The Agency Game Plan
I am fortunate enough to have met with the founders of many great agencies during my time at Cact.us.
The one thing in common that all of the most successful agencies have, is a plan. Ok, there are two things…having the plan is extremely important, but having the drive to see it through is another!
So, what’s the plan? You started your agency a few years ago because you wanted to freelance, or have a better work/life balance or whatever, but I think it’s probably fair to say that very few founders start their agencies with a view to building something of value.
Having helped many owners build value over the years, I always say that you start at where you want to get to and work backwards. For example: I have a client called Jack (name changed to protect the innocent!) and his particular goal was to build the agency so that he could exit with £2m from the agency.
Jack holds 50% of the company, so the agency will need to sell for at least double that for him to achieve the desired exit value.
To set expectation now, it can cost at least £100k to sell a business, in legal and accounting fees, so to achieve this level of sale, and allowing enough to cover the capital gains tax at the entrepreneur rate of 10% the business would need to sell for £4.5m, for Jack to realise his £2m.
Typically, agencies are valued on a multiple of profit which is usually somewhere between 5–7 times the agencies normalised profit, after taking out one off exceptional costs, which are usually described as add backs. If you want to achieve a higher multiple than 7, then read Spencer Gallagher’s recent article about where agencies are going; link below:
So, an agency sale price of £4.5m. Let’s assume we achieve a 6 x multiple of profits, this would mean our profit would have to be £750k in the year of sale. It’s safe to assume that an agency primed to sell would have optimised its profits to the 20% level, from those of a growing agency of 10–15%, which means that the turnover level would have to be £3.75m.
So now Jack has a plan. £3.75m turnover, 20% profit, 6 times multiple of profit.
Jack is currently at £1m turnover which is typically where we see most of our clients begin their journeys with us, as at that point they have realised that the agency now has some real value and further potential for growth, with the right help.
We are currently working with Jack to improve his business structure to help accelerate that growth and after some planning we will be working with him on this journey as follows, over the next five years:
Profit should steadily improve during the agencies journey as the investment made into the business in the earlier years begins to be repaid, before an exit in 2022, when the agency will be optimised for sale.
Five years could be seen as a long time, if you have already been trading for five years….most faster growing agencies take this long to get to their first £1 million turnover.
It’s possible to cut the journey time down, but this would involve doing one of three things:
1. Increase turnover
2. Increase profitability
3. Increase the multiple of profit you sell on
In my experience, you need a reasonable level of turnover to attract a buyer of significance, and we don’t see many agencies exiting below the £3.5m turnover level. With clients squeezing budgets and day rates it’s hard to find additional profit, but one area that can be capitalised on is the profit multiple.
We see the highest profit multiples where the agency is offering a niche service or targeting a niche sector, or is offering a service that is seen to be at the cutting edge of technology.
In this particular example, I have talked about a client who wanted to build his agency to a point of real value and then sell. But for me, it’s more important to grow the business and then have choices about what you want to do. For example:
- Stay in the business, because you love the clients and the work…take dividends and enjoy greater financial freedom
- Appoint an MD to run the business, take smaller dividends attend the board meetings and act more like a non-exec.
- Sell the agency
But the point of this blog was to spell out the need for a plan, because without that (and the drive to get there) then potentially, none of the above could happen.