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Agency Owners: What’s your exit plan?

exit-signsIf you own a communications agency and you’ve never thought about an exit plan, you’re either fibbing or foolish. Even if you’re a young owner, growing the firm and plan to stay “forever”, it is very wise to plan for the future. Simplistically there are basically 5 strategies you can use to exit your agency:

1.Sale to an outside party

2. Sale to insiders

3. Ownership transitioned to the next generation of family

4. Close up shop—voluntarily or through bankruptcy

5. You die

Let’s put # 3, 4, 5 on the shelf for the moment and assume you don’t have family in the business and would rather not close, go bankrupt or die (yet). Family businesses have their own unique mishegaas worthy of separate discussion–we won’t review this here. Let’s assume you have an ongoing firm which has achieved some degree of success, and you seek to “monetize your asset” (i.e.sell). What do you do?

First of all, not so fast–you need a plan. Not, “I can’t take it anymore and I want to get rid of this agency asap” plan, but rather a well thought out long term strategy. There are some basic truths:

Selling in haste is a lousy idea.

Selling in a lousy economy (like this one) is a lousy idea.

Selling without full knowledge and advisors is a lousy idea.

Every agency owner, and business owner alike, thinks their company has great value, usually far in excess of reality. Most owners want to base their sale on multiples of the growth they think they’ll achieve in the future, not reality.  And virtually every agency owner wants an “all cash upfront” sale. (Dream on). Communications agencies, and professional services businesses in general, have unique characteristics which make their sale particularly delicate. Those unique characteristics are:

1. Few, if any, long term contracts. Most agency contracts are cancellable within 30-90 days.

2. A handful of personal relationships, perhaps with you hopefully, which tie your clients to your firm. However if the relationships change (i.e. senior folk and/or you leave the firm) the account might be in jeopardy. That means you’ll need to plan to have at least a portion, if not majority, of your sale through a multi-year earn out. The buyer understandably wants the security that the seller will help transition the account to the new owner.

3.  A potentially fickle client base which is always “at risk” to an incoming CMO or a business downturn which could cause an account loss.

There’s a lot more to be considered in the sale of an agency, either internally or externally, but here’s what I’d do if I were in the initial thought stages:

Get an objective independent appraisal of your company’s worth. The first step is a reality check  from a pro, not a “friend”. What makes your agency desirable to others—its unique capabilities, client base, reputation, etc.? Obviously all these factors in addition obviously to the financial condition effect the company’s potential value.

Think through who the agency might have the greatest value to. Build a relationship with that potential buyer years in advance, if possible.

Clean up your balance sheet (a good idea whether you’re selling or not). A financially strong organization is far more desirable than a desperation “hail Mary” sale.

Get an education. The sale process should start years before reality.

Most importantly, hire experienced folk to advise you. I’ve heard it said that an experienced buyer buys many times and knows all then angles, and the seller sells once. Level the knowledge playing field.

In the end your firm’s value is only what the buyer is willing to pay, and with an earn out, much of the price is at risk.  But an “educated seller” will always fare best.

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4 Comments

  1. Milan says:

    …and be prepared for what life will be like working for someone else, with their rules and financial metrics, for the life of the earn-out.

  2. Jeff says:

    So is an earn out percentage based (5% of Gross for the next 5 years) or is it a set amount (the next 5 million in profit that the business earns for the next 5 years)?

    • Lonny Strum says:

      Good question. But not a simple answer. If I am the seller I want the earn out based on thing I can control. Can better control income than profit. But real answer is be sure that it’s clear,

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