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In the latest episode of the Agency Leadership Podcast, Chip and Gini discuss non-traditional revenue streams for PR and marketing agencies.
First, the pair address tax law changes related to meals and entertainment expenses — something that will impact many agency owners.
Next, Chip and Gini look at how agencies can go beyond retainer and project revenue to find opportunities in education, training, products, and software.
They also explore the pros and cons of partnering with startup companies in exchange for equity.
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CHIP: 0:00
Hello, and welcome to the agency leadership podcast. I’m Chip Griffin
GINI: 0:04
and I am Gini Dietrich
CHIP: 0:05
and we are here today to talk about non traditional revenue streams for your agency. But before we talk about making money, we want to talk about spending money for just a moment. And
GINI: 0:18
maybe not money you want to spend necessarily. But exactly, you know,
CHIP: 0:21
it might be that you want to try to, to find ways to spend money and then have it be tax deductible, a lot of agency owners are interested in minimizing their tax burden while maximizing their fun. And one of the ways to do that is with meals and entertainment expenses, something that most agencies I’m sure are already deducting and using to their tax benefit. But there are changes taking place in 2019. And there was some discussion about this in the all important spin sucks community recently. And so we thought that we, before we jump into our broader topic of revenue, we would just touch on this for just a minute because it’s it’s, you know, it is an important area and it is something that most agency owners have done for years and years. And so the fact that there are changes now taking place, you know, what isn’t, is not deductible is something that you should be paying attention to.
GINI: 1:16
So the article that actually makes it super easy to understand is from bench bench is the accounting firm that we use a love bench, they keep things updated super fast. This is not a commercial for them, however, but it was on bench and it talks about the type of expense the old rules of 2017 in the new world, and 2018. And the two biggest things that have gone away or declined is entertaining clients. So concert tickets, sporting events, golf games, things like that used to be 50% deductible now at zero percent deductible. And the other big thing is office snacks and meals. Meals used to be 100% deductible. And that’s now for 50% deductible. So when you’re thinking about, you know, entertaining clients, or bringing food in for your employees, keep that in mind that it’s not either not deductible anymore, half of what it used to be
CHIP: 2:12
right. And there are there are different guidelines when it comes to employees, for example, as far as the percentage of your staff, they’re engaged. So, you know, like everything with the IRS, it’s not simple, it does require a little bit of education. You know, I think the the biggest thing that will hit at least some agencies, probably the larger ones are things like season tickets, luxury suites, those kinds of things that you know, that the bigger agencies tend to spend more money on, obviously, smaller agencies, little bit less likely, but, you know, may have season tickets to sporting teams and those sorts of things that they’ve used for client entertainment. And that’s I think that’s probably where the pinch will be felt the most it you know, there’s been some discussion about impacting on travel and client meals generally, for the most part, most rules seemed to be pretty similar. Obviously, we’re not accountants, so talk to your own accountant, which is the sort of upshot of the segment we think that it’s important that all agency owners are having these ongoing conversations with their professional tax and bookkeeping advice to make sure that they are both tracking things correctly, as well as, you know, being prepared at tax time to properly document any of these expenses. so that in the event that you are audited, you can explain Yes, Mr. IRS man, we did this properly.
GINI: 3:34
Yes, Mr. Iris, we
CHIP: 3:37
want to be sexist here. I mean,
GINI: 3:38
air Yes, please. IRS, IRS person. And, you know,
CHIP: 3:42
I mean, you know, IRS audits are are certainly not something you look forward to. But as long as you are maintaining your records appropriately, and not doing anything outlandish, you know, they shouldn’t be a huge deal. I’ve certainly been through various government agency audits, including one IRS one nice little random check on my retirement program for my firm, few years ago, that was, that was fun, because they were just, it was the first time they had ever started auditing small business retirement plans. And I said, well, it’s the fidelity simple IRA. So you’re kind of going to have to talk to them about the details of how
well we’re the plan documents, you’re going to have to ask fidelity I went on the fidelity website and click Sign up. So that, you know,
GINI: 4:33
it’s funny you say that because
I have our 401k administered through our accounting firm, because they also do that. And she sends me paper files every year and says, put this somewhere where they can be found. And I’m like, Can you send it to me digitally? No. So I have paper files of them all in my little book, that if it ever happens, I can just say, here they are.
CHIP: 4:57
And you definitely want to hold on to those because that that has become an area of emphasis for the IRS in recent years, is monitoring retirement plans. So unfortunately, we were we were one of the first small businesses in New England to be subject to this part is probably five or six years ago. And the the guy who was doing it had never audited a small business retirement program before. So it was all he was learning as he went
on, on us. And, you know, so he was certainly, you know, nice enough, but he was he was used to, to auditing, you know, thousands of employee retirement plans, right, you know, self administered the whole thing where we’re, a lot of these issues do come up. And, you know, when you when you got a 401k, you know, there are more issues, like I said, in our case, it was a simple IRA through fidelity. So, couldn’t get any simpler than that. So that’s about all you can do at the simplest level. And, and so he just wasn’t quite sure what to do when we said call fidelity, fidelity because we said look fidelity, much more likely to answer your phone call than ours. So
GINI: 6:03
Exactly. Yeah, you’re exactly right. You’re exactly right. That’s what
CHIP: 6:08
we ended up resolving. It wasn’t no huge issue there. But, you know, certainly I’ve been through that I went through one for auditing independent contractor statuses. Again, it was a random audit, not a targeted thing, very simple, you know, kind of just made tread the documentation, but you want to make sure that you always have your documentation in place, so that if you get selected for random or not so random on it, you are ready to deal with it. And in this case, with the change in the meals and entertainment, because it’s something that so many agency owners are probably taking advantage of, you know, you want to make sure that that you all are thinking about it and aware of this change. So,
anything else on fun tax matters before we move into?
GINI: 6:48
No, that’s my least favorite topic. So let’s move on.
CHIP: 6:50
I wouldn’t say it’s my least favorite, but pretty close to it. I think employment laws probably is probably my least favorite.
GINI: 6:58
That’s, that’s I’ve been there too. I would agree with that. All right.
CHIP: 7:02
Anyway, Alright, so let’s talk about making money. instead. Let’s talk about
GINI: 7:05
Yes, I like I like to make money. Let’s
CHIP: 7:07
talk about non traditional revenue streams. And we’ve previously talked on this show about the importance of diversifying your revenue streams not being reliant upon just one thing as an agency, and really finding ways to smooth out cash flow, accelerate growth, etc. And some of that through traditional means. In other words, mixing up projects with retainers, but increasingly, agencies are finding non traditional revenue streams, things like courses, webinars, products, even software. And, and one that you and I have talked about offline before is equity, which is sort of it’s a, it’s an alternative form of compensation in one sense, but it’s also an alternative revenue stream, depending on how you structure it. So there’s a lot of different ways that agency owners can generate revenue these days, and I thought it would be fun to sort of talk about some of them, and how we view them, and how agency owners might be able to take advantage of them.
GINI: 8:06
Yes, I like to make money, that is my favorite topic,
CHIP: 8:10
and finding ways to to make money while you sleep, which is even better, a lot of agency owners are either consciously or subconsciously looking to do that, because you can only do so much by selling your own time. And so if you’re able to look to some of these non traditional revenue streams, so that, you know, instead of being a one to one revenue generator, maybe it’s a one to many or, or alternative ways of getting money in the door, it’s worthwhile thinking about. So let’s, you know, let’s talk about some of the some of these. And, you know, one of the ones that I know, has become particularly popular with a lot of agencies lately is courses or trainings. So in the old days, agencies would do trainings for an individual client, right, or their teams. But, but increasingly, I think we see folks who are starting courses, you know, either online or in person to train groups of people. And this has a two fold the fact that you can generate revenue directly out of it. But it’s also a way to build your reputation, get in front of more people show your expertise.
GINI: 9:20
And we have found that so we have an agency on our program that teaches agency owners how to build passive income and how to market market it and sell it just based on our last five years of our doing it, what’s worked and what hasn’t, and, you know, we help them through it. But we found with those clients is that there’s a third piece to that, which is you, you can have a conversation with the prospect, and now you have, you know, one or two, you have several different paths to take them down. So while you’re having a conversation with the prospect, you can say, Oh, well, we have this online program that teaches you how to do XYZ, let me tell you a little bit about that. And it’s five thousand dollars, or the client the prospects like, Oh, that sounds awesome, but there’s no way I can do that myself, I really need an agency with arms and legs, great, we can do that we can do exactly what you’ve just detailed. And it’s $20,000 like, so if we find that ancillary benefit, where it You may be talking to somebody about your online program, but come to find out, they really need you to do the work, or vice versa, you may be talking about to them about doing the work, and they don’t have the budget to spend for you to do it. So you have this program where they still get you, but they’re, you’re teaching them how to, you’re teaching them how to fish instead of doing the
CHIP: 10:37
right. And I think that that what you’ve described there is great because it, it expands the, the breadth of prospects that you can reach out to, right. So you don’t necessarily have to limit it to just a small swath that is, you know, right, for your highest end solution. Although, certainly you want to get them there, if you can, you know, there’s ways to, as I like to put it, you know, to give them the money you and let them decide how much they’re going to pay you and, and still make money all the way all the way along the process. And, as you say, also find ways to upsell them. Because, you know, it’s the magic of sales is, it’s always easier to sell to an existing client than it is to is to find a new one. So if you can get someone in the door with a lower cost, but not cheap training program, you can then move them up the ladder and into some of your other opportunities, particularly if you paint that picture. And they realize, geez, I can’t really do this on my own. But, you know, you really convinced me that this is the right path.
GINI: 11:42
And I mean, to your point, people get really accustomed to working with you. And the idea of flying on their own without you is scary for people. They’re like, Okay, I know, you just taught me this. But what happens when, when I do that, and then this happens, and they, you know, know, I mean, there are some people who are like, yeah, I’m good, thanks for all that. But there, you know, I would say 70% of your clients on the online program side of things will say, I need to keep keep working with you, can you keep coaching me as they’re like, so that you, you’ll be able to find new quote unquote, products to continue to work with people because of what and based on what they need because of what they’re telling you. And it’s significantly easier once they start working with you to keep them on as a client for very good.
CHIP: 12:31
And I think what you’ve identified there is really the trick to this, which is in the course of your conversations with clients with prospects to identify what the real need is there. And if you’re doing a good job of listening, then you’ll be much better situated to figure out what solutions you can offer, using the expertise that that you have, that you’ve developed the processes that you’ve created, and try to find additional ways to capitalize them. capitalize on them, so that it’s not just, you know, limited to the traditional agency construct.
GINI: 13:08
Yeah, I mean, it’s, yeah, you have to listen, you can’t do that, do all the talking, and you will hear things repeatedly. So there are two things that we’re launching this year, just based on what our clients told us last year. And they, both of them were not things that we had even considered, but because we were listening, and we’re like, oh, oh, that makes a lot of sense, let’s do that. And so, you know, I mean, we still have to sell it, right. But so that’s, that’s still to be seen. But it’s an it’s a really good opportunity for you to start to create, I hate the word product, because it’s not really a product, it’s a program, it’s training based on your intellectual property. But it is product ties from the perspective that you create at once, and then you sell it, I mean, it’s not like, I mean, it’s, it’s sort of like having a widget, you build the widget once, and then you’re just keep manufacturing it sort of, it’s the same idea. It’s also a different business model. So there’s that too, but it’s a significantly easier to scale a business when you have this type of revenue stream, because it’s not reliant on a person,
CHIP: 14:15
can you say it isn’t product per se, but in some cases, it actually is it particularly for digital agencies, or more digitally minded agencies, you’re increasingly seeing them perhaps create a tool for internal use, and then they realize, hey, this actually, you know, there’s a market beyond my own clients for this, and they turn around and they sell it, whether that’s, you know, a WordPress plugin, or a standalone platform or whatever. I mean, you know, I, I go back to thinking about custom scoop. When I created that 20 years ago, I, you know, I, I was doing the traditional agency consulting thing. And I had built, I was using sort of traditional paper clipping services and realize that that wasn’t great. I had built this other program to grab headlines for a political newsletter that I wrote, and we said, Hey, wait a minute, this is something that we could use more broadly than our own clients as a way to gather online news clips. And so suddenly a business was born. And, you know, we’ve seen that I think, increasingly in recent years, particularly as the the barrier to entry to creating some of these software, products, Software as a Service, etc, has become much lower, it’s much easier for agencies to get involved with this. So you know, it take a look at what you’re doing, and say, you know, is there knowledge? Is there process? Are there tools that I’ve created that I can find an additional source of customers for, you know, can I can I go beyond my existing customer base with it,
GINI: 15:49
that’s a really good point. And, you know, coverage book was created that way, because they were trying to figure out how to build a better coverage reports for for their internal audiences, and did it that way. And then they were like, Wait a second, there’s a, there’s a business out of this. And then Iris, the same thing, Allie sacks, ran an agency in Phoenix, and they were trying to figure out how to better track results for Media Relations and built this tool internally and realize, wait, wait, there’s something here, we could actually go to other agencies and sell this as a media Media Relations results tracking tool, and they’ve done extraordinarily extraordinarily well, they’re doing right.
CHIP: 16:27
And actually, if memory serves correctly, base camp was born that way,
Unknown 16:30
right? Yeah, yeah, you’re right. You’re right. What
CHIP: 16:32
was originally developed as a product project management tool. Yep, for a design and development agency. And then they said, hey, look, turns out, other people can use us, and they ended up going down that path. So, you know, there’s, there’s a lot of different ways that you can get there. Now, Jenny, you also mentioned something that’s important, and I think that that agency owners need to consider is, this is a different way of doing business, right? This is a different business model. So they may not be right for everybody. And so you need to think through Okay, is, is this really something that I want to pursue, because, you know, while you know, we think it’s great to have additional revenue streams, they need to be ones that are a good fit for what you’re trying to build for your ability to manage. I mean, managing a software development team is far different from managing traditional communicators, right?
GINI: 17:23
And even read up a different Yeah, even managing a team where it is intellectual property, and you’re doing training, it’s completely different. Because you have, you have a traditional sales team, you have, you know, inside sales, you have coaches like you, it’s, it’s different than hiring a team of communicators, where you have the skill set to be able to help them evolve and grow. And when you’re building a team, where and bringing on people that have varying skills, a you don’t have those skill sets yourself. So you don’t know if they’re, you know, are they doing a good job? I think so. I don’t know, right? So there’s a lot of that that goes into it to where you you are, it is a different business model,
CHIP: 18:08
right. And so it may be that, you know, you have this great idea, and you realize that you’re not the best fit for it. So, you know, that may be an opportunity to look at creative business arrangements to, you know, do you do you partner with somebody else, maybe you’ve already developed a relationship with another firm, and you say, Hey, you know, the, you know, we could work well together, our intellectual property, your existing sales team, whatever, there are there other ways to do it there, there are risks to that as well. And something that, you know, you want to be aware of, you want to make sure that if you’re engaged in that kind of joint venture, that you very carefully document it. Because otherwise, you know, the possibility that someone decides that down the road that they own something fully, when perhaps that wasn’t the initial understanding, put them in, put these things in writing, yes, flush them out, think about think of it. But it’s also as I’ve always said, most of these agreements, it’s the process you go through, that’s just as important as that the paper that you end up with. So, you know, it allows you to start thinking those things through with your potential partner, whether that’s an individual or another company, or whatever, and, you know, find those those, you know, possible synergies find the potential potholes at the same time, so that you can identify those early
GINI: 19:24
which I think leads to the equity conversation. And you and I’ve had this conversation on spin sucks the blog in the comments,
but I think there is it certainly not for every client, and maybe not even for clients at all. But, you know, finding yourself
really finding yourself in front of an organization that you really believe in, that you think is going to go big places, you figuring out a way to work in equity
in exchange for quote, unquote, sweat, sweat, so you know, time inside, helping them from a PR marketing perspective, and you get equity out of that the way I’ve always I’ve done this three times now, where I’ve been on boards that have sold, and I’ve had equity, I’ve always, I’ve always done it, so that anything that was my time, so it was strategic, forward thinking, helping with messaging, helping with crisis, kind of that kind of stuff, that all went into my equity piece, but if it required execution, and my team, then there had to be a retainer for that. So I’ve always worked out a deal on on in all three instances where if the team was doing, you know, content, and social and media relations, and all that kind of stuff, then and it was truly tactical execution, then there was a retainer for that, but the high level strategic thinking, media training, that kind of stuff that all went into my equity. And so I was essentially at the time, quote, unquote, giving my time away from free been in all three instances, it worked out on the back end quite well. And I ended up making more money than I would have had we done a retainer and I had built, you know, for my time,
CHIP: 21:11
yeah, look, so I am, I am a big believer in having equity in growing businesses, right, I love it, I think it’s great. I’ve invested in a lot of companies, either through sweat equity, real equity, whatever, over the years. So I, I think there’s huge upside potential. Plus, at least in my case, I also just find it fun, you know, I, I enjoy sort of the startup mentality. And typically, this is a startup culture kind of family, this is not typically something where an established business is going to look to, to compensate you with equity, it’s not unheard of, you know, there are, there are pivots that companies may make where they might do it, but by and large, it’s the startup world that would do it this way. So I, I’m a huge fan of it. At the same time, I think that when I look at it from an agency comp perspective, it you have to put it in the category of very advanced techniques. And, and I would say, not even just advanced techniques, but very advanced, because if you don’t know what you’re doing, you can get yourself into a whole lot of trouble. And so if this is something that you are interested in, if it’s something that you’re thinking about, you know, some of the things that I would advise you to think about, first of all, don’t view this as a just as solely a way to replace cash, right? Which is how a lot of times this conversation starts. A lot of times, it’s a startup that just doesn’t have cash, and they’re like, Well, you know, how can I just give you equity instead? Nope, no, you want to be very, very cautious, to the point of almost absolutely saying no to that. Now, this is something that was very popular during the first internet bubble 20 years ago, and a lot of professional service firms, both PR and law firms, in particular, took a bath because they ended up with all sorts of worthless equity. So you want to you want to make sure that if you’re going down this road that you’re doing it because you see value that you can add beyond the mere transactional. And so I think the way that you thought about it, and the way you’ve structured it such that your time that equity execution involves the rest of your agency, that’s that’s straight cop, right. That’s, I think that’s, that’s a useful way of thinking about it. But the other pieces and, and, you know, we’ve talked about this ad nauseum on the show already, even though we’ve only been around for a few months so far. But you need to get professional advice, because the, the number of things that you can get tripped up on here are incredible. And you want to make sure that you know what, all of the consequences, particularly the tax consequences are, because you can get yourself into a whole lot of a financial mess very quickly when you’re taking equity. Because depending on the stage of the company, and valuations and all that kind of stuff, if you’re getting actual equity given to you, in other words, actual shares of the company that may well be a taxable event at that time, even though there’s no cash, so you may owe taxes on it. So be very, very careful in how you do this, and how you structure it. And in all likelihood, the company itself is going to be thinking about this. And if they’re not, that’s probably a warning sign to right. If, if, if they haven’t given thought to what the tax consequences are there, they’re probably not thinking through all the issues they need to as a business. And so you want to be very careful, because you don’t ever want to have equity turn into a negative, right, yeah,
GINI: 24:42
and I will tell you, you can, you can negotiate that in there. So I’ve always been negotiated the you’ll pay, you’ll send me a check for my task, my taxes that are due. And so that that becomes a quote unquote, cash event, because they do send you a check or wire transfer for the amount that you’ll Own your taxes. But it’s just as a straight turn around,
CHIP: 25:04
right. And anytime you’re dealing with equity in any fashion, whether it’s, you know, you’re you’ve got partners in your agency, or you’re doing it as part of a revenue stream, or whatever, you know, you always want to think about those tax consequences and how you handle tax payments, because any good agreement that you have, you know, will will address how taxes getting handled, particularly if it’s a pass through taxable event, which is very common within the agency itself, a little less so on the equity side, but it can still create taxable events. And so you want to make sure that that everybody’s on the same page as far as how that gets paid for.
GINI: 25:39
The other thing, the other two things I would I really think through is, number one is if you’re going to do time, in exchange for equity, especially as the leader of the organization,
make sure that you have a board as a board seat for that, because that makes a big difference when the company has sold. The other thing, Do not Do not Do not ever, ever, ever, ever, ever trade equity for results on your communications program, or any program do not do it. I have made that mistake, I made it one time, I caution everybody do not trade any compensation in exchange for results.
CHIP: 26:27
I was just about to jump in and say, don’t just limit it to equity. You never, ever ever watched your car? No, no,
Unknown 26:35
no, never. Never. Never. Never. Never. Never, ever, ever
CHIP: 26:42
unless the performance of your own agency. But and frankly,
GINI: 26:46
you can control it. And it Yeah, the performance of your own agency that’s different. But when you can’t control how money is being spent, or what profit looks like, do not do it.
CHIP: 26:55
Right. Right. And, and you should always, anytime you have and I think we addressed this a little bit in the employee compensation side of things. But, you know, anytime that you have anything that’s incentive based, whether it’s equity, cash compensation, I don’t care what it is, you always have to assume that that your upside is zero, right? And so are you happy if you if you never see a penny of it, for whatever reason, and this goes for whether you’re selling your business or, you know, getting a employee bonus, any of these things, it’s, you always want to be assuming that it’s going to be a zero in that column. And if you’re still comfortable with it,
you can think about it. But But, but as an agency, you should never allow your agency compensation or to be or no, no, no, never. Never.
GINI: 27:44
That doesn’t even depend. Never know.
CHIP: 27:48
Hello. I mean, everything depends, right? I mean, it It is, it is the motto of this show, you know,
which I’m not sure anybody’s really noticed. Because, you know,
Unknown 27:59
I think some people having I’ve had a couple mentioned.
Unknown 28:03
Yeah,
CHIP: 28:04
it’s, it’s always nice when people listen to that.
GINI: 28:07
I mean, I think final list was, but
CHIP: 28:09
Well,
yes. But you know, more than that, to start the show, we just don’t know how many of you finish. So,
GINI: 28:16
right, that’s fair.
CHIP: 28:19
So in any case, that does actually bring us to the end of this show that we’ve managed to go on for quite some time here. And we always keep this show under 30 minutes for your listening pleasure. And because, well, that’ll help you if you’re on the treadmill, you know, your 30 minutes are up on our show is done.
GINI: 28:35
Now, you’re now you’re you know, you’re almost finished with your own
CHIP: 28:37
and so we will let you get off of that treadmill and on the treadmill of life
lame.
CHIP:
So on that note, this has been another episode of the agency leadership podcast. I’m Chip Griffin.
GINI: 28:53
and I’m Gini Dietrich
CHIP:
and it depends
