What You Need To Know To Profitably Sell Your Agency | #AskSwenk | Ep #139

By Jason Swenk on August 16, 2016

Curious about selling your agency? In this episode of Ask Swenk, I cover how to determine your agency’s current value and what you can do to increase it. I also take a real look at the process to eventually sell your agency and gain profit.

{0:48} Tim asked: “What is my digital agency worth if I sold it today?”

{4:10} Bree asked: “What does the process look like when you sell your agency?”

{7:32} Tony asked: “How can you increase your agency valuation?”

Tim asked: “What is my digital agency worth if I sold it today?”

The short answer is it’s worth whatever someone will give you money for it, and whatever you’re willing to take. The thing I want to debunk right now is if you can get over $5 million, that you’ll get tons and tons of money, or get over a million. It doesn’t matter on your gross. I know agencies that are over $10 million in revenue, and they’re like at 4% profit, which is horrible. Your goal for a profit margin should be 40% and more than that. If it’s not, you’re doing something wrong. There’s a lot of people doing something wrong, but the cool thing is, know there’s something wrong, and you can make it darn change. Through doing this and making that change, you can focus on how your agency can gain profit. Right? I don’t want to cuss.

To answer your question, to give you kind of a baseline, it’s all about looking at the past three-year track record. As a possible acquirer wants to know is, they want to make sure you’re going up. If you’re going down, it’s going to be like a fire sale. They’re going to be like, “Well, we’ll just acquire your assets, and we’ll give you this amount of money, and that kind of stuff.” You really want to look at has my revenue grown, and by what percentage year over year in order to figure that out. On a low end, it would be 15% gross every year. On a high end, it might be 50%. Then you also need to look at the profit. That’s really where it is. Who cares if you’re a $10 million agency. You should be making mad bank on the profit. Then you can base your margins …

On a small side, I’ll give you a low, and a small, just to give you some kind of range. If you were 15% gross, or growing every year for the past three years, at 15%, and then 15% profit, you’d probably have a 5x multiple on profit. If you were at $1 million profit, you would get 5 million valuation for your agency. That’s not saying you’re getting $5 million cash, that’s just what they evaluate it at, and then you can go through all the other stuff that I’ll cover in the next question.

On a high end, let’s say you’re at 40% on both ends, 40% growth, 40% margins, then it could be 11x. Let’s say you were $1 million profit, then you would get $11 million valuation.

That’s just a rule of thumb to give you kind of low, and the high, and then you can calculate if you really want to sell it or not. A lot of times, I tell people not to sell their agency, because a lot of agency owners, and tell me if I’m wrong, they go, “Well, the grass is greener on the other side. I want to go build this product.” This was me. “I want to go build this product, because it’s so much easier, and I don’t have to do all the hard work, and deliver, and all that kind of stuff. What they find is that the grass is greener on the side you actually water. If you did actually want to do a product, you can actually use the agency as an incubator, or this kind of system that just keeps producing these amazing products and technologies. Keep the agency, since you’re not getting the huge multiples that you would on a Saas company. Build up these amazing Saas companies, and then you’re off to the races, right? You get the money that you want, if that’s what you want. If you’re doing it just for the money and to gain profit, you shouldn’t be doing it.

Bree asked, “What does the process look like when you sell your agency?”

The first thing is is an acquirer is going to reach out to you and ask you a number of different questions. They’re just trying to get a baseline to figure out, “Am I going to give you a letter of intent,” which will basically give you an idea of what they evaluate your agency worth, and kind of a high level structure of a deal. Maybe I evaluate your agency a $5 million. I’ll give you $1 million cash up front. The other $4 million will be tied up in equity, and earn out over time. Something like that.

You have to be happy with the letter of intent. If you’re not happy with the letter of intent, you don’t want to go to the due diligence phase, because it’s going to be a waste of time. You want to kind of negotiate back and forth, be like, “How did you come up with that valuation?” That kind of stuff. The other thing I want to tell you is when you actually start going through an acquisition process, whatever the acquirer asks you, ask them back. A lot of people do not know that, and they do not ask the right questions. They’re just so excited someone wants to give them a bag of money, they’re like, “Cool!” Sometimes they’re just prying to figure out what’s your strategy, and who are some of your clients, so you’ve got to be careful.

One of the things that I would recommend you do is set up an escrow account, or have them set up and escrow account saying … After the letter of intent. Let’s say you agree on the million cash up front, and then $4 million over time in equity. What I would do is I would say, “Let’s put 25/50,000 in escrow. If everything you’ve asked me so far is true, when you actually start going through everything, and you back out, we keep the escrow. If it does go through, then you get that money back.” It just keeps a lot of the time-wasters at bay. You’ll see if they’re really serious.

After the letter of intent, and you start going through the due diligence phase, then they’ll actually draft up kind of a term sheet. This is the legal document. This is telling you everything. What you’re really looking for is cash up front. The one thing I’ll tell you, be happy with the guaranteed cash. Expect kind of the earn-out, the equity, all that that it won’t ever happen. If it happens, great. But I want you to be happy with the cash. A lot of people, they’ll get a $5 million valuation, they’ll sell their agency, but they only got like $100,000 in cash. Then they never see the other $4.9 million. It’s happened to so many people. Be happy with the cash up front. You have to figure out why you’re selling as well.

After the term sheet, then you’re sold. Then you’ve got to figure out am I staying on with the acquirer? What do I need to do? Am I going to have a non-compete? All of that other stuff. Then you can actually celebrate, because congratulations, you just sold your agency. Now what? I struggled for two years trying to figure out what the heck am I going to do next? I was just lucky enough that a lot of you reached out for help, and I truly loved it.

Tony asked, “How can I increase my agency’s valuation?”

Well, there’s a number of different ways you can actually increase it. The first one is looking at your assets. What assets do you have? Assets could be your client contracts. You want to make sure you have long-term contracts, not clients can cancel at any time. If you’re month to month, that’s not good. You want it fully extended. Also, too, you want to make sure that you can transfer those agreements with just written notice, that you don’t have to get their approval. A lot of acquisitions, agencies will be an asset purchase, meaning if someone wanted to buy you, you actually have to go to your clients, get them to sign off … You being able to sell that contract to them. You want to put that in your contract now. Just chat with your lawyers on that. It’s just a transferable contract with written notice. That’s about it.

Then you want to make sure that you don’t have too much revenue tied up in one or two accounts, right? If you lose that account, you’re going to lose a ton of money, and you don’t want that either. You’ve got to make sure.

The other thing is kind of the profit. You want to make sure you’re charging enough, you’re not over-delivering, and is actually kept at a minimum, because that increases your profit, so you can keep growing, keep going up and gain profit. They also want to make sure you have multiple channels for your business development, right? I always tell people that I work with, and this is what we had: inbound strategy, outbound strategy, and strategic partnership strategy. I’m not talking about you give me a referral, I’ll give you a referral. It’s more about who is my strategic partners, how can I align with them, how can I help them out, and move forward?

Other things are, you want to really have a good snapshot of all your KPIs, right? My profit. How much does it take to acquire a client? What’s the lifetime value of the client? What’s my burn rate? All of these, you want to make sure you have a really good understanding of it. We’ve all watched Shark Tank. It’s one of my favorite shows. I love when an entrepreneur comes in there, and they’re not prepared knowing their numbers. That’s what you look like if they start asking you questions, and you take a while to get back to them. We had everything ready. When they asked us questions, we’re like, “Boom! Boom! Boom, boom, boom, boom, boom.” Just giving it to them. They knew we were prepared. We knew our stuff.

The other one is really, a lot of times, getting outside perspective. You want that outside perspective to see through the trees. That helped us increase our valuation, because when you’re in it, running it every day, that’s hard. If you want to set up an advisory group, or board of directors, work with me, hint, hint. I’m winking, if you can’t see me. Gives you that outside perspective in order to really get to the next level.

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