Danyel Newcom
Here is a hard truth for all owners of a service business, such as advertising agencies, consulting practices, and professional services firms: one day you are going to exit. Many dream of selling the business one day to a third party, but for most it is just a dream.
“Nobody wants to be in the position where they say, ‘We’re closing the doors in two weeks,’” said Danyel Newcom, president of Colorado-based Agency Management Institute (AMI), which offers agency management training for small to mid-sized agencies (advertising, digital, marketing, media, and PR).
Newcom says service business owners must make their wealth while they are still working. Get the money out of the business and invest it somewhere else. Don’t count on a future pay day from a sale that probably will never come.
“Selling to a third-party buyer rarely happens for agencies,” says Newcom. She was an exception, and over the course of her career as an agency owner, bought several existing agencies and grew her original purchase from a small, four-person agency to a nationally recognized firm with more than 40 employees.
The majority of agency owners end their businesses by closing their doors and walking away. Because of that, some service business owners fall prey.
“Beware, the sharks are everywhere, sending emails offering 15 times EBITA [net income before taxes] and blowing smoke about how amazing your agency is,” says Drew McLellan, CEO of AMI, who has advised many agencies on valuation, mergers and acquisitions. “Many agencies have fallen for this. The real offer will be two to three times EBITA with all kinds of strings attached.”
McLellan has worked in advertising for 30+ years and started his own agency, McLellan Marketing Group in 1995 after a five-year stint at Y&R (Young and Rubicam). I interviewed McLellan and Newcom in person when I attended their two-day Money Matters workshop in Orlando in December of 2022.
There are ways to sell the business. The most common and successful model is to sell internally to existing partners or employees. The buyer is a known entity and the payout can be over time, or an SBA loan.
“Do not give away shares of your stock!” McLellan said emphatically to the 40 agency owners and executives in attendance at the workshop. “If employees are not willing to write a check, they do not really want it.”
Or there could be a merger with another agency. However, exiting owners usually need to stay for three or more years, and there might be a clash of cultures.
“Have a long runway in case plan A doesn’t work; then you have enough time for plan B, C or D,” said Newcom. “Planning five to ten years before exit is not too soon.”
Bottom line: Your job as owner is to create a money-making machine that can run without you. You gain your wealth by pulling it out of the business. Michael Gerber of The E-Myth Academy (author of The E-Myth) taught me personally that you want to show potential buyers, be it internal or external, your money-making machine. They need to think, “Imagine how much the machine will make when I own it.”
