How to sell an agency and find the right buyer (2023)

Headspace, a web design agency, was my first venture - my baptism in entrepreneurship - but I couldn't let my romantic attachment to the agency or my pride get in the way. My business partner Kevin Springer (now my co-founder here at Proposify) and I had to leave the agency industry.

The decision to sell our agency would have been more difficult if Headspace had been making a lot of money, but splitting our focus between running a successful agency and trying to build a young Proposify hurt us, and we had to shit or shit the proverbial pot raise.

After a few promising leads that went nowhere, we got a call from a local businessman who seemed serious about buying Headspace. For nearly a year, we endured call after call, email after email, countless legal complications and cash flow shortages as we desperately tried to keep Headspace afloat and move Proposify forward.

I took a low-paying freelance job just to pay the bills myself, and Kevin got a full-time job in case things went wrong. It was without a doubt the darkest moment of my life as an entrepreneur. I thought it was all going to come crashing down at any moment.

Eventually, the deal closed.

Here's what we learned about trying to sell an agency that could help make your process a little less painful and hopefully positively prepare you for your next business venture.

Why sell your agency?

Many agency owners don't have an exit strategy in mind when starting their businesses. I am not.

I started Headspace because I loved design and wanted to make a living doing what I loved and still be able to choose who to work with. Also, I really couldn't think of anything.

Even if you think you'll never sell your business today, having an end goal in mind will improve the way you run your business now.

Here's the devastating truth: most agencies have an expiration date. The chances that you or I will build the next Ogilvy & Mather or Crispin Porter are astronomically slim, and eventually you'll want a less stressful job before you retire.

While there are many different reasons to sell your agency, and many of them will be specific to your personal situation, one reason you shouldn't trust is that you'll take a financial hit. This rarely happens.

Selling Your Agency: An Entrepreneur's Guide

Service agencies are among the toughest businesses to sell. According to a recent study, only a quarter percent of agencies were sold in the last twenty years.

Compared to a brick-and-mortar business with physical assets or tech startups that can scale exponentially, service agencies need people to grow and rarely own intellectual property.

The prospective agency buyer is looking for a turnkey business that can operate independently of existing owners, or is looking for a specialist team to complement their wide range.

So to get your agency a deal, let alone the best possible deal, you need to start with the right foundation.

1. Make sure you have a salable business

The most important part of selling your agency starts long before you actually sell it. You have to create something worth selling right from the start.

It's important to start your business with the right mindset. For example, think about buying a house. A homeowner who plans to change ownership will treat the home very differently than someone who plans to live there for the next 20 years.

As I mentioned earlier, most small agencies cannot be sold because there is nothing to sell. They have no recurring revenue, no unfair advantage, no repeatable formula for generating new business, and no well-known brands.

You need one of those things, at least one, if you want to withdraw money. See how:

Create an unfair advantage

Anyone can hire designers, writers, digital strategists and programmers.

as Peter Levitanleg is:

"It's not easy to sell a business where assets walk out the front door at 6pm every day."

To truly compete for customers globally, you need clear leadership. This usually means they offer a specialized service that is sold to a vertical market where the agency has in-depth knowledge and years of experience.

I've interviewed some amazing agency owners who do just that:

For example:

• An Bordspecializes in public relations for technology startups.

• One400specializes in content marketing for the legal industry.

• Organic SEOspecializes in search engine marketing for purpose-driven businesses.

• Ribotspecializes in developing mobile apps for retail.

If your business has a clearly defined target customer and years of experience in a specific industry, you will have a much more valuable business in the buyer's eyes.

When a larger company buys your agency, they may be looking for an impressive client list or a highly talented team, but those deals are rare and difficult to close. Even Teehan + Lax, the respected design agency behind Medium,initially indicatedwas acquired by facebook but how is ithe finished,In fact, 40 employees were laid off and only the partners were hired by Facebook.

(By the way, Jon Lax once told me that every agency has three months to close.)

Being good just isn't good enough.

Create a repeatable formula

Most agency owners are the senior salespeople for their agency. This is fine for the first few years, but your goal should be to turn your sales process down to a science and be able to hand over the reins to your business development team in most situations.

When we interviewed the owner of the incoming agency Kula Partners,Carmen Pirie, on our salesperson hiring podcast, he said:

“Your job is to work your way out of a job. When you're integrated into the day-to-day operations of a company, you can't leave even if you want to. A lifestyle business distracts you from a better purpose that creates a sustainable business that can survive without you."

It's hard to do thoughYou have to work on your business, not your business.

Create a respected brand

How do you create a “reputable” brand and what does that mean?

1) The agency that creates beautiful, innovative, award-winning work for popular products

An example would be MetaLab, which helped design Slack.

To build a company like this, all you have to do is hire A-players and create the kind of culture that attracts the best.

2) The owners have a huge following online due to the content they produce (speeches, written books, popular blogs, presentations).

Examples would be Jeffrey Zeldman's Happy Cog design and Mike Monteiro's Mule design.

To do this, you need to invest your time and energy into creating quality content and speaking to an audience. In short, build your personal brand as an expert in your industry.

Achieving any of these feats is not to be underestimated, but even if you are not a celebrity agency, you simply need to have a decent reputation at a smaller, more local level, having all the other ingredients (e.g., solid finances, specialist industry ). . knowledge, a repeatable sales process, a great team culture) increase your chances of attracting a qualified buyer.

Create recurring revenue

Larger advertising agencies operate on a retention model, where they charge clients a monthly fee on a long-term basis, usually 12-18 month contracts. However, most small boutique agencies work on one-off projects for clients.

In recent years, more and more small agencies, especially those that started offering inbound marketing services, are emphasizingongoing monthly commitmentcompared to project work. An example would beKula Partners, which increased its recurring revenue by 1,066% in one year.

Ongoing retention contracts are much more attractive to buyers as they can focus on growing the business rather than starting from scratch in three months because all existing projects are complete.

2. Find the right buyer at the right time

Regardless of what you are selling, you are always in the best position when you have nothing to lose and in the worst position when you are desperate.

Your ranking will be lower when you are losing customers and owing hundreds of thousands of dollars.

To use the house analogy again, when you plan to sell your house, you will first make necessary renovations that will add value. The same goes for selling your agency:

• Plan a year ahead and get the books in order.

• Do not waste unnecessary things and do not take on risky projects.

• Have as much money as possible.

How do you find a buyer for your agency?

Hire a business broker

A business broker can make things easy as they have a network to leverage and will be pushing for the highest possible sale based on their commission. While many business owners have used an agent to help sell their business, Kevin and I tried an agent once when we sold our agency and it was not a successful experience.

Use your own network

Have some open conversations with your closest contacts, tell them you are thinking of selling your business and ask if they know anyone who might be looking for you. Eventually someone will talk to the right person and you'll get a few emails.

Come in armed with information

When buying a car, don't look at the purchase documentation until you've had a chance to ask the seller about cost and mileage, then take it for a test drive.

Once you start talking to potential buyers, there are some basic things they'll want to know before starting the time-consuming and expensive due diligence process.

Here are some documents to have on hand:

• non-disclosure agreementYour potential buyer shouldn't have a problem signing this, as you're about to give out extremely confidential information.

• balance sheetImportant! You have to ask your accountant for one each month, so if you need an updated one, it's just a few clicks away.

• Other financial recordsThings like lost profit, a list of payables and receivables.

• performance metricsGross Margin, Net Margin, Consumption Rate, Completion Rate, Usage Rate, and Customer Lifetime Value.

• Client/Project SummaryThis should show all current projects in progress, how much they are worth, how many resources are needed, and when they will be completed.

3. Negotiate the terms

Rankings are difficult and subjective, but remember that businesses are ranked like anything else:

• How big is the demand for what you offer?

• What are the goals of similar companies in your market or geographic area?

• How much is it worth to a potential buyer?

If your buyer asks how much you're asking, it's okay to be shy at first, but you should still have a number in mind. When you finally show your cards, you have something to back up your assessment. You can't just say you're selling your company for $10 million just because you think it's worth it.

If finances aren't as strong as you'd like, you can still get a decent rating if you have what banks call "intangibles," such as a good market reputation, strong expertise, or high customer standing.

There is no such thing as a smooth exit or a clean deal.

Getting a buyer to say "yes, I'll buy" is the easy part compared to the financial due diligence and expensive hot potato game you'll be playing with the attorney for the next 12 months. Even the simplest of deals will have complications that slow things down.

This is where your skills as an entrepreneur will be most tested. Can you still run your business efficiently, keeping your end goal firmly in mind, surviving the legal negotiations?

I can't offer a trick to make this quick and easy, but I can give you a few tips to keep in mind:

Hire a lawyer who is sensitive to the big picture

It's easy to say that hiring a reputable attorney at a large firm, but that doesn't always bring the best results. Some attorneys get in the way of sales by overanalyzing small details and pushing them back so far that they turn off the buyer.

If selling is important, and by that I mean getting out of the agency business as soon as possible is important to your life goals, then you need a lawyer who understands that and is willing to work with you.

You need someone who doesn't slow the deal down by trying to anticipate every possible (but unlikely) risk. They should be able to save their reserves for major threats, but otherwise get down to business quickly.

Be wary of long-term payments or fractional share purchases

Buyers prefer to keep the down payment as low as possible, so they often suggest paying in installments over a period of about 12 months. I would reject a longer buying period because it would otherwise be too risky.

If the buyer cannot finance the business, is he stable enough to run the business? Or are they just hedging their bets in case it doesn't work out and then try to reverse the deal later?

What if they want to pay part of the way in stock? I would be careful with that because it might be their way of keeping you loyal to the company. If the buyer is Apple and they give you Apple stock, that's one thing, but if your profit is directly tied to the agency's performanceafterIt's out of your hands, so you're likely to be disappointed in the long run.

Diploma

Whether your business is just a young acorn just beginning to sprout or a mighty oak tree with deep roots, you must manage it as if it will one day be sold, even if you don't think that will be the case now.

When you have this build-to-sell mentality, you regularly step back and work on the business as a whole, rather than getting bogged down in the little day-to-day things that take up your time and force you to lose touch. . with the bigger picture.

Selling our agency didn't bring much profit for Kevin and me, but it was necessary so that we could focus on our true passion, Proposify. Maybe one day you'll have another reason to sell. And when that day comes, I hope you're ready for it.