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About the Host:
Host: Doug Simon
Guest: Rick Gould
DOUG: When it comes to building value in your agency, what are some of the key things to be thinking about?
RICK: The key thing that you should be thinking about is to run your business as if you’re going to sell it. Hey, look at profitability. Do not run it as a lifestyle firm. Many, many of the small PR firms and marketing communications firms run their business for tax write offs, for how much they can take out of the business. That’s not the way to run your business. You should run it to maximize the bottom line.
When a buyer, prospective buyer is looking at your firm, they’re looking at profitability, they’re looking at what kind of return on investment they’re going to get over the term of after the buyout. Once you’re fully paid off, what kind of return are they going to get? So you should run it for profitability. Don’t run for the tax write offs.
DOUG: And one of the things I’m hearing in that is that you would, in effect, be able to take less money out of the business if you want to run it for profitability. But along those lines, if you’re not thinking of selling, wouldn’t it be rational to want to maximize your income as well as the money that can be paid to your team members?
RICK: Sure. What you should be taking is a market salary, because most people don’t realize this, but when we value a firm, we normalize the owner’s salary. So if an owner is taking fifty thousand a year, but the normal salaries two hundred, we value it as if you’re taking two hundred. So it doesn’t matter what you take when the valuation is done, it’s going to be normalized. But it also looks good to a prospective buyer that you are taking a market salary. It’s just good business. That’s what I recommend.
DOUG: What are things that a potential seller or business owner tends to overlook that maybe could come back to bite them? Or if they didn’t overlook it, they could perform much better as a company as well as be a better target or prospect for someone looking to buy a business.
RICK: The most important factor in positioning your firm for a sale is have a really good number two. Have that person that could step in for you as the owner, as the CEO of the prospective seller firm, you need someone that will be able to step in to you because the fire is going to look right behind you. They look beyond the owner and say, “hey, the owner is going to get millions for their firm, they’re going to want to do other things once they fully bought out, who’s going to step in and not lose those or keep those clients happy?” I should say. And be able to run that book of business.
DOUG: It seems many sales. The owner does stay on for a while. So is it sort of a two-part that they want to see the owner’s capabilities, but also think of what’s behind them? Because they do assume that it only lasts for a certain period of time?
RICK: Yes, the buyer will be asking, almost immediately, what do you want to do after you’ve fully paid off? Do you want to stay? Do you want to slow down? Do you want to do other things? Start another business, teach college? A buyer will be asking that. So you have to be ready for that. And you want to be truthful. So many sellers do stay beyond their earn-out. The earn-out is the buyout. Many sellers will stay beyond that, if you’re making good money, having fun, have new opportunities, a bigger playing field, because it’s a bigger firm, new challenges; many of the sellers will stay way beyond. And they’re getting paid. They’re getting a market salary to stay. So some have other ideas to do things after they’ve bought out.
DOUG: Let’s use some clean numbers to get a sense of sort of the time because people think, great, I’m going to sell, I’m set for life. I get the big check, I’m done. Let’s say there was a purchase for a million dollars, just to make it easy in math, what should the seller expect to receive right at the moment of the sale? And how would that payout likely be over? What kind of time?
RICK: Great question. Typically on a sale, the seller will get twenty five to thirty five percent of today’s valuation at closing. So if the value today is one million dollars, you could pretty much expect to get maybe a quarter of a million, maybe a little more. It all depends on the profitability of your firm and the profile of the firm, and it’s in negotiation. Sometimes we’ve gotten as high as 50 percent on certain transactions because the firm is positioned really well to maximize valuation and the negotiation. It’s all a negotiation.
DOUG: What happens if it doesn’t go as well? You get this big start and then the agency’s just becoming less profitable for whatever reason; independent market conditions, the performance of players, people leave because there is a transition and change that they experience. What happens then? Does the rest of the money go away? How does that play out?
RICK: No, it doesn’t go away, you would just get a lower down payment and have to perform. It’s all about performance post-closing, and normally the terms of the earn out is four to five years. So you’ll be there for another four to five years managing your own book of business, trying to keep it as profitable as possible. And you could do really well on the earn out.
DOUG: A couple of questions. Did the buyers typically sort of impose conditions, make decisions about staffing? Because I know a challenge for organizations is ‘are we going to have to let people go?’ And that also becomes a concern to the employees that have helped build the business to be in a position to sell it.
RICK: Buyers rarely, if ever, will let people go unless you, the CEO of the seller firm, feel certain people should go. So it’ll be totally up to you as the CEO seller who stays, who goes, and usually everyone stays. It makes sense. You don’t want to create chaos within the ranks and the clients, you want everyone to feel like there’s no change. It’s the transition is just an easy one and transparent one. That’s the goal of everyone.
DOUG: And last question. If you had to sum up one key thing during the negotiation process that both buyers and potential sellers should be thinking about, what is that to maybe give a clue if the process is going smoothly or not?
RICK: Sure, the key factors that a buyer looks at is revenue growth and stability, profitability, which the goal should be 20%. If you’re doing 20 percent and we call it recasted profit, because what your PNLs are showing is just the starting point. There’s a lot of adjustments we make that increase the profitability of the agency beyond what your accountant is showing you. So profitability is, number one, your staff, your number two, the tier of your structure, organizational chart. A way to locate it is key for buyers looking for a firm in Chicago, and we present the firm in Chicago. That’s a big plus. So the location does matter.
DOUG: Excellent. Thanks so much for sharing these great insights. Lots of things for agency leaders and potential buyers to be taken away from the conversation. Clearly easy to see why you’ve been able to successfully handle so many M&A deals.
RICK: Yep, and my only other advice is be patient, if you want to sell, you want to sell to the right buyer. You’ll be living with them. You want to like them. You want the culture to be perfect. That’s more important than the money.
DOUG: Great final point. Thanks so much for spending time with us.
RICK: OK, thank you, Doug.