Every agency owner believes that they’ll sell their agency some day. But the truth is, most agency owners are not doing anything to make their business sellable. 90% of all agencies just close the doors one day. There’s nothing wrong with that. You can make a good living and pull extra money out every year and then when you’re done – lock the door on your way out.
But if you do want to sell your agency, the time to begin prepping it for sale is today. Even if you’re 10+ years away from retirement, the time is now.
Do you want to keep it? Pass it on to your kids? Sell it to your employees or maybe sell it to an outside buyer? Each of these options requires you to prepare and be ready when the time comes.
My guest, John Warrilow helps business owners prepare for these options. Join John and I as we walk through the ways that you can get your agency ready for the future by discovering:
- John’s book “Built to Sell”
- The very easy path for agencies to follow that make it extremely hard to sell
- What services look like that make an agency sellable
- Why you can’t confuse the doing with owning a business
- When is it time to say no to business?
- What to do after selling your agency
- Things to avoid when exiting your agency
- Services agencies can offer on a subscription model
- Standardizing a process and giving that process or product a specific name
- Why you shouldn’t surround yourself with journeymen agency employees
- How to assess how sellable your agency is and what can be done to make your agency more sellable
John Warrillow is the author of books “Built to Sell” and “The Automatic Customer” and founder of The Value Builder System™ where advisors help company owners increase the value of their business. Previously, he founded Warrillow & Co., a subscription-based research business dedicated to helping Fortune 500 companies market to small business owners. A sought-after speaker and popular Inc.com columnist, John lives in Toronto.
To listen – you can visit the Build A Better Agency site (https://www.agencymanagementinstitute.com/john-warrillow/) and grab either the iTunes or Stitcher files or just listen to it from the web.
If you’d rather just read the conversation, the transcript is below:
Table of Contents (Jump Straight to It!)
- The Biggest Mistake(s) Business Owners Make When Preparing for Sale
- Building a Business to Sell
- Steps to Take Before Selling Your Agency
If you’re going to take the risk of running an agency, shouldn’t you get the benefits, too? Welcome to Build a Better Agency, where we show you how to build an agency that can scale and grow with better clients, invested employees, and best of all, more money to the bottom line. Bringing his 25-plus years of expertise as both an agency owner and agency consultant to you, please welcome your host, Drew McLellan.
Drew: Hey, everybody, Drew McLellan here with another episode of Build a Better Agency. All of you, as I talk to agency owners all over the land, one of the things that we are always talking about is how to create an agency that has intrinsic value, so that you have choices in terms of keeping it, passing it on to your kids, selling it to your employees, selling it to an outside buyer. But a lot of times we spend time talking about how does an agency get evaluated, and what makes it a valuable proposition for someone else if they’re looking to buy, and that’s why I’m super excited.
Many of you have heard me recommend the book Built to Sell by John Warrillow. And John also has a great new book out, called The Automatic Customer: Creating a Subscription Based Business in Any Industry. But John has lived our world. He has started and exited four companies, including a market research business. And the book, if you’ve read it, is a business parable book. And the business, that in John’s book, that his character is building to sell is an agency. So he certainly knows our world.
So I’m excited to talk to him about how business owners think differently about their business so that they have options down to the tail end of the business cycle for them. So John, welcome to the podcast. Thanks for joining us.
John: Thanks for having me, Drew.
Drew: So what prompted you to write the book Built to Sell?
John: So I had, as you said, exited a couple of businesses, and figured I’d made every mistake in the book, and I had some time on my hands, and thought I should get some of these ideas down on paper. So I took a few weeks and started banging out the story. And you’re right, it’s a parable about an agency owner who is tired of the hamster wheel of always chasing the next client, always chasing the next project, and figures there’s gotta be a better way.
Drew: One of the things I love about the book is that it talks about something that I preach to agency owners all the time, which is if you’re a generalist, you diminish the value of your company. It really is about being different and differentiating, and narrowing your focus. Can you talk a little bit about that?
John: Well, it happens, yeah. It happens pretty easily. And that is because a lot of agency owners are really personable. They are the rainmaker for their company, and they’ve built great relationships with the other side of the table, being the client. And a client says well…the client will hire you and say, “We love the fact that you do great websites,” let’s say. And then they say, “You know, you’re doing such a great job managing our website. Have you ever thought about doing SEO, search engine optimization?” And you scratch your head and say, “Well, I don’t really know much about Google, but I probably could figure it out.”
This client who I really love working with has asked me to do SEO, so I’ll do SEO. And then they start to work together on the SEO front, then the client says, “You’re doing such a great job on SEO. Have you ever done search engine marketing, like where you actually buy the Google keywords? Would you ever consider doing that on our behalf?” And then you go, “Well, I don’t know the first thing about that, but I’ll figure it out.” And sooner or later, you’ve gone from being a specialist in building websites to being a generalist marketing agency, where you basically offer all services to a few customers. And that’s the definition of an unsellable business. Where you’ve got a general suite of services, a handful of clients that you personally take care of. It can be, by the way, Drew, a very profitable agency, but no one would wanna buy it.
Drew: Right. Well, and one of the things that I have conversations with agency owners all the time is, you may very well choose to say no to selling your agency. The idea though is to build a company of value, so that that’s an option for you if you want it, right?
John: Yeah, a lot of agencies will transfer from one ownership group to the next, like a law firm. The senior partner will say, “Hey, it’s time to retire. Let’s let some of the new guys come up and buy in over time.” And that’s a pretty typical way an agency owner will exit.
The Biggest Mistake(s) Business Owners Make When Preparing for Sale
Drew: Yeah. Absolutely. So when you think about building a business that is ready to sell, what’s the biggest mistake business owners make around that?
John: Great question. Probably thinking it’s an overnight transaction is probably the biggest mistake, and it sounds like an overused, trite sort of example. But a lot of agency owners think that selling the company is like a 400-meter relay. You sprint as hard as you can, and you just dive into the arms of the next guy who’s gonna run it for you. And you hand the baton and you kind of ride off into the sunset, or more accurately, you collapse onto the tarmac. The reality is, most agencies are not transitioned that way. So you decide you wanna sell, it takes you a couple years to get the business ready to sell, and it takes you a year to negotiate the sale, and then it takes you three, or five, or even seven years on an earn-out to capture any value out. So I mean if you’re 40, and you’re listening to this podcast, you’re saying, “Yeah, yeah, I think I wanna be on the beach by the time I’m 60,” my advice would be to start proactively selling your agency by the time you’re 50. Because it’s gonna take you 10 years to capture any value out of it. It literally takes that long.
Drew: Well, and I think to your analogy, when you’re 40, that’s when you start building the business with purpose around creating value, so that it is sellable when you’re 50, and then you start the marketing and the process that you describe.
John: Exactly, yeah.
Drew: What are some other stumbling blocks that agency owners need to be mindful of as they…let’s assume that they are 40 years old, and they’re saying, “Okay, yep. I think I do wanna be on the beach by the time I’m 60. I’d like to have part of my exit strategy be that someone buys the agency for whatever reason they are motivated to do that besides money,” because I think it’s not always just about the money. So I’m 40 years old, what do I need to do? What’s the recipe for building a sellable business?
John: Yeah, so the first thing you identified earlier, which is to find one thing in your agency that meets the trifecta of scale. So for me, that means it’s a service, typically, in an advertising context. It’s a service that is teachable to employees, valuable to customers, and repeatable. So the way to remember that is TVR, teachable, valuable, and repeatable. And so the first step is really thinking about all the services you provide. So let’s say you do direct mail, copywriting, graphic design, brochures, event marketing, whatever. We put the whole suite of services you offer on a white board. And then score them on a scale of 0 to 10, to what degree you can teach employees to deliver it, or on the inverse, it relies on you. To what degree it’s valuable to customers, or on the inverse, it’s a commodity, get it from any agency in the market? And the third is, is to what degree it’s repeatable? Meaning to what degree do clients have to purchase that service on a regular cadence? And then you’re really looking to start to specialize in the service and sources that rank the highest against the teachable, valuable, repeatable criteria. That’s strong cheese for a lot of people to consume.
A lot of people, a lot of agency owners will look at and say, “Yeah, but the most profitable stuff we do, or the most scalable stuff we do is the smallest portion of our revenue.” Or, “Only three of our customers want that.” Or, “Our biggest client wants us to do 50 other things. We could never just specialize in one thing.” To which, unfortunately, I think, the response would be, well that’s the price of building a scalable agency. In my view, you’ve really gotta start eliminating the services…eliminating offering the services that you cannot teach other employees to deliver, that clients will choose you for, rather than view as a commodity, and are repeatable, meaning they’re not just a one-off product launch process, where you’d never need to buy it again. So I think that’s the first step. We sort of touched on that when we talked about generalization versus specialization.
Drew: Right. You know, one of the things in that equation…I think agents…one of the reasons why people get into the agency business, and why some people rise to the ranks of an owner, is because they do like serving clients, and they do like being a trusted resource, or a trusted counselor, and they do like being at the C-suite table, and offering good marketing advice. And part of what you’re saying is, you have to be able to park all that at the door, and be able to not really, especially as the owner, not really be that guy or that woman, but that you need to teach your people how to do this repeatable sort of check, check, check, check item list that delivers value to the client, right?
John: You bet. I remember I was doing a speech a while ago for a group of graphic designers. And I was blathering on, the same spiel, basically saying you can’t think of yourself as a chief creative officer, you gotta find things that you can replicate, you can’t be your client’s number one and the audience was going ashen. They were like, “This is terrible, this is like the antithesis of what I got in the business to do.” And my message to them, it’s the same to you is that, hey, if you want to be a graphic designer, be a graphic designer. Don’t run an agency that does graphic design, because that’s terrible. Actually just be a freelancer. Because if you wanna do the doing, and you wanna be a graphic designer, then be a graphic designer. If you wanna be a marketing strategist, hold your shingle up, and say, “Look, you could hire me for $500 an hour, and I’ll build you a marketing strategy.” It’s not a company, it’s a job. And that’s fine, and that’s a perfectly acceptable way to have a career. Many people have tremendous successful, add tremendous value, but don’t confuse the doing with actually owning a business. Because even if you’ve got employees, if you’re the person the client wants to see to build a strategy, to design the design, to write the copy, you’re not an owner of a business, you are a glorified employee. And that’s a tough, tough message to hear, but again, if you get all sorts of ego gratification from being the guy the client goes to for advice, by all means, be that guy, but don’t expect to sell your company. Don’t expect your company to be worth anything.
Drew: Yeah, you know, it’s funny when I look across all the agency owners I work with, the ones who transition best to what you’re describing are the ones who didn’t grow up in agencies, and whose identity and ego isn’t tied to the skillset they had when they were an agency employee.
John: Totally, totally, totally. Yeah, and I get that. It’s the same, by the way, in HVAC companies, in plumbing companies. In all those companies, if the owner thinks that, “Hey, I’m the guy they wanna go to to fix their furnace,” well, guess what, there’s nothing to sell. You can just be a furnace fixer, that’s great. And if that’s what you’re into, then be the best furnace fixer you can be. Be the best copywriter you can be. What I get upset about is when entrepreneurs say, “I’m a great copywriter, I’m gonna start a copywriting business, and I’m gonna hold myself out for $500 an hour, and write great copy for clients. And they invest all the proceeds of their hard work into building their agency. Fancy furniture, office space, marketing, advertising, and then at the end of the day, turn to someone and say, “Why isn’t my company worth anything?” Well, it’s not worth anything because you didn’t set it up to be sold. So again, if you’re gonna hold yourself out and be a freelancer and charge $500 an hour to write amazing copy, then great, do that. But by all means, do it from your basement, where you don’t have any costs, and you can keep all the money you bill, as opposed to pretending you’re running an agency where all the money you’re making is just going to fund the overhead, which is basically worthless.
Drew: Yeah, you know, in the book, I think one of the big turning points for the character in your book, the agency owner in the book, is when he has to turn down business that is not his core competency. So, right, he’s decided that he’s gonna be a logo shop, and all they’re gonna do are great logos. He’s got this great logo process, and then somebody asks him, and I don’t remember what it is now, but somebody asks him to do something different. And it’s a big pot of money, and he’s…that’s a crossroads for him. Talk to us a little bit about that crossroad, and how people can decide or figure out when is the right time to start saying no to things that are not where they’re pointing the company towards.
John: Yeah, you know, you characterize it as a crossroads, and in the book, it is a crossroads, but I would argue that especially when you’re making this transition, you have to look these decisions in the eye and make the right decision again and again and again. So in the book, for those who haven’t read the book, the main character goes through this process of specialization, he decides to do logos. And this one client, his dream client, he’s always wanted this client on his resume, comes to him and says, “Look, we want you to be our agency of record,” and it’s like 750 grand worth of fees a year, and it’s his dream in the old world. So he’s gotta decide, do I take the money and fulfill the dream I’ve always had, which is to be the agency of record of this big advertiser, or do I stick to my knitting, and continue to crank out building this business to sell. And so I think that, in maybe less dramatic form, happens to business owners who make this transition all the time.
So, a couple of thoughts. One, you’ve gotta rest assured that if your goal is building a sellable company, there will be these moments where you have to sacrifice short-term money, ego gratification, for long term value. So it should feel wrong, but hopefully in your gut, you know it’s the right call to make, to specialize. Number two, charge upfront. So if you are the world’s…like if you decided your agency, you’re going to become the world’s greatest designer of PowerPoint presentations, and that’s gonna be your unique little corner of the universe. When someone comes to you, when Apple, or Al Gore, or some other company comes to you and says, “Look, we want you to create a PowerPoint presentation,” then charge upfront. Charge a large portion…and if you truly are the world’s greatest fill-in-the-blank, you should be able to determine the pricing terms. So at least, while you may not have the glory of the big client of the year, you’re not void of cash flow by turning down projects. And so again, I think if you become the world’s greatest fill-in-the-blank copywriter, whatever, you can start to determine your pricing terms. And so that can give you…when you’ve got cash in the bank and you’re not scrambling for your next project, that could give you the intestinal fortitude to say no when something looks very tempting.
Drew: Yeah, I think when you have X number of employees, and you know that all of them are counting on paying their mortgage that month, the pressure to have money coming in the door can sometimes force you into a decision, or make you feel like you’re forced into a decision that is taking you off of the path. So I think you’re right, I think figuring out how to manage the cash flow is one of the ways to take that pressure off.
John: You bet.
Building a Business to Sell
Drew: So in terms of building a business to sell, where do you…and this was not something really you dealt with in the book, but I know that you deal with it in terms of the work you do outside of the story in the book, where does the importance of an owner’s emotional state…So I’ve walked a lot of owners through the process of selling their business, and yes there’s the financial part of, you know, it is or isn’t worth what they thought it was worth and all of that. But I also think that part of the ability to build a business to sell and then actually be able to pull the trigger and sell it is tied to where they are emotionally, and what they’re going through after the sale. Do you have some thoughts about that?
John: Yeah, I think you want a big goal, a big box to check outside of work to go do once you exit. Because I think most of us as entrepreneurs who haven’t worked for a boss for years, if not decades, every day we’re waking up on the hunt, right. You’re waking up for the next hunting, the next client, making sure you’ve got enough money in the bank to fund the things that you need, and so forth. So you do have that built in adrenaline rush that…you’ve got that excitement in your life. So the moment you exit, you lose that, right, that purpose, to use an overused expression. Great book on this, by the way, by a guy named Bo Burlingham, wrote a book called Finish Big. If you haven’t read it, I’d strongly recommend reading it. It talks about the emotional impact of selling a company, and things to think about before and after.
But one of the core ideas in Bo’s book is the idea that you’ve really gotta think about, and have a purpose. That, for some people is gonna be philanthropic. They wanna go start a foundation. They might wanna go start another business. They might wanna travel. They might wanna master some sports, get in shape. In our case, my last company, I sold back in 2008, and my wife, and we had two young kids, we wanted to move to another country. So our goal was to move to Europe. So for us, that was very galvanizing, and it gave me something to focus on. So when you’re trying to learn a new language, you’re trying to figure out how the driving laws work in another country, you’ve got something else to think about other than, “Oh, I miss my company,” or, “I miss the people,” or, “I miss that adrenaline rush.” So for that, that worked for us. That’s not gonna be right for everybody obviously, but having something to go to, it’s cliche to even say it, but there’s only so much golf you can play. It will get boring very quickly. So having something that energizes you I think is a good best practice.
Drew: Yeah, I think entrepreneurs by their human nature are, whether they’re type A’s or not, they are driven. They like to be super busy. They like to add value. And so I’ve seen some agency owners really stumble out of their agency without something big like you said, and they’re sort of miserable for a while, as they sort of reinvent who they are.
John: Yeah, Yeah, yeah. And then many…let’s be honest, get back into running an agency, because that’s what they know, and that is what gave them the ego gratification, and so a lot of them do. Which is why by the way if you ever do sell your company, the non-compete is not an inconsequential discussion. So any buyers that are gonna come in and wanna buy your company, they’re gonna want you to sign a non-compete. And you’re gonna look at that non-compete, and if you’re anything like me, you’re gonna look at and go, “Yeah, there’s no way in the world I’m ever gonna get into this business again.” It could be a lifetime non-compete, and all of marketing services can be covered, ‘cause I don’t wanna touch this business for the next 50 years. I’ll never in my life…but time has a funny way of healing all wounds, and never is a long time. And so I would just encourage you to sign a non-compete slowly. And know that, hey five years, that’s a long time to sit on the bench. And even though you may not feel like running another agency now, you may in five years. So I would just encourage you to think about what scope…and the scope usually is length of the non-compete, number one. And then the industry, like what scope of services, is it I will never start another marketing services business? Or is it more specifically I will never get into the business of doing search engine optimization, if that’s your specialty, as an example. So just be careful what you sign when it comes to a non-compete.
Drew: Yeah. Well, and in fact what I’ve seen is that some agency owners cut the deal for the sale, part of the deal is that they have to stay for a certain amount of time. And then they don’t get out when they’re supposed to, and it really mucks up the deal for the new person, because it’s hard to run a company when the old guy or the old boss, male or female, is still in the shop.
John: Yeah. It’s one of the reasons I can’t stand earn-outs, is because you’re immediately in competition with the buyer. So if you don’t know what an earn-out is, basically an earn-out is when you sign up to…the way typically the big agency holding companies buy agencies right now is they’ll come to you and say, “We’d love your agency. We’re gonna pay you 10 times earnings for your company.” And you’re like, your eyes go wide, you’re like, “Ten times earnings, that sounds great.” The fine print takes all, most of that away, however. And they say, “Look, we’re gonna pay you three times earnings up front, and then another seven times earnings you have the potential to earn if you meet all these future goals five years from now, or three years from now.” And so it’s you’re actually selling your agency for three times EBITDA, but they don’t open the conversation with that. They give you the 10 times EBITDA as the headline number.
And so your goal over that three, five, or seven year earn-out is to try to hit a bunch of goals. And you’re gonna reach…through that period of time, there are gonna be all kinds of times where hitting your earn-out is going to be competing with the overall goals of the buying company. And so you’re gonna butt heads with the agency holding company, your boss, essentially, because for you to hit your earn-out undermines their ability to do something they wanna do in the company.
So let’s say, for example, they wanna, at the agency holding company, they want to rationalize…a good example would be, they wanna give General Motors agency of record relationship. And you’ve got the Ford account, right. They’re gonna come to you and say, “Hey, listen, I know you got a couple hundred grand worth of revenue from Ford, but you gotta get rid of it, because as a parent company, we’re gonna take the GM account. And so you say, “Yeah, but that’s part of my earn-out,” and they say, “Yeah, but you’re part of the company now.” So that’s just one stupid little example, but you’ll run into almost daily conflicts with the buyer, where your goals to hit your earn-out are in direct conflict with their goals to integrate you as part of their business.
Drew: Well, and sometimes the way they want to run the business may simply be that they wanna spend more money than you would have spent, and that impacts AGI or other things that ultimately affect the net profit, and so your payout, right?
John: Right, yeah. You canvas a hundred entrepreneurs, in particular agency owners who’ve gone through an earn-out, you’ll get 90, 95 of them who will roll their eyes and say, “God, that was the worst three years of my life.” And they’ll recount stories like the one you just shared. So, yeah. So the trick, by the way, to avoiding that is to…getting as much recurring revenue as you can in your agency. Because when you’ve got recurring revenue, and you can demonstrate to a buyer you’ve got this annuity stream of revenue coming in, and that is not personally dependent on you, that’s when you start to get away from the huge portion of the deal on the earn-out, and a bigger, fatter payment upfront. And so if you’re doing search engine optimization as an example, you can do search engine optimization one of two ways.
You can do a one-off search engine optimization product for a client, and try to get them ranked first or second in Google and their Keywords. Or, you can say “Look, over the next two, three, five years, we’re gonna manage your natural search listings, and we’re gonna provide a service on a monthly basis that ensures that you stay ranked and your keywords on a monthly basis, and we’re gonna just bill you once a month and here’s this two-year contract for us to do that. And now an acquirer looks at the company and they say, “It’s not just this project-based, one-and-done business. These guys have got a tail to their revenue.” And that’s really what you’re looking for in building a more valuable agency, is that recurring revenue.
Drew: So that sort of leads me into this segue between the first book you wrote and the second book. So the second book is called The Automatic Customer: Creating a Subscription Business in Any Industry. Do you believe that agencies are a business that can create that? Because that’s in essence what you’re saying is…we wouldn’t call it a subscription perhaps, but you’re saying follow that kind of methodology. What kinds of products or services could you imagine that an agency could build a subscription model around?
John: Well, as I just shared, having…there are nine different subscription models in the book. The most obvious one is the simplifier model. So the simplifier model states that, for a lot of customers, it would be a lot easier, and it would simplify their lives to a high degree if they could just buy from you on a regular basis, and you automated that for them. So that there wasn’t the need to pick up the phone, call you, and say, “Yes, we’d like you to do that service for us again.” That there was that ongoing tail, if you will. And so I think you wanna think about are there services where customers buy those things from you again and again?
I’ll give you a stupid example. If you do business cards for your clients, and corporate identity, you could offer a service that says, “Look, we understand employees come and go. It’s kind of a hassle to always get them business cards. So we’re just gonna offer you a service. It’s a hundred bucks a month, and it’s basically unlimited business cards for your team. We’ll just offer that to you, and as you have employees come and go, no problem.” Let’s say…so there’s an example of a service. Now you might be saying, “Why on earth would I care about 100 bucks a month? The reason I think you wanna care about a small amount of subscription revenue in your business is the Trojan horse effect. And the Trojan horse effect states that subscription revenue, when you have that locked in recurring revenue, it makes the buyer more likely to buy additional services from you. So because you have the $100 a month business card offering, you are much more likely to get their project when they’ve got an event to run, because they know who you are, you’ve got their credit card on file, you’ve got an ongoing relationship, you’ve got their brand standards, you have their…you know what color the logo is. And there’s just this ongoing relationship, whereas if you’re just billing yourself as a project-based agency, then clearly those things…you’ve got to teach a new agency, all those things.
So again, I would be looking for services customer buy on a regular cadence. In the area of search engine marketing, most advertisers these days have a keyword, a bunch of keywords they they wanna buy and bid on. So that is a good example of a service that should be automated, right. It should be on an automatic monthly basis. We bill on a regular cadence, we’ve got a budget everybody agrees to upfront. Looking for those types of services. And sometimes you’ve gotta be creative, but I think that’s really where you wanna get to.
Benchmarking also is a biggie. So for example, if you offer market research services, or if you offer employee satisfaction services or any of those services, benchmarking over time the brand equity that your client has in the marketplace. “Hey, once a quarter, we’re gonna do a brand study for you. We’re gonna do a piece of market research that assesses your clients’ expectations or impressions of your brand, and we’ll do a little brand audit of your competitors, we’re gonna do that quarterly, and that’s part of our service we charge 10 grand a quarter for. Those sorts of things, where they need to have regular feedback, regular benchmarking, regular information is what you’re looking for.
Drew: And you know, for some agency owners, again that feels like they own a factory rather than an agency. How does an entrepreneur, and again maybe it’s simply that they have to make that choice, but how does an entrepreneur wrap their head around in essence creating that sort of repeat revenue, but it doesn’t feel like they’re customizing everything for everybody? So I think in many times in the entrepreneur, the agency owner’s mind, that diminishes the value of what they sell.
John: Yeah. I think you can have…in the book, it talks about a process which is always replicable. So while the outcome…in the case of Built to Sell, the protagonist is creating logos. It doesn’t mean that every logo looks identical, uses the same color palette, uses the same font. It means they have a standard way of creating a logo. So in your case, maybe it’s a standard…like if you’re creating brochures, as a silly example, a very trivial example, but let’s say your agency is specialized in creating the world’s greatest point of purchase brochures. Well, that’s great. So asking yourself what is your process for creating the world’s greatest point of sale brochures? Does it start with a brainstorming with all the key stakeholders in the room? Does it then go to a competitive landscape audit, where you look at the point of purchase materials for the five biggest competitors? So like, what is the process you go through? And then standardizing the process, naming the process. One of the keys to making this transition from a service-based business to a sellable company is productizing your service, so making it look like a thing. People buy things, they…agencies transition on an earn-out, but companies that sell things have a better chance of getting bigger chunk of their money upfront. So naming your process, trademarking it, always talking about it in the same way, using the same font and the color of the name, all that kind of stuff. Making it look like a thing.
Drew: Well, and I think what that does too is, it creates a buyer who is less likely to tinker. So when you say, “Hey, we create logos,” and you are generic about it, then the buyer tries to influence the way you do that. But when you have a standardized process, where as you say you’ve productized it, they think they’re buying something that is already tested and true, so they don’t mess around with it as much.
John: Such a great point. “We’ve got the nine step process for optimizing your website. We’ve done it from everyone from Wells Fargo to Xerox to IBM, and we’d like to sell you that service.” Well if you’re the car dealership down the road, you’re like, “Okay, well if Wells Fargo’s using the nine step website optimization process, it must be pretty good.” So yeah, they’re much less likely to tinker with it when you own the name of the process, you’re absolutely right. And what’s the worst? The worst in any service-based business, and I hasten to say it’s probably the same in a marketing agency, is when the client thinks they know your business better than you do, right?
John: They’re like, “Yeah, yeah. I know you usually do it this way, but we’d like you to do it that way.” Well, no. There’s a reason we do it this way. We’ve been doing it this way for 20 years. So if you’ve been doing it that way for 20 years, then codify that, name it, claim it, own it, because that’s when you get that point of differentiation. And to your point, it’s such a good point, they don’t tinker as much.
Drew: Yeah, yeah. So one thing I wanna circle back around in terms of building a business to sell. It seems to me that especially in an agency business, where A, the biggest investment an owner makes is their staff, but B, that’s the factory that produces whatever it is you do are your people. So as you’re thinking about building an agency that someday you wanna sell, so again, you’re that 40-year-old, and you’re marching towards 50 when you’re gonna put the for sale sign out, what do you need to think about in terms of staff, and staff development, knowing that they’re gonna be part of the sale?
John: Yeah, don’t hire agency people basically, is the long and the short of it. Because a lot of agency people are wrapped up in their status in the industry, and have a greater degree of loyalty to the industry than they do to your company. So they’re an art director, they happen to be working for your company right now, and as long as your agency is winning awards, getting great clients, getting great projects, your account directors are pushing back when the client wants to tinker etc. As long as all those things are in line, the art director will condescend to work for your company. But the moment you stop winning awards, or you start specializing, or you fall out favor in the local media, the art director’s got one foot out the door looking for the next client, next agency to go work for. They have zero loyalty to your company, their loyalty is to the industry, marketing industry.
And so I would try to avoid those journeymen who are going to…to really basically push back at any attempts you make to make your agency more sellable. I would argue that if you’ve been doing business for 20 years in the old model, and you start to implement some of the changes I’ve suggested on this call, you’re gonna get a lot of pushback from those people who consider themselves agency employees, and creative directors, and copywriters, and I’m darn proud of it, and I love watching Mad Men, because that’s how it used to be. Those are the kinds of people you wanna avoid like the plague. I think what you wanna do is find people who wanna follow a system, scale a business, that happens to be in the marketing communication space, not people who define themselves by being a copywriter.
Drew: Yeah, that’s interesting. You just made a whole bunch of agency owners clutch at their chest, I suspect.
Drew: Because I think they love to surround themselves with those creative, entrepreneurial, “I love the business” kind of people, and that’s…if they look at their agency today, that’s who’s in their business, and so…
John: Right, like so anybody who sends you a reel, just dismiss immediately. You know I mean? Like anybody who sends you a creative reel and says, “Hey look at all this stuff. I worked on McDonalds, I work on Nike, I work…” Yeah. And you’re gonna go prostitute yourself out to the next agency the moment my agency goes through three weeks of hard time.
Drew: Yeah, right. Or I tell you that you have to do the same thing day in and day out, because that’s what we do.
John: Right. They’re gonna be like, “Pardon? I’m a creative.”
John: Right. So go be a creative somewhere else.
Steps to Take Before Selling Your Agency
Drew: Yep. So for the agency owners that are listening, that are saying, “I’m 40,” or, “I’m 40 plus, oh shoot, I haven’t done any of this yet. I need to start thinking about this, because I am within a decade of wanting to put the for sale sign out,” or, “Shoot, I was gonna do it next week and now I gotta rethink that.” What are two or three things that they should do right now to A, understand where they’re at, what the playing field of where they’re at? How do they assess how sellable they are? And B, what do they do…what are the first couple steps they should take to making themselves more sellable?
John: Such a good question. So I think you really wanna think hard about what it is you want out of life? Why you go to work in the morning? What you find most fulfilling? And I think that those answers to those questions are important. If you love the business, and you love being creative, and you love the way it’s structured, then I would disabuse you of the idea of selling your agency ever. The likelihood that you will ever sell your agency for any significant amount of money is very low. That the likely way you will transition out of your agency is to sell your shares to the next generation of buyers. It will be a low multiple. If you do sell it externally, it is going to be for a very small cash payment upfront, and some at-risk payment in the future. So the idea…I think if that’s…if you like that, then that’s fine, and then if you need to pull more money out of the company among the way over the next 10 years, and make sure you’re dividending out your retirement fund if you will. That’s completely fine, and a great legitimate response to that, and you sort of just forget about everything I’ve said on this call, because I think that’s fine. It’s a way to run a company. So that’s I think the first decision you need to make.
And then I think if you come at it and say, “No, I actually, I’m not happy with selling the business for nothing, or a small upfront payment. I actually wanna build some value over the next few years, and I wanna be able to sell the thing and get out without some huge portion of my proceeds at risk,” then I think the biggest decision you need to make is this one about what are we going to specialize in? How do we winnow down this huge list of “marketing services” to the one, two, or three things that are again, that we can differentiate on that are teachable, valuable, and repeatable? And then once you’ve figured out that it’s search engine optimization, or it’s event marketing, or it’s graphics design for whatever. Once you’ve figured that out, I think then the hard job, or the next big task, is to figure out how do you do that on some sort of recurring basis. Use one of the nine subscription models to create a transaction model with your customer that doesn’t rely on them to pick up the phone to call you every time they need your service. That there is an inherent or implicit, implied relationship that continues. And again, I think those are the two biggest steps that I would take if the goal is to sell at a decent multiple.
Drew: Yeah, great. Great advice. I knew this was gonna be a conversation that was packed with thought-provoking ideas, and you have not disappointed, John. I can’t tell you how grateful I am for you to take the time to do this today. Like I said to you before we hit the record button, I recommend your books like crazy, and will continue to do that, because I just think they’re so smart and so practical. So thank you so much for being with us today.
John: Thanks for having me, Drew.
Drew: You bet. Hey, if folks want to track you down, if they wanna learn more about your work, if they wanna learn about your company, The Value Builder System, how do they do that?
Drew: Okay. And as I recall when I was poking around there that all of your links to Twitter and Facebook and all those other things are there as well, correct?
John: Yeah, that’s right. If you wanna dig deeper on the book, it’s builttosell.com, or automaticcustomer.com. If you wanna know what the nine subscription models are, again that’s automaticcustomer.com, you can opt in, and you’ll get a one-pager, it’s actually more like a 10-page PDF of the nine subscriptions models. But that all coalesces or centers around this one website called valuebuilder.com, where we work with entrepreneurs and help them improve the value of their company over time.
Drew: That is awesome. Thank you so much. I appreciate it.
John: Hey, thank you, Drew.
Drew: You bet. Hey, everybody, this was another episode of Build a Better Agency, where every week I try to bring you a guest who will spark new thinking, give you some great ideas, and help you create an agency that serves you and your family, your employees, and your clients. So I’ll be back next week, I hope you will too. If you are so inclined, please make sure you swing by iTunes and give us a review, and subscribe so you do not miss an episode. I will see you next week.
That’s all for this episode of Build a Better Agency on selling your agency. Be sure to visit agencymanagementinstitute.com to learn more about our workshops and other ways we serve small to mid-sized agencies. While you’re there, sign up for our e-newsletter, grab our free e-book, and check out the blog. Growing a bigger, better agency that makes more money, attracts bigger clients, and doesn’t consume your life is possible here on Build a Better Agency.