How an Acquisition Can Be Used as an Agency Growth Strategy
Why Buying or Selling An Agency is EASIER Than You Think.
In this episode we cover:
- Why buying an agency isn’t as expensive or as hard as you’d think.
- How rolling-in another agency can be killer agency growth strategy.
- 5 ways to improve your digital agency’s valuation to be acquired.
- What to look at if you’re looking to acquire another agency.
Today’s guest, Eric Keiles was doing inbound before inbound was even a thing. Eric and his partner founded Square 2 Marketing in 2003 with the intention of helping brands revamp their old-school marketing to the way people are buying in the new millennium. In 2009, they partnered with Hubspot and took their business to a new level.
I met Eric at Hubspot’s 2015 Inbound Conference and quickly learned he is pretty serious about making a plan and sticking to it. He has one major B.H.A.G. (big, hairy, audacious goal) and that is for Square 2 to be the #1 inbound agency. They’ve been growing organically for a few years at 30%+ but that just wasn’t aggressive enough… so they accelerated it with a layer of acquisitions. Actually, 3 acquisitions in just 18 months with 2 more in the pipeline.
Why would you BUY another agency… or several?
Eric says there are two reasons this is Square 2’s growth strategy. They’re looking to either acquire an agency with a specialization they don’t have (like social media or an agency that works on a different platform) or to acquire another inbound agency in order to benefit from economies of scale. Size doesn’t matter – 4 people or 20 – stability and profitability are key.
It doesn’t take a huge pile of cash to acquire another agency.
Eric says it really doesn’t. There is, of course, an initial layout of cash on the front end of the deal but his team feels pretty strongly about keeping the existing leadership in place and structuring an attainable earn out for them. They’ve found this situation to be a win-win. Square 2 sees the growth and profitability they’re seeking while the agency leader of the acquired firm eliminates the stresses of ownership and gets to focus on an area of the business they’re passionate about while hitting earn out goals.
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Use these to improve your agency valuation and as a guideline for vetting one you’re looking to acquire.
1. Systems & Processes that Prevent Bottlenecking
A great target for a potential merger is an agency that has great systems and processes in place. Everything cannot revolve around the owner. Eric says it’s a major deal breaker if you’re the only “go to” person. It’s important to have established systems and processes in place so the business can run without you. I say, “systems outperform talent every time.”
2. Long Term Client Relationships
When someone is looking at buying you, they are looking at what kind of profit they can generate in the near future. As Eric and his team are looking at agencies to acquire, they’re looking at ones that have retainer clients or long-term (12-18 month) project clients. Shorter-term projects or one-and-done clients don’t make a viable agency. A mix of both is OK too, but they find that agencies that are 100% project based are not viable. A buyer a well established business with predictable revenue.
3. Common Personalities and Culture
It’s more than just buying a business, it’s marrying two entities: meshing teams, workflow, ideas… so it’s important the owners have the same core beliefs and the culture of the offices will gel. There’s success where there’s synergy. The guys at Square 2 Marketing look for like-minded individuals to go into business with, so before going too far into a merger they like to hang out together.
4. Healthy Margins Without Underpricing or Over Servicing
You can have amazing clients and top talent on your team, but if you don’t have positive profit margins then you’re too risky to merge with. A lot of agencies want so badly to keep their clients happy they will over service without tracking the time. Or, they just want to win the deal so badly, they will undercharge. Sounds like a no-brainer, but agency profit margins aren’t usually calculated accurately. Time tracking and scoping is huge. Eric says when he’s looking at an agency to buy he not only looks at hourly rate but also excessive rounds of revisions and out of scope requests. An agency with healthy (an accurately accounted) margins has a much higher value than one that only thinks they do.
5. A Variety of Different Sized Accounts
It’s like the old adage goes, “don’t have all your eggs in one basket.” The same is true for agency clients. It’s not good to have just 1 key account. Eric says he categorizes clients in 3 ways: Acorns (have the ability to grow), Cornerstone (solid, long term) and Shit Box (tons of work, low profit, pain in the ass). He places higher value on agencies have plenty of Acorns and Cornerstones, with minimal or no Shit Boxes.
It’s the owner’s job to be the agency’s steward to the future, not involved to be in everyday operations. Here’s a great post about the 5 roles of an agency owner. Guess what? Working IN the business isn’t one of them 🙂
Tips from the Agency Trenches
Best Advice Ever Received for Building your Digital Agency:
Fire the shit box accounts. At a time of struggle and despair Eric was advised by a mentor to review and fire all the accounts that were a drain on hours and resources with little to zero profit margin. He listened and he got rid of ALL SIX… He says it was the best advice he’s ever received.
Best Business Building Tip for Building your Digital Agency:
Eric’s answer is three-fold… (1.) Set aside time that is dedicated to focusing on growing your business. For Square 2, Eric and his partner have a standing 90 minute Monday morning meeting that is non-negotiable. (2.) Get involved in events and conferences that are focused on learning and new ideas. Eric says this forces them to clear their schedule and get their heads wrapped around leadership, and only leadership. (3.) Peer to peer coaching is great for bouncing ideas off someone who’s been there and done it.
Is My Agency Mastermind Right for You?
I have led a lot of successful Agency Mastermind groups over the past couple years. There are a few more spots to fill in the upcoming group. We meet every two weeks so it’s not a huge time commitment yet the benefits are immeasurable. You can read more details here and if you’re interested there is a brief application process. You’ll fill out a quick form and then I’ll let you know if the group is a good fit for you.