Profit Strategies for Agency Owners: Should You Distribute or Reinvest?

All right, so we have a little treat for you. So this is a coaching call from the Agency Owners Association. This is a group that Neil and I have for agency owners to help you grow faster. So if you're in the agency space, you are a services business, this is applicable to you. It's a little preview of a call. It's probably 10, 15 minutes or so, and you get a sense for what it looks like to be in the group. If you wanna learn more about the group, you can go to marketingschool.io/agency. Again, it's marketingschool.io/agency. Hope you enjoy the episode. Neil really likes taking distributions. He's always liked to take distributions before he even even had NP Digital, he had other companies. I've always been a fan of, because I come from working in tech, I'm like reinvest, reinvest, reinvest, right? Um, I think it's probably better to have a mix of both. So you want, because at the end of the day, you need to protect yourself, right? Um, you know, you're young right now, Allianz, so you can gamble more, but maybe not so much because you're going to be a dad soon, right? So you just got to be careful there. I think it's, um, you got to decide what risk you're comfortable with. Um, if, if You know, if I'm a, if I'm going to become a father, I'm not a father, right? But I'm just like, okay, shit. Like, it's no longer just about me. It's about my spouse and my kids. So I might just up the distributions more. So it ultimately comes down to personal choice. Yeah.

Thank you.

Yeah. And the other thing too is like, at least in America, you can very comfortably live on like a really nice life on $1 million a year in profit. $2 million is, you know, if you want to have a margin of safety. So it's not like you need to have like $100 million or anything like that. So I think it's very possible for everyone here to do $1 million in profit, $2 million in profit to take home. I think it's just a matter of sticking with it more, adding additional services, maybe buying some companies, hiring a couple of right people here and there. And that's all it is, right? Easier said than done. I think if you stick with it and you stay focused, there's no reason 100% of the group can't get there. So does that answer the question, Peck, or do you have a follow-up?

I think that clarifies it a little bit. I think it's, you know, like you said, personal choice. You know, I just had my own experience. I was kind of more like you. I reinvest a lot. I think if I had any regrets, I I would tell myself to have some more distributions if I could go back in time because I just totally erred on the side of investing into the company.

Yeah. I think that, so, Peck, so you and I had the same problem. And Peck, what ethnicity are you?

I'm sorry?

What ethnicity are you?

Thai.

Thai. Okay. So, I mean, obviously we're both like yellow people, right? And Scott's like you, but it's like, and Amber too. But I think at least for me, you know, being like Taiwanese American, there's a gambling, you know, gene in me, right? And so to me it's like, okay, why would I want to get taxed? Like, let's just reinvest the whole thing, right? Um, but the problem with that is it, it creates a lack of discipline. And, um, it's not like it's, you're no longer operating a company in like a, like a legit manner, right? Um, and so it's like, oh, like everything we take, we're just going to reinvest it, reinvest it. But then one, you're not taking care of yourself. And then 2, it's, um, there's no methodical way about, okay, we're going to take 10, 15% and invest it into R&D and then, um, you know, take another, you know, 5, 10% for bonuses or whatever. It's just like, it's like all or nothing, right? Um, but I think when there's more discipline tied to it, then, um, the business grows more methodically. I've, I've just found that when I take, when I was just reinvesting everything, it felt like it was a train. Uh, it was like a runaway train.

Right?

Because on one moment I'm investing into education, I'm investing into SaaS here, I'm angel investing over here, like all this stuff, right? And so, you know, at the end of the day, you still need to cover your own costs. And that's at least my experience share. So yeah.

Can you speak about buying companies? I think you and Neil recently bought a company or I don't know. Yeah, I think I heard somewhere you bought a company. I'd love to learn more about that.

Yeah, I'll come back to it in a second. So, Peck, hold that question for a second. I'm going to cover David's question here and try to go down the list a little bit. So David says, did my last, did my last promise free shoot at a high status hotel where a lot of celebrities go to where they perform in Antwerp? I don't know if I pronounced that correctly. I made 6 documentary reels and a general manager showed during the shoot that she is thinking to work with me long-term. Okay, amazing. I am thinking for asking after delivering the free content, ask for 4 months, maybe a year of services. What is your take on it? I think it's arbitrary if you say 4 months or a year, and obviously that's good for you, right? I think, I think so. One, yes, you do have to cover your own ass first, but I think it's talking to her first and say, hey, like, what would be a home run to you? What do you absolutely need? Like, what is this going to do for your business, right? I often like tying— hopefully, like, I often like to ask, hey, if we hit these numbers for you, What is the value of meeting this metric? And they might say $10 million. So I said, okay, well, if we can guarantee that we can hit this metric for you to $10 million, would it be fair to pay us $1 million, right? 10% of that. They, they'd say, oh yeah, well, of course. Right? Um, nobody's gonna say no to that. Right? And so then, uh, what I would say, then I'd go back to my team and say, guys, what are the odds of us hitting this metric? Is it like 40%, 50%? Oh, it's 50%. Okay. Well, in that case, then I'm gonna take that $1 million that they might pay us if we guaranteed it and multiply it by 50%. That's $500K now. See, so now I'm pricing it on value. So then I take that $500K and I divide it by, by 12 months. Okay, so that's $41 grand a month. This is like a crude example with very round numbers. Um, but I think, you know, David, if you could talk to her, hey, like, what's the value of doing this, right? And you, you might have to dis— like, if you're telling her this is your first time doing, or you're a little new to doing this, you might have to discount a little bit just to try to build a relationship, because a lot of people are going to be willing to give you a shot. That you're like, they understand what it feels like to be new, right? So, um, they should be willing to give you a shot. And honestly, David, like once you figure out the, the value of the metric, maybe you do start with a 3 or 4 month engagement and see where it goes from there. But we all have to understand that this person sounds like an employee, right, David? So this person's an employee. Her job is to not look at, look like an idiot. Her job, like you have to make her look good. Number one. Two, she doesn't, like, you can't make her look like an idiot, right? So that's what we need to all think about. Like, how do we make her look really good? And how do we make it less risky for her while also covering your own ass? Those are the dynamics. All good there, David?

Yeah, thanks.

I'm typing.

That's a bit fast. Cool.

I got to take a minute to tell you about the Agency Owners Association. This is a peer group for agency owners. Think YPO or EO, but for agency owners. And I just wanted to read you a couple of testimonials. So this first one comes from Carrie, and we asked her, what do you like most about the group? She said, Having a group of people to discuss and bounce ideas. The leads are great too. Yes, we share leads in this group as well. This one from Alian, he says, the ability to really post whatever I want and need and the group responds. Great experienced members. Getting a lot of insights from conversations with other members. Getting a lot of value from sessions from Eric. Getting advice from others as well. And so if you want to grow your agency faster and you want a peer group to do so, just go to marketingschool.io/agency. This is a group that both Neil and I And our hope here is to create a vibrant community of agency owners and do a lot more with it in the future. So again, marketingschool.io/agency, and we'll see you inside. Let's see, I think we got the rest of the questions. So Peck, let's come back to you on— your question was, how do you go about acquiring stuff?

Right. And then also maybe the strategy, if you could, you know, how— I don't know how much details you want to share, like how much of it was like equity or cash or, you know. Yeah, sure.

Is that helpful to everybody? That this doesn't sound like it'd be helpful to everybody.

Okay, cool.

So, all right, so buying a company, there are— I'm going to start with Single Grain as an example. So Single Grain was acquired in 2014. Okay, so it's been about 10 years. It's been, yeah, it's been 10 years. So it's been 10 years and You know, I was in my mid-20s. I had, I had no idea how to operate a company. And somehow I negotiated this deal to buy the company for, um, some of you know this story, but I bought the company for $2 out of pocket. So $1 was for Neil's shares for 10%. Another dollar was for, um, his partner Heaton Shaw's shares for 10%. The rest was seller finance. And I'll explain what that means in a second. There is no upfront fee for me to pay out of pocket.

Okay?

So I didn't need to, you know, take money outta the bank or whatever. Um, I also put in a contingency saying that if the company failed, I would owe nothing. So while the 4 other partners said, hey, we need to get out, even Neil was like, dude, there's no equity in this company. There's like no brand equity. There's nothing. You should go do something else. My thinking was that if I could help turn this company around, my upside would be unlimited, right? It took a while for us to realize that dream, but it happened. So basically, what happened was the seller finance portion was $150,000, and that was supposed to be paid over, I think, 2 or 3 years or something like that. So what that means is over, you know, that period of time, 36 months, I was basically paying like, you know, $4,000 or something like that. And that was paid through the profits of the company, right? And, you know, my thinking was, oh, okay, if I can just make sure that we're continuing to generate profits, this $4,000 is not going to be an issue to cover. And so, so that's what we did. So that's one way of going about doing it. So that, that's how you can structure it. Maybe I'll cover terms first and I'll go over into how you can source these deals as well. So another way you can do this is— Peck, where are you based?

Bay Area. Okay, great.

So if you're in the United States, and I'm sure whatever country you're in, you might have a program like this, but in the United States there's an SBA program and the SBA will give you up to $5 million to buy a company. And so let's say, you know, you want to buy a company that's worth $5 million, the SBA is going to require you to probably put like 10% down. So $500 grand, you can buy a company and you cannot, you cannot do any of the other shit we're talking about here with seller financing, all this cute stuff, right? You just got to buy it straight up and usually the founder is going to be out. So that's the thing you can do. So you can, you can, you can use the SBA to do that. And as long as you look like, you know, you know what you're doing with your company and you've been in the agency space, it seems like they can trust you. You can use the SBA to do that, right? That's one thing you can do. Now, the other thing you can do is you can— there's actually, if you guys Google this later, and maybe, Ezra, we can find this and just post this to the room, but, or the school group. But, you know, if you type in— let me just type it into chat over here. So, Roland Frazier 44 acquisition deal terms or whatever. Hopefully that Google, that query takes you somewhere, but he has a lot of different things you can do, right? So for example, Peck, let's say I wanted to buy your agency. Let's say you own an office building. Okay, I can count that as an asset and say, oh, I can carve that asset out. Let's say I don't want the office building. Maybe someone else wants to buy it for $1 million or whatever. Okay, I can carve that asset out, sell it to somebody else, right? You can do the seller financing that I just mentioned, right? And then you can do a combination of like a 10-20% down payment. You can— there's also other things you can do around— let's see, what else can you do? There's just— I'm trying to remember. There's so many things from that sheet that Roland talks about. Oh, you can do equity swap too. So, Peck, let's say you and I wanted to combine forces. Okay, so let's say your agency might be worth $100 million. My agency is worth $10 million or whatever, right? We can combine that equity together. to form, you know, $110 million, right? And then I would just get like a 9% stake in that. So you can do an equity swap and then you can also keep me in there because oftentimes the agencies, the founders are the most valuable piece because they're the ones, you know, everyone trusts them, everyone loves them. They're the strategists you want to ideally, like one of the lessons I learned is you want to keep the founders around. Because once the founders depart, like everyone just becomes all sad and shit. And so it's just like, you know, Just keep the founders around and keep them happy, keep them incentivized. And maybe you could also give them a second bite of the apple, right? So, Beck, you can do the equity swap, but maybe you can give some money upfront too so they feel pretty good about what they did. So like, yeah, they got a little money from the exit. Now they're part of this bigger organization. You got to sell them on the vision though. It's like, hey, this thing, our combined entity, it's worth $110 million right now, but in the next couple of years it's going to be worth $500 million because we're going to be buying other things. And then your equity might be worth, you know, 5x that. Maybe there's some dilution. So maybe it's worth like, you know, $30 or $40 million. Like, you got to paint a good picture. You got to be a good salesman here. So I just threw a lot of stuff at you, but does that kind of answer the question in terms of the terms piece before I talk about sourcing?

Yeah. Yeah, it does. Thanks.

All right. Quick note. This is about my company. It's called Single Grain, and Single Grain is an ad agency where we're focused on driving innovation. I want to talk about a couple of new strategies, and if you need help with marketing, great. If not, here are a couple of new strategies that you should try out. One is programmatic CRO. So we are doing programmatic conversion rate optimization on our site. So it's building products that will automatically optimize your site to increase conversion rates. We're also auto-optimizing, auto-updating from an SEO standpoint. And we're constantly thinking about what else we can do in terms of enriching the visitors that are hitting your website and also tailoring custom messages for them using AI. And so there's a handful of things that we're doing from a marketing standpoint. And our mission is just to drive more innovation. So if you want to learn more, just go to singlegrain.com, grain like rice. So singlegrain.com to learn more and we'll see you inside. All right. So in terms of sourcing, there are other— oh, we got Carrie. Let's invite Carrie. So let's remove her note taker. So, okay. In terms of sourcing agencies, the best thing you can do is source off market. Um, so you're looking for people that aren't ready to, to sell necessarily, right? And so, you know, you might say, hey, I want a creative shop that has, you know, 50, no more than 50 people, greater than 10 people. You can always go on LinkedIn and, and, and source these agencies and just reach out. Right. And it, it's a lot of work to reach out. It's just like sales. You're, you're just reaching out to these companies and saying, hey, like, let's, let's have a conversation. Hey, Peck, noticed that you're an agency in the creative space. Would you be open to potentially partnering up or, you know, potentially be open to some type of investment? Just a very easy email. And they might say yes or no. A lot of people are just going to ignore you, but you know, you're going to have a certain percentage of people that respond. So off-market's generally the best because they haven't been shopped a ton already. The ones that have been shopped a ton, you know, they're on these— there's like, you know, I invested in a company called acquire.com. There's agencies on there, right? But they've been shopped to death there, right? And they're like, the reason they're still there is because like maybe some people are— a lot of people have evaluated these deals and maybe they're just not good enough, right? So if you want to find the really good deals, the gems, you're probably going to have to source them yourself. There are brokers out there too, Peck. One reached out to me. Their name is Palmer. They're a broker that's out there. And then there's also, there's, I'll try to put it in the group later, but there's one guy out there that all he does is he focuses on sourcing for you and that's all he does. So that's what I'm looking for. But Peck, if you're going to go buy an agency, you're going to need a deal team that's helping you. So there's someone I spoke to yesterday. Her name's Athena Simpson. She will actually help you with the structuring of the deals, the financing. She'll help you also find on-market and off-market deals, and she'll help you, you know, she'll be your deal team too, right? She'll have people on the finance side, the operations side. And so, you are going to need people looking at all the numbers. You're going to be doing your due diligence. And so, just keep that in mind too. So, you know, that's a lot of M&A stuff consolidated into like 10 minutes, but do you have any follow-ups to that, Peck?

No, no, this was a good primer. Thanks.

Okay. I would recommend if you wanna follow up on this is check out the book Buy Then Build. I'll drop it into chat. Buy Then Build book. And then Agile M&A is another one. These are simple books and there's a Harvard Business Review book, Harvard Business Review and M&A book. He also has a Facebook group, Buy Then Build.

Oh yeah.

Also very active. What's his name? Walker, Walker something.

Yeah, then— then—

Disciple? I don't know.

Yeah.

Yeah.