If you’re an agency owner, you’ve probably thought about selling your agency at some point.
Whether the idea came at the end of a particularly rough week and quickly dissipated or has been the end game all along, you need to know how to determine and maximize your agency’s value.
After all, an exit is inevitable regardless of whether you’re selling your agency or passing it along to your kids.
No matter the size of your business, there’s a buyer out there.
If your agency is large—at or above $3 million EBITDA (or earnings before interest, tax, depreciation, and amortization)—you might be able to sell to an institutional investor.
If the agency is smaller, you’ll likely be targeting strategic buyers who are looking to acquire in the industry.
Typically, this means selling to employees or another agency in the market.
So, how do you maximize your company’s value?
Can Your Team Run the Show Without You?
In other words, if you went on a monthslong vacation, would your agency flourish or flounder?
If your agency simply can’t survive without you, don’t even think about getting full value in a sale.
It follows, then, that selling your agency would mean wooing not just potential buyers, but also your key employees.
Incentivize them to stick around after the sale so the buyer feels confident the company will remain profitable once you’re out of the picture.
Adding a stay bonus that’s only paid to key employees six months to a year after closing can add value to the sales process (and encourage your people to stay through the transition).
If the buyer knows your key employees have a strong economic incentive to stick around, they’ll be more comfortable buying your business.
The stay bonus will need to come out of your pocket.
Still, if done properly, the money you pay will come back in the form of a higher purchase price.
Is Your Agency Working In a Vertical Space?
Transforming your business from a generalist to a specialist agency is one of the best ways to increase value.
If you’ve built a niche in a vertical industry, that means new business likely seeks you out—and you’re not scrambling whenever you need to add to your client roster.
Of course, getting there requires extra effort.
You must be willing to take a risk in turning down potential clients outside your chosen niche, investing in relevant conferences to advertise your services, and publishing content relevant to your target companies.
But the work will pay off when clients start coming to you solely based on word-of-mouth.
Are Your Client Relationships Diverse?
Buyers will scrutinize the tenure and nature of your client relationships.
If you have too many new clients within the past year or two, buyers might start to wonder: will your client roster empty after a transition? Have you been underpricing services? Or, perhaps you’re just the latest agency trend.
I’d bet most agency owners occasionally lose sleep worrying what would happen if their biggest client calls it quits.
Although there’s nothing wrong with landing a huge account, you should never have one client represent a huge portion of your revenue.
If you get above the 10% mark, your value will suffer during a sale.
Recurring revenue is also important.
If you have ongoing client engagements or yearlong retainers, a buyer will see your agency as a safer bet.
If much of your work is project-based, on the other hand, buyers might have more questions for you.
What’s Your Exit Strategy?
To plan your exit strategy, start with your long-term goal and work backward.
You’ll need to stay with the agency for at least two to three years during an earn-out.
Before that, allot six to eight months for the sales process and another six to nine months to arrange legal work and finances.
If you want to retire at 50, for example, get the process started when you’re 45.
Are Your Finances In Good Order?
Even if a sale is far down the road, it’s a sound business practice to maintain sound finances.
Yearly audits are a must.
The first one might be difficult, but the process gets easier as your auditor becomes more familiar with your business.
Also, don’t feel like you have to blow a bunch of money on a Big Four auditor.
A local professional will do the trick.
If you handle your agency’s finances yourself (as many owners do), consider hiring a bookkeeper to make sure everything’s as squared away as possible.
I guarantee you: if you’re considering a sale, your company has outgrown QuickBooks and Excel.
If you have someone with accurate financial training at the helm, your buyout process will go more smoothly.
Expect Surprises During the Selling Process
Even if you’ve done everything possible to maximize your agency’s valuation, there will likely be surprises throughout the selling process.
They won’t all be bad, of course.
For example, you might find that your investment banker can boost your valuation from an “add back” perspective.
This means if you’ve put personal expenses through the agency, you can add that money back into the books, which ultimately boosts your company’s value.
The bad news is that no matter what surprises pop up, the process can be draining.
Expect buyers to come back with a lower valuation due to a variety of reasons—some valid, others not so much.
Just remember, it’s all negotiation: don’t let the buyer trick you into thinking your company is worth less than it is.
Remain confident in your worth and be willing to walk away.
There are always other buyers out there, and sticking to your guns will likely land you a higher sale anyway.
Whether you’re looking to retire or are in search of a new adventure, be prepared to feel a lot of emotions when you finally make your exit.
When Selling Your Agency, Give Yourself Time
Leaving an agency, especially one you built from the ground up, is never easy.
Give yourself time to say goodbye.
Even if you stay with the company in some capacity (perhaps as an advisor), your role will be different than it was before the sale.
Be prepared for this to feel like a big change.
Embrace it, but also honor all the hard work you put in and the connections you’ve made all these years.
If you would like to learn more about agency growth, join Drew, Chip Griffin, and Gini Dietrich TOMORROW at the RSW Virtual New Business Conference. Find more information and register here.