Over the past 10 years of working specifically with agencies there is no doubt that the last 12 months has been one of the hardest trading periods I have seen. Whilst some have continued to flourish, many have seen sales challenges which when combined with a fixed cost base has resulted in eating into significant cash reserves and in some cases needing to wind up the business.
Whilst there are many external factors that have contributed to those challenges, the most important exercise is to look within and understand how you as the agency owner can take responsibility. If things are going well, don’t take that for granted – understand what the drivers of the success are and challenge if you are making the most of the opportunities. If things are going less well – plan out specifically what needs to change by when to return to profitability. Ideally that will come from new business, but if not it will often mean reducing costs and letting people go. People decisions are always the most difficult, so agree what those lines in the sand are by which point action will be taken, and use your circle of trusted advisors as a sounding board and as accountability.
The financial health of your business can be such a powerful thing – exactly the same as our personal health can be. It can bring such peace of mind that it should be one of the areas of your business you invest in the most. Without it you are not able to function effectively. It’s only when you don’t have it that you perhaps take time to reflect and wish you had done things differently. Having financial health means you can make decisions from a strategic viewpoint, rather than when on the back foot and having to act quickly. It means a de-risked business that is a valuable asset for you to own and run, and therefore also a valuable asset that if you choose to one day, someone may well be interested in buying from you for a premium.
Building a financially healthy business should be seen as a huge opportunity. If you choose to own and run your agency for many years to come, it can be done with financial comfort and peace of mind. If you are preparing to sell your business, when the negotiations start and the due diligence process follows, you can be reassured you’re in a good place to maximise the valuation and deliver a successful transaction. Here are 9 key considerations in building a sellable agency.
1. View your agency through the eyes of a buyer
There is a reason why I chose this as number one – it is a simple one to start but is hugely effective. Viewing your agency through the eyes of a buyer raises your standards immensely. A buyer is coming at things with a fresh, rational and unemotional view. They are viewing the business and an asset and challenging if it is a worthy addition to their portfolio. As the existing owner, your business is most likely a significant part of your personal portfolio and it can be refreshing to view it in the same way. The emotions are put to one side and you expect more. You expect processes to be stuck to, you expect a high performing team that holds each other accountable, you expect your clients to provide that brief when they say they will and pay you when the invoice becomes due. Whilst there does need to be a balance, it can be a refreshing way to look at things and it can bring real clarity as to what needs to change in the business.
2. Have a positive cash flow model
Having a positive cash flow model means that delivering work generates cash in your business, rather than you acting as a bank for your clients whilst you pay your team and then maybe they pay you 60 days later. In the challenging times that I spoke about earlier, it can genuinely make the difference to the survival of your business.
It is rare now that an agency will fully complete a project before raising the first invoice. Most are asking for deposits up front and then invoicing on milestones throughout the project that are under their control.
It’s hugely attractive to a buyer as it means they are less exposed to having to put their own cash into a business. It also lends itself to the business having higher cash reserves, which is again favourable in a sale process as it could mean your payments are weighted more up front.
3. Reduce the reliance on key customers
We have seen agencies have up to 50% of the total revenue come from one customer and it is hugely risky. Whilst if that customer is happy and continues to offer you more work it is going to be difficult to say no, steps must be taken to wrap other customers around it. We have seen business sales fall through due to over reliance on customers, and we have seen agencies come under significant financial pressure almost leading to closure when that one customer leaves. Aim for no more than 20% of your gross profit to come from one customer – on the basis that if you are a 20% EBITDA agency and that customer leaves, you are still likely to be above breakeven.
4. A predictable marketing and sales function
The old adage is that any business challenge can be tied back to a sales challenge. If you are able to generate an abundance of qualified leads, it leaves you in a position to be selective about who you work and price that work correctly. The majority of agencies are still largely reliant on projects and so a forecast of confirmed revenue will only extend so far – but the further it does the greater peace of mind it can bring you as the agency owner. Understanding the numbers and the relationship between each stage of your marketing and sales funnel can really help with that. That funnel will be unique to each agency but I would suggest tracking numbers from MQL > SQL > Average Conversation Rate > Average Project / Retainer Value. Only then can you see what is working and what is not, and refine each stage to improve those averages over time. Being able to give a buyer confidence that you have an effective marketing and sales function that will continue to generate new business is essential in any project based agency.
5. Do one thing and do it well
Whilst it is often not practical to do just one thing, the principle stands strong. Typically an agency will deliver a number of different services to a number of different types of customer. That can naturally become the case as your agency evolves and reacts to market demand, but it is an important one to keep in check. Wearing many hats can result in a lack of clarity for your marketing, a lack of clarity for your team, and real challenges in delivering work profitably. Consider periodically reviewing the mix of services your agency provides and using the Hedgehog Concept from Jim Collins book Good to Great.
The concept considers which of your existing services tick each of three boxes – 1) What can you be the best in the world at, 2) What are you and your team passionate about and 3) What can you deliver profitably. It’s a great exercise to complete with your team and get their take on things – and you might be surprised at things that you’re doing that tick none of the above.
6. Standardised systems and processes – with playbooks
There is a common misconception about processes which is the view that they’re a chore to your team and an admin burden that can slow things down. When set up and utilised correctly the opposite can be the case – they can allow your team to really flourish, have more time to think creatively and to create amazing results for your clients. For you as the business owner, it can be hugely rewarding knowing that you are building an asset that is ever evolving and is run by playbooks. It makes integrating new team members and new clients seamless – and once again de-risks your agency both for yourself and a potential buyer.
7. Skilled and motivated management team
It’s going to be really important to be able to to present to a potential acquirer that the business is not reliant on you as the owner and that it is managed day to day by people other than yourself. That is the only way to be able to negotiate your exit from the business within a reasonable time frame. It can be difficult to transition to having a management team in place if you’re a smaller agency of 15-20 people, but it can be done if you are intentional with roles and responsibilities. Have those documented so that each person in your senior team knows exactly what is required of them and so that you can manage them effectively.
Implementing some form of performance related rewards can also be particularly powerful. That could be a performance related bonus scheme initially and moving into an employee share scheme from there. They are steps that can really help your team connect the dots, to think more commercially and to have everyone rowing in the same direction to a valuable and sellable business. Remember too that a sale to a third party is not the only form of exit for you as the owner – it is becoming more common for Management Buy Outs (MBO) and Employee Ownership Trusts (EOT) to take place and your management team would play a key part in that.
8. Robust financial reporting and controls
The perfect trio of financial reporting is to have a budget in place, monthly management accounts tracking against that budget, and a live finance forecast plotting future confirmed revenue costs – which is also compared to that budget. Your monthly management accounts pack should be something that you look forward to receiving after each month end, due to the insights it gives you and the KPI’s being tracked enabling you to make more informed decisions. 36 months of monthly management accounts is one of the first things that an acquirer will ask for and there are two reasons for that – firstly it gives them the reassurance that the business has the rigour and governance to do the ‘boring’ things right, and they will also quickly dive into those numbers – understanding the trends, understanding the ability of the business to hit targets – and that is what will prompt their next round of questions in the due diligence process. Similar to above it can also be really useful to document each stage of your finance function – how do we raise sales invoices, how to we do credit control, what is our PO process, how do we do revenue recognition, etc.
9. HMRC and Companies House compliance
Lastly, and perhaps the least exciting, is to keep the business up to date with its compliance requirements. Having a solid record of returns being filed on time and liabilities paid when they become due can once again be reassuring for a buyer. They will be digging into previous years to understand if that is the case and to unpick anything that could come back to bite them at a later date. Being up to date shows solid governance and effective cash flow management too. Having had a payment plan in place with HMRC is quite common and that’s ok – as long as it was addressed with them at the time and an agreed time to pay arrangement put in place.
Each of the points above it a detailed subject of its own and whilst each business is unique, the principles apply well to any agency. They will undoubtedly put you in good stead to have a valuable business that you are proud to own and run – and maybe one day exit if that is your ambition.
There is no right or wrong goal for any business. The important point is that it is intentionally built to give you the personal life that you want. At MAP we run a series of workshops in which we delve into each area in more detail and practically apply it you, your personal objectives and your business. If you would like to know more, please do reach out.
