Build Your Agency Like a Buyer Is Looking, Even If You Never Sell

Here’s an idea: set your agency up for M&A even if you never plan to do a deal.

A lot of agency owners don’t realize how accessible M&A is. That’s what I keep hearing in my conversations with folks in the agency M&A space. Most owners I talk to picture a sale as something for agencies much bigger than theirs, or something you start thinking about the year you want out.

Both of those are off. The things a buyer looks at take years to build. If you start on them early, you get the option to sell. And even if you never use it, you end up with a healthier business to own.

The numbers a buyer reads start now

Buyers look at a handful of things. The first two are about the shape of your revenue.

Steady growth over the last three years. Buyers look at the trend, so if you want to sell in three years, the numbers they’ll read start now. One great year after two flat ones reads differently than three steady ones, because the buyer is trying to guess what the next three look like.

Recurring revenue. Retainers are worth more to a buyer than projects, because they don’t have to be resold every year. A $4M agency that’s mostly project work has to win most of that revenue again next year. A buyer prices in that risk.

No client should be big enough to sink you

Advisors draw that line anywhere from 10% to 25% of revenue. Past it, buyers lower the price or push more of it into an earnout, which means you only get paid that part if the client sticks around after the deal closes.

It makes sense from their side. If one client walks the month after closing, the business they bought is a lot smaller than the one they paid for.

Here’s the part that stings. That biggest client is often the crown jewel account, the one everybody’s proud of. When I break margin out by account, that same account often turns out to be the one draining the team the most and running at the lowest effective hourly rate. So it’s a concentration problem and a margin problem at the same time.

The fix is to grow the rest of the book around them so their share comes down, and to fix what that account costs you to deliver while you do.

The agency has to run without you

If you’re still the lead on sales, your biggest client relationships, and delivery, a buyer has to price in replacing you.

I know how this happens because I lived it. When I ran my agency, I was too busy in the business to do some of the exercises our fractional CFO asked me to do. That’s how owners stay in the middle, because the client work in front of you always wins.

The same thing happens one level down. The fix for a service that’s stuck usually gets handed to the service lead, who’s so buried in client work they never get to it. So the owner stays the backstop for everything, and nothing gets built that would let them step out.

Getting out of the middle takes real time from someone who isn’t billable. Somebody has to write down how the work gets done, hand the relationships over one at a time, and stay close enough that the clients feel the handoff as an upgrade.

Profit that holds up when someone checks it

A common target is 50% gross margin, with 20% or more of revenue left over as profit. If your profit only shows up because you don’t pay yourself a full salary, or because you’ve put off hires you need, a buyer will count it for less. They’ll adjust for the salary you should be taking and the people you should have hired, and the profit they’re left with is the one they pay for.

The other thing they’ll do is look underneath the blended number. Margin broken out by account, by service, and by role shows where the profit comes from and where it leaks. If you’ve never looked at your agency that way, the buyer will be the first one to do it, and that’s not when you want to find out.

These last two are the work I do with agencies, and they’re the two that take the longest to fix. You can sign a few retainers in a quarter. You can’t get yourself out of every client relationship or rebuild how a service gets delivered that fast.

“I’m never selling, so why bother”

Because every item on that list makes the agency better to own.

Recurring revenue means less of your year goes to reselling. A spread-out client book means one bad phone call can’t put payroll at risk. An agency that runs without you means you can take a real vacation. Profit that holds up means the money is there when you want to hire or invest.

It works on the buy side too. If you ever want to grow by acquiring another agency, this is the same list you’ll use to read their numbers.

Whether you’re on the buy side or the sell side, that’s a blueprint for a healthy commercial business. Building toward it gives you options. Whether you ever use them is a different story.