April 25, 2017
It was one of the most important decisions of our lives: do we sell the company that’s been our source of livelihood for five years? The process took an arduous and brutal ten months but looking back both my business partner and I can say with confidence that selling our web design agency was one of the best decisions of our lives. Here's what I learned the hard way.
Headspace, a web design agency, was my first company — my christening into 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 needed to exit the agency industry.
The decision to sell our agency would have been more difficult if Headspace had been rolling in cash but splitting our focus between running a successful agency and trying to build a fledgeling Proposify hurt us, and we needed to shit or get off the proverbial pot.
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 that followed, we endured call after call, email after email, countless legal complications, and cash-flow crunches, all while desperately trying to keep Headspace afloat and Proposify moving ahead.
I took on some low-paying freelance work just to personally make ends meet, and Kevin lined up a full-time job, just in case things went south. It was, without a doubt, the lowest period in my life as an entrepreneur. I thought everything was all going to come crumbling down at any time.
Finally, the deal went through.
Here’s what we learned about trying to sell an agency that might help your process be somewhat less painful, and hopefully sets you up positively for your next business venture.
Why sell your agency?
Many agency owners don’t have an exit strategy in mind when they start their businesses. I didn’t.
I started Headspace because I loved designing, and I wanted to make a living doing what I enjoyed while still being able to choose who I worked with. I didn’t really think of anything beyond that.
Even if today you don’t think you’ll ever sell your business, having an endgame in mind will improve the way you operate it now.
Here’s a devastating truth: most agencies have an expiration date. The odds of you or me building the next Ogilvy & Mather or Crispin Porter is astronomically low, and you’re eventually going to yearn for a lower stress job before you retire.
While there are lots of different reasons for wanting to sell your agency, and many of them will be specific to your personal situation, one reason you shouldn’t bank on is that you’ll receive a financial windfall. It rarely happens.
Selling your agency: an entrepreneur's how-to guide
Service agencies are among the most difficult businesses to sell. According to a recent study, in the last twenty years only one-quarter of one percent of agencies sold.
Compared to a brick-and-mortar business that has tangible assets, or tech startups that can scale exponentially, service agencies need people to grow, and they rarely have intellectual property.
The potential buyer of an agency is either looking for a turnkey business that can run independently of the existing owners, or they may be looking for a specialized team that can complement their broad offering.
So to get any deal for your agency, let alone the best deal possible, you need to start off with the right foundation.
1. Make sure you have a saleable business
The most important part of selling your agency begins long before you actually sell it. You need to create something worth selling from the get-go.
It’s important to start your business with the right mindset. Consider buying a house, for example. A homeowner who plans to flip the property is going to treat the house much differently than someone who wants to live there for the next 20 years.
As I mentioned earlier, most small agencies can’t 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 brand.
You need one of those things, one at the very least, if you want to cash out. Here’s how:
Create an unfair advantage
Anyone can hire designers, writers, digital strategists and coders.
As Peter Levitan put it:
“It isn’t easy to sell a company where the assets walk out the front door every day at 6 PM.”
To be truly able to compete globally for clients, you need a distinct edge. That usually translates to offering a specialized service sold to a vertical market in which the agency has deep insight and years of experience.
I’ve interviewed the owners of some amazing agencies who are doing exactly that:
For example:
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Onboardly specializes in PR for tech startups.
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One400 specializes in content marketing for the legal industry.
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Organik SEO specializes in search marketing for purpose-driven businesses.
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Ribot specializes in building mobile apps for the retail industry.
If your company has a clearly defined target customer, and years of experience in a specific industry, then you have a significantly more valuable business in the eyes of a buyer.
If a larger company is buying your agency, they may be looking for an impressive client list or a highly talented team, but those deals are rare and harder to land. Even Teehan + Lax, the well-respected design agency behind Medium, initially implied it was acquired by Facebook, but as it turned out, it actually laid off 40 members of staff and it was only the partners who were hired by Facebook.
(Incidentally, Jon Lax once told me in conversation that every agency is three months from going out of business).
Being good just isn’t good enough.
Create a repeatable formula
Most agency owners are the lead salespeople for their agency. That’s a good thing during the first couple of years, but your goal should be to have your sales process down to a science and be able to hand the reins to your business development team for most situations.
When we interviewed the owner of inbound agency Kula Partners, Carmen Pirie, on our podcast about hiring salespeople, he said:
"Your job is to work yourself out of a job. If you’re integral to the day-to-day operation of a business, you can't step out if you ever want to. A lifestyle business distracts you from a better goal, which is creating a sustainable business that can exist without you."
It’s tough to do, but you need to work on your business, not in your business.
Create a well-respected brand
How do you create a “well-respected” brand, and what does that even mean?
1) The agency that creates beautiful, innovative, award-winning work for well-known products
An example would be MetaLab who helped design Slack.
To build a company like this, you need to hire A-players only and create the type of culture that attracts the best.
2) The owner(s) have a large online following because of the content they produce (speeches, books written, popular blogs, presentations)
Examples would include Jeffrey Zeldman’s Happy Cog, and Mike Monteiro’s Mule Design.
To do this, you need to invest your time and energy into quality content creation and public speaking. In short, building your personal brand as an expert in your industry.
Achieving either of these feats are not to be underestimated, but even if you’re not a celebrity agency, simply having a decent reputation on a smaller, more local level while having all the other ingredients in place (i.e.: strong financials, specialized industry knowledge, a repeatable sales process, a great team culture) will still improve your chances of attracting a qualified buyer.
Create recurring revenue
Larger advertising agencies are built on the retainer model where they charge clients a monthly fee over a long term basis, usually 12-18 month contracts. However, most small boutique agencies are working on one-off projects for clients.
In recent years, more small agencies, especially those who have started offering inbound marketing services, emphasize ongoing, monthly engagement over project-based work. An example would be Kula Partners, who increased its recurring revenue by 1,066% in one year.
Having ongoing retainer contracts in place is much more attractive to buyers because it means they can focus on growing the business instead of having to start from scratch in three months because all the existing projects have wrapped up.
2. Find the right buyer at the right time
Regardless of what you’re selling, you’ll always be in the best position when you have nothing to lose, and in the worst position when you are desperate.
Your valuation will be at its lowest if you’re bleeding clients and are hundreds of thousands of dollars in debt.
Using the house analogy again, if you plan to sell your home, you’re going to complete necessary renovations that add value first. The same is true when selling your agency:
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Plan a year in advance and get the books in order.
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Don’t splurge on unnecessary items or take on risky projects.
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Keep as much cash on hand as possible.
How do you find a buyer for your agency?
Hire a business broker
A business broker can make things easier since they have a network to leverage and will push for the highest sale they can get because of their commission. While lots of business owners have used a broker to help sell their companies, Kevin and I tried a broker once when we were selling our agency, and it wasn’t a successful experience.
Leverage your own network
Have some candid conversations with your most connected contacts, tell them you’re thinking of selling your business, and ask if they know of anyone looking. Eventually, someone will be talking to the right someone, and you’ll start getting some emails.
Come in armed with information
If you’re buying a car, you’re not looking over the purchasing paperwork until you’ve had a chance to ask the seller about the cost, the mileage, and then take it for a test drive.
Once you start having conversations with potential buyers, they’re going to want to know a few basic things before they begin the time consuming and expensive due diligence process.
Here are some documents you’ll want to have on hand:
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Confidentiality agreement Your potential acquirer should have no problem signing this since you are about to give them incredibly sensitive information.
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Balance sheet Important! You should be asking your accountant every month for one of these so when you need an up-to-date one it’s only a few clicks away.
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Other financial documents Things like profit-loss, a list of accounts payable, and accounts receivable.
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Key Performance Indicators Gross margins, net margins, burn rate, close rate, utilization rate, and customer lifetime value.
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Client/project summary This should show all current projects in the pipeline, how much they’re worth, how many resources are required, and when they’ll be completed.
3. Negotiate terms
Valuations are tricky and subjective, but remember, businesses are priced like anything else:
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How much demand is there for what you are offering?
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What are similar businesses going for in your market or geographic area?
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How much is it worth to a potential buyer?
When your buyer asks you how much you’re asking for it’s OK to be coy at first, but you should still have a number in mind. When you finally show your cards, be able to back up your valuation with something. You can’t just say you’re selling your business for $10M dollars just because that’s what you think it’s worth.
If the financials aren’t as strong as you’d like, you may still be able to get a decent valuation if you have what banks refer to as “intangibles” like a good reputation in the market, a strong specialty, or high profile clients.
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 undergoing the financial due diligence and the expensive hot-potato game you’ll play with legal counsel for the next 12 months. Even the simplest of deals will have complications that slow things down.
This is where your chops as an entrepreneur will be tested the most. Can you still run your business effectively with a firm eye on the end goal of getting through legal negotiations?
I can’t offer you any hack to make this go fast and easy, but I can leave you with a few tips to keep in mind:
Hire a lawyer who is sensitive to the bigger picture
It’s easy to say hire a reputable lawyer at a big firm, but that doesn’t always net you the best results. Some lawyers bog down the sale by overanalyzing minute details and pushing back so much they scare away the buyer.
If the sale is important, and by that I mean it’s important for your life goals that you exit the agency business as soon as possible, then you need a lawyer who gets that and is willing to work with you.
You need someone who won’t slow the deal down by trying to anticipate every possible (but unlikely) risk. They should be able to save their reservations for the big threats, but otherwise get the job done quickly.
Be wary of any long-term payouts or partial share purchases
Buyers prefer to minimize their initial payout as much as possible, so they’ll usually propose paying installments over the course of 12 months or so. I would reject any buyout period longer than this because it’s too risky otherwise.
If the buyer can’t finance the deal, then are they stable enough to be able to run the business in the first place? Or are they just hedging their bets in case it doesn’t work out, and then they’ll try to renege on the deal later?
What if they want to pay you partially in shares? I’d be wary of this because it can be their way of keeping you bound to the company. If the buyer is Apple and they are handing you Apple stock, that’s one thing, but if your profit is linked directly to the performance of the agency after it’s out of your hands, then you’re likely going to be disappointed in the long run.
Conclusion
Whether your business is just a young acorn beginning to sprout, or a mighty oak tree with deep roots, you should run your business as if it will be sold someday, even if right now you don’t think it will be.
Having this mindset of building to sell will cause you to step back on a regular basis and work on the business as a whole, instead of getting sucked into the daily minutia that will consume your time and force you to lose touch with the bigger picture.
Selling our agency did not net Kevin or me much profit, but was necessary to allow us to focus on our true passion, Proposify. You may have another reason to sell one day. And if that day comes, I hope you’re ready for it.
