Episode 196:

I know a lot of agency owners think about selling their shop. But do they think about it strategically? Or soon enough? Do they execute on a plan that will set them up for success 5-10 years before they’re ready to sell?

Usually, the answer to those questions is no. And on the flip side, how many agency owners think about growth through acquisition? Selling is a big part of the conversation but buying should be on the table as well.

In episode #196, I talk with Terry Lammers, who has been buying and selling businesses since he sold his family fuel company. We talk about the monetary and non-monetary aspects of getting the most from your agency or being a smart buyer if you’re on that end of the transaction. Most importantly, we dig into how, why, and when to start planning your exit strategy as an agency owner.

Terry Lammers grew up in a little town of 600 people. His family owned a wholesale fuels and lubricants company and when Terry took over as president of the company, he had some big ideas for growth. Out of that experience developed a fascination with the process of buying and selling businesses.

Since then, Terry has formed a business brokerage that helps people who want to buy and sell businesses. He also has his designation as a certified valuation analyst, accreditation through the National Association of Certified Valuators and Analysts. He is the author of You Don’t Know What You Don’t Know: Everything You Need to Know to Buy and Sell a Business.

What You Will Learn in this Episode:

  • Why it’s never too early to plan your exit strategy
  • How to value a business (like an agency) with little regular recurring revenue
  • Who to have around the table to plan your exit strategy
  • Nonfinancial elements of your agency that add or subtract the value
  • Why culture is so important and why blending two company cultures is so difficult
  • How agency owners can start thinking about the acquisition as a growth strategy
“If you are the hub of your business and you have no leadership team around you, that negatively affects the value of your agency.” – @terry_lammers Click To Tweet “If you allow your clients to pay you late, it's very problematic for the potential buyer of your agency.” – @terry_lammers Click To Tweet “When it comes to your exit strategy, the further ahead of time you plan, the more opportunities you're going to have to find a perfect fit.” – @terry_lammers Click To Tweet “When you start planning to sell your agency, you have to have the right people at the table. You want experts, not generalists.” – @terry_lammers Click To Tweet “You’ve got to have the awkward conversations sooner rather than later, so you know the true value of your agency, and what you need to do to increase that value.” – @terry_lammers Click To Tweet

Subscribe to Build A Better Agency!

Itunes LogoStitcher button

Ways to Contact Terry Lammers:

Speaker 1:

Are you tired of feeling like the lonely lighthouse keeper as you run your agency? Welcome to the Agency Management Institute community, where you’ll learn how to grow and scale your business, attract and retain the best talent, make more money, and keep more of what you make. The Build a Better Agency Podcast is now in our third year of sharing insights, and how small to midsize agencies survive and thrive in today’s market. Bringing his 25-plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey everybody. Drew McLellan here with another episode of Build a Better Agency. Before I tell you about our guest and our topic for this week’s episode, I just want to remind you that we have built an assessment tool that will help you sort of weigh the health of … or measure perhaps, the health of your agency in five key areas, account service, finance, biz dev, staff management, and agency owner happiness. And what we are doing is we will … If you take the assessment, you’ll immediately get the results of your test, and then we will also email you those results. But on top of that, what we’re doing is we’re aggregating a large number of agency owner participants, so that we can come back to you this summer with sort of a comparative analysis of where agencies ranked on these issues and so you can compare your rankings with other agencies.

And so I think that’s going to be very interesting to see the data around that, and all you need to do to take the assessment is go to agencymanagementinstitute.com/assessment. So again, agencymanagementinstitute.com/assessment, and the assessment will take you probably five or six minutes to do, and you’ll immediately get the results, and then we will also follow up with an email, and then later this summer, I will be letting you know that we’re going to do a webinar where we will walk you through the results and you can compare yourself to everybody else and see how you’re doing. All right? So today’s topic is one that comes up quite a bit when I talk to agency owners. It comes up in our owner peer groups. It comes up in some coaching calls, but oftentimes it comes up in a superficial, down the road, one of these days, in the future sort of way, and it rarely comes up in a, “Boy, you know what? I better do my homework. I had better think about this with clarity, with facts, by talking to subject matter experts.”

And of course the topic is your exit strategy, particularly if your plan is to sell your agency. Even less often do I talk to an agency owner who has an acquisition strategy. Certainly there are some inside the AMI family that have grown by buying other agencies, but it’s not all that common. And again, many people who maybe have a hankering to do that, don’t really have a strategy in play. They’re not really thinking about their agency in terms of what is it about my agency that would make it sellable? What is it that would be a value adder or a value driver inside my agency? What are the things that would make it be worth more money?

And on the flip side, what are some of the things, what are some of the realities of my agency that might make my sales price, if I decided to sell it, not as great as I would want it to be? What are some of the detractors of value inside my agency? And some of those may be inherent in our business, and some of them may be just inherent in your agency, but oftentimes we’re not really thinking about that. And one of the conversations I’m often having with agency owners is, even if you think you’re 10 or 20 years away, having some sense of what the plan is, and doing a little bit of early homework to sort of think that through is critical, because oftentimes your agency today may not be worth what you want to get out of it.

But if you had a 10-year runway, you could fix a lot of the things that reduce the value of your agency or enhance some of the things that add value. And you’d have plenty of time to do that. If you want to sell your agency in a year, that runway is much shorter. And so it’s not going to give you anywhere near as much time. So today’s guest is a subject matter expert on the idea of buying and selling companies. So Terry Lammers actually grew up in a family business, and when he inherited the business or took over, I think his folks were still around, but when he took over as president of the company, he had a big acquisition strategy. And so he bought several businesses, and I’ll let him tell you the whole story. But out of that came a fascination with the whole idea of buying and selling businesses.

And since then, Terry has formed a business that serves other businesses and business owners who want to buy and sell businesses. He also has his designation as a certified valuation analyst, which is an accreditation through the National Association of Certified Valuation Analysts. And so he’s got a lot of both practical experience and also some book learning if you will. He’s got some credentials. He’s also written a book called You Don’t Know What You Don’t Know: Everything You Need to Know to Buy or Sell a Business. And so in that book, he really walks you through in-depth explanations about lots of different things, lots of stages that you need to be thinking about, and the questions you need to be asking at each stage.

So I knew I wanted to have him come on the show. I wanted to get him thinking about what it might be like to buy or sell an agency even though I know that’s not the core focus of his background, and I want to pick his brain about how we can add value to our agency if it is something that we want to do if we want to sell it, and also how to evaluate other agencies, if we are on the buying side of the equation. So with that, let’s jump right into the conversation. Terry, welcome to the podcast.

Terry Lammers:

Thanks for having me, Drew.

Drew McLellan:

You bet. So just give folks a little bit of background. I did a little bit of setup as you know in the intro, but give folks a little bit of background about how you came to have expertise in buying and selling businesses.

Terry Lammers:

Sure. I grew up in a little town of 600 people. Family owned a wholesale fuel and lubricants company, kind of grew up with that business, worked outside of the company for a little bit. When I got older, came back in 1991, because we had an opportunity to buy another company. Things weren’t that rosy back in those days. And then when I came back, I jokingly tell people that it was me, my mom and dad, we had two trucks and it was a good day if they both started.

Drew McLellan:

Yeah.

Terry Lammers:

So I bought my first company in 1991 and kind of took the company over at that time. And over the course of the next 18, 20 years had the opportunity to buy 11 other companies. Grew the company from $750,000 a year in sales our first year, to up over $42 million a year in sales when I sold it in 2010. The company that bought me was Growmark. So they’re a large farm cooperative located in Bloomington, Illinois. So Growmark bought my lubricants division, and eight of their FS member companies bought the fuel division that I had. So we covered about 14 counties in Southern Illinois in the St. Louis metropolitan area. So that’s where I kind of got my M&A experience and learned a lot from growing a company from that small to over 25 employees and 40-plus million dollars a year in sales. So got done with that. And it was kind of funny. My wife told me I needed to get a job-

Drew McLellan:

Sure.

Terry Lammers:

… because apparently hanging around the house all day long wasn’t … I jokingly say our house is a marital asset that I’m not allowed to be at during the day.

Drew McLellan:

Seems reasonable.

Terry Lammers:

Yeah. So I did banking for three and a half years, which was painful, but I learned a lot. I’ve always been kind of a finance guy. It was interesting to be on the other side of the fence so to speak, and get what’s going through their mind when you’re asking for loans and why. So it was very fruitful to do that for three and a half years. But during that time, I kind of got my entrepreneurial spirit back you might say, and had a chance to reflect on what I enjoyed doing in life. And I really enjoyed mergers and acquisitions. So in July of 2014, we started Innovative Business Advisors and we basically do three things. We help people buy and sell businesses. We prefer to work with people, companies that have a value between one and 15 million and I’m a CVA, a Certified Valuation Analyst. So we do a lot of business valuations and we also do some coaching and exit planning and stuff like that. There’s about nine of us altogether.

Drew McLellan:

So as you bought and sold businesses, as you were building up the company before you sold it ultimately, what was the thing that surprised you the most? Where was the sort of biggest life lesson in all of that?

Terry Lammers:

You know, probably the lack of planning on people’s part. We was typically buying companies that were literally on the verge of closing. They, somewhere along the line, they had lost one of their big customers, so the company still remains profitable, but they’re not updating any equipment. And by the time that we got around to buying it, most of their equipment was shot. And it was really just left with a customer, a base of customers. But since our business has good recurring revenue in that people are going to use people one way or the other, farmers are going to farm, municipalities are going to run fire trucks and car … police vehicles, you do get some fluctuation with the amount of the economy, but people have to use fuel whether … they may complain about the price, but you’re going to use gasoline and diesel fuel. So that base of customers was always good for us. And it helped us grow geographically as well as a couple of times picking up different products and things like that.

Drew McLellan:

Yeah, so that’s complete opposite of everybody who’s listening to us right now. Nobody has to advertise. Nobody has to market their business. We all think they should, but they all see it as a optional expense. And so part of I think what agency owners struggle with is they think about, A, growing their business, B, sustaining their business and certainly really think down the road of, “What asset am I building and can I sell it?” is that we have none of that predictability of income. And I see the financials of over 250 agencies a year and there’s an ebb and a flow. I don’t care how well they’re run. I don’t care how big they are. I don’t care what part of the world they’re in.

There is an unpredictability to our business that makes I think planning a … to your point, even more important, because you’ve got to be able to weather the ebbs and flows, but B, it makes it more difficult because there is no way … I know we’re going to sell at least this many gallons of fuel or whatever, because we literally can shrink in size by half or double in size half again as much in a year all based on the demand. And so much of that is depending on the economy and other things that are happening, many of which are outside of our control.

Terry Lammers:

You know, and that’s tough, but you look at any company, and I think the key to what you said there is you’re looking at the EBIDTA flow. And if you can recognize that EBITDA is really the basis of the value of your company and you can concentrate on it, I think it will help your situation. Then it is so important, every company is going to have an exit. I mean, whether you’re going to go out boots up or plan something.

Drew McLellan:

I think you’re right. I think the planning is critical and in our industry even more critical, because we don’t have recurring revenue, because we don’t have any sort of reassurance. One of the things that’s fascinating … so I’ve owned my own agency for almost 25 years, and we always have made money. And sometimes we make a lot of money and sometimes we barely make money. But if you asked me where we’re going to make money in 2020, I can tell you the clients that I have on our list. And I can tell you who I think is going to stick around, but there’s no promise of that, right? So we are constantly refilling the sales funnel and the pipeline and customers, and many agencies have clients that have been with them for 20-some years. But that doesn’t mean they won’t pull the plug tomorrow.

Terry Lammers:

That’s always a tricky situation. I think the one thing you said earlier is very critical for your clients to understand, is the value of the company is based off the EBITDA, on the cashflow of the company.

Drew McLellan:

Right.

Terry Lammers:

If you have a business that inherently doesn’t have recurring revenue, it doesn’t mean that it’s not sellable. It means you may need to approach your exit in a different way. If you have the size that you can keep a couple of people going, or at least to bring another potential owner in, that you can transition the business over a period of time, I think that’s very advantageous. Or are you talking to another agency that you may be able to work out an arrangement where you two work together for a while, until you do exit. There’s several ways to approach selling your agency or at least trying to get some kind of value for it.

Drew McLellan:

Right.

Terry Lammers:

An insurance business has great recurring revenue just like my fuel business did. If your business doesn’t have recurring revenue, it doesn’t mean that it’s not sellable. It’s just that you need to approach it in a different way. And again, that goes back to the planning.

Drew McLellan:

Right. Well, I think it goes back to sort of beginning with the end in mind. One of the things I’m always talking to agency owners about is, even it’s never going to play out exactly the way you think it’s going to, but you should have an idea of how you want it to play out because you’re going to make different decisions, whether it’s spending decisions, investment decisions, hiring decisions, based on whether or not you’re building it to sell, whether you’re building it to just decide that at the end you’re going to use it like an ATM machine and take all the money out of it every year. And when you’re done, you’re done, you’re going to lock the door and think that was a great run. Whatever the decision is, having some idea of where you’re headed allows you to make better decisions.

Terry Lammers:

You know it’s interesting. It’s bringing to mind, I bought two companies. One, ironically it was the quickest company I ever bought. It all came about in three days. Found out about it on a Wednesday and we closed the deal on Friday.

Drew McLellan:

Wow.

Terry Lammers:

Yeah. So what was it? The company was in distress and we found out on Wednesday that they’re closing their doors on Friday. So here’s the thing. They’re closing their doors. I called them up. They already said they’re telling their customers to go someplace else. And I just said, “Hold the phone. I’ll be right there.” Their place was about 30 miles away. I jumped in the truck and I ran down there and I said, “What are you doing?” Well, the owner passed away, no succession plan. He willed the company to his niece. She ran it for about six months. The employees were taking completely advantage of her and she was just losing money hand over fist. So her brother stepped in and was just going to close the company down.

So we made a deal. And what we agreed to is I paid them 25% of the gross profit of the customers that we kept for one year. And because we had no … at this point we don’t know what we’re going to keep or not, but it worked out very fair for the family because, I don’t know, I think we ended … it was a relatively small deal, but they ended up getting $100,000 and we got a great group of customers.

Drew McLellan:

Yeah.

Terry Lammers:

And that was a heck of a lot better option than just closing the door.

Drew McLellan:

Yeah, absolutely.

Terry Lammers:

And I did that with another company, same way. This company was about 50 miles from where I was at and the owner was going to stay on with me, another distress situation where he was running out of cash, but I did not know the area. I did not know where his customers were. So I was vulnerable in the aspect that if he left me, I didn’t know where these people were at and they had a relationship with him. I imagine just like a lot of your clients-

Drew McLellan:

Absolutely.

Terry Lammers:

They had the relationship with their clients. So we did the same thing, gave him 25% of the gross profit for the first year and it worked out great. And he was working for me when I sold the company and he’s still working for the company that we sold to.

Drew McLellan:

Yeah, I think that’s interesting. So I think one of the things that people forget about is there are lots of ways to get this done and there is no one right way. So in our industry, as you probably know, a lot of times the little guys get bought up by the big guys, but not the little, little guys, not somebody who’s 5 million or less. An agency has to be worth at least 10 million, and this is in adjusted gross income, not in gross profit or not in gross billings, but about 10 million in AGI for one of the larger agencies to see that there’s merit in buying them.

But there are also lots of other ways to structure a deal. And I know one of the things you talk about is making sure you surround yourself with experts who can help you explore all of those options. So if I were thinking, which I’m not, but if I were thinking that I wanted to start pondering the sale of my agency, two questions. One, how far in advance of when I think I want to sell it, should I start having conversations with my advisors, and two, who should I have around the table? What skill sets?

Terry Lammers:

Excellent questions. So the first one, I would ask you, what’s your number? So what’s your number by … what I mean by what’s your number, what’s your number that you need to retire? What do you need … where are you at right now and where do you need to be in order to retire? So that person at the table is your financial advisor, you know?

Drew McLellan:

Right.

Terry Lammers:

Once I know what you need for retirement, we can value your business. And I don’t know, let’s use smaller numbers. So let’s say you need $2 million to retire. And with what you have, and your company is only worth a million dollars. So we can … let’s come up with a coaching plan. I see your agency does coaching, to coach you up to that spot. Or at least you know how long you’re going to have to work. Can you get to that number? But generally the other people that you need at the table is, who’s your banker? Who’s your attorney? Do you have an M&A attorney? We’ve run into some disastrous situations where the seller has a relationship with their estate planning attorney, and then they want the estate planning attorney to help them do an M&A transaction or the sale of a business.

Drew McLellan:

Right.

Terry Lammers:

And it leads to bad situations. So have the right people at the table, and I think in a lot of times that’s going to be … it is going to be your financial advisor. It’s going to be your banker. It’s going to be your CPA. Maybe it makes sense for you to use your broker if you’re not opposed to using a business broker to help you sell the company. Those are the type of people that you need to have surrounded by with you. The business broker can probably help you think of different ways to structure the sale of the company to help you move forward with it. Because you guys are in a situation where you don’t have a lot of hard assets.

Drew McLellan:

Right.

Terry Lammers:

So, you know.

Drew McLellan:

I mean our biggest asset typically is the copier we rent and some laptops. Yeah.

Terry Lammers:

Yeah, exactly. So what you have though, is you have a relationship with your customers, and people want to do business with people they know, and I think that’s a powerful thing. And that was the reason that I loved growing by acquisitions on the oil company side. I could go talk … so we’re basically selling a fungible product, right? Diesel fuel’s diesel fuel, no matter what marketing you guys come up with, out on the street. That’s kind of funny, but it all comes out of the same pipeline. Doesn’t matter really where you’re getting it from. But so I could go talk to a farmer or a commercial account or a manufacturing company till I was blue in the face, and really have a hard time in getting them to switch.

But if I go buy that company that they have the relationship with, the old 80/20 rule, 80% of your business comes from 20% of your customers. So the day we would sell, we would go hit those 20% of the customers as soon as possible. And if the seller would say, “Look, Drew, I sold my business to Terry because I trust him. I like him and I think he’s a good guy. I’m going to continue to work with him for say the next six months or a year to help transition his business. So rest assured we’re going to be here to take care of you, just like I always have in the past.” And our experience from that was we would keep 95% of the customers.

Drew McLellan:

I’ve never heard of an acquisition where they kept 95% of the customers. But I do think you can build a team that increases the likelihood of keeping more customers as you transition out of the business. So talk to us a little bit about when someone is buying a business, what kind of a leadership team do they want to see? We talk a lot about the fact that if the owner is still quagmired in the day to day, and if pulling him or her out disrupts the function of the business, then that’s a problem for the buyer. So just talk to us a little bit about sort of the management structure and the owner’s role in that, that would either increase or decrease the value from the buyer’s perspective.

Terry Lammers:

Mm-hmm (affirmative). On our coaching platform, we use the value builder system as part of it, so the value builder system talks about eight key non-financial drivers of the value of the business. So what you was just describing is what we would call the hub and spoke. So if you’re the owner and you’re the hub of your company and the spokes are your employees, customers, suppliers, that is a bad situation. I’ll give you an example. I had a trucking company we was trying to sell. It did trucking and logistics. And I mean, they had over a half million dollars a year in cash flow. So that attracts a lot of people, but he was … the owner was the hub.

You take him out of it and that company does not run. So if you can build a team of people around you, especially as you’re getting closer to the end of wanting to retire, and the more you can be outside of that company, with that company still being able to function, it will very definitely have an effect on the value of the company. We never did sell that trucking company. It’s just it was a bad deal. The employees came straight to him. He was the one that called all the customers every day. He arranged everything.

Drew McLellan:

Yeah. So as an owner begins to think about preparing the company for some sort of a sale, what should the owner be doing? So we know based on your story you just told us, he or she should not be the hub. So it can not be the center point, but what is a role that makes sense for them to play as they … let’s say in the last five years before they’re ready to sell?

Terry Lammers:

Yeah. So we’ll go back to the example before where we talked about working with somebody and, okay, you’re going to sell your company. Well, maybe you’re going to hang around for a while. Well, if you’re not experiencing a higher rate of success from doing it that way, maybe that time needs to be longer. Maybe it needs to be three years. Maybe it does need to be five years. I think really the key is, one, the value of the company comes from the cashflow of the company. So you need to have somebody give you a realistic idea of what the value of your company is. And I argue that that should be now. I don’t care if you’re not going to retire for 10 years, or if it is going to be three years, but have a realistic value of what your company’s worth. Then you have to talk about it. I call it the ostrich syndrome, too many people just stick their head in the sand and they never talk about it-

Drew McLellan:

Right.

Terry Lammers:

… until the six months before they want to get out. You have conventions. I’m sure you know other competitors and advertising agencies, is it an awkward conversation? Yes, oftentimes it is. But, and if you don’t want to have that conversation with your competitor, that’s an area that, where we help buyers, who might’ve come to us and say, “Look, Drew, I’m planning on retiring here in the next three years. I have no idea what to do. I know a couple people that I think my company would be a good fit for, but I’m just very uncomfortable to go talk to them.” Well, then hire somebody like us. And we reach out to several people and see if we can develop any interest, you know? And we call that being an intermediary, where you’ve got a seller that wants to sell and you find a buyer that wants to buy and we help them put the process together.

Drew McLellan:

Yeah, yeah. So you had mentioned that there are some other nonfinancial sort of elements or things that add or subtract value. So I want to take a quick break, but when we come back, I want to dig into some of those. So we’ll be right back.

Thanks for tuning in to build a better agency. I just want to take a quick second and remind you that throughout the year, AMI offers workshops for agency owners, agency leaders, and account executives. So if you head over to the AMI website and you check out under the training tab, you’re going to find a calendar of all of the workshops we offer throughout the year. We cover quite a wide variety of topics, everything from Biz Dev to creating a content machine for your agency, to making sure that you are running your business based on the best financial metrics and dashboards that you can.

We also have a workshop on agency owner management hacks, all the best practices that agency owners are using to run their businesses well and profitably. And of course, you’re always going to find our account executive bootcamp and our advanced AE bootcamp. So go ahead and check it out on the website, and hopefully one of those will meet a need for you and your agency. And we’ll see you soon. Let’s get back to the episode.

Okay. We are back. We are talking about selling your agency, or I guess in theory, buying an agency as an expansion plan with Terry Lammers. And so right before the break, Terry was telling us the first of the nonfinancial things that add or subtract value to a business. And he was talking about the hub and spoke model where the agency owner’s the hub, and if you pull out the hub, the spokes don’t have anything to attach to and the wheel doesn’t go anywhere. So I was asking him about some of the other things. So Terry, what are some of the other nonfinancial aspects or elements that add or subtract value to our business?

Terry Lammers:

We talked about another one, which was the recurring revenue.

Drew McLellan:

Yeah.

Terry Lammers:

And if that’s something that you just don’t have, then it is what it is, right. Another one to think about though, that we talk about often is what we call the Switzerland structure. So the idea behind that is Switzerland was a very independent country, right? It didn’t fight in either World War, anything like that. So is your company independent from any one customer, any one employee or any one supplier? I could see this possibly being a problem with a lot of the people that you work with, or customer concentration. If you have one client that’s 80% of the revenue of your company, that’s problematic, versus if you have 50 people that are contributing roughly the same amount of revenue.

Drew McLellan:

Yeah. So, I would say that probably 75% of the people listening to this podcast, they have a client that we call a gorilla client. And what we mean by that is that they are more than 25% of their adjusted gross, which is problematic, right?

Terry Lammers:

It is problematic. But I think the most important part is to recognize what is problematic in being able to sell your company, and as you’re growing a company, or as you’re going down through the years, that you’re able to recognize it and-

Drew McLellan:

Try and mitigate it.

Terry Lammers:

Yeah. And try and make it better, have an effect on it. If you don’t know, that’s why I love the name of my book, You Don’t Know What You Don’t Know.

Drew McLellan:

Yeah.

Terry Lammers:

If you don’t know what you need to do to change your outcome, you can’t do anything to change it. But if you learn, that’s definitely the best thing for you.

Drew McLellan:

Well, it’s interesting because when we talk about risks in the business, we often talk about the gorilla client, but your list also included employees and suppliers. And for most agencies, supplier is probably not too big of a risk, but I will say that many agencies have sort of a superstar employee, who will be the only one in the agency who knows how to do some critical thing that clients are buying. And so you’re right there. They’re really exposed if that person goes away.

Terry Lammers:

Yeah. We sold a drilling company a couple of years ago and the owners did a fantastic job, husband and wife. They had the thing set up, talk about the hub and spoke. They could go on vacation for two weeks, come back, answer a couple of phone calls. And they had these two guys that were pretty much running the show for them. Well, we get to within two weeks of selling the company, the buyers, a young couple, another husband and wife, he has an MBA in business. He’s an engineer, but he’s never done anything with drilling. So he needed those two employees. So now the awkward conversation comes up. Are those two guys going to stay?

Drew McLellan:

Right.

Terry Lammers:

So what I’m getting at here is if you have an employee like that, one, you probably have to have the conversation with them. Two, put some kind of golden handcuffs on them. There’s specific products out there that are for that. A lot of them are cash value life insurance policies.

Drew McLellan:

Sure, yeah.

Terry Lammers:

As well again, it’s just another thing that you need to recognize and work towards solidifying that. It’s interesting, I know of an advertising agency that the owner left. There was that key employee, but he’s … I’m sure you have a lot of very creative people. And sometimes those types of people aren’t … They don’t want to be the business owner, not that maybe that they’re not good at it. They just flat don’t want to own the business. They just want to stay there and work. Well, let’s get them tied down somehow that if you decide to transition that business, that person’s going to stay. So the specific situation I’m thinking of, the owner did sell the business. Somebody else bought it. There was a culture clash between the two. He left, and the guy lost the business. So whatever he paid for it, I’m not privileged to that information, was lost because that key person left.

Drew McLellan:

Yeah, I’ve had many clients who have actually bought other agencies and tried to blend the staff and the client base and all of that. And I will say that more times than not, it’s not successful, and they end up losing most of the employees and most of the clients and so whatever they paid for that agency was just a really expensive business.

Terry Lammers:

Culture is definitely a big thing. And I just lived it, we just bought out of a company in November where a couple of years before we had brought on two people. We sold 10% of the company to the current COO and we brought a new person on. We sold another from outside that we sold 10% of the company to, and right out of the gate, things were good. But when the honeymoon was over, those two did not get along and it didn’t end well. So one of the two has gone from the company now.

Drew McLellan:

Yeah.

Terry Lammers:

So.

Drew McLellan:

Okay. So I’ve got hub and spoke. I have recurring revenue. I have the Switzerland structure. What else you got on your list?

Terry Lammers:

Customer satisfaction. Do you guys ever talk to your customers and get good … the best type of customers that you have are ones that are referring you to other people. This is one that at first I didn’t put a lot of faith in, but in today’s world of social media-

Drew McLellan:

Oh yeah.

Terry Lammers:

… and five stars and stuff like that, that’s something that I would pay attention to.

Drew McLellan:

Absolutely.

Terry Lammers:

Another one that I don’t think it will affect you guys, maybe not too much, but maybe yes. Especially if your Switzerland structure is an issue that you’ve got that gorilla client. So think of when you buy a company, in essence, you’re writing two checks. You’re writing one check for the value of the company and you’re writing a second check for the working capital it takes to run that company.

Drew McLellan:

Right.

Terry Lammers:

So you guys may not have a lot of inventory or things like that that can … but what about your accounts receivable? Is that gorilla client, or are those clients paying you on time?

Drew McLellan:

Right.

Terry Lammers:

Because whoever’s buying your company is going to have to absorb that overhead.

Drew McLellan:

Yep. Yep. Yep. Right. We don’t have a lot of hard assets, but obviously what we have is we have receivables for work we’ve already done. We have some contractual agreements or scopes of work for work that’s coming up, so most of our sort of assets are the work we’ve already done or work we’re contracted to do.

Terry Lammers:

Correct.

Drew McLellan:

Yeah.

Terry Lammers:

The biggest problem with accounts receivable is, and I’ve ran into this. If you’re allowing your clients to pay you late, even if it’s 60 or 90 days and the person that … it’s very problematic for the buyer, because if he’s not going to allow that and you try and force that customer to pay in 30 days or 10 days, here’s the ironic twist. It’s likely that person’s going to leave and he’s going to go to another agency where he probably has to pay in 30 days, but you lost it.

Drew McLellan:

Yeah. You know, in our world, if somebody gets paid in 45 or 60 days, that’s a good client.

Terry Lammers:

Wow.

Drew McLellan:

Yeah.

Terry Lammers:

And that was problematic in my company. I mean, I had-

Drew McLellan:

And the bigger the client, or the bigger the brand of the client … so I have clients who have had opportunities to work with big brands that everybody would recognize, but what they wanted in their master services agreement was actually payment terms of up to 120 days.

Terry Lammers:

Yeah.

Drew McLellan:

So for a lot of agencies, they don’t have the bandwidth to be able to carry a client, especially a big client like that if they’re buying a lot of media, they can’t carry them that long, but I will say even for the smallest agencies, if they are getting paid within 45 days, in our industry, that’s healthy.

Terry Lammers:

Mm-hmm (affirmative). Wow.

Drew McLellan:

Yeah.

Terry Lammers:

That is, that’s just painful. I have a friend who owns a construction business and the construction business is very notorious for that also.

Drew McLellan:

Yeah.

Terry Lammers:

It’s just painful. I struggle to understand-

Drew McLellan:

You have to run your business differently because you know that’s the reality, right?

Terry Lammers:

Yeah.

Drew McLellan:

Yeah.

Terry Lammers:

So, but that kind of leads to another one of the value drivers and that’s monopoly control. So again, to draw a similarity, look at your gas stations. They post their price on the street. So if the guy across the street’s a penny cheaper, that’s probably where the customer is going to go. So what the monopoly control is referring to is do you have the ability to set your own price in the market? So if you’re doing something very unique with your agency that you can demand a higher dollar, and you’re not going to run across the street and compare you to somebody else, that definitely adds value to the company.

Drew McLellan:

Right. So in our world where this really plays in and the listeners are going to think that I’m beating the same drum I always beat, but this is about specializing. This is about being a brain surgeon rather than the general practitioner. So if I am an agency with a depth of knowledge in agricultural equipment, those clients will pay a premium for what we do, because we have a greater depth of information and knowledge and insight and experience and connections in their industry, so we can actually do better work, do it more efficiently and with fewer sort of stops and starts because we already know it. So that’s one of the places where we can actually, to use your language, create a monopoly opportunity where people aren’t price shopping us.

Terry Lammers:

Okay. So if you don’t have that monopoly opportunity, here’s another perfect reason to maybe seek out buying another agency that does do something different-

Drew McLellan:

Right.

Terry Lammers:

… and that you can acquire an employee or two that know something different than what you’re currently doing. I mean, that’s an excellent opportunity to build value in your company by acquiring another company that does something a little bit different.

Drew McLellan:

Yep. What’s next on your list? I think we’re almost up to eight, right?

Terry Lammers:

We’re almost up to eight. So financial performance is one. Growth potential is I think one that we haven’t covered yet, that might be the eighth one. So growth potential is all about, and this one may be a little bit harder for your guys also. The growth potential is about how … what is the ability to grow that company? Think of an insurance agency, it’s probably easier. I’m selling state farm insurance here and I can acquire another territory in another state. It’s pretty easy to go set up shop.

Drew McLellan:

Yeah.

Terry Lammers:

Let’s go back to your agriculture clients. If you’re doing advertising for an agricultural client in Iowa, how easy is it for you to find … and in today’s world, maybe you don’t even need to have somebody there physically, but how easy is it for you to pick up a client in St. Louis-

Drew McLellan:

Right.

Terry Lammers:

… or Minneapolis, Minnesota. That’s-

Drew McLellan:

And again, that’s where the specialty comes in. Right? So, no one’s going to hire a generalist agency, three towns down, or two states down because there’s a generalist agency around the corner. But if you are a specialist, and you have a depth of expertise that they want to tap into, they will fly over multiple generalist agencies to get to the specialty agency.

Terry Lammers:

Correct. And then what’s your ability-

Drew McLellan:

Then it’s more value, right?

Terry Lammers:

Yes. Absolutely. And then what’s your availability, as you would grow that, to bring other people into your agency and teach them what you’re doing so you’re building that employee base of customers that can do that.

Drew McLellan:

Yeah. Yeah. Those are all … those are great. Those are great value drivers. So I know we’re getting towards the tail end of our conversation, but I’m curious, what do you think the big … if I wanted to sell my agency today and based on your experience of watching lots of business owners sell their business, what is the most likely mistake I’m going to make?

Terry Lammers:

Not planning. Not planning. All the things that we’ve talked about today keeps going back to that you, your customers, your type of business really plays out well to transition for the owner being around and transitioning over a period of maybe a minimum of one year.

Drew McLellan:

Right.

Terry Lammers:

So that the sooner you plan ahead of time, the more opportunities that you’re going to have to find a perfect fit.

Drew McLellan:

Yeah.

Terry Lammers:

I mean, I think-

Drew McLellan:

Perfect fit matters a lot if you’re sticking around, right?

Terry Lammers:

Yeah, it does. But if you have a company that doesn’t have recurring income, you maybe can’t grow it. If you’re the hub and spoke that limits your ability to grow it.

Drew McLellan:

Right.

Terry Lammers:

So I merged my company a year ago with another business broker because … and we worked together for about a year to be honest with you before we finally merged in to make sure that we fit-

Drew McLellan:

Right.

Terry Lammers:

And that we had the same ideas and we did culturally, we’ve been a great fit. We even did the disc survey. So we knew we was two people that would work together. And we finally realized that in our situation, it was kind of a one plus one equals three.

Drew McLellan:

Yeah.

Terry Lammers:

We’re able to have a full-time operations manager and it’s just given us that ability to grow. So I think the key to that is you need to plan ahead of time. You need to be thinking about it.

Drew McLellan:

Yeah. Well, and especially because in our industry, most of what you’re going to get for your business is an earn-out.

Terry Lammers:

Yes.

Drew McLellan:

So you might get 10 or 20% up front, but the rest of it, you are very invested for a lot of reasons in the business that you’re selling going well, because otherwise you’re not going to get your buyout.

Terry Lammers:

Here’s another thing to think about, and I was like this. I’m going to sell my business so I’m going to go play golf and hunt and fish the rest of my life, right? Well, let me tell you, it ain’t as rosy as it sounds. So what I would tell you today is I’m going to work for the rest of my life, but you know what I want to be able to be in control of, is my time.

Drew McLellan:

Right.

Terry Lammers:

So if you can transition to another company, maybe you only work 20 hours a week. Maybe you come into the office two days a week, three days a week, but you get to control your time that if you want to go on a vacation, go on vacation. If you don’t want to take a month off and go on a trip, go on a trip, but you’ve always got some place to come back to. So maybe you get that paycheck because as long as you’re there, that girl, a client stays there, even though you may not be coming into the office every day, but you’re available by phone call.

Drew McLellan:

Yeah. You know, it’s interesting. I think one of the places where we can all sort of improve, for lack of a better word, is to recognize that there is no one right way to do this.

Terry Lammers:

Mm-hmm (affirmative)

Drew McLellan:

There are lots of ways to get this done. Some are you packing up your office and leaving? Some, are you sticking around for a while and playing a role? But also the flip side of that is I think most agency owners think a lot about selling their business someday, but very few of them think about it on the flip side of, “Here’s an opportunity for me to grow my business by either merging with another agency or purchasing an agency.” So all this entire thing, this entire topic is one of those things where I think we probably don’t think about it as often as we should with the depth that we need to, which I think is your point of, what are we trying to accomplish? And what’s the relative timeframe that we want to accomplish it in?

Terry Lammers:

Mm-hmm (affirmative).

Drew McLellan:

And then that allows us to start to build the plan.

Terry Lammers:

The ostrich syndrome, right?

Drew McLellan:

Yeah.

Terry Lammers:

Get your head out of the sand.

Drew McLellan:

Right.

Terry Lammers:

You’ve got to be talking about it and thinking about it.

Drew McLellan:

Yeah.

Terry Lammers:

I got a client right now we’re working with, it’s just sad. The owner is in his early eighties and his health is failing and his two sons are running the business, but he won’t give them any control.

Drew McLellan:

Yeah.

Terry Lammers:

And the company’s not doing well. You know? So these things need to be thought out and recognized and talked about.

Drew McLellan:

Well, and in a timeframe when you’re not in crisis, right? So when you’re not facing a health issue or the business is not tanking, it’s really about thinking about it when you don’t need to think about it so you can think about it with a clear head and make good decisions and begin to make choices that set you up to be able to execute on what you think you want to get done.

Terry Lammers:

Yep. And you’re absolutely right. Absolutely right.

Drew McLellan:

Terry, this has been fascinating. If folks want to learn more about your book or about your company, what’s the best place for them to go to find more information?

Terry Lammers:

We’re all over social media as most people are so LinkedIn, Facebook, our website is www.innovativeba.com. A lot of information there. The book is available on Amazon. The name of the book is You Don’t Know What You Don’t Know: Everything You Need to Know to Buy or Sell a Business. You can download load an e-version of the book free off of Kindle. There’s a media page on our website that has podcasts that I’ve been on, articles that I’ve written, my speaking schedule. I’d like to throw that out there, if you need a speaker for any event, I’m happy to come and talk about this kind of stuff, valuation and exit planning and things of such. I have fun doing that. So those are probably the best ways to get hold of me. My cell phone number, if you want to give me a call, 618 530 8922.

Drew McLellan:

All right. Thank you very much for sharing your expertise and telling us some of the stories. You certainly, I’m sure, see some doozy situations.

Terry Lammers:

It’s a wild and entertaining job, let me tell you.

Drew McLellan:

Yeah. I bet. Well, thank you very much.

Terry Lammers:

You bet. Have a great day.

Drew McLellan:

You too. All right, guys, this wraps up another episode of Build a Better Agency. I think the big takeaway here is don’t wait, regardless of if you’re thinking about buying an agency to grow your business, if you believe that you are building an asset that you think you can sell, and that’s something that’s important to you. Even if you start with baby steps, even if you just start exploring as Terry was suggesting sort of what your end number is and what the timeframe is with that, and then finding the right people to sit around the table with you, and think about how you can improve all of those value drivers, or at least as many of them as you can that Terry took us through, now is the time.

I don’t care if you’re 25. I don’t care if you’re 55 and God help you, but I don’t care if you’re 85. Now is the time to think about it and start putting together a plan. I promise you, it will not happen exactly the way you think is going to, but you have a much better chance of it happening the way you want it to if you start planning now. So put some of those conversations into play. Pull your head out of the sand as Terry was saying, and be thinking about how you want to wrap things up, whether it’s 50 years down the road or 10 years down the road, whatever it is, make this a priority for yourself and for your family. All right?

I’ll be back next week with another guest to get you thinking a little differently about your business. And in the meantime, you can always track me down at agencymanagementinstitute.com. Do not forget that we are giving away a free workshop, whether you want to get a seat at one of our online workshops, or you want to show up at one of our live workshops and all you have to do to enter into the drawing is to leave us a rating and review. Take a screenshot of it.

Shoot me an email because you know you all have a usernames that are hard to decipher if you’re love my gophers 102, I can’t know who that is. So take a screenshot of it, shoot it over to me, and then we will put you in the drawing for one of those free workshop seats, all right? I’ll see you next week. Thanks for spending some time with us. Visit our website, to learn about our workshops, owner peer groups, and download our salary and benefits survey. Be sure you also sign up for our free podcast giveaways at agencymanagementinstitute.com/podcastgiveaway.