Succession planning is a bit like a lonely-hearts ad. I estimate that I’ve been involved in about fifteen buy/sell/merge/retire deals with agency principals annually over some 25 years. Most of these deals are powered by the agency owners’ desires to protect their investments and ensure they can cash out at the proper time. Conversations usually begin with an owner’s desire to sell the agency to someone, either to a holding company, a roll-up consolidator, or even to an agency down the street.
“Sure,” I say, “anything is possible. But a sell-out, work-out or pure merger with another agency is not likely. There are just too many agency culture issues that have to be resolved when you do this. Most often, the agency falls apart during the merger process, with employees and accounts hightailing it to places unknown.”
On the other hand, there are a number of success stories involving agencies sold to employees who knew the owner had done well, and looked for a chance to build their wealth in the future. These employee deals are probably the most common way for first generation owners/founders to retire, but they are also fraught with dangers unless handled correctly.
Following are some things you should understand as you plan to sell your agency to employees.
Make sure you have one or more employees to sell it to. It sounds obvious, but not every employee is a candidate to become an owner. Furthermore, not every employee who appears able to become an owner has that certain je ne sais quoi. There is a personality profile befitting a small business owner that transcends individual agency skills. A great designer or creative director may not be able to become a great agency owner. The same thing applies to account executives. Someone who provides the best service around may not be able to understand or take the pressure of ownership.
I’ve found the best-suited profile is:
- An ENTJ personality test type* (Extroverted, Intuitive, Thinking and Judging)
- History/experience in a family business so they understand the rigors
- Paid for part or all of their education by working a “real” job during the summer.
- Not afraid of debt
- A basic understanding of financial statements
You need about 3-5 years to find an owner candidate and make sure they are ready to take over the agency, so it’s important to start looking if you don’t have a candidate already on staff. Read more in This Way Out.
As a trial, give the candidate some euphemistic equity. Call the person “partner”; appoint the individual to a management committee; and provide some sort of profit sharing while you still own the stock.
Find a way for the candidate to buy the agency from you over time. In other words, you will have to finance the purchase. I’ve only done one deal in ten years where the employee brought a check to the settlement table. If you aren’t comfortable with selling over time, then you cannot sell your agency to employees. The best way to do this is to set the value of the agency as the buy-out clock starts ticking. Your selling price is the value at that point. Set a generous percentage of ongoing agency growth as bonus payments, allowing the candidate to buy you out. Yes, of course you are being bought with your own money, but that’s what it takes to sell the agency.
Always make them pay something up front when they buy shares. It’s my philosophy that future owners should have skin in the game.