What It Takes to Build a Sellable Agency and Lessons Learned
While many owners treat their agency as a lifestyle business, the harsh reality is that statistically, very few actually sell. However, if you run your business like you're going to sell it, you will be much happier running it, regardless of your ultimate exit strategy.
I recently joined Craig Baldwin on Upsourced's Creative Outcomes podcast to discuss the unvarnished realities of agency M&A and the necessary steps to build a defensible, mature business. In our conversation, we moved past the theory and covered the actual mechanics of preparing for a transaction
How Do You Prepare an Agency for a Transaction?
[00:00] Craig Baldwin: Welcome to the creative outcomes podcast. Today we're back with a new guest. This is Albert Banks, who is the owner and principal of Apertus. Is that right, Albert? Please correct me if I'm wrong. Albert, we came across one another just a couple months ago. I learned a little bit about your path with your own agency, selling that agency, going through an earn-out period, and seeing lots of things over the last 20 years as it relates to professional services, especially from an ownership seat. Today you're helping agency owners or professional service owners go through a similar experience and prepare for a transaction as a part of your consulting endeavors. Anything I missed or did not factually represent as a part of that story? I'm sure you have much more detail that you could add, which the audience would love to hear.
How Did You Start Your First Agency?
[01:10] Albert Banks: Yeah, absolutely, that's right. I started my first agency right out of college, 20-plus years ago. Originally web design and development, we grew into the digital agency space adding social media, digital marketing, and production. I actually went through a merger of peers about eight years ago, so that was my first experience with a transaction. Then we sold about four years ago to Valtech, and for the past year plus I've been helping others with their journey, so it's been fun.
Craig Baldwin: That's awesome. Is all of your professional experience then just through the lens of your own business, not actually working for others?
Albert Banks: It's a little bit of both. I'm a bit of a serial entrepreneur, so I've tried a couple of different things along the way and had other businesses. I do feel the most comfortable with service, though. Having product and inventory is a whole other ball game. I found where my expertise really lies around operations, finance, and employee engagement. That really does work for any kind of service business. I've worked with a home builder, a broker, and obviously agencies, which is very comfortable for me. I've learned the skills to translate, but agencies are near and dear to my heart.
What Were the Early Growth Challenges and Lessons Learned?
[04:30] Craig Baldwin: Talk to me about what you're doing today. If I remember correctly from our first conversation, you are in a fortunate position where you don't have to work the same strenuous hours you used to and don't have to sweat the small things. You work with a handful of clients at a time, really in preparation for a transaction or with the desire to have a transaction and perhaps sell their agency at some point in time. Is that right?
Albert Banks: Yes, I would say everybody is along the journey, and whether they know it or not, they're probably heading towards some sort of exit. As much as possible, I try to get them in a place where they can be successful whenever that does happen. Interestingly enough, I've had several conversations and clients talk about doing add-on acquisitions themselves, where they are the buyer. There are fundamental things on the other side that are still important to be successful if you're buying or selling. I describe it as wherever you are along the journey. Whether you are just now realizing you can sell and need to understand what that looks like, maybe you're reaching a certain plateau and need help retooling processes or pricing to get you to that next threshold, or maybe you're challenged with developing middle management or growing career paths as a growing organization. Ultimately, if you're at a place where you can sell, I know a lot about that. I know how distracting it could be, and we'll talk a little bit about that today. I help during those transition periods.
Craig Baldwin: Albert, one thing we run into quite a bit at Upsource—we work with close to 130 agencies today providing accounting and CFO advisory services. Are there many owners who actually don't think about the exit and will tell you openly that that's not a priority of theirs? Or they are so focused on other near-term priorities that an exit is not something they want to contemplate. They're trying to be a great place to work, keep things going, and make more than they would if they had a job out in the marketplace. What would you say to those owners? Is it okay to run an agency and not be thinking about or having an exit in mind as a part of that journey? Or is this something that we should always be thinking about when we're running our own business?
Albert Banks: That's common. A lot of owners start as a lifestyle business. It's to suit them and their desires, or they're creative, technical, or strategic and want to work with great people and have a good culture. That's all very common. I choose to look at it this way: run your business like you're going to sell it, even if you're not. You don't have to literally think about the exit as the end of the chapter, but as an owner, you should be running a business that you feel good about and is successful in all kinds of areas. It's all a little bit of framing. The outcomes are the same. How your business is run is the same whether you're going to sell it or not. You'll be much happier in a business where you're in that position.
Statistically, very few actually do sell—it's a low number, around 1%. But if you're one that could contemplate it at some point, even in the back of your mind, you can improve those odds by investing in the business and running it well. We see a lot of times companies go through growth spurts and the profitability doesn't follow. That's part of the growing pains. If you want to grow and get bigger, there are going to be challenges that come with that. You're going to have to work on those things, and running a good business is the same as running a business that's sellable. I saw some great agencies get famous, do great work, or have a great moment in time, but ultimately they really weren't well-run businesses. They couldn't really exit because they didn't have their ducks in a row. They were running a generalist organization or they weren't focusing on profitability, whatever it may be. Even if you're not actively thinking about selling, run your business like you're going to sell it.
What Actually Drives Scale in an Agency?
[08:15] Craig Baldwin: Absolutely. We would encourage owners to think that same way because we think it promotes the best result no matter what that result may be, speaking to a transaction, or anything in life that can come up. We find that applying the appropriate amount of rigor to running the business and making decisions usually leads to better results than not. You used a phrase a couple times that I really like: operational hygiene. Taking that stat that you threw out—less than one percent of businesses will actually sell or have a successful equity exit—a lot of your work is meant to improve those odds for the clients that engage with you. Talk to me about what promoting operational hygiene can do in terms of increasing the odds of a successful exit for an agency.
Albert Banks: I always introduce myself and the things that I do as the ironic, sexy, non-billable work. I say that jokingly because it is the unsexy stuff that we're talking about. You could have leaders that are really focused on the creative, the output, and the clients, and that's great, but you need a system in place where you're running a great operation. Going from a gut feel of "we should do it this way" to actually having data around what you're doing, some systematic processes, and tools in place. Those change as you go through the different growth spurts over the years, so it's a constant change. If you don't have a true understanding of your costs and your capacity utilization, you're going to be bleeding, and you're not going to have great profitability, which ultimately won't be helpful for your multiple.
Growth does not necessarily follow with profitability. Operational hygiene is getting yourself in a situation where you can have repeatability and clarity. Once you get into due diligence, it's not a negotiation; you're just proving it. If you don't have operational hygiene or rigor in place already, you're going to struggle. When I ran our agency, it was very much all about the scorecard. We identified those key metrics that were really important to the health of the organization, and it was only possible with the right tools, processes, and buy-in from the team that those were even accurate, much less actionable. We knew really when we went to market to sell what valuation we could get because we felt confident in the history of our numbers and what we could show in terms of being a well-run organization that could continue long after the founders are gone.
Craig Baldwin: Okay, you mentioned capacity utilization. Make this a little bit more tangible for me. What are some of the metrics that you're looking for or looking to manage to as a part of this operational hygiene? What are the types of tools critical to procuring that information within an organization and managing it on an ongoing basis?
Albert Banks: It's a big question. Typically, I'll go through an exercise with a client. I did this myself at the agency; I think I came up with maybe 80 different measurements we could track. It's all about measuring what matters and what's important. Inevitably you get down to some of the more common ones, such as utilization. I really liked to have measurement that touches every part of the organization. We had metrics around sales and marketing. Depending on how you're set up, we had specific metrics for our accounting, account growth and retention versus net new business, qualified leads, sales, and retention rate. Of course, we had the operational delivery metrics, such as capacity utilization. I'm a big fan of effective bill rate, really looking at both what you're charging and what your cost ultimately is to evaluate that. Financial metrics being revenue and EBITDA. I'm also a big fan of culture measurements. If you can have some sort of pulse measurement or survey that you run periodically with your team to get a sense for how the team is feeling, because ultimately that does impact the work and your retention numbers. Making sure people are taking PTO, things like that. For me, it was a more holistic view. Obviously, a buyer cares about a subset of those, but having a broad picture of what's going on in your organization is important. As soon as you start asking questions about one, you can likely find an answer in one of the other data points.
Craig Baldwin: Oh, wow. Okay. As a part of going down this path, deploying these metrics, and managing them on an ongoing basis, this is how you think about shifting to a factory mindset, and having really good data integrity is key to making that happen. Is that right?
Albert Banks: That's right. Having clean financials, clear data, better forecasting, being as forward-looking as possible, documentation of how things are run, and a process for onboarding and offboarding team members and clients will be seen as valuable when you go to an exit. You're not getting dinged for things that they can nitpick at.
What Are the Biggest Mistakes Agency Founders Make?
[12:40] Craig Baldwin: Obviously, we'd be huge advocates of accurate and timely financial data, so no issues there. I know that some of these things can feel icky to the average agency owner. When I say average, I don't mean their skills are average or they're a small or large business. What I really mean is many of these owners are craftspeople. They are designers, developers, people who are really good at a trade and stumble their way into owning a business. They don't commonly think about managing the business. They just think about doing great work, taking care of their people, and making sure their clients are happy. If the scorecard at the end of the day says things are going well, that's even better. But they don't think about those other things. In fact, in some cases, they shy away from that because they view that as not in line with their identity. Is that something that you ever see? How do you help owners mature—and I hesitate to use that word because I don't want to degrade those individuals—when they realize they need to get out of the hobby or craftsperson phase and make sure everyone is taken care of to keep growing?
Albert Banks: Very common what you describe. I was a computer engineer. I was a developer when I started. I didn't know anything about running a business. When we first started, my partner was creative, so we learned on the fly. My personality was more applicable to the operational and financial side of the business, and I took that on myself. You see it across the board. There's somebody who's really creative and cares about the craft. I'm 100% for people doing the work that energizes them and not doing the work that doesn't. If you're that type of leader, there's a degree to which you have a responsibility as the owner, because you have people to take care of, that you understand the business and have enough information to make informed decisions. That doesn't mean you have to be the one doing all of that work. You can find someone like myself or a full-time operations or finance head where that is their passion. They can empower you with that information and take that side of it. You can have your cake and eat it too as long as you find your resource to help you with those things. Whether that be one of your partners, an internal resource, or a full-time hire, you can get the help to run a mature business while also following your passions.
Craig Baldwin: The EOS program would definitely advocate for having people who own different areas within the business. It's why I advocate for solo founders to match up with a partner or have people with skin in the game who can take on these responsibilities, because it's hard to play multiple roles across the entire business. Did you use any type of operating system or framework during your years in your own agency, or did you just make your own program as you went along?
Albert Banks: Early years, I really did it on my own. Coincidentally, when we came together with Union, they were running EOS, and that was something I was going to implement prior to us coming together. We ran EOS during my tenure at Union, and I was the implementer. That freed my new partner up to be the visionary and true CEO. Those are some of the roles and how we split things. I was probably a little more strict about running it. We ran it about 80%. There are a couple of tools out there, and what I think is great about EOS, whether you fully adopt it or not, is you started this business and weren't a business person; you were an entrepreneur. Basically, EOS says you don't have a system, here's a system, just use it. If you use it to a certain degree, it's helpful. There are some purists that have to run it fully, but we ran it probably 80%.
Craig Baldwin: I take it that it had a positive influence on the business and your ability to perform.
Albert Banks: For sure. Right person, right seat, the scorecard, the routines and rituals, even the issue tracking. Having a culture where your people raise up issues, they're discussed, addressed, and communicated out versus things sitting and lingering. EOS was fundamentally ingrained in our culture that way.
What Makes a Professional Services Business Sellable?
[17:20] Craig Baldwin: That's cool. Let's shift back to the transaction side of things or preparing for a transaction. As it relates to the journey or the potential to sell, what everyone wants to know is how much can I get for my agency? Or what are you seeing? Usually, what they mean is what are the multiples of EBITDA that you are seeing for an agency like mine. Most people want to know that within 30 minutes of meeting them, before we look at the books, before we know their client concentration or retention issues. What are you seeing today and what should a business owner expect for their agency from a multiple perspective?
Albert Banks: It all depends, and I think you're probably saying this to them as well. There are these revenue brackets where if you're a certain size, you can expect a certain multiple—the two to three, the six to eight, to 10x plus. It depends generically on what top-line revenue looks like. Where you fall within that multiple range really has to do with your EBITDA and a lot of the things you just described. You can be in a revenue range and say, 'My multiple is maybe six to eight in that range, that's the current going rate.' Getting from six to eight depends on a lot of the things we've talked about. Do you have a client concentration issue? Do you have a turnover issue? Are you seeing actual top-line revenue growth? Is margin following that revenue growth? What is your outlook for the future? Are you a well-run system with operational hygiene? What's the future of your founders, and is there a risk of them leaving? There are all these other elements that will determine where you are in that range.
When we went to market, we felt pretty good about all of those things, understood what multiple we thought we could get, and we got it. You have to really look at your business through those lenses to tell that. That's what I do sometimes—help educate an owner on what the sale process looks like and all the factors we just talked about. Sometimes I can even go through a pre-diligence, get all their financials and legal agreements, and do a mock due diligence. I say find the skeletons and clean them out before you go to sell. If I find risks that a buyer might look for, let's get those buttoned up. Get all your employee agreements. What is the thing in this client contract that's weird? I'm seeing this in the financials; can you get this cleaned up? Looks like personal expenses are in there; let's stop doing that. There are things you can do in advance to narrow down what you would likely see in the market from a multiple perspective, but it is still a range, and ultimately you're still only worth what someone will pay you.
Craig Baldwin: I want to take a step back because you've had some interesting experiences. You had a merger with another agency at one point in time. Is that correct?
Albert Banks: Yes.
Craig Baldwin: I very rarely see that go well. It is hard to pull off. I would love for you to share what the thought process was as you decided to go through a merger. How did you manage it? Were there specific things about the commercial or management arrangement? It worked in your case because you guys ended up selling, but talk to me about that. A lot of people look at that as an escape hatch, but what I often find is they haven't done their diligence on who they're getting into bed with and if they can really trust that partner when the rubber meets the road.
Albert Banks: I'll be pretty transparent here. We were peers in the Charlotte region, in the same market. We knew a lot of the same people, had employees change companies over the years, and had very similar cultures. I probably talked to their founder three or four times over the course of 10 years about the possibility of coming together because we were so similar and worked well. It wasn't an out-of-the-blue thing; it was something where I had gotten to know them. What I impress upon owners is: what if your partner wants to sell one day? It turned out that both my partner and my new partner's partner wanted to exit. It was all of these things coming together. We were similar cultures, doing similar things. If we remove a competitor within our market and our other partners want to leave, it makes sense. We both had a little bit of a client concentration issue, so when we came together, that dissolved. Fast forward two years later, I think we had lost both of those clients, so that was a good strategic move.
Coming together was a challenge, but we were so similar, connected, and familiar. There was clear role delineation—what my role was going to be versus the partner—and it was a net add for him in particular. It's not easy, but we had some good things going for us.
Craig Baldwin: How many years passed between the merger to the eventual sale that took place?
Albert Banks: I think it was probably about four or five years later.
Craig Baldwin: So not too long. You could obviously say mission accomplished from the perspective of should we have undergone that merger.
Albert Banks: In retrospect, for sure. I didn't want to run the business solo. I always had a partner, and I felt it was important to have someone to bounce things off of and have multiple voices in the room. I'm a big fan of playing devil's advocate and taking the opposing view just because. I couldn't sit in a room by myself as the sole owner. I'm a big fan of partnerships if they work and run well for that benefit.
What Was Your Exit Experience Like and What Surprised You?
[21:10] Craig Baldwin: Talk to me about after those four to five years, you guys underwent a sale. Talk to me about the 12 months leading up to that. Had you actively decided that you were going to sell the business? Did this just fall in your lap? How long was the diligence process? What did you learn about that process and what did you learn about yourself?
Albert Banks: We were proactive. We decided to sell. We had run the business for a couple of decades, had been through several downturns, and had to do rebuilds or pivots. We got through the 2020 challenges, were back to where we needed to be, and were sellable. We actively went to market and hired an advisor. From the jump, it was, 'We have our numbers, we understand what we believe we're worth.' We went to the advisor and said, 'Here's the kind of deal we're looking for, here's the multiple we're looking for, the cash up front, the type of buyer, etc. Can you get us a deal like this? If not, okay, we won't do it.' Throughout the whole process, that was still an option, which is huge leverage. We were running our business so well we were okay staying if there wasn't an appealing offer.
It was an interesting process with a lot of data gathering. Because we were well organized, it wasn't as big a lift as somebody who had a bit of chaos and didn't have that operational hygiene. Describing our business and putting together that CIM was cathartic. You're almost describing your business to an outsider, but to yourself you realize we've got something really cool going on. One of the things I learned is you really have to craft a story regarding what the future is afterward. For us, I was game to stay on, go through the integration, and help out, but I didn't want to lead our business. We brought a third-in-command under the tent and said, 'Here's what we're thinking of doing. Here are the roles we think you would be great to run moving forward.' Months or maybe almost a year before, we put ourselves in a position where she was running the show, I was running operations, and our founder was a figurehead. We were able to craft a story for the person we were selling to: 'She's running it, he's running this, this guy can just go do sales.' Our situation was prebuilt. If somebody came in and said, 'No, you have to stay for three years,' well, then it's not a good fit and doesn't jive with what the three of us want. We explained that story going through the narrowing-down process of potential buyers who came in with various offers.
Craig Baldwin: It sounds like you had multiple offers or entertained multiple offers along the way. How did you sift through those offers? What did you guys prioritize? I presume money, but beyond that, what was top of mind for you?
Albert Banks: We set non-negotiables, so everybody had to meet those in terms of cash up front or a short earn-out time. Once through that filtering process, it was more about the outcome for our team. Joining a larger organization, which is what we ultimately did, afforded our team more leadership opportunities. They could move up in the organization beyond us into the global organization. Giving our team a greater opportunity was certainly a factor. Culture fit was a factor. Avoiding redundancy was key—we were the only group in North America providing marketing services, so we weren't joining a group where there's four agencies like us all fighting over the same bone. The situation we were putting ourselves in strategically to be successful, as well as the future for our team, became the deciding factors, setting aside that the money worked for most of them and they were all within a reasonable margin of each other.
Craig Baldwin: Something you mentioned before was an identity crisis around the transaction. Break that down for me. I think my crisis would be, oh my God, thank goodness this is finally happening, I can't wait to go sip mai tais. But it's probably not that simple, is it?
Albert Banks: I've had it both ways. When we merged with Union, our My Jive brand went away. I went from the lead there to being more secondary. I went through this identity crisis: 'Am I my job? Am I this thing?' You go from being one of the owners of this independent organization to a piece of a larger organization. Further, if you truly exit the business and leave, for two decades you've been tied to this brand. Especially my partner, he was the founder, he was the guy. Going from 'I own this thing, this is my identity' to 'Wait, who am I now? What do I do here?' is really challenging. So much of an owner's life can be wrapped up in the business they've made. When it's gone, there could be depression, an emotional toll, a sadness. You hit this financial achievement and should be happy, but maybe you have regret. 'What do I do? Did I do the right thing?'
My advice to someone inevitably going through this is to have a vision for what your life is after. It's very busy during the transaction, but you've got to have your eye on what this will look like in the future and feel comfortable with that. Even if it's a temporary chapter, having a sense in your head of what you will do next will help you get past this. For me personally, it was diving headfirst into the integration. Knowing how much was going to change, I shifted gears to being the team protector. I oversaw the work streams, made sure whenever there were changes it was communicated clearly to the team with as little disruption as possible. I shifted my identity from running the business to shepherding our company into this new situation.
Craig Baldwin: I've never seen founders stick around much longer after their earn-out period. A lot of that is because they are founders at heart and want to start something new. But that integration period weighs on them heavily. They have to have difficult conversations or start reporting to someone else. Talk to me about the integration process and how you made that a smooth process.
Albert Banks: It definitely is a distraction and outside the normal course of business. Some of it goes back to operational hygiene. If you have systems and processes in place, sometimes it's just going from using one tool a certain way to a different tool used the same way. It's much harder to go from having no tool and not knowing what you're doing to suddenly needing processes, systems, and policies. When we did the merger, we did a little bit of 'we'll figure it out' because we were similar peers. In retrospect, probably not the best thing. With Valtech, they had a full-on integration team and a person in charge of change management. There were 12 work streams with a two-in-the-box mentality: one from our side, one from their side. There was much more planning that set us up for success.
Within each work stream, we had a stakeholder from both sides. There was a give-and-take. I sat at the top level with visibility over everything, pumping the brakes when needed. The translation wasn't quite so bad because we had good systems. Post-merger integration is where the value falls apart for both the buyer and the seller. If you don't have good integration, you're not going to achieve the expected results. We moved pretty much all of our tools to their tools, going from Google to Microsoft. That was a hurdle for our team. As long as you can explain the why and the how behind what we're doing, we found that was successful.
Craig Baldwin: You mentioned something I profess quite a bit: structural alignment. It's often overlooked but particularly important in an organization full of people providing professional services. The human side of the business can get in the way very quickly if we don't have alignment.
Albert Banks: I'm a big policy person. I say clarity is kindness all the time. If anything is unclear, we don't want that. Having alignment internally when it comes to the people is vital—having a clear, transparent compensation strategy, career paths, salary bands, and information for people to understand what their journey with the company could look like. When we went through the transaction, we translated what that meant for their career path. Getting it on paper and evolving it as you need is great. If you're on the same page with people going in, you can more easily translate where we're coming from to where we're going.
What is Your Advice for Agency Owners Navigating Earn-Outs Today?
[25:00] Craig Baldwin: I want to talk a little bit about the earn-out. Talk to me about how you thought about the earn-out, what ended up happening, and anything you would do differently.
Albert Banks: The letter of intent is like the engagement. The definitive agreement is the marriage license. But don't sip your mai tais till after the earn-out. That's really where you're getting the rest of the value from the deal. Typically, 50 to 70% of the deal is upfront, and the remaining portion is through some sort of earn-out. The earn-out can be cash, or you earn equity in the buyer. Usually, it's financially based—revenue, revenue growth, margin. We actually had a combo; we had some employee retention figures in our earn-out, which I applaud. You're buying a service business, you're buying the people, you want the people to stay.
What I would tell people is make sure the earn-out is achievable. If you want to make even more money and put forth revenue growth goals that are so ambitious you'll never meet them, you're setting yourself up for failure. You have to have operational rigor and solid forecasting so that the numbers you say you're going to hit are actually possible. To be successful in the earn-out, you have to have achievable goals, communicate, have leadership on board, and have good integration plans.
Would I do anything differently? Probably not. We were able to hit our earn-out goals, and it was a short run—I think it was only 15 months. I would say the shorter earn-out period you can get, the better. Earn-outs aren't always necessarily tied to you continuing to be an employee. You could sail off into the sunset and let the numbers become what they become. I would encourage people to think about cash versus equity. Sometimes buyers will require you to convert into equity in the larger acquiring entity. Then there's the whole concept of the second bite of the apple if that parent company sells again. Think about how you want to be tied to this organization longer term.
Craig Baldwin: I just came across an organization who sold as a part of a roll-up strategy. That larger organization sold just a couple years ago to a publicly traded company. The second bite of the apple for that ownership team was significantly larger than their original transaction. It was a total lottery ticket that paid out. I don't find that story very common, but it is something to think about. Do you trust the leadership team? Are they on a good trajectory?
Albert Banks: Exactly. I've heard the other end of the spectrum too: people who say everything I got at close is all I'm ever going to get. That's why I say go with eyes wide open into the transaction. At that point, you become an investor. I have an investment in the company that acquired us and have to believe in their potential outcome. We were going from a small-to-medium business to a global company; you have very little impact on that greater company's ability to be successful. You are buying shares, you believe it will do well, and there will be a return someday, but ultimately, like any investment, it may not pan out.
Do You Have Any Final Thoughts for Agency Owners?
[28:30] Craig Baldwin: Awesome. Well, Albert, this has been fantastic. Really appreciate your time. How can someone get in touch with you or find you and have more conversation?
Albert Banks: You can find me at the Apertus.co website or albert.banks@apertus.co. I'm always happy to have conversations. I can only take on so many clients because it's a lifestyle business for me, but I'm in the stage of my career where I'm always wanting to help, give advice, and make connections where I can. Feel free to reach out.
Craig Baldwin: Thank you, Albert. Really appreciate your time. This has been lovely. Thank you.
Albert Banks: Thanks for having me.
