What to do when you are preparing to sell your agency

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Chip Griffin: Hello and welcome to the Agency Leadership Podcast. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich.

Chip Griffin: And today we’re going to talk about selling your business, some of the misconceptions that you may have, and some of the things that you need to do if you are planning to sell your agency anytime in the near future.

Let’s get into the show.

Perfect. Hit the buttons correctly. I didn’t have a weird.

Gini Dietrich: You’re getting, you’re getting better. You’re getting better.

Chip Griffin: I’m, I’m improving, you know, slowly, but surely I am pretty soon. I will be a 200 hitter. Pretty soon. Pretty soon. Pretty soon. Just, just like a Chicago cub. No. Okay. So selling your business, are you selling your business, Gini?

Gini Dietrich: I’m not selling my business, but I will say this, that I sat on the board of an organization For a decade and about five years. I want to say it was about five years before he sold. We started to prep the, the business to sell. And we looked at things like, and we’ll talk through this, but we looked at things like, who’s the team that’s going to go with the new owners.

how do we get the owner out of the day to day? How do we develop relationships between clients and then the new team? So we looked at all those kinds of things and we started to build for, Sell and it was a good five years. So I think that even if you’re not thinking about selling your agency right now, if you think you might do it in the next 10 years, this is something you need to be thinking about in the next couple of years, because you’re going to have to build for that, that eventual sell.

Chip Griffin: Well, and here’s the thing. Most of, most of what you would do to prepare your agency for sale are just good business practices. There’s things that will help improve your agency, whether you sell or not. Now, there’s a very small number of things that you need to look at that, you know, that, that are really more just for the sale.

But the vast majority of things that you want to do are things that, that, Frankly may make you want to keep your business at the end of it. I mean, it’s, it’s sort of like when people, you know, do some light renovations to their house to get ready to sell it. And they’re like, this is actually pretty nice, you know, I might actually want to live here now.

Gini Dietrich: Yeah, I think that’s a really good point. And, and you, you’re right. There are things, especially if you do things with your team and with your financials. to help prepare for if you’re going to do it to help prepare for a sale, it will put you in a better position from a business perspective.

Chip Griffin: Yeah, absolutely.

And, and this is, this is something that has been written about recently on Spin Sucks, Drew McClellan of the Agency Management Institute had a good article looking at that. And then we’ll, we’ll go to a slightly bigger shot here. And it’s also something, you know, Rick Gould, who is a mergers and acquisitions consultant for primarily PR agencies, but also does marketing agencies.

He recently released, a booklet on the topic. And so he’s got some great insights in there as well. And so we’ll, we’ll include a link for that. Thank you. You know, don’t have a complete memory lapse when it comes time to do the show notes. but if you just search for Rick Gould online, you’ll find this.

He’s actually, I think he’s got a domain for the book exitingyourbusiness. com or something. I don’t know. Something like that. In any case, so there’s a lot of good resources that are new and fresh out there. So we thought it would be good to talk about. And, You know, it’s one of those things where a lot of times the best opportunity to sell your business may be when you’re not thinking about it.

Of course. So, so working through some of these steps just as a matter of, of practice, and good business practice will make it so that if someone comes along and says, Hey, you know, Gini, I think you’ve got something real special there. And I’d like to give you a 30 million for it. Are you interested?

Gini Dietrich: Yes, I am. Yes. The answer is yes.

Chip Griffin: You’re like, I’m not even looking at the paperwork. Just send it. I don’t care what the requirements are. Send the check. Send the check. Send the check. But, but actually, that’s a good point to start on because the first big misconception, and I know Rick covers it in his booklet in particular, is that you’re not going to get it.

Cash up front. No agency. No. No, it’s people don’t just cut you a check and and buy pretty much any business these days But particularly a service business like an agency They’re they’re gonna give you a down payment and then you’re gonna have to earn out the rest

Gini Dietrich: Yeah and it’s something that you really need to be thinking about and it’s something that I’ve been thinking about too because As I build my own business, there are things that I’ve done that will allow me to not have an earn out or not have as long of an earn out because I’ve been creating product out of intellectual property.

So. You know, my, my goal is not to go work for somebody for three to five years and be on their schedule just to earn my money. I have no desire to do that. There are lots of people who will, I mean, Mitch Joel and his business partners sold their agency. What are we at three or four years ago and just, just finished their earn out.

So there are, there are opportunities and there are people who will do that. That’s just not something I want to do. So I’ve been thinking about how do I position and build the business in a different way so that I personally don’t

Chip Griffin: have to do that. Right. Well, and, and that’s really critical. Think about what your role is within your agency.

Think about what you want it to be. And so the more that you can get yourself in that direction, first of all, you’ll be happier pre sale because you’ll be doing the kind of work that you want to do, but you’ll also be in a position where. If you do sell and if you do have to have some sort of an earn out, which is likely it will be in a role that you more appreciate, right?

Because typically the buyer is going to want you to do things fairly similar to the way that you were doing them before the sale. Because the whole the well, not the whole one of the biggest reasons to have you do that is to smooth the transition. And so if you’re doing largely client service, they’re going to want you to continue to do that because that’s how you retain the book of business that you brought over.

If you’ve primarily been a Rainmaker, they’re going to want you doing that because that’s how you, you know, continue to feed the pipeline. So whatever your role was pre sale, that’s going to be the foundation post sale. So it’s best to get yourself in the right position before you get to that point.

Gini Dietrich: Yeah.

And you know, one of my favorite examples of this is, I have a really good friend. Who I will not name, but most of you know, because I don’t know that he wants me naming this, but

Chip Griffin: just between you and me. Just share the name. It’s it’s

Gini Dietrich: one of the things that he and his business partner did is they realized that neither one of them really wanted to run the business.

Like he, my friend is really great at marketing. He’s out there on the speaking tour. He like he he’s written books. He’s done that whole thing. And his business partner is really great at building websites, but neither one of them wanted the responsibility of operations and financials and HR and all those other things.

So they hired a CEO and that he’s been there. Five or six years now, but one of the things that they’re looking at as, as they continue to build the business, you know, he will, if, if they sell the CEO, of course we’ll go with the sell and he’s incentivized to do that. the, the business partner who’s really great at websites will continue to do that.

And my friend will continue to be sort of the face and the marketer and do all those kinds of things. So to be thinking about, I think you’re exactly right. You know, what is it that when you sell, you’re willing to do for three to five years for someone else because it’s passion and you enjoy it. And it doesn’t matter if you’re doing it for yourself in the short term or not.

because I think you’re right. That’s the foundation that builds into a cell for sure. .

Chip Griffin: Right. And, and Drew makes a good point in the article that he wrote for your site, where he talks about the, the importance of, of getting yourself out of the, the, the place where the whole thing can’t run without you.

Yeah. Right. So you, you don’t want to be in a place where some of the, the knowledge or the skill resides. Only in you. So in your example, you know, your friend who does the website building portion of it, he would still want to make sure that there are other people on the team that can do that so that, you know, that there’s a path post acquisition to get to, you know, where he wants to be and not necessarily, you know, stuck in the trenches.

Gini Dietrich: Yeah. And I think in that case, there’s 30 or 40 of them. So there, yeah. So there’s, there’s opportunity, but yeah, I think you’re right. If you’re, if you’re looking, if you, I would say, if you’re an agency, that’s 10 people or less, it’s probably less a buyout earn out and more of an acquisition, but in the same, same thing, you’re still going to have you and your team are still going to have to transition over and make sure that clients stay and that you’re continuing to, to build business and all those kinds of things before you can be.

Chip Griffin: Now, the other thing that Drew talks about, and I know that Rick is focused on as well, is, you know, how do you, how do you, you know, Shine up your agency, right? So, you know, how do you pick what you’re what you’re focused on? You know, Drew talks about verticals, you know, but, you know, it’s more than that.

You know, how do you how do you look at your agency’s positioning so that it’s appealing to a buyer? So right now, for example, you know, agencies that are in health care or digital are in very high demand for acquisition. Now, you You’re obviously not going to move from being, you know, like a regional PR agency into being, you know, a digital specialist in all likelihood, it’s possible, probably not, but it’s, you know, you do want to be thinking about, you know, how do you, how do you position yourself so that you have the most glitz and glamour to a potential acquirer, because that’s where you get premiums, you know, one of the problems with most agency acquisitions is that it’s really just buying the book of business.

And so you want to try to come up with something that’s special enough in your brand, in your service delivery, in whatever you’re doing, that it gives that little bit of magic dust that allows you to get a premium from the buyer.

Gini Dietrich: Yeah, and I think you’re right. I think there’s, there’s a lot of conversation right now in my circle of friends, which are PR firm owners.

Which is around, you know, how do we, how do we make acquisitions in the places where we, where clients need us to do the work. So where before we might have worked with contractors or smaller agencies to do the work. Now we’re looking at acquisitions. Can we, can we acquire a digital firm? Can we acquire a for a content firm?

Marketing firm. Can we acquire a web firm? Like those are the kinds of things that PR firm owners are looking at right now is how do we build or merge those specialties together to build or to create a full service?

Chip Griffin: Right. And, and one of the things along those lines that Drew talks about, that Rick talks about is client concentration, right?

So, you know, you need to be, you know, thinking about all of this, but also being careful that you don’t end up putting all your eggs in one basket because, you know, the, the, the acquiring agency wants to make sure that you are, you know, you have that glitz and glamour, but it’s not all because of one marquee client.

and that’s something that, you know, I’m sure you’ve seen a lot. I’ve seen a lot, you know, with agencies where they’ve got that, that one marquee client that gives them their identity, but beyond that, you know, what do they have? And, and particularly if you’ve got someone who’s, you know, 40, 50, 60 percent of your revenue, which is unfortunately not uncommon.

you know, that’s, you know, that makes it much more difficult to get not just a premium price, but even a fair price. When you’re selling the business, well, the risk is just so high.

Gini Dietrich: The risk is huge. But the risk is huge. Even if you’re not selling your business. And we’ve talked about this. Absolutely.

Yes. And this goes back to what you said at the beginning. If you’re prepping your agency for sell, all the things that you’ll do will make it a better business. You should not have one client. That is the majority of your business, you shouldn’t. And so you should be diversifying regardless if you’re putting it up for sell or not.

That, that should be one of the very first things you do.

Chip Griffin: And, and that brings us to finances, right? So, you know, when, when we think about agency finances, every time I talk to an agency owner, the first thing they talk about is revenue. And that’s great. Revenue is only one piece of the financial picture though.

It is. It is there. There is there is profitability. And then there’s also particularly if you’re looking to sell the business, the buyer is going to want to what is called normalize your numbers. In other words, they’re going to want to take a look at, you know, how would your business run within theirs?

And so some of the things that that trip up a lot of small agencies in this area are how they compensate the owner. That’s probably a number one. Okay. Because most agency owners are at one extreme or the other, they either take out absolutely every penny that they can and just, you know, and take every tax benefit and have their car through the business and, you know, every little thing that they can do, or they’re at the other end, and they pay themselves 20, 000 a year and claim that they have a 90 percent profit margin.

I mean, yeah, so, so whoever is buying you is going to say, okay, if I were actually replacing you. What would it cost me? Right? So, so that, that, that would come up with a normalized compensation number. If you’re paying yourself a lot of, if you have a lot of perks in the business, they would actually add those back.

So it shows a better profit margin, right? Because I don’t want to freak people out, but you’re not going to have a company car with whoever acquires you. That’s just, that’s not going to happen. So if, if you’re running your car through the business, you get the good news. You get to add that into your profit margin when it comes time to sell.

The bad news is you’re going to have to start paying for your own car and probably your season tickets for sporting events and. You know, all of those fine. If

Gini Dietrich: you’re selling your business, you can probably do that.

Chip Griffin: It’s fine. And you can do both. Right. So, I mean, you can talk to your accountant and figure out, you know, what you can get away with as far as running expenses through the business and, you know, and what’s the most tax advantageous way to pay yourself.

So we’re not saying don’t do those things. And frankly, your buyer doesn’t really care that you’re doing them now. But you also have to know, and you frankly should know just for the health of your own Agency business. What are the real numbers, right? So you can figure out, you know, do I have a 1 percent profit margin in my business?

Or do I have a 30 percent profit margin? And that can swing substantially if you’re in a 5 or 10 person firm, depending upon how the owner is compensating himself or herself.

Gini Dietrich: Yeah, and you know, this is a conversation that you and I have had many, many times, but I think you’re right that you and this is what I what I say to my clients.

How, if you went to get a job right now, how much money would you make? Right. They hem and haw. On they hem and haw. Well. 80, 000. I’m like, that’s not true. How much money if you went to get a job right now, running a profit center at a large agency, running a division for a large company, wherever it happens to be with your expertise and your number of years of experience, how much money would you get?

And you finally get to, okay. And then you add in bonuses and benefits and all that kind of stuff. That’s what you should be paying yourself.

Chip Griffin: That’s it. And, and, and even if you don’t actually pay yourself that, it’s what you need to use when you’re assessing. The performance of the business. Right. So if you if you’ve only got a 20 percent profit margin because you’re paying yourself 20, 000 a year, then you probably need to increase your prices or find other ways to reduce costs and other aspects of the business.

Right. So you absolutely need to understand what those are. Even even before that. I mean, I guess we should have said this. I hate that we have to say this, but you should actually be able to generate a proper P& L for your business. I, I don’t know about you, Gini, but I’m, I’m kind of shocked by the number of agencies that I work with that can’t produce even a rudimentary halfway plausible P& L.

Yeah, I know. It’s, it doesn’t have to be fancy. I don’t care whether you do cash or accrual. I don’t, I don’t care about any of that. I don’t really even care if the, the balance sheet portion of it is absolutely correct. Your accountant is probably going to care about that, but I don’t, right? Because agencies aren’t carrying a lot of assets that they should be.

Typically matter on a balance sheet, but if you can’t get just a simple, and you don’t even have to break it out with cost of goods sold or any of those kinds of fancy things that we like to see, just give me a straight, here’s the revenue, here’s the expenses, here it is by month, by category, just something simple.

Please have that. It would make my life easier if I’d end up working with you, but it’ll make your life a whole lot better if you have some vague idea. And by the way, I, and, and, and my other hobby horse, of course is profit, or, or project budgets. So, you know, profitability on individual clients and projects, please do those too.

Yeah. Again, doesn’t have to be fancy, but that’s the other question that I, that I never get a or very rarely get a good, satisfactory answer in my first meeting with a client. You know, who are your most profitable clients? These are the three biggest ones. Does that make them profitable? Yeah, I didn’t ask who your three biggest ones were.

I, I frankly would hope that you could tell me that because I mean, that’s about the easiest thing to know. And I’ve yet to meet a business owner who couldn’t tell me their three biggest clients. Sure. Yeah. If you can’t name your three biggest clients, you’re probably not involved with the business anymore.

So, so you’re probably not listening to us because we talk to owner operators. But I mean, you absolutely need to know profitability because that the profitability on a client level will really help drive what you can sell the business for. Buyers love to see people who are running a profitable business because it’s a good indicator of how the business is run generally, if you can be getting good profit margins.

Gini Dietrich: Yeah. And it’s, I mean, I think that helps in all areas that we all have conversations about, which are, you know, how do I price, how do I charge? My client has gone from project. Now they want a retainer. How do I make sure that we’re not over servicing? It goes to all of those pieces. If you understand truly how much things cost and what your, your profit goal is and what you’re doing for client that helps you in all of those areas.

Chip Griffin: Absolutely. And, you know, one of the other things that Drew brought up that I think is just, it’s really sort of a good way to sum up the whole process. Expect surprises. Yeah. And, and, and again, in, in Rick’s booklet, he talks about a lot of the surprises that come along during the discussions about, you know, Selling the business, they’re going to ask you some uncomfortable questions.

They’re going to question some of your expenses. They’re going to question your contracts. They’re going to question some of your decision making. Part of this is because they’re, they’re doing proper due diligence. Part of it, frankly, is because a lot of buyers, you know, want to go in and kind of nitpick a little bit so that they can negotiate the price down after you’ve already.

Agreed on a number, right? Or shift some of it to to an at risk earn out versus a guaranteed up front payment. I mean, it’s, it’s basically like the process that you go through when you’re buying a house and you have the home inspection and, you know, you kind of go through the report. You’re like, what can we get through?

Those sellers to give us, you know, I, I think they need to sand all of those floors down and re refinish them for me. I, you know, the, the inspector said, yeah, I mean, it’s gonna be the same kind of thing. So you’re gonna have some of that. You need to prepare yourself for that. You need to prepare yourself for the fact that you may not like some of the, the actual terms that they have for you and your earnout.

You know, Rick talks about the, you know, how they will often. You know, lowball your salary a little bit, or a lot in some cases, be ready for it. You absolutely get to push back. I mean, look, here’s the thing. You don’t ever want to be selling when you have to sell, right? So don’t, don’t sell when you’re, you know, 12 months from retirement.

That’s too late, right? If you, if you want to retire in the next 12 months, you should have been working on this three, four or five years ago, because, because prepping your agency for sale is really a three to five year process. Yep. If you want to maximize your value.

Gini Dietrich: And I will tell you to add to that as we went through the sell of this business that I was on the board on it took It took about 15 months from interest to sell and in those 15 months I’m, I wasn’t even an owner operator.

I was just on the board watching the questions that they got and the anxiety and the sheer frustration Just of Of the owner where he was like, what do you, what do you mean? They, I mean, there were a couple of times where I said to him, I don’t know how you’re doing this. They’re calling your baby ugly.

It’s not ugly, but Holy cow. So the emotion piece of it, I think nobody’s prepared for it. And it’s, it’s completely emotional because you have birthed this business. You have brought it up. You have raised it. It has been your blood, sweat, tears, and everything. You’re fine. Families invested in it.

Everybody’s invested in it and they are going to your point going to nitpick. Everything and it’s completely emotional. It’s a completely emotional thing.

Chip Griffin: It is, and it is, it is frankly on both sides. And a lot of times as the seller, you don’t realize this. You know, I’ve been on both the buying and selling side of the equation multiple times.

I have had successful deals that came to fruition. I have had ones that fell apart basically at the rehearsal dinner for the wedding, right? I know people who have literally had it fall apart at the altar. At the closing process where it fell apart. I know one individual who was literally waiting for the wire transfer to come in and it never came.

So, so these things can fall apart at any time. So, You know, one of my biggest pieces of advice is continue, no matter what stage of the conversation you’re at with a buyer, keep operating your business as if it’s not going to happen, because I can tell you, that is advice that I wish I had given myself and taken at least a couple of times over the course of the last 20 years where I, I had business sales that were almost sure things didn’t end up happening, but I took my eye off the ball, and so those businesses suffered in the process, and it’s hard, right, because, you know, part of it is the excitement of, oh, look, this, this could happen, and this could happen, and all these great things, and part of it is, you know, I don’t want to take risks that might upset the apple cart, right, and so, so in my case, that was actually the bigger thing.

It wasn’t so much that I was focused on some grand thing, because none of them were life changing outcomes, but the, the, there was the constant, if I do this, is that going to alienate the buyer? You don’t want to alienate the buyer, but if the deal doesn’t happen, you may regret that you didn’t alienate the buyer.

So run your business up until that wire transfer comes in as if it’s not going to happen.

Gini Dietrich: Yeah, I think that’s really good advice. And I think if you start thinking about it three to five years out from when you want to do it and you start preparing for it. to your point, 12 months from now is not the right time.

And it’s the same thing with business development. You know, we’ve talked about this. It’s ad nauseum, you cannot go look for new business when you need it. It’s just not the way you do it. And the same thing with selling your business.

Chip Griffin: Well, and not only that, but the, you know, the part of the problem with selling an agency is unless you catch the wave at the right time, you get the, you know, that, that really In demand, you know, you’re, you’re a health care agency today, for example, if you’re not one of those, when you actually sit down and look at what you’re being offered for your business, the only way you’re probably really going to want to take it is if you’re just looking to get out anyway.

Yeah, right. Because, because most. Sales of agencies or any other kind of professional service firm, it’s not life changing money. It’s simply de risking, right? So you’re basically accelerating your income for the next few years. But it comes with a bunch of strings either in the form of an earn out or a non compete or those kinds of things.

So when you actually sit down and run the numbers, you know, what can I make with this business if I keep it for the next three years? What would I make? Over the next three years, if I sell it, those numbers aren’t going to be that wildly different in most agency sales. So you really have to be realistic about that and either catch the wave or do it because you’re looking to transition to doing some other kind of business.

I know plenty of agency owners who want to get out of agency world and do something else in communications or marketing. I know others who want to retire, you know, others who maybe just want to downshift, they don’t want to run a team anymore. But if you’re not looking to make some kind of a transition.

You have to set reasonable expectations for what you’re likely to get as part of a sale.

Gini Dietrich: For sure. Yep. I think that’s really good advice.

Chip Griffin: So I don’t like to be a Debbie Downer, but no, I kind of do, I kind of do this. It’s kind of my personality. I like, I mean, I’m an upbeat person, but I also, I also like to give reality checks.

That’s because I mean, frankly, I’ve needed a lot of reality checks over the course of my career and it’s, you know, it’s healthy to have someone give them to you. So that’s, that’s the role I play.

Gini Dietrich: I like it. I think it’s really good advice. And having been through not personally selling my business, but having been through it as, as a board owner a couple of times, it’s.

It’s a process.

Chip Griffin: Yeah, it is. And you really have to look at the details. I mean, you know, one of the other things that Rick talks about in his book is, you know, that post sale you may not have the level of control that you thought you were going to have. Right. And that’s, particularly if you’ve got an earn out, that’s something you really need to zero in on.

Because if you’ve got an earn out, you want to make sure it’s good. It’s completely within your control. Yep. You don’t want to be in a situation where your earnout is tied to things that are based on decisions that the, the new buyer makes, or the other things that are, you know, unrelated. Mm-Hmm. , you know, so, so make sure that the earnout is tied directly to the performance that you directly control.

For sure. I’ve seen that go sideways way too many times. Yeah.

Gini Dietrich: And I think you get into there. There are certain situations that you get into where all they care about is profitability and you have to, and you’re now in a position to cut staff or, you know, do things with clients that you’ve, that are uncomfortable, whatever it happens to be to meet the new owner’s goals.

And it has to be aligned with what you’re comfortable doing.

Chip Griffin: Right. And look, I mean, at the end of the day, you have to have transparent conversations with the potential acquirer. You, you know, you have to be willing to be a bit vulnerable with them. You know, you can’t, it’s difficult because you’re, you’re now having to trust someone else.

And so these conversations, you know, they tend to be very guarded. And again, having been on both sides, I know that we sit there and say, well, I don’t want to say this because, you know, that, that exposes this weakness or that weakness or this interest or that. And, you know, maybe I won’t get the best number.

My advice is. Is be as open as possible on both sides, because buyers don’t understand the fears and concerns that are sorry, sellers don’t understand the fears and concerns that buyers have, and vice versa. Sure, right? Because it really is a two way street. And the more that both sides open up and are just honest with each other, because most of the time, I mean, as a seller, there’s a tendency, you just trust that bigger person out there who’s got the big guns.

Buckets of money, and they’re just trying to, you know, trying to steal from me, right? That’s not true. They’re, they’re trying to manage their own risk. Right. And making sure that they’re getting out of their investment what they need. And the more that you just open up on both sides, I think the more likely you are to have a successful sale, not just by getting a signature on the dotted line, but in the aftermath, which is at least as important.

Gini Dietrich: It is, it is a process.

Chip Griffin: It is indeed. Well, I think we’ve blathered on long enough, but I, I know that, that selling the agency is a, an interest of just about every agency owner, even if they’re not actively trying to sell now, it’s, it’s in the back of your mind. Maybe I, maybe I could get my big payday off of this one day, one day, one day.

So with that, that will end today. And I’m Chip Griffin.

Gini Dietrich: I’m Gini Dietrich.

Chip Griffin: And it depends. Thank you for listening to the Agency Leadership Podcast. You can watch or listen to every episode by visiting agencyleadershippodcast. com or subscribing on your favorite podcast player. We would also love it if you would leave a rating or review at iTunes or wherever you go to find podcasts.

Be sure to check out Gini Dietrich at Spinsucks. com and join the Spin Sucks community at Spinsucks. com slash spin dash sucks dash community. You can learn more about me, Chip Griffin, at smallagencygrowth. com, where you can also sign up for a free community membership to engage with other agency leaders.

The Agency Leadership Podcast is distributed on the FIR Podcast Network, where you can find lots of other communications oriented podcasts. Just visit www. firpodcastnetwork. com. We welcome your feedback and suggestions, and look forward to being back with you again next week.