The mental image that many agency owners have when thinking about selling their agencies often differs from the reality that they experience.
In this episode, Chip and Gini share some of the difficult truths that agency owners may end up confronting if they decide to sell to or merge with another agency.
The co-hosts discuss why it is important to build an agency you are happy to own and treat selling as the icing on the cake rather than the primary objective.
If you’re looking for insight into the agency M&A process and don’t want a sugar-coated perspective, this episode is for you.
Chip Griffin: “Most agencies never sell. Those that do sell rarely sell for life-changing money. And even those that do sell for life-changing money typically come with so many strings attached that the owners aren’t necessarily happy with the deal that they’ve struck in the succeeding years.”
Gini Dietrich: “In the last 10 years, I’ve been involved with boards where the company has sold. And it never goes according to plan.”
Chip Griffin: “If you are betting on the lottery ticket, odds are you’re going to be unhappy.”
Gini Dietrich: “You don’t have to sell your agency. You don’t have to be acquired. You don’t have to merge with another agency. You don’t have to do those things. So go into it with eyes wide open.”
The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.
Chip Griffin: Hello, and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin,
Gini Dietrich: and I’m Gini Dietrich.
Chip Griffin: And Gini is going to behave herself today. I hope. Right after this.
So do I need to let you get the ridicule out of the way?
Gini Dietrich: I really think I have to get it out of my systerm.
Chip Griffin: And you’ve got like 30 seconds so that we can get it out of the way. And we can move on to topics that actually matter to agency owners.
Gini Dietrich: So Chip is famous in his hometown. And I’m going to quote not because he worked on Capitol Hill, founded companies worked as a CEO and a COO, but because he has a hobby.
And that hobby is the friendly photographer at the town sports games.
Chip Griffin: Yes, as discussed previously on the show, I do take local sports photos and the local newspaper decided to write about it. And Gini thinks nothing could be more entertaining today.
Gini Dietrich: Listen, I am very pleased with this young man’s ability to craft a story about a photographer who goes to the high school’s games and shoots photos for free.
I think that’s amazing. I think your photos are fantastic. I’m not making fun of your hobby. What I think is hilarious is the article itself. And I would very much like to link to it in the show notes so that everybody else can join in my sheer joy in reading about my friend who has done a lot of things professionally, but not what he’s known for.
Chip Griffin: So that’s out of the system. We’re going to move on to topics that actually matter.
Gini Dietrich: Show notes. And if it’s not in the show notes, because he’s in charge of that, let me know. And I’ll send you the article myself.
Chip Griffin: Excellent. Okay. So, I was concerned we weren’t even going to get an episode recorded today because Gini has been enjoying this story just so much.
But in any case, we are going to have an episode. And our episode today, we are going to be talking about M and A – mergers and acquisitions. Something that a lot of agency owners like to talk about. We’ve talked about it previously on the show in various different forms, but not exactly the way we’re going to talk about it today because I’m concerned that there are too many people in the agency community who dream of selling their agency one day and think it’s going to change their lives. It’s going to allow them to retire to Tahiti. And it’s being promoted by a lot of people who aren’t telling you the whole truth. And so we want to rain on your parade a little bit today, or I do. I mean, I think…
Gini Dietrich: What is the whole truth?
Chip Griffin: The whole truth is it’s not quite as good looking as it seems. Most agencies never sell. Those that do sell rarely sell for life-changing money. And even those that do sell for life-changing money typically come with so many strings attached that the owners aren’t necessarily happy with the deal that they’ve struck in the succeeding years.
So I think it’s important to build a business that you’re happy to own today. And if you happen to be able to sell it, that’s fantastic. That’s gravy. It shouldn’t be the end goal. And I know that this is, this is not popular. This is not what you want to hear. And we’ve talked previously about Built to Sell, which is a great book.
But as we’ve said on this podcast previously, there are things that are not in that book that you need to understand before you think about selling your agency.
Gini Dietrich: I think the way you started this with mergers and acquisitions is an interesting point, because I’m seeing in the industry right now and, and throughout my career, or both of our careers, we’ve seen this consolidation, you see a consolidation and then you see a separation and then you see consolidations, and we’re seeing a consolidation again.
And what I’m seeing, and I’ve been approached by at least three different businesses, umbrella businesses that say we’re going in and we’re acquiring quote-unquote, smaller PR firms. And we’re doing that by going to agencies that are between, I would say five, three to $5 million, three to $7 million somewhere in there.
So not, not solopreneurs, not one to three employee businesses, but you know, good little small businesses. And they’re doing that in a way that brings those agencies together under one umbrella and consolidates them that has a CEO like professional business management. So all of the owners continue to run their businesses the way that they want to run them and do it in a way that will make the umbrella company or the parent company money as well, but have the structure and the resources to be able to scale.
They’re not making money to do that. It’s quote unquote is an acquisition, but really it’s just a, let’s fold you in under here. And everybody gets the same. Everybody has the same profit sharing. Everybody has the same profit margin goals. Everybody has the same everything, but you continue to run things the way you see fit.
So I’m seeing a lot of that, but again, to your point, it’s not a sell. It’s not something that you’re going to say, oh my gosh, I’m going to get 16 times my profit margin and be on my way, that’s not the case at all.
Chip Griffin: Yeah. And if you get 16 times your profit margin, then you’re probably doing something a little sketchy because even high-flying digital agencies, these days are not getting 16 X profits.
So, and traditional PR agencies, you know, are more in the four or five times profits. And of course that’s real profits, not the profits that a lot of you think you have because the money that you’re taking home is not entirely profits. Some of that has to be compensation. Anyway, we’re not going to get into all of those things today, but you do need to be thinking about this big picture.
And there are a lot of these creative M and A strategies that are out there right now. Like what you’ve discussed. I think the important thing is that if you’re contemplating something like this, you can’t get too excited about the prospect of all the good that can happen, whether that’s a check, whether that’s the, you know, all of the synergies you can have by coming together, what you really need to focus on is what can go wrong and what happens then? I know that’s not as much fun.
But the problem is that we all get excited about it. And I’ve been on all sides of acquisitions. I’ve been a buyer, I’ve been a seller, I’ve been an advisor. And I can tell you that when these deals are put together, everybody has a different view of what the reality is. Everybody’s excited about it.
Everybody thinks that – and this is both sides, buyer and seller. I mean, most buyers are not going in saying, Hey, you know, I want to stick it to this guy. You know, they really sincerely believe the good things that can happen and good things can happen. But what you need to think about is what happens when it goes wrong.
What then? So if you’re in one of these deals where you’re coming in and everybody’s running their own business, but we’re pooling together some resources. Well, what happens when you all disagree with each other on something. What, how does that get resolved? And this is the same thing you need to think about before you bring in a partner in your business.
Right. You know, a lot of people think, oh, you know, I just need a business partner. I need, you know, if there’s, if there’s two or three of us, I’ve got someone I can work with and talk to. And that’s all great. Think about what happens when you disagree, think about what happens when you’re performing well and someone else is performing poorly or vice versa.
How does that impact you in this structure? What happens if you don’t meet your earn-out targets that you think are easy to reach? What happens then? Are you still okay with it? If you only got the down payment in your sale and nothing from the subsequent earn-outs, are you okay with that? Right. That’s sort of a worst case.
You need to think these things through and understand what can go wrong, what the likelihood of it is and how you will feel about the deal if they do.
Gini Dietrich: And you also have to think about, and we’ve talked about this from the perspective of building the agency that you want. But if you’re building the agency that you want to work in and that you’re happy working in, and you’re, you get everything that you want, there are certain things that have allowed you to do that.
So when you look at opportunities like this, you say to yourself, what’s important to me? So for me personally, it’s I have a ton of flexibility. I have a ton of freedom. I work from home and nobody tells me I have to come into the office two or three days a week or fly to a headquarters city once a quarter or anything like that.
I have a ton of freedom. I make what I want to make. And if I want to make more money, I make more money. I don’t have anybody to report to. So those things are really important to me. Right. So in a conversation with somebody who I would say is courting me. I said that to him. I said, you know, I have a lot of freedom.
I have a lot of flexibility and I really enjoy working from home. And he said, and this was a red flag for me. He’s like, yeah, yeah, yeah. That’s not a problem. Of course you can keep all of that stuff. And then five minutes later told me how important it was that he thought that the leaders were in an office together.
And I was like, wait… That’s a red flag for me. So just you know, listening for those kinds of things. Like he was, he was paying me lip service when I said these things are important to me, but then not five minutes later told me what’s important to him and our values don’t align from that perspective.
Chip Griffin: Right. And, and if you have important things like that, you need to get them in writing. Make sure that you’ve got it in writing that I never have to go to the office. Right. Now, does that actually carry that much weight depending on how you structured the deal? Maybe not, but really it serves as a forcing mechanism to get the other party to really say, oh no, I was just giving you happy talk before when I said you could work from home, I really need you in the office.
I’m not going to agree to a document that says that you never have to show up. Right? You need to understand what those things are. And you need to understand that the deal process takes a while to execute and there are going to be things that, that everybody’s happy about. Oh, sure. That’s fine. In the early stages, you know, when you’re first, when you’re doing the handshake deal and then you get to the letter of intent and now all of a sudden we’re putting some more restrictions into that.
And, then we start negotiating the actual purchase agreement and okay, now we’re going to put some more things in there. And so you’re going to, the deal will shift over time from what you shook on. And you need to make sure that you don’t allow the desire to just close the deal to erode what your standards are and what you’re willing to accept. Because I guarantee you that whatever you shake on is not going to be what the final agreement is that everybody signs. There’s going to be in all likelihood, less money for you, the seller, and more restrictions.
And that’s just how every deal goes, and this is not, this is not because I think there’s something wrong with your business because I don’t even know who you are who’s listening to this right now. I’m just telling you that that’s how it works. It’s never going to be a better deal than what you shook on. It’s always going to be a worse deal.
Gini Dietrich: I have now in the last 10 years, been involved with boards, on a board where the company has sold. And you’re exactly right. It never goes according to plan. And, we actually went through a sell in February of 2020, which was brilliant on their part in one month later and it would have not, it would have all fallen apart, but it closed in February of 2020. And part of what we helped the founder do is we helped him build a leadership team and put that leadership team in place five years before he thought he would sell so that when he went to court, or when he, when investors began to court him, he already had that in place so that they weren’t buying him.
They were buying the leadership team and the business and the clients and all that. But when he sold and everything went through, the president just decided, I don’t know what happened. He just stopped performing and they had to fire him and they made the founder come back into the business. So he thought he was free and clear. He was out in Hawaii. He was in Maui, like celebrating when he got the phone call saying he by contract, he had to come back into the business and he’s three, almost three years later, still working in the business.
Chip Griffin: Yeah. And things like that happen. And sometimes even if you’re not forced to come back, you feel compelled to come back because you see, okay, well, you know, the way that things are going now, the earn-out targets aren’t going to be hit.
And the reality is for most agencies, the vast majority of the purchase price doesn’t come up front. It comes through earn outs. There was a time where you might get half of the payment upfront or even more. Now, if you get a third of the payment upfront, you are doing well. Most of it’s going to come in the three to five succeeding years.
And the idea that that a lot of buyers have is that they’re going to use your money to buy you. In other words, they’re going to use the profits that, that your business unit is throwing off in order to use those profits to make the payments so that they’re not really having to come up with money out of their own pockets from other operations or debt or something like that.
And so if that’s the case, you know, you’re going to be in a situation where you may feel compelled to come back and work or work harder than you wanted to or do something that’s just distasteful to you because it helps you get those numbers and you feel so invested in and you literally are invested in those earn-outs.
And so you need to understand what those things are and understand that things do go wrong. The other thing is just because you’re shook on the deal doesn’t mean it’s going to happen. So at that point, you still need to run your business as if it’s never going to sell. Right up until the moment that that purchase agreement is signed, you should assume it won’t be.
I have been on both sides of many deals or several deals over the course of the last 20 years that didn’t go through, some at very late stages. I even know of one person in the industry whose business that they were sitting at the table to sign the documents, waiting for the wire transfer to come in and the wire transfer never came in.
Gini Dietrich: OH NO!
Chip Griffin: I mean talk about 11th hour. Right, but I’ve been part of many situations where after the letter of intent and before the purchase agreement is agreed on the deal falls apart for whatever reason. So you need to continue to operate as if it is not going to happen because otherwise you’ll start making bad decisions about the business.
And by the way, speaking of bad decisions about the business, the reason why I preach that you need to build to own and build something that you are happy to own is because if you build in order to sell and you’re structuring your leadership team or your revenue or something like that, because you think it will make the business more attractive.
If you don’t sell, you may end up with something you don’t want.
Gini Dietrich: Right. That’s exactly right.
Chip Griffin: So don’t make years of sacrifices building someone else’s business in the hopes that they will buy it. Build what you want. If you’ve got a successful business, I guarantee you you’re going to get inquiries. Someone will want it. Now, will they want it on terms that you’re willing to accept?
Who knows? But at the least you’ve built a profitable business that you’re enjoying having. And so you’re not in a situation where you’re saying, oh my God, I spent the last five or six years building what, you know, this expert told me would sell. And now I can’t sell it for what I want for it.
Gini Dietrich: You said something a few minutes ago that I think kind of got glossed over, but it’s really important for people to hear.
And that is, you said in the three to five succeeding years that you’re invested in the business. And I think every, almost everybody has the wrong impression on that, that you’re just going to get this money and you’re going to walk away. And like you said, fly off to Tahiti and be done and that’s not the case at all at all at all at all. So you will have three to five years of continuing to build the business, work for somebody else. Do all of those things that you may not even want to do. Like I, the deal could be the very best deal in the whole world. But the fact that I would have to work for somebody is a deal breaker for me.
I can’t, I can’t, I won’t, I’m not, I’m not a very good employee. And I know that. So why would I put myself in that situation for five years? Five years! That’s a long time.
Chip Griffin: And, and that is the biggest challenge that I have seen even in the most successful agency sales. That the sellers are not fully prepared for the fact that they’re becoming an employee often for the first time in decades, decades.
Right. And, and to become an actual employee. And I guarantee in the conversations you’ll have with the buying agency or the buying business, they’ll, they’ll talk about, oh, you know, you’ll still be able to do things the way you want to do them. You’ll be, you know, that everybody wants to assure you that it’s all going to be fine.
But then when they become the actual employer and you’re the employee, guess what? They’re going to treat you like an employee. That’s just how it works. And so you can talk yourself into almost anything, but you’re going to be an employee and you have to accept that. And if you’re not willing to accept that don’t sell.
Gini Dietrich: I have a friend who sold his business, his agency to a holding company for generational money. They made a lot of money. They also had a seven-year workout and in year two and a half they walked away from the money because it was so horrendous for them. Because all they were responsible for were the numbers. And because all they were responsible for was the numbers where they couldn’t, they couldn’t do anything, they couldn’t be creative like they wanted to be, they couldn’t take on the clients they wanted to. They couldn’t take risks with clients they thought we’re going to grow and, you know, maybe didn’t or did. They couldn’t hire the people they wanted to hire. They were only responsible to the numbers and it became a miserable existence and there were three founders. They all walked away from it. All of them, they were like, okay. After two and a half years, we’re walking away from the rest of the money, that’s how miserable it was.
Chip Griffin: Well, and it’s so bad for some that, that we’re seeing an increasing trend of agencies that sold to holding companies, buying back their agencies from the holding companies, like how crazy is that?
They sold the business and now they’re buying their own business back. Right. And that’s because it is very difficult and holding companies are – if you’re selling, they are the, typically the buyer that will provide the highest premium on what you do cause they have the deep pockets. And so they can, you know, if you’ve got, if you’re a small firm being bought by a midsize firm, those are the ones where they’re generally trying to use your money to pay for the deal as much as possible because it’s, that’s how they can make the numbers actually work for them.
The holding companies obviously have the big pots of money and so they’re going to typically pay higher premium for it, but it comes with all of those strings and you are absolutely just an employee when you sell to a holding company. You have to completely accept that you’re – that there’s a reason you’re getting that premium.
And if you’re okay with that, that’s fine. But part of the problem is that a lot of folks are not, not only not contemplating the fact they’re becoming employed, but they’re not contemplating that as part of their timeline. And so I frequently have agency owners come to me and say, look, I want to retire in the next three or four years.
So I need to get ready to sell. I’m like it’s too late. If you want to be retired in three to four years and you’re not on the verge of selling right now, you have no chance of hitting that target. Because there is no buyer that’s going to give you a fair amount of money unless you work for those three to five years afterwards.
And people will say to me, well, but I can sell. I, you know, I’ve heard of someone who sold and they were able to walk away. Yes. But there’s a discount on the deal for that. And so anytime you hear – and part of the problem is that we all sit there and read our PR week and O’Dwyer’s and these things.
And it talks about, oh, this agency sold to that agency. And so we’re like, oh, all of this activity is going on. How many of those actually include the terms of the deal? Almost none.
Gini Dietrich: Almost none. Right.
Chip Griffin: I can guarantee you because I know the terms of many of those deals. They’re not very good.
Gini Dietrich: Or they’re not true. They’re not a true, I bought this agency. And like, it’s usually a merger of some sort where there’s no cash outlay or cash exchange.
Chip Griffin: Yeah, that’s right. Yeah, exactly. So, so it might be that there’s not very much cash. There might be no cash. Sometimes these are really more acquihires where you’ve got a small team joining a larger agency.
Sometimes particularly over the last couple of years, we’ve seen a number of agencies that have effectively been distressed sales. And so instead of, you know, closing up an agency or you’re going bankrupt, they transfer their employees and their assets over to another business and it allows it to keep going. But, it’s not really a sale in the traditional sense that you’re thinking about it when you’re looking at it in the trade publications.
So you need to, to understand that these are not unicorns per se, where an agency sells for real money cause they do happen, but they are a lot rarer than you think they are. And if you think that this is your exit strategy, your prospects for disappointment are much higher. And so you need to be thinking about, okay, not only how do I build an agency that I’m happy to own today, but how do I take enough out of it that I can put that in investments so that I’m not relying on the sale of the agency for retirement, for the next stage of my career or whatever it is that I’m trying to achieve. Because if you do, now, you’re in a position where you have to accept the bad terms, right? If your whole thing, your whole strategy is built around selling and you get to that point, you realize you can’t sell for what you wanted to sell for.
You’ll probably end up having to sell for whatever someone will give you and whatever those terms are, and those terms are going to be pretty bad. And so now you’ve put yourself in a position where you were miserable building to get to where you wanted to go, because you thought it was going to be good.
And now you’ve got a pile misery on top of misery. I mean, it just, it breaks my heart to see agency owners going through this and too many are going through it because they are not getting realistic advice. And so that’s the point of today’s episode is to really, is to be that buzzkill, that Debbie downer, that person who’s telling you don’t believe all the hype that you hear. Is it possible that you’ll be the winner and that you’ve got the winning lottery ticket? Absolutely. Is it likely?
I don’t know. I guess we’ll find out.
Gini Dietrich: Go into it with eyes wide open. Know what your stressors are, know what your red flags are. And go into it with that. Like, you don’t have to sell your agency. You don’t have to be acquired. You don’t have to merge with another agency. You don’t have to do those things.
So go into it with eyes wide open. There will always be other opportunities. If this one is not the right one and just know what it is that you’re getting yourself into.
Chip Griffin: Yeah. And, and what you said is great because there’s all sorts of ways that you can wind down your agency. It doesn’t have to be through a sale.
It can be transferring to a family member or an employee. It can be you just gradually wind down your business. A lot of small agencies just gradually shrink as the owner approaches retirement. They just keep reducing the workload until it’s maybe just, you’ve got, you started out as a solo. You built a team and now maybe you finish as a solo.
That’s all okay. There’s nothing wrong with that. It doesn’t mean that you were a failure. It means that you created a business that gave you what you wanted and needed at each point in your life. And if you do that, you’ll be happy. If you are betting on the lottery ticket, odds are you’re going to be unhappy.
Gini Dietrich: Amen.
Chip Griffin: So would that go forth, be happy, be realistic. And, uh, just go in eyes wide open. That will bring to an end this episode of the Agency Leadership Podcast, I’m Chip Griffin,
Gini Dietrich: and I’m Gini Dietrich.
Chip Griffin: And it depends.