Many agency principals have the notion that when they wish to retire, they can sell their agencies to a larger agency, collect their money and start playing golf. While this is essentially true, it is not easy. For one thing, other agencies do not necessarily operate as yours does, so the cultural obstacles for a smooth transition from your management to the new owners are substantial. Clients may also have potential problems with the new regime; employees almost always will.
A few years ago a Second Wind member in the Southeast purchased a smaller agency. Twenty-four months later, 80 percent of the clients and 90 percent of the employees who were with the agency when the purchase was made were gone. What went wrong?
With both client and employee turnover rates being high in any case, it may be fair to say that many of those clients and employees would have left whether or not the transaction had taken place. But we feel safe in suggesting that after this purchase, both client and employee turnover were higher than normal… which leads us to say that perhaps the best people to sell your agency to are your current employees.
You may look at your employees and say, “I don’t think so.” But with a little planning, selling to your current employees may be the best solution. First, they are already there and may have built good relationships with your clients. They also have a sense of what the agency can do; they’ve seen you do it and done much of it themselves. Finally, you can continue to have influence in the agency, as they buy it from you (over terms, not cash), giving the transaction a better chance to succeed.
We work on many transactions in the course of any year, and those where the next generation of ownership is brought forward from the current employees are far and away the most successful. To accomplish this transfer, however, you need to put some things in order. Following is a list.
1. If you don’t have the right people in your agency, find and recruit them. The right potential people show leadership skills, are the right age (about ten years younger than you) and exude a certain entrepreneurial spirit. We were recently involved in a situation where an agency president knew he wanted to begin to retire in the next five years. He already had a creative director he felt could assume ownership of the agency, but he wanted to secure the situation by also having an account service person as a co-owner. None of his current flock of AEs fit the requirements. They were too young or in some other way unqualified. The principal went looking. He placed ads in his local newspaper, in Adweek and ran job postings at several online job sites. All produced candidates, but in the end, it was the local paper that brought forward the correct person.
“Tom” worked at a much larger agency (an agency of legend, if you will) in Atlanta. He didn’t like the South; it was too hot, too mannerly for him. He was a Northerner through and through, abrupt and direct. Although he would have liked to go home after ten years away, Tom didn’t think he could find an agency job worth having in the smaller city where he had grown up. One day his aunt, who knew Tom’s desire to return home, scanned the employment ads (as was her habit even though she had not held a job in over forty years). Lo and behold, she came across our principal’s ad seeking a senior account supervisor with partnership potential. She quickly called nephew Tom and sent him the ad. Tom called the agency principal, and within three weeks he was hired, left Atlanta and was on the road to owning a nice thirty-person advertising agency in a smaller city.
2. Once the successors are in place, you must anoint the leaders and make sure the other employees understand the transition that will take place over time. For example, the founder of a Second Wind member agency appointed her three potential buyers to a management committee. She still has all of the votes, but the group essentially runs the agency on a daily basis. She believes it is good training to allow the key employees to see how the agency runs and how profits are made.
3. When the leaders are in place, you must make sure you set the terms so that the new owners will be able to pay for the agency over time with dollars they continue to earn after you are gone. The key to many of these transactions is for the agency principals to set the price and the employees to set the terms, fixing the total price at a certain value. They then take over the agency, exert a lot of energy making it grow, and pay off the purchase with the cash generated each year. A plus for the new owners in this type of deal is that, in many cases, they can pay the retiring owners with “cheaper” dollars because, while the agency has grown, the sellers are being paid based on a valuation established when the agency was worth less.
Finally, you need to move out of the way after you sell the agency to your employees. The problem with many retiring agency owners is that they stick around far too long and eventually become more of a negative than a positive force. Certainly you need to assure yourself that the new owners are going to treat the agency as well as you have. But once you have confirmed their success, go get your “Second Wind.”
