5 Mistakes to Avoid When Buying Agencies | Ep. 2619

When you are buying a company, the seller always has the advantage.

When you buy an agency, the founders and management team, they need to stick on board for a while.

If the leader leaves, then the clients are like, what the heck? There's no need to try to force through a deal in the next month or so. The deal of the century comes every single year. All right. So we're going to talk about critical agency acquisition mistakes. So in the last episode, we talked about if agencies are ripe for for rollups, check that one out. But that actually sparked the idea for this one, critical agency acquisition mistakes. I've acquired some and then Neil has acquired some companies in the past and, you know, we might or might not be in the market in the near future. So if you've got a cool agency, you know, let us know. But, you know, we wanted to share some mistakes that we made and hopefully you can sidestep these mistakes because this is a lot of wisdom and a lot of money spent and a lot of time too.

Yeah. Yes. You know, the first big mistake is when you buy an agency, and Eric went through this, whoever you're buying it from, the founders, the management team, they need to stick on board for a while. If they're not there for a year or 2 years, it's really hard for the knowledge transfer, the client relationships, and you're in, you know, expect a world of hurt if you're not retaining the top talent whenever you acquire because the agency is a people business. The people is really what matters. The people is what's driving the revenue. The people, it's what's reducing the churn. And if you just do a change of all the people or the main people, you're going to have a lot of issues.

Yeah. I'll get a little more specific here. So, you know, in one case for the agencies that we got, the founder was involved with every single account. He was super serving every single account, which is good when you're a smaller agency. That's how you build a lot of goodwill with the clients. The clients are like, oh my God, I love working with you because You're giving everything you got. And the thing was, in this situation, they were not doing any one-on-ones with their staff. People were getting burnt out. And at the very end of it, people were just tired, right? And so, they were just sprinting the whole time. Now, that's not how we worked, right? Now, what happened was, in that situation, so the founder basically left immediately, right? And so, basically what matters is, and this is not anybody's fault, I would say, it's just if anybody's to blame, I'm to blame, right? So, the way you want to structure the deal typically is you want them to stay on for an earnout period. It could be from anywhere to 2 to 4 years, right? That way incentives are more aligned because if the leader leaves, then the clients are like, what the heck? Because the leader's on every single account, right? And then there's also the lieutenants of the leader too. They all look up to the leader. And what happened immediately after was like one of the key lieutenants left, right? And so, it starts to become really shaky immediately because you're integrating— business is chaotic, right? So, you're integrating 2 chaotic organizations or organisms together. It might not take. It's like when you put a new organ into your body, it might not take because it might get rejected. So that's a key thing.

The other thing is you need to do diligence and amazing diligence at the beginning before you buy a deal. Eric went through this mistake. He used a broker and the broker didn't give him the correct diligence materials. Like what is the churn? What is the LTV? You have to look at churn by client count and revenue and then segment it per industry. How many units or service items are they selling per client? What are the staff on board? How long have the staff been there? What does the staff churn look like? Like these are all very important questions. What is their key differentiator in the marketplace? How long have they been in business? How do they get their leads? Is it word of mouth? Is it the founder? Because if the founder, once you give them the money, they're not going to stick around forever. But on the flip side, if they're getting it because their brand name, they've been in the industry forever and they're getting tons of RFPs, Your risk goes down drastically. All these things are super important.

Yeah. So I'll share a couple things because these are mostly my stories. But I would say this, we got all that information. So it's key to get that information. So the monthly recurring revenue, the churn, the key staff as well, the key accounts too. And then you don't want to have key account risk too where they're over 10%, 15% of revenue. What I will say is The and again, I'm not going to blame the broker, right? It's it's ultimately it's my mistake at the end of the day. It's it's my responsibility. It's we pushed the deal through too quickly because the broker was like, "Hey, let's get it done. Let's get it done." And it was happening on both sides. Let's get it done. Let's get it's like no. Like reality is these deals take probably a couple months of due diligence, four six plus months or so, right? But you're constantly communicating. You're meeting with people, and it's because it's by the way, I'll say I'll say this other thing over here. When you are buying a company, the seller always has the advantage from an information standpoint. So you got to take your time doing the due diligence because you got to figure out how to decrease— they're always going to have an advantage, but you could decrease that advantage as you talk to them.

Then you also need to look at multiple agencies. When you look at multiple agencies, you'll learn a lot more about these agencies and it'll help you figure out which ones are actually good versus which ones are bad. The first one you talk to isn't necessarily the best one to acquire. You got to kiss a lot of frogs to find the right one. And when you're kissing these frogs, make sure that they're providing things like audited financials. If they don't, you should have someone review the financials to make sure they're actually accurate and there's no fraud in there. Have good lawyers in the process. This will all help you avoid mistakes as well because they'll tell you what to look out for. But these are just some common things, and I really believe it all starts with diligence when it comes to avoiding the mistakes. From— and I mentioned some of these things like churn and revenue and make sure that the businesses are growing and the employees are there and make sure that they're selling multiple units, uh, for services per customer. Ideally, they should be keeping their customers for more than 4 years. Keep that in mind. Again, ideally, they should be keeping their customers for more than 4 years, right? You don't want someone who's only keeping customers for a year or 2. That's like, It's just a revolving door at that point. But these are just some of the things to look out for and it takes time to find the good ones.

I'm going to add a couple more things before we get out of here. And so, what I would say is there's— people use this word culture and it's like this rah-rah thing, but it matters a lot. You got to interview for cultural fit. And so, whatever your core values are. So for example, our core values are to be improvement obsessed, to be open-minded, and to be reliable, right? And so, with one of the agencies we got, we found out after we did the acquisition that people were going to yoga classes during client calls, right? And it's like we didn't know that because we didn't do enough due diligence quickly enough. But I would also say this, you got to talk to the people when they come into the company too. You got to make them feel at ease and you got to help. You got to constantly communicate. And you as the leader of the company, you can't just abdicate your responsibilities. You can certainly delegate some of them. But you have to be on top of it. You have to be very close to it. I would just say on my end, I wasn't as close as I would've liked to be with these acquisitions. And so now, there's a scar tissue on my side where it's like, okay, it's very clear what we need to do next. So, high level again, if we were to recap is say, do your due diligence, right? Keep the founders on and for probably 2 to 4 years or so, just make sure incentives are aligned. Make sure there's a cultural fit as well. Like Neil said, kiss a lot of frogs, right? And take your time with this stuff. There's no need to try to force through a deal in the next month or so because the deal of the century comes every single year.

Yep.

All right.

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