There is a major change coming to the agency world and you should be prepared for it. Right now, there are thousands of agencies who all look similar, are similar sizes, and provide similar services. This means this industry is ripe for a roll-up.
I was discussing this with the agency owners in our Mastermind Group last week. Almost all of them were interested in this process and it was a lively conversation with everyone sharing.
Some of you may have even had initial conversations with potential buyers. Some potential acquirers are working on rolling up a number of smaller agencies to produce an agency that does over $10 million in revenue and over $1 million in profit each year.
That’s the goal since there are very few agencies of this size.
Creating a large agency is becoming more and more attractive to PE companies and other potential investors who have the money and the desire to build this larger more profitable agency.
This means many of you may be entertaining conversations around the value of your agency.
Let’s talk about what your agency is actually worth and how to increase that value.
How to Know What Your Agency Is Worth
This is actually much easier to uncover than you might think. It’s usually pretty simple. Take your net profit at the end of last year and then adjust it based on the following set of instructions.
Add back in any expenses you’re taking out of the business for personal use, like a car payment.
Check your compensation. If you’re not paying yourself or not paying yourself enough, you have to deduct that amount.
Take that final estimate and multiply it by three, four, or five. This is the most common multiplier used when calculating value.
Now you have a rough estimate of what someone might pay you for your agency. If it's too low, then you should start working on improving the numbers used in this calculation. If the number is reasonable, then you have some perspective on what your agency might be worth to a potential buyer.
What Makes It Worth More
Yes, you can make the agency worth more by driving more profit each month. That is easier said than done.
Cut your team back and you run the risk of having the remaining team quit because you’re overworking them.
Cut back other expenses like marketing and you run the risk of generating fewer leads.
Cutting your own comp will have no effect as most buyers would realize you’ve been underpaying yourself.
Raise your prices and you run the risk of closing fewer new clients.
Invest more in sales and close more new clients but you’ll quickly get to the point where you need to hire more people.
I hope this illustrates what we all know. Improving profit is hard. Growing your agency is even harder.
There are other ways to increase the value of your agency. Look for potential purchases who are willing to pay more than three, four, or five times earnings. Paying you six, seven, or eight will increase the purchase price. But this means you’ll need to earn those higher multipliers.
You can do that by offering something no other agency does. You can do that by having proprietary software as part of your service offering. You can do this by finding a more strategic buyer than a financial buyer. You can do this by having strategic partnerships with companies like HubSpot. There are ways to drive up your value if you focus on it.
There are many people who might want to buy your agency. Twenty years ago, hardly anyone wanted to buy a digital agency. Most owners simply closed down their shops upon retirement or transitioned the company to one of their employees.
Today there are all types of people and groups who might want to buy your shop.
Financial Buyers – These are people or groups of people who see the financial gains associated with grouping multiple agencies together, removing the redundant costs, and then selling the packaged group of agencies to another buyer down the road.
They know that a $2 million agency would earn a value multiplier of 5x but a $20 million agency would earn a value multiplier of closer to 7x or 8x. This makes this very interesting to them.
Strategic Buyers – These are people or groups who see the value in grouping agencies together. They are not as interested in packaging and then selling the larger group, but leveraging the expertise of the different agencies to cross-sell and upsell new services to current clients.
They are interested in working with the owners who remain to help them grow the new bigger company. They would be interested in reinvesting in future acquisitions, investing in marketing and sales, and even helping to develop additional products and services.
They might still have an interest in selling the larger agency at some point too, but their path to that higher valuation is different than the financial buyers.
Other Agencies – Some agencies are already doing this. They’re acquiring agencies with a complementary skill set. They’re acquiring agencies to get access to talent. They may be acquiring agencies to get access to technology partnerships too. They may also be interested in this to expand their relationship with their current technology partners.
These agencies also know that the more revenue and the more profit they can generate the higher their valuation. They know that acquisitions might be faster than organic growth. In some cases, these agencies might be feeling like they are in a race to grow. Speed is important and these acquisitions do accelerate growth.
Private Equity – PE firms can be financial buyers or strategic buyers. PE firms come in all shapes and sizes, they are as different as the people managing those firms. However, they all have similar investment strategies. They get money from other people and other entities. Their job is to find investment opportunities and put that money to work.
They have a financial obligation to the people and institutions who give them the money. They have to show gains. The way they produce gains is to purchase business properties and then share the profits with their ownership groups or sell the business properties, generating gains for their investors.
If you’re considering an acquisition by a PE Group, make sure you understand their investment strategy, timeline, and where their money comes from.
Family Offices – A family office is similar to a PE firm, but instead of representing a group of investors, they represent a high net worth family who has decided that investing in businesses is better than investing in the stock market, or other financial vehicles.
The same questions apply. Make sure you understand the goals and objectives of the family office. Make sure you understand their timelines and how they expect to work with you once the transaction is completed.
Corporations – Finally, companies buy agencies too. Some companies want an in-house agency to be part of their organization. They might feel that having control over the agency provides them advantages in hiring or working with agencies in the traditional vendor-client relationship.
We see this last scenario much less frequently, but we’ve seen it nonetheless and you should be aware of it.
Some of you might be thinking, “Why would anyone want to sell their agency?” Or you might be thinking that none of these buyers and scenarios sound especially attractive.
The truth is there could be some signals or industry conditions that might make selling the best option for some of you.
Here are a few reasons to seriously consider an exit.
Many of the services marketing agencies sell are getting easier for clients to do on their own. Many of those same services are also getting cheaper due to a large number of contractors.
Today, there are more agencies than ever before, and differentiating your agency is harder than ever before.
People interested in purchasing agencies won’t be around forever and they won’t be interested forever. In two or three years, the market for agencies might not be as hot, meaning the valuations will be lower.
Selling your agency doesn’t mean a lack of freedom, a lack of control, or the end of your career. It could actually mean better, more exciting, and rewarding professional experiences.
You could realize significant financial gains that would be hard for you to replicate on your own.
The only one who knows what’s right for you and your family is you. Keep in mind the realities and the opportunities that might not be around forever.
When To Know If Selling Is Right For You
These decisions are highly personal ones. No one is ever going to know what’s right for you. But here are some signs that might help you consider if selling is right for you now, or might be right for you in the future.
If you feel like you’re tired of running the agency alone.
If you feel like you don’t know how to get the agency to grow.
If you know what you need to do to get it to grow but don’t have the financial support or energy to get there.
If you feel like you’re not being compensated appropriately for the work and energy you’re putting in.
If you feel like working with a bigger team would be a better path toward growth.
If you want to take some chips off the table, derive some financial gains now, even if you want to continue working in the agency.
And of course, if you’re ready to do something else or retire completely.
All of these reasons are solid reasons. Again, no one can tell you differently. But if you feel like any of these represent how you feel today or how you think you’ll feel in a few years, I’d recommend you start looking at some of your options.
Having had many discussions with potential buyers and having acquired a number of agencies, it's always challenging to know what’s right for the owners.
In the end, many of these decisions simply come down to personal decisions. What future do you want for you and your family? How do you feel about working with a team, instead of on your own? Do you really want to do something bigger or are you fine managing your small agency until you retire?
For many of you, these aren’t easy decisions nor are they easy discussions to have with friends, family, or loved ones. Change is scary and if you’ve been running your agency on your own for the past 10 years, the idea of going to work with someone else, or for someone else can be scary enough for you to just ignore the idea.
Change can be amazing. New opportunities. New responsibilities. New people to work with. An ability to share the risk and work toward something that you could have never done on your own. It can be exciting and beneficial for everyone.
One final thought. It’s hard to grow an agency from zero to $20 million in revenue. Very few people do it. Most agencies hover between $1 million and $5 million in annual revenue and while they produce nice lifestyles for their owners, there's an opportunity to do more.
Working with other agencies or groups you could gain the ability to set yourself up for life with larger payoffs than you would be able to create on your own.
While merging or being acquired isn’t for everyone, I think you should look toward the future and decide on this one point. Is it going to be better to be with a bigger group or on my own as our industry changes?
As Brian Halligan once said to me, “It's better to be a small owner of a bigger company, than a bigger owner of a smaller company.” It certainly paid off for him. I think it can pay off for you too.
Start Today Tip – You’re going to be approached at some point. Be open to listening to the people who are interested in talking to you. It’s very likely you’ll have to kiss a lot of frogs before you find your prince or princess. But be open to looking for the right deal. When you find it, go into it with everything you’ve got. Don’t be concerned, be excited, and be open to working with your new partners to build something you might not have been able to build on your own. A bigger, better agency. Now that you have the financial backing to hire, expand marketing, add more salespeople, expand your technology partnerships and build out your team—the future might look extremely bright and you might actually have the opportunity to cash out again and just simply sail off into the sunset. This will make all your hard work pay off handsomely. It’s possible. Be open to it.