Episode 310

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At Agency Management Institute, we have repeatedly found ourselves in the position of helping agency owners figure out their exit strategy. Ideally, we’re talking about this many years before they’re ready to execute on whichever outcome makes the most sense for them and their agency. The typical scenarios are: Just making a fantastic living off the agency until you’re done and then closing up shop. Others want to sell to an outside buyer. But for many, the ideal scenario is to sell the agency internally to someone they’ve been grooming as a successor. This is often where we come in to assist.

Any sale is complicated, and everyone wants it to go as smoothly as possible. Which is why we’ve identified some common mistakes and the best ways to avoid making them. They’re all understandable and easy to make choices, but fortunately so are the fixes so you can just avoid them all together.

Whether you’re thinking of selling your agency in a year or it’s much further down the road, knowing what to avoid now is the best first foot forward.

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.

Selling The Agency Internally

Selling The Agency Internally

What You Will Learn in This Episode:

  • The problem with gifting employees shares
  • The importance of hiring outside guidance
  • The need to fully structure the deal
  • The lack of an owner’s transition plan
  • The mistake of not being prepared emotionally
“You want to know from the very beginning that they want this. That they are hungry for this. That they are willing to sacrifice for this. Because all of those things are what it actually takes to run a successful agency.” @DrewMcLellan Click To Tweet “You have worked too hard for too long building your agency for you to give it away for free.” @DrewMcLellan Click To Tweet “At the very least, you want somebody who understands agency life, who is vested in making this a win-win for everyone, and who is willing to have really hard, candid conversations with all of you, so that it's happening on all sides.” @DrewMcLellan Click To Tweet “There are so many elements to this that you really do have to have a formal plan about how we’re going to do this before the first transaction.” @DrewMcLellan Click To Tweet “One of the things the new buyers need from you is they need you to get out.” @DrewMcLellan Click To Tweet “As the owner, you’ve got to have something that you’re so excited to do and so passionate about that you are ready to walk away from this huge investment - this big chunk of your heart - which is what your agency and people are.” @DrewMcLellan Click To Tweet

Ways to contact Drew McLellan:

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About the Author: Drew McLellan

For 30+ years, Drew McLellan has been in the advertising industry. He started his career at Y&R, worked in boutique-sized agencies, and then started his own (which he still owns and runs) agency in 1995. Additionally, Drew owns and leads the Agency Management Institute, which advises hundreds of small to mid-sized agencies on how to grow their agency and its profitability through agency owner peer groups, consulting, coaching, workshops, and more.

  • Leading agency owner peer groups
  • Offering workshops for agency owners and their leadership teams
  • Offering AE Bootcamps
  • Conducting individual agency owner coaching
  • Doing on-site consulting
  • Offering online courses in agency new business and account service

Because he works with over 250+ agencies every year, Drew has the unique opportunity to see the patterns and the habits (both good and bad) that happen over and over again. He has also written several books, including Sell With Authority (2020) and been featured in The New York Times, Forbes, Entrepreneur Magazine, and Fortune Small Business. The Wall Street Journal called his blog “One of 10 blogs every entrepreneur should read.”

Speaker 1:

It doesn’t matter what kind of an agency you run. Traditional, digital, media buying, web dev, PR, whatever your focus, you still need to run a profitable business. The Build a Better Agency Podcast, presented by White Label IQ, will show you how to make more money and keep more of what you made. Let us help you build an agency that is sustainable, scalable, and if you want down the road, sellable. Bringing his 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McClellan.

Drew McLellan:

Hey, everybody, Drew McLellan here from Agency Management Institute. Welcome back to the podcast. Thanks for coming back. This is one of my solocasts, so as you know what that means is no guest, just you and me hanging out, talking about something that I want to make sure that you are thinking about. Before I get into today’s topic, I am going to give you just a couple housekeeping things. Number one, remember that at every solocast I give away, through a drawing, a free seat at one of our live or on-demand workshops. And here’s how you qualify, here’s how you need to get your name in the hat. All you have to do is go wherever you download the podcast and leave a rating and review, and then take a screenshot, because your username may or may not give me any clue as to who you are or where your agency is, so take a screenshot and email it to me at [email protected], and your name goes in the hat. And your name stays in the hat until you win.

And as you might imagine, we don’t have 10 bazillion names in there, so sooner or later, odds are good that you’re going to win. So spend the five minutes because our workshops without member discounts and all the other stuff, remember, our workshops are around $2,000. So you can win a $2,000 workshop, two days of complete immersion learning, for free, and all you got to do is leave a rating and review. So that seems super easy to me. So this week’s, or this week’s, this month’s winner is Bob Abate, Bob Abate Marketing out in Connecticut. So Bob, congratulations, thanks for your review. It was a couple, I think, a year or so ago, but thank you for doing that. Congratulations. You have won. I’ll reach out by email as well to let you know that that’s the case. But seriously, everybody, this is easy. This is shooting fish in a barrel easy. Just do it for five minutes and sooner or later, you’re going to get a $2,000 prize. Who doesn’t love that?

So the other thing I want to tell you about is I want to tell you about a resource that we have on the website that actually is related to the topic I want to talk to you about today. So about 15 years ago, I went through an exercise that helped me think about the future I wanted in terms of work and life and all of those things. When I finished the exercise, I looked at it and I was like, “Well, my life doesn’t look anything like that. I must have done it wrong.” And my coach at the time said, “No, you didn’t do it wrong. That’s what you aspire to. Now the question is how do you get from where you are to where you aspire to?”

And I’m telling you, while I would love to tell you I put together a plan and I worked the plan, that’s not actually how that worked. Things just started presenting themselves. Opportunities, new chances, doors closed that maybe I would have pounded on before that I just walked by, and new doors opened that I was like, “I’m going to walk through that door,” because I had a vision of what I wanted, so it was easier to spot these opportunities. And I will tell you today, when I read what I wrote 15 years ago, and I look at my life, they are spot on. Spot on. Some of the names are different. I made up people that I wanted in my world and I named them, and I didn’t get those right. But other than that, I’m telling you, spot on.

And I don’t believe in… I mean, I know there’s The Secret and all of that, and I’m sure there’s some of that involved, but what I honestly believe is once your subconscious knows what you desire, it looks for opportunities to deliver that. That’s exactly what happened to me was I began to be able to create the life that I wanted because I knew what that life looked like. So anyway, I’ve taken and I’ve built an exercise for you, a self-directed exercise, and it’s going to take you maybe four, six weeks to do, if you give a little bit of time in between each question. It’s very thought provoking. You need to kind of soak on it a little, so it’s not something you’re going to do in a weekend. But go check it out. So go to agencymanagementinstitute.com/myfutureself, and we call it a mini course. I think you’re going to really enjoy it. I think you’re going to be astonished at the clarity that you get, if you actually do it and do it well. So I hope you’ll take advantage of that.

All right, let me tell you what I want to talk about today. At AMI, we partner with a lot of agency owners, as they are beginning to think about their exit strategy, their succession plan. We start with that with helping them think about how they want that last chapter to wrap up. Do they want to sell to an outside buyer? Do they want to sell to an internal buyer, to an employee? Do they want to just close the door and use the agency as an ATM machine until they do that? All of those are perfectly fine answers. Absolutely fine. And for each of you, it’s going to be different, but you need someone to walk you through that thinking to figure out what is… To paint that picture. So we do that work.

And then for the agency owners that want to sell internally, they want to sell to employees, we actually have a whole soup to nuts program where we come alongside them, we identify the employees, if they haven’t already done that, we assess everybody to see who’s really qualified, who has the chops, the skill set, the motivations, the behaviors, the desires to actually own an agency, because as we know, that’s not everybody. We then can do a valuation and we not only do the numbers valuation, but the softer side of the valuation, the things that influence the multiplier. And then we put together a plan of how to add an increased value to the agency. We facilitate the conversations with those employees to see if they really are interested. We If they say yes, we start coaching them to get them ready to shift from employee to owner. We work with the agency owner to help them plan the future after they walk away from the agency, because otherwise they don’t walk away, they muck up the deal by not really being able to let go.

And we’ve got it all. We mediate the deal, we’ve got the lawyers, we’ve got the finance people. But my point is, we have seen this over and over again. And there are some mistakes to get made every single time if you’re not careful. So what I want to do in this solocast is talk about the five biggest mistakes that an agency owner makes when they are selling their agency internally. And then my next solocast, I’m going to talk about the five biggest mistakes that the buyers, the employees make when they are buying their boss’s shop. So I want to bookend those for you in this solocast and the next solocast. It would be too long for me to do all of them in one, so I’m going to do them as separate solocasts.

So let’s jump in, the biggest mistake. That’s not true. It’s not the biggest mistake, it’s the first mistake that agency owners make is they gift their employees shares. So that seems like a really nice thing to do. You want to reward them for being a great employee, you want to set the hook to get them to want to own more of the agency. I understand it all. But it doesn’t work. And here’s why it doesn’t work. Someone has to think long and hard about if they actually want to own an agency. This is not a gig for everybody. So you’ve got to be sure that your people really want it, and they have really given it the thought that it requires before they just take the shares. And when you say to somebody, “Hey, I want to give you 2% of my company or 5% of my company,” no one’s going to say no to that. No one’s going to say no to that.

And they don’t actually think about what it means. They might ask about the tax implications or something else, but they don’t really understand it. And they also don’t really understand that owning 2%, while it’s a lovely gesture, doesn’t actually get them any voice at the table or anything like that in a legal way. I mean, yes, they have a 2% voice, but you have a 98% voice. So of course they’re going to say yes, and they’re going to take it, but they have not thought through whether or not they genuinely wanted to own the agency. Got to have skin in the game. They’ve got to pay you something for those initial shares. We can deeply discount it, we can put together a payment plan that makes it super easy. So we can remove all the friction of them buying it, except for the decision.

When I have to write a check, when I have to go home and discuss with my partner that I’m going to write a check for 5,000 or 10,000 or 20,000 or whatever the number is, now it’s a decision. Now I have to decide, am I willing to trade my money for this opportunity? And that triggers the thought provoking conversations and decisions that you really, really, really want your buyers to have on the very front end. Why? Because you want to know from the very beginning that they want this, that they are hungry for this, that they are willing to sacrifice for this, because all of those things are what it takes to actually run a successful agency. We have to want it. Owning an agency isn’t easy. If you don’t want to do it, and you don’t have the chutzpah to do it, and you don’t have the drive to do it, it’s not going to work.

And if you’re not willing to put some skin in the game, whether that’s hours or dollars or whatever it is as an agency owner, on the days and the months when the shop is struggling, you’re not going to survive. So this is the first litmus test to say, “Is this person wired to own an agency? Do they really want it?” And if so, great. Then let’s sell it to them, again, deeply discounted, but let’s sell it to them, let’s force them to hand me a check for those shares so we now know they’re committed. I will tell you, when I think of all the agencies I know that have gifted shares, and what the outcomes of that were, 95% of it, outcome was not great, not great at all, because they took it because it was free and who doesn’t want to own a company, at least part of a company. Sounds great. But somewhere along the way things got sideways.

And in many cases, the buyer ended up leaving the agency. And you know what the owner had to do before the buyer could leave the agency? The owner… I don’t know if you can hear that behind me, but my dog Heather is snoring, so I’m sorry if you hear her snoring, but I’m just going to keep talking over because that’s not going to stop. So here’s what happened. Before the buyer could leave the agency, the owner had to buy back the shares they had given to that employee. Can you imagine? I cannot tell you how many agency owners I had to talk off the ledge when they had to write that check. They’re so resentful and mad. And granted, they did it to themselves, but that doesn’t make it feel any better. So do not put yourself in that position, do not gift or give away shares. Again, we can deeply discount. We can do lots of other things. But let’s not give it away for free. You have worked too hard for too long building your agency for you to give it away for free. So don’t do that. So that’s mistake number one.

Mistake number two is this is complicated stuff. It is complicated in terms of just the nuances of it, the humanity of it, the emotion of it, all of the things that you have to get right. The deal itself is complicated. Do not do this by yourself. Whether you hire us or someone else, I don’t care. But hire someone who does this specifically with agencies who can walk you through the entire process, who can help facilitate all of the difficult conversations, who understands what it’s like inside your shop, who is aligned with making sure that this is a win-win for you and the buyer, that everybody benefits from this. You want to have somebody alongside and you want to have somebody that both sides trust, that can ask questions, that can hold confidences. All of that is critical.

So do not do this by yourself. You want to have not only a facilitator, but you want to have somebody who can guide you, who has the connections to help you make it easier, whether it’s the attorneys or the valuation partners or any of that. There aren’t going to be a lot of companies that can do it all in house like we can. And frankly, some of what we do in house is because we have partners, no doubt, but at the very least you want somebody who understands agency life, who is vested in making this a win-win for everyone, who is willing to have really hard candid conversations with all of you, because sooner or later that’s happening on all sides, and somebody that is willing to say, “You know what? You’re not being fair. Here’s why you’re not being fair. Here’s what we could do to be fair,” and is going to hold all of you accountable to doing this in an equitable and fair and respectful way.

So do not do this on your own and do not do this with a generic lawyer or banker who doesn’t understand agency life and who doesn’t understand how you’re going to evaluate whether or not that person can act… Somebody being able to buy your agency and somebody being able to run your agency as an owner, because odds are, you’re going to have some an earn-out, so you have a vested interest in them being successful. Those are two different things. That somebody can get financed by your agency is one thing. That somebody has the chops to actually run it as an owner and the heart to run it as an owner, that’s a whole different thing. So make sure you have a facilitator that understands that and is going to walk you through all of that and walk alongside you for as long as it takes.

And in most cases, yes, you can do it in a year. For most of you, you’re not ready to move that fast or the buyers aren’t ready to move that fast. So we’ve turned it around in, shoot, six months, at a rapid clip, and I also am working with an agency, we’ve been working with them for three years and we’re nowhere near done. So a lot of it depends on your personal timing, on the buyer’s timing, but make sure you have a facilitator that is in it for the long haul, and is going to be with you the whole time.

The next mistake that I see people make is that after the initial stock sale or gift, there’s no plan about how the rest of the ownership is processed. So you set the hook, you get somebody to say, “Yes, I want to own your shop.” And then what happens is you get back to work and you’re busy and you’re crazy busy, and you don’t have a plan for, “Okay, how much is somebody buying every year, every month? How are we facilitating that? What’s the deal?” A lot of you gift shares or sell shares, but you haven’t even really valuated the shares. The buyer knows what the share was worth when they bought it, but they have no idea how you’re going to future valuate it. There’s no discussion about when they can buy more, how much more they can buy. Do they have to buy more? If so, under what schedule?

So there’s no plan to actually transfer the rest of the agency over, over time to the buyer. And that is dangerous. You need to have worked out the deal, the structure of the deal. And again, the structure of the deal is things like, how are we going to decide what the agency’s worth? What is the formula we’re going to use? Who’s our valuation partner? How often are we going to update the valuation of this is going to happen over time? What are the elements of the deal? So what is the multiplier? How much do I have to put down? How much do I have to pay every year? Is the agency owner’s salary part of the purchase price? All of those things have to be worked out and they should be worked out on the very front end.

And then there should be a timetable that says, “Okay, every year you can buy another 15% of the agency or whatever it is.” And you map out what’s possible. You also map out from the buyer’s perspective, what they are and aren’t allowed to do. Can they skip a year? Can they skip three years? Can they renegotiate price? How long are we locked into the price? So many details. But if you don’t have that plan… Right now I have three agencies in my world that have sold shares to what is now their minority partner, but there’s no plan in place, so the owner has no idea when they’re actually going to get out. And because it wasn’t agreed to on the front end, now they’re kind of in a pickle because they have these minority partners, and what if the minority partner is like, “Yeah, we don’t want to buy anymore,” or, “We’re not going to buy anything for another 10 years,” or, “We only want to buy right now because of COVID pricing because our agency took it in the short, so we want to use that as the valuation year.”

If you don’t have all of those things worked out in advance, it just gets ugly in a hurry. And there’s no reason for this to be ugly. You guys are all from the same family. You love each other. You want them to be successful. They want you to be successful. They want to honor you and take care of you because you built this amazing agency. You want to make sure that you set them up for success, that you don’t drain the company dry. There’s just so many elements to this that you really do have to have a formal plan of how we’re going to do this before that first transaction, before either they hand you a check and they get part of the company, or you just gift it to them, however that is, you got to have a plan.

I’m sorry, but not really sorry to interrupt you because you are going to be as