Sharing ownership in your agency

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Hello and welcome to today’s webinar. I’m your host, Chip Griffin, the founder of SAGA, the Small Agency Growth Alliance. And today we’ll be talking about sharing ownership in your agency. As always, before we get started with the actual content, I’ll do a few housekeeping items here. We’ll be sharing a replay of this webinar.

So if you are watching this and have to step away for something, or you just want to rewatch it because it was so informative and entertaining, it’ll be available on the SAGA website in the next day or two. If you have a question and you are watching this during the live presentation, I will be taking questions at the end of the formal presentation, and you can use the Q& A function that is on your screen, in most cases you’ll see it at the bottom, and you can ask that question at any time and I will answer them at the conclusion of my primary presentation.

We’ll next let you know that if you are watching this on replay or if you’re watching live and have a question that you would rather not share with someone else, feel free to just email me directly at chip@smallagencygrowth.com and I’ll do my best to answer it. Of course, I would also encourage you to join the SAGA community on Slack.

It’s completely free and a great way to ask the question, not just of me, but of your peers as well. So you’ll get additional feedback. If you’re talking about this webinar on social media, please use the hashtag agency leadership. It makes it a little bit easier to find and discover the conversations so that others can join in.

And finally, If you would like any of the resources that I mentioned today, or frankly, plenty of others, visit smallagencygrowth.com. The search function there is really robust and will help you to search through articles, podcast episodes, webinar replays, videos, all sorts of different things to get the answers to whatever questions you may have, whether it is related to sharing equity or some other aspect of your agency business.

All right, with all of that out of the way, let’s go ahead and talk about what we’ll be covering over the next 30 to 40 minutes. I’ll be talking about why agency owners share equity in their business, including the benefits and drawbacks of it. I’ll talk about the different kinds of partners, partners from the beginning, partners that you bring on somewhere along the way, equity that you may give to an employee to help keep them around, as well as equity for succession.

In other words, transferring or transitioning ownership to an employee, as well as ESOPs, Employee Stock Ownership Plans, because that’s another way to give up, equity in your business to those you’re working with. And finally, I’ll talk a little bit about how to share equity the right way if you choose to go down that path, but I do have a more detailed webinar about how to make partnerships successful, and I would encourage you to check that one out in the webinar.

library on the SAGA website. If you are interested in getting more information about how to make them work for the best of the business and make sure that all of the partners are getting what they want from it. So with that, let’s go ahead and jump in. And I apologize. I’m still about a month in getting over a cold, so I’ll be clearing my throat a little bit more often than usual.

So I hope that’s not too distracting as we as we move along here. So first, I think that we all need to think about what sharing equity in the business is. And anytime you are bringing someone on as an owner of the business, no matter how small a percentage stake they have, it’s basically the same as getting married.

So you need to know what you’re getting into. In fact, partnerships have often been compared to business marriages, because in many ways they’re similar. You’re signing paperwork that commits you to each other as business partners. And that paperwork basically means that no matter what happens, if the business does well or does poorly, you’re together.

Unless you die or unless you get some paperwork that gets you out of it. And that paperwork to get out of a partnership can be more complicated potentially than a divorce that might end a marriage. In part because there are much more clearly defined processes in most cases for dissolving a marriage.

Whereas in business there tend to be a lot more variables involved. And so the process can get a lot more complicated. And so you need to think about that before you give away even one share of equity in your business. Because if it’s going to be harder to get out of, then it becomes something that you have to be even more certain of before you do it.

And I think the other thing we need to keep in mind when it comes to partnerships is the more partners that your agency has, the more complexity that comes in. Obviously there are potential benefits to having, you know, more partners and it becomes easier to sort of go through the process. It’s why you sometimes see some agencies, mid sized agencies, typically that look a little bit more like law firms with the number of partners, that they have.

But it certainly adds to the complexity of it any time you’re bringing in more than one other partner. So there are more than two of you who have ownership stakes in the business. So keep all of those things in mind as the context for a lot of what I’ll be talking about through the rest of this presentation.

So let’s explore some of the reasons why you might choose to share equity in your business. So obviously you might choose to do it because you’re starting out the partnership. You have a shared vision and you want to go forward and create the business with someone else. You probably were talking about them.

We’ll explore that a little bit more later. You might be bringing on a new partner at some point in the middle stages of the business in order to accelerate growth. Perhaps you’re bringing on someone who has a skill set that you don’t or Perhaps they’re bringing a set of business with them or all sorts of different things that might be a reason for you to add a partner in midstream.

You might be, and probably this is what a lot of you might be thinking about, is giving some percentage of ownership to an employee in order to entice them to stick around. And there are pros and cons to that which we’ll explore. A lot of you might be thinking about transitioning ownership to an employee at some point down the road.

We’ve, I’ve talked plenty in my webinars and other places about. the challenge of actually selling your business as an exit strategy, selling it to someone else. It’s a very small percentage of agencies that do that. More agencies do have the potential to sell to an employee. And so that is something to think about as a succession plan.

And then finally, we’ll talk about using an ESOP primarily as an exit strategy. Although sometimes owners will use them for other purposes as well, even if they’re not planning to imminently exit the business. So those are all things that we will explore as we move forward. So what are some of the benefits of sharing equity?

This is not an exhaustive list, but these are some of the things to think about. If you bring on a partner in the business, you’re typically bringing on someone with real experience and real skills and oftentimes skills that you don’t have. So when I see an agency with multiple partners, it might be that one of them has a particular skill set in, business development, whereas another may be more into client service.

Perhaps one of them is media relations focused and another one has more of a digital inclination. There are a lot of different combinations that you can bring to the table through a partnership at a very senior level in the business that might be harder to tap into if you were hiring an employee. You also typically, because generally partners in the business have some level of experience, if you have more than one partner, each is bringing in their own network to the business.

And so bringing in different past experiences, different networks of contacts on the client side, on the recruiting side, that can be very helpful. Having more than one person means that you’re not just sitting there alone in the room staring at the wall trying to figure out the answer to a problem.

You’ve got someone you can bounce things off of and brainstorm with. You’ve got someone also who will push back on you. And I know this was always helpful to me when I had partners in my businesses, because I was often way out there with some of my ideas, and I would have partners who would push back and say, you know, let’s think about this, does this actually make sense?

I would do the same with my partners. They would come up with an idea, perhaps, that I thought was, you know, not particularly realistic. And so I would push back and say, let’s take a different look at it. Play the devil’s advocate, if you will. So that can be very helpful because that’s something that’s really difficult to get.

in an employee. Same thing with accountability. It’s much easier to be held accountable by a peer, a partner, as opposed to by someone who works for you, and by definition knows that you sign their paycheck. So, if I commit to doing something for the business, to a business partner, I’m much more likely to actually follow through, because nobody wants to go into the next partner meeting and tell their partners that they didn’t do what they said they were going to do.

There’s also frankly the notion of camaraderie. You’ve got someone else that you can just commiserate with in the business. And frankly that’s a reason that I often get hired by agency owners is so that they have someone to talk to because it does get very lonely at times as a business owner. And having a partner who you can talk through things with and frankly complain about the challenges with, that can be very beneficial.

And finally, there’s a benefit to having someone else who is as committed to the business as you are. We often hear agency owners lament that why can’t employees think more like owners? Well, the reason why they can’t is because they’re not. And we all think like what we are. If we’re an owner, we think like an owner.

If we’re an employee, we think like an employee. If we’re a client, we think like a client. And it’s while we can have people who are their understanding of the perspectives of people in different roles, it’s really hard to get anyone to act like something. that they are not. So all of these are benefits to having a partner in your business.

Of course, if it was all sunshine and roses and unicorns, we’d have a whole lot more agencies that had partners. And the reality is that there are reasons why having a partner isn’t always a good thing. the most obvious, the logical one that everybody always references when I first ask them, you know, what’s the potential downside to a partnership that they’re considering?

It’s almost always that they have to give up a percentage of the business. You’re, if you don’t have a partner, you own a hundred percent. If you bring on a partner, you own less than a hundred percent. And so giving up a piece of the pie means that you are potentially, at least in the near term, going to earn less.

That in turn puts pressure on the business to generate more revenue more quickly. So particularly if you’ve got an agency where you’ve got more than one partner at the start, it becomes a lot more challenging to get both partners up to a reasonable compensation level because you need to grow the business much, much faster.

And while having a partner can lead to increased revenue. Is it going to lead to double the revenue that you would have had otherwise? A lot of that may come down to how diverse your own networks are. If you’re both coming from the same prior employer, it may be more difficult to get to the kind of revenue levels that you need in order to make it an attractive business for both sides, at least as quickly as you would like it.

So you need to think about what the ramp up time to revenue is in order to get you to where you want to be. That’s even more true if you’re bringing someone on as a partner midstream because now you have to have an immediate acceleration of growth. So hopefully if you’ve got someone joining as a partner, they’re bringing in a fresh book of business.

There’s also higher administrative costs. Generally this is not an obstacle but it’s something to be aware of. If you have more than one partner you typically are filing different kinds of tax returns and things like that. If you are both located in different states that can mean potentially business filings in multiple states and so you need to think about those things just to make sure that you’re prepared for them and that you’re not caught flat footed by those additional expenses.

Having a partner also decreases your flexibility. If you are the sole owner of a business and you want to go in an entirely different direction, you wake up one morning and say, I want to pursue a different industry or different, different line of service. You can absolutely do that. And there’s nobody to really push back in a meaningful way.

Once you have a partner, you need to work those things through and you can’t make those decisions or shouldn’t be making those decisions unilaterally. That’s the true. It’s true. Not just if you want to change sort of the overall direction of the business, but if you want to pull back, if you hit a point in life for whatever reason that you want to downshift a little bit, if you’re going to do that, you need to work that through with your business partner because it may have impacts on how you compensate each other and those kinds of things.

That leads into the potential for mismatched needs or priorities. And one of the things that I always encourage if you’re bringing on a new partner is to really have a clear conversation around what you want from the business, where you are in life. Is this something that you are fully committed to because the last thing you want is to enter a partnership and then have a partner who decides that they actually want to go work in house somewhere, or that they have some other idea they want to pursue.

So they’re no longer. as committed to the agency itself and growing it. That can lead to a lot of stress and strain on partnerships, and so it’s something that you really need to be aware of as a potential risk in any kind of partnership situation. This and other things can lead to conflict, and if you’re head butting as partners, it can be very uncomfortable for both of you.

It can be uncomfortable for folks around you. And so you have this potential for conflict, and it’s not as simple as we talked about earlier with an employee, where you can simply say, see you, we’re done, move on. With a partner, you have to find out a mutual way to Rearrange the business structure if one of the partners wants to exit or one of the partners wants their other partner to exit.

So, something to think about. And all of this leads just to a higher level of complication. So, 100 percent owner of the business, things are pretty simple. Obviously, it doesn’t come with the same benefits of partnership. But if you understand what these complications are, it may be a reasonable thing to pursue sharing equity in your business with a business partner.

So let’s explore each of the different kinds of partners that are typical to see in agencies. And one of the most typical is partners at the start. You’re going out, you’re founding the firm together. Perhaps you’ve been having conversations for months or years where you’re talking about, geez, wouldn’t it be great if we had our own agency and we could do this and we could do that and change the whole paradigm and all of these different things.

It can be very exciting to talk about. And so you are starting typically in these cases with a shared dream. But that dream doesn’t always come with the same expectations. And so that’s one of those places where you need to align. If you are both in the same stage of life, that can certainly help. So if you both have young kids or you both have kids who are off to college or out of college, though, if you’re both in the same situation, that can oftentimes help with expectations and help to put you in a similar situation.

So what you need from the business might be the same. For example, are you more focused on driving up your own personal income as quickly as possible? Or are you interested in building a larger business that will produce more results over time? What is your time horizon to see your reward? What are your needs for flexibility around the amount of time that you’re spending or which hours of the week you’re spending on the business?

You want to get that clear understanding from the get go in any case, but particularly when you’re founding the firm together because it’s the easiest time to do that. to have these conversations. You need to very clearly define your roles. You don’t have an existing business that someone is coming into and so you are beginning to think about, okay, well who’s going to be handling the tax returns?

Who’s going to be handling primarily business development? Who’s going to be leading on client service? And the more you have well defined roles, the more that you structure it in such a way that you can avoid some of the problems that I discussed earlier. You won’t eliminate all of them, but you can certainly address them early on if you’ve got the expectations set and you’ve got the roles well defined.

One of the most challenging things at any point, whether it’s, whether you’re founding the firm together or later on, is trying to figure out how you split equity. And I will tell you that it is very appealing to say, okay, we’re bringing in two partners, we’ll do a 50 50 split. And I will tell you that I counsel everybody, do not have a 50 50 split in your agency.

It sounds great on paper, but it’s an absolute nightmare if something goes wrong because now you have an immediate tie. And I have talked with agencies before where they were having troubles in their partnership, they were 50 50, completely equal splits, and trying to resolve an issue there can be absolutely horrible.

And I’ve seen cases where basically the agency went into a complete stalemate. Because neither partner could leave the business. Because if they left the business, they couldn’t work with any of the clients that they had brought in. And they would be depending upon that if they were going to start a new venture.

And so you really want to avoid that. You want to have some clear way to break ties, at least if you don’t have a 51 49 split, have something in your documentation that we’ll talk about later where you actually address these ties because it can be a real problem. So think about that equity split. Think about if you’ve got If both of you are full time, it’s a lot easier to figure out what kind of equity split you want to have.

If you are starting this agency on the side while you both have other jobs, it becomes more complicated. Particularly if one of you decides to start working on the agency full time more quickly. So it’s one of the reasons that you might want to think about having an equity split that is different from your compensation split.

That you might pay the partners in the business, a set amount to work for the business. And those numbers might be different depending upon what their inputs are and their contributions are to the business. And yet the equity numbers could be a different percentage. These are all things to put in the paperwork that we’ll discuss later.

And finally, I would tell you that starting the business with a partner means that you do have that immediate pressure on revenue. So, when you’re solo, you can go out there and you can start gradually building the revenue, and as long as you’re getting enough revenue to put food on your plate, you’re generally okay.

Once you have more than one partner from the start, you need to hit much higher revenue targets more quickly, typically, in order to be able to hit your revenue targets. And it also means that it tends to delay your ability to hire an employee, because in order to hire an employee, you need to have even higher revenue levels.

and so you need to be aware of the fact that you’re probably going to be doing work that is below your pay level, which is both frustrating at times for owners, but it can also, lead to some profit pressure on the business. Because if as a partner, you’re doing things like building media lists, that may not be the most effective use of your time.

And yet, if your revenue isn’t high enough, there may not be another option. So. things to think about when you’re starting a firm together with somebody else so that you have these thought through and planned out so that you can set yourself up for success. So what if you’ve been running an agency for 3, 5, 10 years and you’re having a conversation with somebody, maybe it’s someone you’ve done work with in the past, maybe it’s someone who’s out on their own as a solo and you’re talking about, wouldn’t it be great if we started working together?

So at that point you might bring on a partner midstream in your business. And I would suggest a couple of things if this is something that you are considering. First of all, I would encourage you to try before you buy. In other words, find a way to work with that individual on some projects if you haven’t already.

So perhaps use them as an independent contractor on some work so that you have a chance to see how your styles mesh, how your skills mesh, whether it really does make sense. And the more that you do that kind of thing, the better sense you will have as to what they might be like to work with as a partner.

Keeping in mind, of course, that working with someone in a contractual relationship is very different than having them as an equity partner, but it’s something that at least gives you a taste for it so that you have at least some way to judge whether you’re making the right call or not. Now here we have a challenge because you’ve got an existing business.

So you need to figure out, you don’t just hand out equity by making up a number like you might when you’re just starting the agency. And instead you need to start thinking through what is the actual value of the equity that this partner is receiving. And you want to think this through because there are implications to

you as the owner who’s giving up a percentage of what you already own. And there are also potentially tax consequences to this as well. So you want to make sure that you are working with an accountant and legal advisor to make sure that you’re doing all of the things that you need to do in order to make sure that everybody is treated fairly in the process.

So it is something that you need to give thought to if you are passing off equity, to a new partner in midstream. And the larger your business, the more mature your businesses. The more challenging this potentially can become, but make sure that you are involving the professionals because it’s really easy to get into trouble very quickly if you are just doing this on the back of an envelope or on a handshake.

You need to think this through and make sure you understand the implications of what you’re doing, and you might think about doing it in a way that the equity that you’re giving. isn’t all handed out at once but instead accrues over time so that now you have an opportunity to be working with this individual and you’ve mitigated your downside risk because even if you’ve done those side projects with them to get a sense for how they work you haven’t seen them as an owner and so if you are able to provide the equity to them on a rolling basis so that you are able to see how they work and mitigate that risk by being able to exit sooner from that arrangement and you have less equity at stake that’s going to be better.

Generally speaking a smart move, but you also have to think about how does this equity transfer? Is it being purchased by time, sweat equity, if you will, or is it being purchased in cash? Is it being, are you paying part of their compensation on an ongoing basis in equity? There’s a lot of different ways to structure it and you want to make sure that you’re thinking those through.

And here again, you need to make sure that your expectations are set correctly, not just on the terms of bringing the person into the partnership, but also just as you would bring on a partner from the start. What are your expectations for the business? What are your dreams, goals, ambitions as an individual, and how does the business help to fulfill those?

You have the same need to define the roles properly. In this case, you’ve already been operating the business, so you have a sense as to what you do, what you’re good at, what you need help with. So it’s a little bit easier to define roles sometimes in this case than it might be when you are just getting started and you don’t really know how each of you is going to shine in the business.

But make sure that you have that conversation before any paperwork is executed so that everybody is on the same page. And finally, just as is the case when you start out, there is this additional pressure on revenue because typically if you’re bringing in a partner, they are at a higher level of compensation.

And so now let’s say you bring on this partner and let’s just say that they’re, you know, getting 20 or 30 percent equity in the business because they’re bringing some book of business to the table. You have to hope that your, profit, Your total profit pool is large enough that it offsets the equity that you’re giving away.

Otherwise, you may be taking a more immediate compensation cut, in the short term, and you just need to be prepared for that if that’s the case, and you need to have a plan to move on from that, which typically is addressed by increasing your revenue that you’re generating. So all things to think about if you bring on a partner in midstream.

Another common scenario is you’ve got an employee, someone maybe who’s been with you five or 10 years, and you know, you’re a small agency, so you’re in a position where you can’t keep promoting them and they can’t have larger and larger teams. They might have incrementally more people reporting to them, but it’s probably going from three to four people or something like that.

It’s not like they’re gonna take over an entire division if you’re in an agency of say 25 or fewer employees. So you start to think about other ways that you can keep them around because you feel that they are that valuable. To the business. And so sometimes you will choose to share equity. with an employee.

And so this is an area where I think you need to be really careful because this is an agency, this is an area where it’s easy to create more problems than you solve. First of all I would suggest to you don’t run around offering equity unless you’re asked. The reason why is because, frankly, a lot of employees don’t particularly value equity.

They would much rather just receive cash for their services. And so, if you are offering it, they may say, sure, I’ll take it. But it may not make any difference to the actual retention that you have. And it can increase the complexity once you’ve done this. Because of the complexity and some of the challenges that you can run into, I would encourage you to look at something called phantom stock instead of true equity.

And so true equity is giving them actual shares in the business, whereas phantom stock is basically like a highly structured bonus plan. That’s probably the best way to think about it. And so what phantom stock does is it gives them the ability to share potentially in the annual profits as if they were an actual shareholder, as well as to participate in, any eventual, event, where the, the business is sold.

That, they may be able to then receive a percentage of the sales price based off of the phantom stock. The advantage to, really, everybody as part of a phantom stock agreement is that it removes a lot of the complexity and potential tax consequences of, of granting equity to the employee. It doesn’t require the employee to come up with actual cash to make the purchases or to reduce their salary in some fashion in order to, to purchase the, the shares in the business or all of those complexities that can be, in place there.

And it also makes it easier. So if that employee does decide to move on, you don’t need to try to find a way to purchase back the equity that they own, because that can both be complicated as well as expensive. so. In general, I would encourage you to look at this phantom stock if your main goal is retention.

Because typically, you can describe it to the employee in such a way that they understand they’re receiving the main benefits as long as they remain an employee of the agency. And of course, if they go away, the phantom stock goes away as well. I would say to you, even if you are going down that path, make sure you think this through and you, that you’ve got a plan for all of your employees, not that all employees need to receive phantom stock, but just have a plan in place because once one employee has it, there’s the potential that other employees may come to you asking for the same because inevitably employees do talk amongst themselves about their compensation, whether they do so, intentionally or just because it’s in passing at a happy hour or something like that.

So make sure that you have in mind how you will handle this, who you would do these kinds of deals with so that you are not caught flat footed if someone asks you a question about it at an annual performance review or something like that. You need to make sure that you really understand the value of what you’re giving.

This is true even if it is phantom stock. So work some actual numbers. Decide, take a look at it and say, Okay, if I’m offering you phantom stock that’s the equivalent of 3 percent ownership, what would that mean? What would that have meant in past years if I’m sharing percentages of profits? What does that look like to them?

What does that look like to me? You also need to think about, Okay, if I were to sell the business, you know, Would I be okay giving up that whatever percentage that I’m offering? And so you generally want to be very cautious here because you can always give higher percentages down the road and increase the amount of phantom stock that you’re giving, but it’s really difficult to take it back if you find that you have been overly generous as you think about it over time.

And then finally think about whether this approach is actually going to help you meet your needs, meet your goals. So really part of this is understanding your employee and whether or not this is going to be a true benefit to retention. Because really it’s the primary reason for giving equity to an employee, apart from succession planning, which we’ll talk about next.

Because. If you’re, if you’re giving this benefit away and it’s not helping you to hold on to that team member, then you’re really not doing it for a valid purpose. So, something to think about there. All right, I’m going to grab a sip of water here, so just bear with me for one moment.

So next up is a, a popular, thing with small agencies who are looking for, you know, perhaps you’re looking toward retirement or looking toward just exiting the business. And you look around and say, okay, you know, what could I do with the business? I can certainly just, you know, close the doors and walk away.

I can generally downshift my time in it and, and turn it into business. basically sort of reverse the process that I probably started with where I started out as my only employee and basically as a solo became a super solo and then built a full fledged agency you can follow the reverse process and through attrition or otherwise just reduce your head count until it’s just you and and you can gradually sail off into the sunset while continuing to keep your fingers in the pie if you will and continuing to do some client work.

You can sell to another agency. Obviously, that has challenges and is not all that common an occurrence. An even less common occurrence would be to sell to a holding company or a private equity firm or something like that. So these options all do exist and they’re worth considering. But one that a lot of agency owners, small agency owners, come back to, particularly because many small agencies have employees who have been with them for a long time, they will look and say, okay, You know, I’ve got Sally who’s been working for me and I, you know, I think it would be great if she would take over the business someday and, you know, it’s a way that I perhaps can find a way to, help my existing employees, help my clients, and at the same time, find a way to transition out my ownership in a way that I’m getting some degree of compensation for what I have built over the years.

So this is the thinking that goes behind transferring ownership to an individual employee. And so if you’re thinking about this, if this is in your mind, the very first thing that you have to do is remind yourself that not all employees want to be owners. And so as owners we sit there and say, well why wouldn’t they want to do this?

And then we look around and we’re like, oh right, it’s not all sunshine, roses, and unicorns. There are some challenges here. And frankly, some employees are just happy to be employees, even if they’ve been with the firm a long time and they really like everything that the agency does, they don’t want to sit in the same seat that you did.

So you shouldn’t assume that they want to, and before you really start to solidify this plan in your mind, you should have a conversation with them. Now, the timing of this is something I get asked about fairly frequently, and it is a challenge to figure out when you raise this. I certainly wouldn’t start asking them as soon as the idea popped into my head.

I would. I would digest it and live with it for a little bit and kind of see how it goes. I might find ways with those employees to sprinkle into the conversations things to get a general read on what their ambitions are, where they think they would like to take their career. Do they talk about owning their own business?

If they talk about owning their own agency, then it becomes much more likely that they might be interested in acquiring the agency they’re currently working in as a stepping stone. Because usually, not always, but usually it’s easier to grow an existing business than it is to start one from scratch, particularly, an agency style business.

So you want to try to start to figure those things out. You also need to make sure that you’re understanding what the financial impact is both for you and for them. So once you’ve come to this conclusion that you want to sell the business to an employee, once you’ve had some general conversations, now you need to start thinking about what it actually looks like and what kind of timeframe are you talking about?

That generally speaking, The longer the time frame that you’re able to do this transition over, the more fair the compensation can be because you can do it in such a way that your employee is still receiving fair compensation and you are gradually downshifting in the business, but being paid for the equity as you transfer it.

It can be done such that you are basically receiving payments after you’ve left. That’s another way to structure it, where essentially the employee is taking out a loan, often from you, and paying it back over time. There’s a lot of different ways to structure it. Just like I said, with some of the other things, you want to make sure that you’re working with legal and tax advisors to help you navigate this, to make sure that, You’re getting a fair deal, your employee is getting a fair deal, that everybody’s protected or as protected as they can be in the process.

And so you want to take your time putting this all together and not rush. So definitely start thinking about this well in advance of when you would like to actually do it. exit the business. It is important to, as you hit key milestones, to make sure that you get things in writing. Handshakes are great and it’s, you know, we’re often tempted when we’ve had an employee that we’ve known for five or ten years to just say, yeah, let’s just go ahead and do this.

But, you know, again, working with your advisors, they’ll let you know at the proper points what kind of documentation that you should put in place to make sure that everybody is truly in alignment and everybody is clear on what the expectations are. I would tell you when you’re planning on this kind of thing, you also need to be thinking about a plan B.

What if this doesn’t work out? And sometimes you may have an employee who initially indicates that they would be interested in going down this path. And perhaps you’ve even talked about a general framework for what the deal would look like, but it might be that at some point they get cold feet, or at some point they receive some other offer.

A headhunter calls them and offers them a great in house position at their, their dream organization. You know, they are not yet in the ownership seat, and so they have the ability to back out at any time before they fully signed all the documentation. So just make sure that you’re thinking that through and saying to yourself, If this were not the option I was able to take, what would I do then?

Because you don’t want to be scrambling late in the process after you’ve already psychologically begun to depart the business or ramp down your time in the business to realize, Ooh, this isn’t going to happen. So definitely give that some thought and make sure that you haven’t. Structured things in such a way that you foreclosed other opportunities or made them much more difficult to take advantage of because you put all this planning in place before you actually got it all properly signed, sealed, and delivered in legal documents.

The final option, option I’ll talk about is the ESOP the employee stock ownership plan. These are things that seem to, to come and go in popularity, and they are things that, that often sound very good on paper. You know, we have an employee owned agency and, and oftentimes that means that it is owned, by an ESOP and, and basically the.

Essentially the, the, what you see with ESOPs is that you’ve got an owner who is looking to exit the business. And they’re using the ESOP as a way to purchase their equity on behalf of the employees. And then you start bringing the employees on, to the ownership of the business. And typically the owner, We’ll see their, equity transfer over time so that they can be compensated for it.

So it tends to work out, pretty well for the owner, the initial owner who is selling off equity. I will tell you it is often not nearly as good for the agency itself or its employees, and I’ll, I’ll talk about that. But I think before we even get to that, you need to be aware that this is something that definitely requires proper professional advice.

It is not an inexpensive process to go through. It requires a fair amount of accounting and legal documentation in order to set it up and it requires some ongoing work in those areas as well. So it is not, it is not something to enter into lightly and it is not, an easy magic wand to solve your issues as far as, trying to sell your business.

and or trying to reward your employees with the notion of ownership. And you really need to make sure that you are talking with these professionals so that they can help you to understand the potential costs, the potential risks. and, and that’s, I think the biggest problem is that typically an agency that becomes owned by an ESOP, it’s effectively a dead end because at that point, third party buyers tend not to want to buy businesses that are owned by ESOPs because of all of the complexity.

that it introduces. It also brings in complexity because then when employees leave, they have to typically be bought out. and so that then puts pressure on the business itself. very similar to, you know, in a larger partnership type, set up with an agency or law firm or whatever. When a partner leaves, you have to buy back their equity, upon departure.

Same kind of pressure can come into play in ESOPs and it can become complicated. I don’t pretend to be a true expert on ESOPs, so if, if I have someone who comes to me and they want to do an ESOP, I will always steer them elsewhere. because that is not my specialty, but I, I know enough about them to know that I am very, apprehensive of them and generally would not recommend them.

I think there are other better ways for agency owners to share equity or, or sell off their own equity as they, their, they view their retirement or other exit from the business. But it is something to be aware of because it is something that at least some agencies do. and as I said, it does seem to ebb and flow over time.

Right now, I, I, have not had conversations in the last couple of years with as many agencies who are thinking about ESOP. So, you know, I guess I would describe it probably as more of a lull, at least based on what I’m observing, at this moment in time. But again, something to be aware of as you’re thinking about what the options are.

Finally, I just want to touch on how to share equity the right way. And before I do this, I will say, if you have questions, feel free to start sharing them in the Q& A function on your screen. And I will start answering questions here in just a couple of minutes. So, if you’ve And you’ve got some ideas for how you might want to share equity in your business, or perhaps what I’ve said is not scared you off from doing something that you were already thinking about doing.

You do want to make sure that you are doing this properly, no matter whether it is a founding partner, a midstream partner, equity for retention, equity for an exit plan, all or an ESOP. All of these things require that you get proper tax and legal advice. As I always disclaim, I’m not a lawyer, I’m not an accountant, and I do not profess to provide that kind of professional advice, but I certainly have been a partner in businesses.

I’ve seen partners come and go. I’ve had partnerships that worked and partnerships that didn’t. And I’ve seen partnerships that have failed spectacularly. So I do have a lot of perspectives on partnerships, but you need to get the personalized advice based on your own circumstances to make sure that whatever you’re doing will achieve what you and your potential partner want it to achieve.

You need to make sure that you’re having clear conversations with any of these folks, who you’re thinking about granting equity to, or sharing partnership with, about what your business objectives are, and I think you want to have the general framework for what you’re planning from a business perspective.

settled before you start drafting up actual legal paperwork because that makes sure that you’re not wasting a lot of time and money on legal documents that may end up being unnecessary if you can’t reach the the solid conclusions and and the meeting of the minds over your business structure that you want to have.

But once you have that meeting of the minds, now it’s time to start putting pen to paper and you need to make sure that you have a proper partnership agreement, something that describes how the business itself will operate How you will handle things like ties if you’re 50 50. How you will handle disagreements generally between the partners.

Who is responsible for tax filings. How you will distribute profits. Whether you will have a tax draw or things like that to cover the taxes of the business. What the business structure itself will be. in terms of tax filings, all of these things are important and need to be covered in a partnership agreement.

But in addition to that document, I would strongly encourage you to have what’s called a buy sell agreement. In other words, a document that covers what you can and cannot do, or what you must do with your shares in the business. And typically this is a document that will cover a whole range of things, from I want to sell part of my ownership in the business, Am I allowed to do that?

Do I have to offer a right of first refusal to you as my partner? Do I have to, what kind of approvals do I need to get in order to sell it? How can I go about doing that? What are the timelines for that? But it also goes into other things like what happens if you get divorced? So is. what happens to your equity in any potential divorce settlement.

And oftentimes it may be that if, if a partner gets divorced, it triggers an automatic sale of their equity, primarily to keep the equity from going to a disgruntled spouse. And now you have a partnership that has you, your original partner and their disgruntled spouse, and that can create all sorts of potential issues.

So oftentimes your buy sell agreement may force a sale in those cases. But there are other things that this will cover. It’ll cover what happens if a partner dies or becomes disabled. You know, does the, how is the, the stock valued in terms of compensating the estate of the deceased partner? There’s all sorts of these things that are, none of these are real comfortable to talk about, but these are things that a good business lawyer will help you to walk through.

And I remember the very first partnership that I set up. Our lawyer sat down with all of us in a room and basically said, I’m going to ask you a whole bunch of uncomfortable questions. And he proceeded to do that. And it, it forced us to think about all of these things. You know, what if we have a stroke and can’t do work?

What if we die? What if, you know, we get divorced? All of these things were difficult questions for us to be considering, but it’s so much easier to think through these scenarios at the outset and figure out how they will pan out. So if you test these worst case scenarios before you get into the partnership, before you share equity with an employee, you’re going to be in a much better situation.

So really war game these possibilities and make sure that you are covered because It’s much better to have this paperwork in place and never need it than it is to get to a situation where you never covered it and now you have a real problem and you potentially even have an existential threat to the agency business because you didn’t think about it.

in advance. And finally, I would say, make sure that you’re defining everyone’s roles carefully. I mentioned this in each one, but I would, I would encourage you actually to have a job description for the partners so that everybody understands what the expectations are. You know, you don’t want a situation where both partners are assuming the other is going to take the lead on business development.

All of a sudden you’ve got a business and neither one of you is all that excited about, generating new clients. These are things that you want to know in advance because you can either address them then, or you can say, well, maybe, maybe we’re not really ready for this partnership. So, make sure you’re crossing your Ts, dotting your I’s, getting everything done correctly.

As I mentioned, I do have a webinar where I talk about some of these kinds of things in a bit more detail, so I would encourage you to check out that, check that out in the, in the SAGA library. after this, webinar is complete. So, with that I think I’ve, I’ve covered the different scenarios, under which you might consider granting equity.

I’ve talked about the pros and cons of it. We’ve walked through some of the specific considerations of the different styles, of sharing equity and of course the actual paperwork that you want to consider having in place for them to make sure that you do it correctly. So with that, that will draw us to an end of the formal presentation today.

I appreciate you taking the time to listen to this. Hopefully you’ve gotten some insights that will help you as you decide what to do with your own agency going forward. If you are watching this on replay, this is where the replay itself will end. So thank you for joining. You can email me with any questions.

It’s chip@smallagencygrowth. com. Ask questions in the SAGA community on Slack so you get feedback. from your peers as well as from me, and of course, tap into the SAGA resource library for answers to other questions that you might have.