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Hello and welcome to today’s SAGA webinar. I’m Chip Griffin, the founder of SAGA, the Small Agency Growth Alliance, and today we’ll be talking about is it time to sell your agency? This is something I get asked about a lot by agency owners, so I suspect it will be of interest to many of you. Before we go ahead and jump into the actual substance of today’s webinar, I do want to, as usual, cover the housekeeping items I go over at the start of every one of these webinars. First of all, the full replay will be available on the SAGA website probably tomorrow, so feel free to check it out there if you’re, if you have to leave early or if you just want to re watch it. If you are here live, you’ll be able to ask questions at the end of the presentation, so use the Q&A function to ask a question.
You can submit your question at any time. As I say, I will take them at the end. of the presentation portion. If you’re watching this on replay, you won’t have the live Q&A, but you can email me at email@example.com with any questions that you may have. If you’re here live, you can also use that if you’ve got a question that you would not, you would prefer not to ask in front of the group.
If you want to get feedback, not just from me, but from other agency owners and experts, then I would encourage you to join the SAGA community on Slack. It is free to join and you can do so. on the website at smallagencygrowth.com where you can also find a lot of other resources and some of the things that I’ll reference during today’s talk.
If you talk about this, webinar on social media, I would encourage you to use the hashtag agency leadership to make it easy for others to discover. So, with that administrivia out of the way, we will go ahead and jump into discussing what the agenda for today’s webinar is. We’ll start by looking at the common reasons that agency owners decide to sell.
I’ll give you a bit of a reality check on what the sales process means. I’ll talk about how your agencies are valued, and a couple of asterisks with that, which we’ll get to at that point. I’ll talk about the difference between exiting your business and selling your business, because they are two distinct things.
Selling is a subset of how you can exit. I’ll talk a little bit about the sales process, although this webinar is not primarily about the actual process of selling your agency. It should give you enough of an expectation that it helps you to answer that question as far as is now the time or when would be the time.
to, potentially consider selling your agency. I’ll talk about the steps you would need to take in order to get ready because some of those have a fair amount of lead time involved with them. I’ll talk about whether you use a broker or not. And finally, I will talk about that question of how you time the sale effectively.
So those are the topics. I will tell you that I am someone who has been on both sides of the M&A equation from buying agencies and selling businesses and all of that. So I have some perspective for this from both of those points of view. And so I will try to share as much as I can over the next 30 or 40 minutes about that.
So let’s talk about the main reasons that people might consider selling their agency. The first and most obvious one is that they’re looking towards retirement. So if you plan to stop your working career then you want to try to think about how you exit your business and selling your agency is a logical step there.
Some people do view the actual sale of their agency as all or part of their retirement financial planning. I would encourage you not to do that. We’ll talk more about that later, but it should be gravy. It should not be the way that you find your retirement savings nest egg because it’s a very difficult way to go about doing that.
Some of the other reasons would include changing your career path. In other words, you’ve just, you don’t want to be doing agency work anymore. You have found another passion. A lot of agency owners found that happening to them in 2020, as many people did in other walks of life as well. Sometimes your personal needs change.
Maybe it’s your own health, or a family member’s health, or where you’re living and what you want to be doing from a personal standpoint. Those things can shift from time to time, and so it may necessitate exiting the business, and selling again is a good reason, or a good way of going about doing that in some cases.
Probably the biggest reason that I have people coming to me and saying I would like to sell my agency is because of burnout. And we had a webinar not too long ago on burnout and how to address it as an agency owner. I would certainly encourage you not to sell simply because of burnout. I would encourage you to address that directly and then decide if selling is the way to go.
Because otherwise you may end up making a decision for the wrong reasons. Other reasons that agency owners will sell. One is, is business problems. In other words, you’re struggling to continue to hit your revenue targets that you need to make. And so, you know, rather than, continuing to try to solve those challenges, you think maybe the better approach is to exit or maybe, you know, the, the industry is going in a direction that you don’t want to go.
And so that may be a reason that you want to exit. And finally, A lot of people have a vision of a big payday when they exit, and we will talk about why that is probably the worst possible reason. Maybe even worse than burnout for selling your agency, because there are a lot of strings that come attached to any sale.
So you need to be realistic about those things, and the vast majority of agency owners are not selling for life changing amounts of money. Which brings us to that reality check. And that is in fact the very first thing on the reality check slide . The truth is that most agencies are not selling for, certainly billions of dollars or millions of dollars.
Most agency transactions are relatively small. In fact, the ones that you see in the trade press, often the financial terms are not all that generous towards the seller. So, You need to be realistic about those and not just look at stories that you see about businesses outside of the agency world or even inside of the agency world being sold because the chances are that most of them are on terms that are not all that rosy.
And the reality is that how your business is valued is largely just what you agree to and what the buyer agrees to. So we’ll talk a little bit about the valuation formulas that you can use. But you’re not likely to be able to sit there and use a simple formula and say this is exactly what my agency is worth.
So, you, there are plenty of online calculators or experts who will give you a formula. That’s a great starting point and we’ll talk about those starting points, in a little bit as well as some of the things that can modify it. Most buyers are buying you not just for the finances, just for your P&L, just for your profits.
And that’s how most formulas are derived. Most buyers are looking for something else. And we’ll talk about some of those specific things that buyers are looking for. But because of that, it tends to skew some of the formulas that you may see. Most of the formulas also are based on profitability. But I will tell you that from having looked at a lot of agency P&Ls over the years, most agency P&Ls do not report profitability accurately.
And in most cases, it oversells profitability largely because it doesn’t factor in the compensation of the agency owner to actually run the business. There are exceptions to this, and depending on how you’re structured and what your accountant has advised for tax purposes, it is possible. that your P&L is understating your profitability, perhaps because you’re running expenses through the business that are legally legitimate.
They’re not going to get you into trouble, but they may not be something that the buyer is looking to do. And so you may be able to add back to your profits on some of those things, but more often than not, your profitability is overstated. And so if you’re using that in one of these online formulas, you’re probably going to be disappointed by what your actual valuation is perceived to be by a potential buyer.
Also, not all sales are created equal. It’s not just about the financial terms. You really need to be thinking carefully and looking carefully at the actual terms of the agreement, which brings us to some of those gotchas that tend to upset agency owners as they get into the sales process. First of all, you are very unlikely to get paid in full at closing.
Most agencies are receiving maybe a third of the total deal value when the deal closes. So, if your agency sells for a million dollars, you could expect to get maybe 300,000, 350,000 tops at closing. The rest of it will be in the form of an earn out, which usually is tied to you working for the buyer for somewhere between two and five years.
Now, you can certainly cut a deal where that doesn’t happen, but I will tell you if you are cutting a deal where you are not part of the business and there is still an earn out, you need to expect that you will never see a penny of that because you don’t have any control if you’re outside the business.
Even if you are inside the business, you are in a very difficult position to really make final decisions that will help you to achieve those earn out numbers. So you need to make sure that you are in a position where you are happy, not happy, where you are willing to accept that you do not get all of those earn out payments over time.
You are, you need to be willing to accept that you will be an employee and you probably haven’t had a real boss. for many years if you’re selling a successful agency. It’s also important to note that the process of selling takes a lot of time. And so, if you’re going to be taking a lot of time to sell the business, that can be a distraction.
And so, you need to think about how that impacts your business, particularly if the deal doesn’t end up going through. I would also note that the first price you pay, you agree to is probably not the amount that you will actually receive, not just because of earnouts, but because of things like due diligence, which we’ll talk about a little bit later.
And so what if you agree to sell for a million dollars, probably in the process of due diligence, the owner will or the buyer rather will find reasons to tell you just like when you buy a house, right? You have the home inspection. Due diligence is a very similar process. And so through that buyers will often go through and find things weaknesses in the business and tell you that they’re going to need to discount that sales price or put more contingencies in and shift more of the total deal value into earnouts.
Now, despite all of this, I know I’ve really dumped on the whole sales process. There are good reasons to sell and there are some good deals to be had. But I think it’s important to start with this dose of cold water, if you will, so that you don’t go into the sales process with this idea that it’s going to be quick, easy, and you’re going to have a giant check in your account or a wire transfer that’s going to allow you to sit on a beach in Tahiti anytime soon.
So, let’s talk about that valuation conversation because this is one of the things that I do get asked a lot by new clients. What’s my agency worth? If I wanted to sell it, what would I get? And as I noted before, it really does come down to how much you’re willing to accept and how much a buyer is willing to pay.
But let’s take a look at some of the things that go into it. First of all, you’ll hear an expression called multiples. And so there are what we would call standard multiples. And what a multiple is, is it, you take the amount of profit in the business and you multiply it by a number. Typically for agencies, it would be four to six times profits.
Annual profits would be the valuation of your business. So if you had a 250,000 profit last year, your valuation will be somewhere between one and one and a half million dollars. And that’s something that’s good as a starting point. It gives you a basic idea of what your business might be worth. First of all, as I noted earlier, you need to make sure that your profit margin is accurate.
And so, we’ll talk a little bit later about getting your books in order for a potential sale. But that is certainly a factor that goes into it, starting at that four to six times multiple. Things that can impact this up or down. Profit margins. If you have really strong profit margins, I would define really strong as 20 percent or more.
That can generate a higher multiple for you because you appear to be, to a buyer at that point, as running a really effective business. You’re pricing really well. You’re able to control your expenses in a sensible way and so you’re able to demonstrate to them that they are buying a very strong business.
On the other hand, if you have very thin margins, if you have single digit percentages, it’s going to be a discount to your multiple typically because that means that signals to the buyer that prices might need to be raised in order to get them in line with what they probably are seeing on their side of the equation, because anytime another agency is buying you, or worse, a PE firm or an investing group, they’re going to want to see as high a profit margin as is actually possible.
The rate of growth in your business also is a factor in your valuation. And typically, most buyers will look back three years. And so, in an ideal world, you want to see very strong year over year growth for each of the last three years. If you see, you know, static, stagnant growth, right, you know, you’re not really changing at all, or worse, going down, those can be negative factors on your valuation.
On the other hand, if you are seeing very aggressive growth, consistent aggressive growth, not because you signed one new client a year and a half ago, but because you’ve consistently signed new clients at higher prices, those are the kinds of things that can help improve your valuation and perhaps generate a multiple that’s higher than four to six times.
Your revenue concentration is an important factor. In other words, do you have whale clients, clients that are typically 25 percent or more of your total revenue? That is going to harm your valuation because that is a clear risk to the buyer because if those whale clients were to go away, that would greatly diminish the revenue that they would likely see coming in.
So the more that you have your revenue spread out and diversified over different clients and they’re not all tied together, that’s something that is very beneficial and something that most buyers will value. They’ll also look at the predictability of your revenue. So this can come in the form of typically, retainer based revenue that is an ongoing revenue stream.
So if you’re an agency that is largely project based, that’s probably going to generate a little bit of a discount for you, depending on who the buyer is and why they’re trying to acquire you. If you have a lot of retainer based revenue and it’s very consistent month to month, that is something that buyers tend to value.
Client retention. You don’t want to have a high churn rate. So the more that you’re able to show that you are able to sell clients and keep them around because you’re delivering on the promises you make. That’s beneficial. Now, team and owner dependence are sort of intertwined. You want to have a strong team and you ideally want to have a business that is not dependent upon you.
It’s important that you are providing value as an owner, but if the business is dependent upon you, most buyers will apply a discount in their mind to your valuation because at that point, they understand that if you go away, so in other words, if, if clients are signing up with your agency simply because of you and because of your name brand or your expertise, that is going to be a negative for a buyer.
On the other hand, if you’ve got a strong team and they’re able to represent the business and they’re able to bring in business on their own or with only modest help from you as the owner, that’s going to be extremely beneficial to you in the valuation.
What your focus is can also have an impact on valuation.
So for example, if you are focused on certain sectors that are hot at any given time, That can improve your valuation. So if you were an agency right now that had demonstrated expertise in AI, that’s something that a lot of buyers would really value. Now we can just debate whether that’s actually something that they should value or not, but it is something that they typically do.
Back in 2020, any agency that had digital capabilities had a significant bump in valuation because as businesses realized that they needed to shift from brick and mortar focused to having a strong online presence, that meant that anyone who was doing digital work and doing so well would be more attractive to potential buyers.
So what’s your focus is can have a real impact. Of course, on the negative side, liabilities and risks. Do you have a lot of debt? Do you have, are you engaged in business where you tend to generate a lot of criticisms. Or have you ever been sued or any of those things can, can create additional issues. So that’s something to keep in mind.
The buyer specific needs. So if I’m an agency and I’m looking to build a U S presence, or if I’m looking to add a certain kind of capability, those are the kinds of things that can boost your valuation. So understanding what a buyer is looking for and being able to match up with that can be really helpful in maximizing your sales price.
And then finally there are the intangibles. There are the things where a buyer might be willing to pay a premium simply because you have a certain reputation and they want to associate themselves with that. Or perhaps they just, you’ve got a brand that makes them feel good and so they would like to have you as part of their overall portfolio.
There’s, there are those intangible things that go into any kind of purchase that we make and it goes to and includes business acquisitions. So don’t overlook those when, you are selling. If you’re buying, be careful not to overpay because of those though, right? If I’m advising you on that, on the buy side, I would tell you that’s something to be very cautious about because that’s an area where you can unnecessarily pay .
So let’s talk about this concept I mentioned earlier about the difference between exiting and selling. And in particular, we’ll look at the different ways that you can exit your business. So let’s say that you’ve decided that you want to exit or sell, as we talked about in the first slide. We want to think about, The other alternatives the first one and the one that you’re probably coming to this webinar today with in mind is the idea that you would sell to a third party that third party could be an agency.
It could be a holding company. It could be a private equity firm. There’s a lot of different Third party acquirers for your business. So that’s one bucket Another bucket is that you merge with a similar or, slightly larger or slightly smaller agency. So you’re coming together and you’re joining forces.
Technically on paper that could end up being an acquisition as opposed to a merger, but if you’re roughly equal then it tends to be viewed more as a merger, and the way that you would go forward would be viewed in that way, no matter what you structure from a legal document perspective. And in those cases, the considerations are a little bit different than selling to a third party because you’re really, at this point, looking for a lot more, a lot more of a strategic match between the two businesses.
And so some things that you need to think about there are how the two teams will function together, how you will complement each other. Whereas in an acquisition as the seller, you’re more focused on the frankly selfish things like, can I deal with reporting to whomever I’m reporting to in this new acquirer?
So there are more puzzle pieces to consider in a merger. But I would say mergers are typically more common than straight up sales. You could sell to an employee. This is a fairly common route that a lot of agency owners take. You might have a long time employee who’s interested in continuing on the business.
And so you work out a payment plan for them to acquire the business from you. Obviously there are challenges here because most employees don’t have the ability to write a large check and purchase it all outright. And so you need to figure out some kind of a payment structure that works, whether it’s paid to you while you are continuing to be in the business.
And so it’s part of their compensation. And so as part of that, they’re able to acquire pieces of the business or whether that’s some sort of a loan that you are granting to the employee that needs to be paid back over time, perhaps even after you have exited the business. There’s a lot of different structures that you could take here, but selling to an employee is certainly an option.
In addition to selling to one employee, you could sell to the entirety of your employees through an ESOP, an Employee Stock Ownership Plan. I will tell you that I am very negative on ESOPs. I think that they are, generally not a particularly good route to go. they have a lot of, costs associated with them.
They are very legally complex. And frankly, they tend to be dead ends for the agency. Because once you’ve sold, or once you’ve transitioned the business into an ESOP, you, You typically have a great difficulty in continuing that business for a long period of time or selling it to another entity because most buyers don’t want to buy an ESOP owned business.
So there’s a lot of reasons not to do an ESOP. But it is certainly an option that you can, can consider and it tends to work out okay for the initial owner who is transitioning their ownership because they are able to get cash out of the business, you can pass along to family. So if you’ve got a family member who is working.
in the business and is interested in taking it over. That is certainly a common thing as it is with all sorts of small businesses. You can simply close the doors. Typically in this case, you would, you would take fewer and fewer clients over time, become more of a general counselor to businesses, and then eventually simply retire and, you know.
Hand the keys over to the landlord effectively for the business. If you had still had an office and then finally you can obviously just keep running the business until you leave toes up. that is something that some owners do because they never want to truly retire and they’d always like to keep their, their finger in the business.
That is certainly an option that is worth considering if that’s what you want to do. So now, let’s talk about the actual sales process and what it looks like to sell your business. And I’m going to give you some timelines in here. They are really just to give you a rough idea of what some of these things may take.
But they can vary wildly. And So don’t take these as gospel, but take them as some idea so that you have a concept of what an M&A process might look like before you decide to go down that path. First of all, you have the preparation to sell. And so typically once you say to yourself, I’m interested in selling my business, I really want to go forward, it generally takes two to three years to get yourself in a shape where You can maximize the value of the business.
Doesn’t mean that you can’t try to sell faster, but the faster you try to sell, the less likely you are to maximize that price that you get from a potential buyer. So, in this preparation period, we’ll talk a little bit more about it later, but these are, During this period of time, you’re going to be getting your, your books in shape, you’re going to be, focused on, addressing any of the weaknesses, that are, identified in that valuation slide that I shared, the things that might negatively impact valuation and focus on things that might positively impact valuation.
impact your valuation, but we’ll talk more about the preparation process in a little bit. But generally speaking, I would say it usually takes somewhere on the order of two to three years if you’re doing a methodical process of trying to sell your business for the most that you can get. At that point, once you’ve prepared it, now you can enter the market.
And so this is where you start having active conversations. with potential buyers. And that can be with a broker or without. We’ll talk a little bit about that. but generally speaking, if you’re actively out there and saying, hey, we are for sale, we are interested in soliciting, bids to purchase us, typically that’s going to be somewhere in the order of six to 12 months.
Once you’ve got someone who is on the hook, There’s a courtship process. Now, if you’ve had a very structured sale and it’s with a broker and they’ve gotten specific offers, this courtship period is going to end up being on the shorter side. If you’ve simply gone out and you’ve started identifying some people and now you’re building the relationships, well, that can be three to six months.
In some cases, you might have a courtship that lasts years. I know of many cases where, a potential acquirer has spent two, three, four years slowly working away at a, potential acquisition before they build a relationship to the point where they can move on to the next stage and actually talk numbers. And as you actually start, you talk numbers, you typically have some sort of a handshake agreement, but then you put together what is called a letter of intent. And so this letter of intent is typically drafted. by the acquirer, and usually this process being passed back and forth between lawyers and all that, that’s usually one to two months of time that it takes to put it together.
It’s usually a relatively short document, and we’re not going to talk a lot in this particular webinar about what that ought to include, but It typically covers things like, here’s what the purchase price is, here are what the general terms are, there probably is or should be an expiration date on when the deal has to, to close, there’s usually an exclusivity provision in there so that you can’t be out negotiating with other potential buyers while the letter of intent is in effect so that you effectively can’t just you know box in the buyer and try to get them to get into a bidding war after you’ve already reached an agreement.
So all of these things typically go in there and it sets the framework for the next step which is the process of due diligence, sort of like the home inspection if you will, for your business as well as the legal terms for, the purchase and sale agreement. So it walks through all of the things, specifically what’s being acquired, if there are any exclusions, what happens, all the liabilities, brand name, the financial terms, your employment contract, all of these things need to be negotiated and all need to be worked out with lawyers and the due diligence process itself will take time as well.
Typically they’re going to review contracts that you have with your clients, they’re going to ask a lot of questions, about whether you’ve ever had any legal entanglements, as a business, whether you’ve had, disgruntled employees, all those kinds of things. This is a process that will typically take anywhere between three and six months after you’ve signed the letter of intent.
And so now we’ve done all that, we get to closing. And we still have two to five years to deal with the earn out, again, typically with you being an employee during that timeframe. So, you can see here, even though these are all rough estimates, that if you decide today that you are looking to sell your business, you are looking at a multi year process before you are likely to be fully exited from the business.
Again, there are exceptions. So, before I, I have anybody tell me, well, you know, I, I know someone who did it all in a year and they were out of the business and sitting on that beach in Tahiti, it can happen. But this is the reality of what most M&A processes will look like. And, and almost all of them will have at least all of these steps, even if the timeline is shortened up considerably.
So if you are thinking about this, if this is a path that you want to go down, here are the things that I would be doing to get ready to prepare. So, first of all, make sure that your financials are in order. Make sure that you have really well done P& L balance sheet. Make sure that you’re working with a bookkeeper, accountant, and you’re really, you’re consistently producing accurate financial reporting.
Because if you don’t have that, then you don’t have the basics that you need to provide to a potential acquirer for them to evaluate your business and decide how much they’re willing to pay. And so you really need to make sure that your most recent three years are just rock solid in terms of how you’re reporting on that data.
So focus on that. And if you don’t, if you can’t do that for your past couple of years, start now. And then once you’ve got a solid three years, now you’ve got a strong foundation for going out into the market and soliciting bids for your business. This is also a great time for you to really clarify your compensation for the work that you’re doing for running the agency versus what you’re taking out of the business as profits for the risk of being an owner of that business.
So if you’ve got that clearly defined, now you’re able to figure out, as we talked about earlier, that accurate profit margin, because your profit margin and the actual amount of profit is really important for that initial starting point of the valuation. Because if you don’t have an accurate profit number that takes into account the cost of the work that you’re doing, you’re not going to be able to have that simple multiple that 4 to 6 time multiple as your starting point for figuring out a valuation.
So, make sure that you’ve got that nailed down and make sure that if a potential acquirer asks about your profits. You’re able to explain how you’ve calculated those numbers. At the end of the day, they may accept or reject how you’ve calculated it, but you are better off having a number that, that you can explain the rationale for logically.
and, and hopefully that will win the day. we’ll talk, and, and on the SAGA website there is, I believe an article that explains a couple of different approaches to how you calculate your own compensation for these purposes. and by the way, this is separate from how your accountant may calculate your compensation for tax purposes.
So, be really careful that you’re not confusing, tax accounting with the business accounting that goes into this because frankly a buyer doesn’t care what your tax return says. They’re not looking at your tax return and making decisions on valuation based on what you report as taxable income. They care about it in looking at it from, if we bring your business into our umbrella, what are we going to be able to generate in terms of profits?
And we’ll worry about our own taxes. You can worry about yours. So don’t focus on tax accounting here. Focus on business accounting, and they are different. And again, I think there’s an article on the SAGA website that explains in more detail that difference and the things to watch out for. As you’re going through this process, you also want to be clear what your goals are for the transaction.
And so, rather than going in and just saying, Oh, I’m just kind of curious what I might get. I mean, that’s fine, but I would, I would tell you that you are better off putting down what your goals are financially, what your goals are as far as your own future work, what you would like to achieve out of this.
In other words, is it financial freedom? Is it just the independence to go off and do something else? Be really clear about what your goals are up front because that then becomes something that you can check any offer against. And it doesn’t mean that you have to reject an offer that doesn’t meet all of those goals or objectives, but at least it gives you that, that starting point.
And you can say to yourself, well, when I was first thinking about this 6, 12, 36 months ago, this is what I wanted to achieve. How does this stack up against it? And so you can realistically assess those offers and not just get caught up in the moment because there’s a lot of zeros sitting in front of you and it just feels good to say, ah, I could sell my business for a million dollars or whatever.
This is also a good time to craft the story because when you’re talking with a potential acquirer, they’re going to ask you to share your story of the agency. And so you need to be able to explain how you became involved in the business, the arc that it’s on. You need to be able to explain, you know, the progression of the business, particularly over those last three years that we talked about earlier.
And so if it’s a strong growth story, you’ve got your story. It’s obviously in front of you. If it’s been a little bit rockier, you need to craft your story and explain, you know, why there maybe was a roller coaster or why there’s been a dip, how you see the future. And it’s not about. you know, spinning, but it is about putting some context in there because a buyer is going to come in and they’re going to look at financials and they’ll look at them in black and white, but they need the context that you can provide so that they understand where the business is really headed.
Now, be careful that you are not. doing anything that would mislead them because that can just come back to bite you once you get into due diligence. And so if you’re telling them something as part of this story that once they dig deeper, they find out is not true, well, that’s not helpful, right? That’s just going to set you back because now you’ve gone through a lot of effort to get to that point, only to have the buyer either back out or diminish their offer.
tell a good story, but make sure that that story is accurate. And finally, it can be helpful to market your agency. And not in the way that you might where you’re focused on acquiring new clients, but if you’re absolutely planning to go through an M&A process and you really want to maximize the value, then getting some stories just generally about the business, even in publications that may not be the ones that you are targeting for potential new clients who meet your ideal client profile, they can be helpful as far as helping you to tell that story and potentially even helping to get in front of potential acquirers.
So if you identify, you know, maybe you say, okay, the, the work that I’m doing in this agency would really be beneficial to law firms, then maybe the work that you’re doing could get featured in some publications, that lawyers are more likely to read, right? So that perhaps, you know, cause there are law firms that will acquire PR and marketing agencies for various reasons. Those are the kinds of things or build relationships with in a joint venture kind of way. These are things to look at and you may want to get in publications where it’s different from who you’re normally targeting for those ideal clients. So think about marketing your business here at the same time.
Should you use a broker? So, here’s the thing with brokers. Brokers work where they will generally sit with you, they will work with you to come up with a valuation, they will work with you to put together a seller’s package, which, again, let’s use home buying as a common example because most owners have bought a home at one point or another.
They will put together a package on the business that is very similar to what you might get when you go to an open house. It’ll have all sorts of great pictures and stats and data and comparable sales and all sorts of other things so that they can try to convince you to buy that house or in your case, the broker is working to be able to sell your business to someone else.
So they’ll put together this package and they will start sharing this package with potential buyers. So that they can look at them and decide if they want to pursue conversations with you as the owner . These brokers obviously get compensated, and there’s two primary models that brokers use to be compensated. The first is a, typical retainer structure, where they will charge you a, a fixed fee, or an hourly fee, or something.
You know, very similar to, the way most consultants work. And so, it’s just straight up, they’re getting paid for the work that they do. Others will be paid off of some kind of success fee, or commission on the final sale. And There are two different approaches to that. One is a flat percentage, so, and that can be anywhere from five to twenty percent, depending on, the broker and what they’re doing and all of that kind of thing.
I would say most typical is probably about ten percent. So that means if you sell the business for a million dollars, they get a hundred thousand. and so those are the things that you need to think about in terms of the value of the deal. Others use some sort of a sliding fee, so if they sell for a million, they get one percentage.
Two million, it’s a smaller percentage, et cetera. and typically these are called either layman or double layman terms. So if you see those in a broker’s documentation, that’s what it’s talking about. Layman is just a sliding scale for what you are paying for that success fee. So these are two different structures financially about how brokers work.
Obviously, the benefit on the retainer side is you’re paying for the work that’s being done. Their incentive is just to do good work. On the success fee side, their goal is to maximize the price that they get for your business. which is great. The only downside, is that, that frankly, their goal is to get a sale done, because if they don’t get a sale done and if you decide, no, these terms don’t work for me, they don’t get paid.
So their incentive is to get the deal closed isn’t necessarily a bad thing, but it’s something to be aware of as you’re working with them so that you don’t end up agreeing to something, because of the enthusiasm that they’re creating and not because it’s really a good decision for you. Some brokers work just with buyers, some just with sellers, some work with both.
there’s pros and cons to each kind of approach. I’m not going to address that. I would simply say beware of the agency, the brokers who are reaching out to you by email. If you just get random emails from people who want to help you sell your business, most of those are not particularly productive for your conversations.
You want to look for people who have experience in working with agency owners and selling their businesses because they tend to have the best perspective on the terms to look out for the best potential acquirers and can give you the greatest perspective on that. So That is something to focus on there And then obviously if you’re thinking about going down the broker route before you sign anything make sure that you talk with from some of their successful sellers because you want to understand what the process was that they went through and did they have regrets after the fact?
Because I will tell you a lot of people who sell their agencies do end up having regrets after the fact for one reason or another. And so if those do exist. You want to make sure that it’s not because of the work that the broker did, but for other reasons that may then give you additional perspective as you go into a potential sale.
So finally, that brings us to the question, with all of this context, with all of this information that I’ve now given to you, is now the time to sell your business? And basically, there are two main things that you need to think about. And the first one is the overriding one. What are your personal needs?
What, going back to the first slide where we talked about the reasons why agency owners sell, are you ticking those boxes? Are there things in there where you’re like, I just need to get out for whatever reason right now? And if you can’t find another route other than selling, obviously you need to do it.
If it’s just, you know, a balance of scales and it’s leaning towards, selling, well then that’s something, that you need to decide, you know. How heavily does the scale lean one way or the other? But I would encourage you to focus mostly on what your personal needs are. I would also encourage you, you know, I’m, or many of you know that I am a proponent of build to own.
In other words, create a business that you are happy to own. Frankly, the things that you do to build a business that you are happy to own are the same things that you would do to build a business that is easy to sell. and so if you’re able to execute on those things, if you focus on some of the preparation that I talked about in that segment of today’s discussion, you may end up with something where you’re, you’re happy to continue to own it.
You might find that you can build in the flexibility to address any of the personal challenges or life changes or career objectives or any of these kinds of things that you want to achieve without actually having to sell it. The other thing to factor into timing is market conditions. There are obviously good times and bad times to sell agencies.
I would say that, that, you know, right now, I wouldn’t describe as either particularly good or particularly bad. There are times where, you know, if we look back to 2020, most of the agencies being sold in 2020 were either at the end of the spectrum where they were digitally focused and selling at a premium.
Or they were distressed because they had lost a lot of business due to COVID. And so they were simply trying to find a graceful way to get out of the business. That’s the business problems reason for selling that I cited earlier. Most of the timing question really comes down to your business, how in demand the things that you are doing are, how do your financials look, and how are they going to look to a potential buyer.
So start with what it means for you, and only after you’ve said, yes, this, this makes sense for me to sell right now, only then do you look at those market conditions and say, Is 2024 the right time? Should I wait for 2025? But if you simply try to time the market, your odds of success are relatively low.
And so instead focus on the fundamentals of your business, how well it’s doing and how well you can maximize the value when you go to market. With that, hopefully I’ve given you, Some good ideas, some things to think about as you’re considering whether or not you should sell your business at all, whether now the time is to do it.
You’ve got that reality check that I’ve given you on some of the challenges that you will have in selling your business and some of the things that you want to watch out for so that you remain happy with your decision, even after you’ve gone through the closing process and the earn out and all of that.
And so, if you’re thinking about all of those things, it will generally put you in a much better place to make those important, frankly life changing decisions about whether to sell the business that you are running today. So, with that, that will draw to a close the prepared presentation portion of today’s webinar. For those of you who are on replay, the replay will end here. But if you have questions, as I said, you can email me at firstname.lastname@example.org, or you can join the SAGA community on slack and ask your questions of me and other owners and experts who I’m sure will all have their points of view as well.