In Creating a Five-Year Exit Plan: Part 1, we discussed setting goals as the first step in developing your exit plan. Step 2 is reviewing those goals against current agency performance, or taking inventory.
Agency Inventory:
The inventory gives the agency owner a clear picture of where you are today—the current agency’s ability/inability to meet your exit objectives. And, the inventory helps you identify areas where you can significantly improve the value of the agency between now and when you sell it.
A. Profitability – Whoever buys your agency will be paying for it with the agency’s profits. The more profits your agency can generate, the more your agency is worth to a buyer. It’s not so much the size of the agency, in terms of people and accounts, or even gross billing. It’s your agency’s ability to generate income and profit on a consistent basis—typically over the three years prior to sale. We recommend agency evaluation at about one times average AGI (Annual Gross Income), adjusted for factors like quality of people, reputation, quality of creative product, and net profit trends.
Once you have an approximate valuation you can estimate the sale price. And you can determine if the after-tax cash you receive over a period of years will enable you to meet your income objectives after you leave.
B. People – People are just as important as profit—more important, because the people running the agency after you leave will determine the agency’s success and ability to make your payments after you leave. The key here is to assemble the team that will run the agency when you go. Very often the agency principals at small agencies have been very active in all aspects of managing the agency.
Now it’s time to “move upstairs” and assemble a team that can manage the agency and enable it to continue to grow. As you consider who your management team will be, we suggest you take a “cold-hearted” look at your people.
Are they the absolute best at what they do? Remember, you have five years to find better people, so be tough as you evaluate each employee. Who are the agency builders? Who has “department head” potential?
Is there a possible president and successor at the agency now? Compare your people not just with other local agencies, but with larger successful agencies. These are the agencies you will be competing with over the next five years as your agency grows. It is imperative that you have “next level” people running your shop.
C. Product – Take a look at your agency’s product in terms of growth potential and profit potential. Do you have a core competency that is valuable to clients? Has your agency’s product been “institutionalized” so it is unchanged as people come and go, and will continue unchanged after you leave?
D. Clients – Which clients will help you grow profitably—which clients are unprofitable? Which clients fit your core competency and will help you become better at what you do?
E. Systems – Take a look at your internal systems. Will they enable you to grow painlessly? Are you keeping up with technology? Will your systems enable your agency to grow to the next level?
An honest inventory will enable you to identify all the areas where you can improve. Remember, you don’t have to change everything overnight: You have five years to improve your people, clients and systems, and at the same time your profitability.
Read more in Creating a Five-Year Exit Plan: Part 3.
