstrating a value that is very different than a generalist

Agency, right? We’ve seen very few generalist agencies sell, but when we have, it’s because of their co their actual client list. So if somebody in a geographical region, like a big bo, the the big brother, big guy of your, your town that may want to acquire you, but that’s because you have a very strong client list and they can see the synergies between their agency and yours. Yeah. But that again is, that is not what the high value, a generalist is not as high value as somebody who’s more specialized. Another thing that’s extremely important is that most of the owners that are thinking of selling tend to be the people that drive the new business for the agency.

So what adds value is for you to be irrelevant in that. So having a reliable way to keep the pipeline full without your involvement, without the seller’s involvement is really crucial. A lot of internal sales that we see where the owner, who is the driver of most of the new business, that that’s the hardest part of the transition is to figure out who’s going to be doing it now and how is this pipeline gonna stay full? People don’t wanna take r risks as you, again, when you’re looking at the business in the bottom line, your risks are higher if you don’t have a reliable pipeline that you can fill, right?

’cause otherwise, if your clients, you know, if you have attrition in your clients and you can’t fill the pipeline, then the value of the business obviously diminishes. So having confidence in the ability to sell and, and attract new clients is a critical thing for any buyer, internal or external.

So you should really start tracking what your close rates are, understand that the people that you want to be involved are actually selling the strategy and that it isn’t dependent on you. And that usually takes a few years to get into place if you’re not doing it already. So that goes into actually anything that you’re doing inside the agency. The value of the agency is really dependent on your irrelevance. They need to see that if you leave that the, the agency is almost turnkey, that it can run by itself or they can fill in the gaps. But if you’re deep in the client work or are relying on all the client relationships, that’s problematic. And so that it’s, it’s, it’s anti to what we think of adding value to our agency.

But being irrelevant is super important. And that generally means that you need to have a strong leadership team that runs the day-to-day, which again, you have might have some strong leaders, but actually optimizing their skill sets and having them run as a well-oiled machine without your direct involvement. You, and you’ll know this is the case if you can take, you know, three weeks off and nobody talks and nobody calls you and you don’t get any texts, there are no fires, right? There are no fires. And any fire that happens that’s being taken care of, that’s when you know you have a good leadership team in place. Super important. Another big part of what adds value is the documenting and, and having all your systems and processes documented so they’re not living in one person’s head or a few people’s head.

Again, think of turnkey. You want somebody to be able to go in and know exactly how you do the work and, and the KPIs associated with what is, what’s going well so that they’re able to run the agency really clean and clear. If you have a couple key people that all of the knowledge in your agency lives within their heads, that is a liability. And so really working in while you’re preparing for the, for a sale to have, how you do the work documented and should be scalable, teachable, repeatable, and consistent. So the agency way is very clear, huge part of evaluation. Obviously no debt or long-term liability adds to the value.

And it’s important to just know that you’re doing everything to keep your agency as strong as possible and you can prove those things in the numbers. So what you look at as for a, for your scorecard and having that consistency, they don’t wanna see a lot of waves. And of course in the agency world, you know, they have some ebbs and flows, but as consistent and constant that you can show your numbers for a five year period of time will only add to your value.

So a lack in any of these areas, the way you compensate for that when you sell your agency is you have to stick around and fill in the gap. So if you are not irrelevant, if you are the biz dev person, if you are the one that carries all the tribal knowledge of systems and processes, or you’re the one that has the deep relationship with the big client, that gorilla client, the whole reason you’re selling the agency is because you want to not be there every day anymore. And when you are deficient in any one of these areas, it is, it increases the likelihood that you have to stay for a period of time after the sale. And so again, if you want a clean break and you wanna be able to sell and walk away and go on to the next chapter of your life, understand that not thinking about these things and not putting a plan in place to really strengthen yourself and your agency in all of these areas, puts you at risk of not being able to do that.

And with an external sale especially, they’ll be picking apart eve