Looking for a creative way to rapidly grow your agency? Wondering how to structure an agency acquisition without getting screwed on the other side? Whether you want to grow your agency through acquisition or are considering selling to lessen your risk liability, acquisition is one of the best strategies. And that’s exactly how one agency soared to $15 Million in under one year.

In this episode, we’ll cover:

3 myths about agency acquisition.
What motivates an agency owner to sell?
7 criteria of a good agency acquisition.
How to avoid getting burned on an earnout.
How to structure the best agency acquisition.

On today’s show, you’ll get to hear from one of my business partners, Thomas LeMaguer CEO of Republics which is the agency we started about 10 months ago. The goal of the agency is to be the leading platform for growth as a service. In that short time, we’ve worked to rapidly grow the agency to $15 million through acquisition. He’s here to talk about how you can grow your agency through acquisitions, or set yourself up for a fair and profitable sale of your own agency.

3 Myths About Agency Acquisitions

1. You Need a Ton of Cash to Buy Another Agency

Nope! Thomas says you don’t need money in order to buy another business, you just need some creativity. Also, banks are more willing to loan money to agencies that are in the $1 Million to $5 Million EBITDA range. Bigger agencies with higher EBITDA are a riskier investment for them because often those businesses are too reliant on their owner.

2. Small Agencies Cannot Afford to Buy a Bigger Agency

Not true! As Thomas put it, a minnow can swallow the whale. The whale is easier because it’s stronger. Again, this is where creativity comes into play. The smaller agency is actually more nimble and can adapt to the processes and systems of the bigger one.

3. The Best Acquisition is a Failing Agency That You Can Turn Around

Wrong again! You don’t need (nor should you want) to buy a failing business and try to fix it. That usually turns into way more work and headaches. The way we grew our agency was by acquiring profitable agencies with monthly recurring revenue, solid profit, and strong leadership.

What Motivates an Agency Owner to Sell?

Usually, the owners of solid, profitable agencies want to sell for one of two reasons. Either they no longer enjoy what they’re doing and feel like their only way to eliminate what they hate is by getting out of the business entirely. Or, they want to reduce their personal risk and feel like a more secure, stable “job” is better than the liability of ownership.

Thomas says in either case, true wealth is built by a series of transactions. An acquisition can alleviate agency owner risk and help them get back to just doing what they love.

7 Criteria of a Good Agency Acquisition

First and foremost, the only way for an acquisition to work is if both agencies are aligned core values. If the foundation is there, then we look at 7 specific criteria:

Does the agency offer complementary services that we can scale?
Are they at $1 Million+ in EBITDA?
Is there a strong leadership team that will remain in place?
Are they physically located in an area we would like to be?
Does the agency have good financial controls?
Is there 60% in monthly recurring revenue?
Are they motivated and ready to sell?

How to Avoid Getting Burned on an Earnout

I used to advise agencies to avoid an earnout as part of their acquisition structure. But, I’ve learned an earnout isn't bad as long as it’s structured in a way benefits both buyer and seller.

Thomas and I agree the best agency acquisition is one where everybody wins. A fair and honest deal beneficial to both parties is the best way to work an acquisition. And, it’s the way we’ve structured five acquisitions in ten months in order to grow from $0 to $15 Million.

Learn from my mistake. When I sold my agency, I got burned on my earnout. It was tied to profitability within a specific time period. When time ran out (and the agency sold a second time) I got screwed out of the earnout. That’s why we don’t like to structure earnouts the same way.

Instead, the earnout is theirs to gain at their own pace. When the agency hits its goals, we both win. The seller with their earnout and us with a more profitable agency. Of course, they’re motivated to earn it sooner rather than later which is great. Win-win!

How to Structure the Best Agency Acquisition Deal

If you’re considering selling -- or considering buying one -- but you feel the agency’s value is going to be greater in the future, you can still sell now without screwing your future self. There’s a smart way to structure your acquisition -- here’s how we’ve been doing it:

The initial payout is half cash upfront and the owner stays on with us. They hold 20-30% of their own stock for future payout. Over the course of time, we grow the business together and they cash out their stock in the future at a 10X return.

For example, if you have a $2 Million agency, you’re getting $1 Million in cash in the present and pull $10 Million in the future. We help each other grow and fulfill the agency’s full potential.

As Thomas quoted an old proverb: “If you want to go fast, go alone. If you want to go far, go together.”

Are You Considering Selling Your Agency?

If you’re interested in learning more about the acquisition process and/or interested in possibly selling your agency check out: JasonSwenk.com/sellagency

How an Agency Went $0 to $15 Million in Under One Year

Smart Agency Masterclass with Jason Swenk: Podcast for Digital Marketing Agencies