The dream of many agency owners is to one day be able to sell their agency and, frankly, get a nice payday after putting in years of hard work. A few agency owners are able to pull it off, but for most, it doesn’t pan out, for one reason or another.\nHenry Corona (LinkedIn) of FinanceSur specializes in, among other things, handling mergers and acquisitions of agencies, and in his career, he has seen it all.\nToday Henry shares the common mistakes agency owners make that prevent them from being able to sell when they retire, and also what you need to be careful of during the actual sale process.\nAre you planning on selling your agency? Here's everything you need to know. (PODCAST) Click To Tweet\nIf you hope to sell your agency someday, you need to tune into this episode to make sure you’re on the right track.\n Download a full transcript of the interview with Henry: Get it right here.\n3 Common mistakes that prevent agency owners from an exit\nA lack of succession planning [3:30 – 10:00]\nHenry’s point about succession planning is simple: start hiring people who are smarter than you are or as smart, as soon as you can. Additionally, you need to make it a habit early on to delegate responsibilities to employees who seem capable. Make your mistakes early so that when things go wrong, you don’t have all of your chips on the table.\nFor many agency owners, this can be a huge hurdle to overcome, because they get so good at doing the task themselves that they know it’s going to take 3x more time to teach somebody else to do the task rather than do it themselves. And while we know we need to make investments like that to prepare ourselves for the future, with how busy things can get, it always seems like there simply isn’t the time to make those investments now. But you need to make the time.\nOnce you have a team supporting you and freeing up your time, then you can work on going after bigger clients and improving your business. Otherwise, you’ll be stuck in the weeds for far too long.\nNot managing your hires (and fires) carefully [10:00 – 14:30]\nOne of the toughest decisions around hiring is when to actually do it. Do you make the hires in anticipation of revenue, or only once you have the revenue? When you are pitching new clients, do you want to be able to truthfully tell them that you have the team already in place, or do you want to take the financially conservative route that forces you to scramble together a team at the last minute?\nYou can cover your bases by having a network of freelancers you can call on as needed, but in the long run, it will be less expensive to have employees because you aren’t paying a premium for their flexibility. That being said, there are obviously the cashflow issues that arise when expanding your team’s full-time headcount.\nOn the other side of the coin, when do you fire somebody who doesn’t seem to be working out? What criteria do you use to determine when that point is? What if their work is mediocre, but you know they have your back?\nThis is a hard problem, and because of that, it can be invaluable to have somebody from the outside offer their perspective. As the owner, you often are going to base your decisions on factors that ultimately don’t matter, and for such important decisions, you need to be as objective as possible.\nHaving too many small clients [14:30 – 24:30]\nThe primary purpose of an agency, especially one that is looking to eventually sell, is to make a profit and to increase the profit margin. If you do that then you have options, but if you’re not making any money you don’t have any options except the wanted ads. \nWhile most of us got our start with small clients, the rates they are able to pay make it very difficult to build an agency with big margins, especially when the overhead requirements of servicing a small client isn’t that much lower than a larger client. In order to increase your margins, you can (and should) make your processes as efficient as possible, but there is still a ceiling on your earning potential when dealing with mom & pop shops.\nYou don’t want your entire business to depend on just one or two clients, but you also don’t want to spread yourself thin without much reward. Make sure you find the right balance here.\nThe 10-step process to selling your agency [28:00 – 35:00]\n\nDetermine whether or not there is a fit between the buyer and seller\nEstablishing that you are going to move forward\nDiscussing the value and general structure of the deal\nIssuing (and signing) a letter of intent\nMeeting to plan the process of moving forward\nYou agree to proceed and inform you key agency staff\nDue diligence\nConfirming compliance, eliminating conflicts, and agreeing to the deal\nPreparing a legal document with everything exactly as it was agreed to\nClosing\n\nTranscript:\n\n\n\nAndy Baldacci:\nHenry, thanks for coming on the show today.\n\n\nHenry Corona:\nHappy to be here.\n\n\nAndy Baldacci:\nThe depth of your experience is impressive to say the least, when I looked over your LinkedIn it was almost dizzying just to see how many different facets of the agency world you’ve been involved with. I think the easiest way to introduce you to my listeners are just a question, what led to you starting your current company, Finansor, back in 1991.\n\n\n[00:00:30]\nHenry Corona:\n[00:01:00]\nWell, I was in the film business in Los Angeles, principally in mergers and acquisitions but generally corporate finance in entertainment and creative services. I went to Virginia to do an acquisition for someone and that just turned in…. I liked it and I stayed. I met Dave Martin, the founder of the Martin Agency in Richmond and he had sold the Martin Agency and was forming another agency and he had some challenges in setting up his agency. I was able to help him and then I helped him sell to an agency called Fahlgren, Smoot Fahlgren was the owner in Atlanta. The face that I had done this for Dave Martin got a lot of attention in Richmond and the consulting business grew out of that.\n\n\n[00:01:30]\nAndy Baldacci:\nInteresting. What do you do today. How would you describe the services you offer?\n\n\nHenry:\n[00:02:00]\nI look at agencies for operating efficiency, profitability. I do consulting and the management, the financial management of the business. Always with an eye towards the value. I do expert witness work and the valuation of professional creative services. With agencies, I’ll come in and we’ll do a valuation and we identify the elements of value in the business or in the value of the business, which is redundancy.\n\n\n\nIn some cases I just help them tune up their businesses and make them more profitable and they continue to do what they’ve been doing and they continue to grow.\n\n\n[00:02:30]\nAt some point all agencies look around to sell or in some cases, many cases, it’s exit strategies for the older owners. I don’t believe your audience is facing the older owner dilemma.\n\n\nAndy Baldacci:\nThere’s a few, but no, traditionally I think most are on the younger side.\n\n\nHenry Corona:\nYeah.\n\n\nAndy Baldacci:\n[00:03:00]\nIt’s funny because you mentioned that it’s something I really want to dig in to the details of how you work with them to add all that value to get them with the eye towards exit plans. One thing is when I talked to a lot of agencies owners, many have the idea, sort of just in the back of the head, that one day they’ll be able to sell. In reality, very few agencies actually do have that sort of exit. Have you seen any common reasons for why agency owners aren’t able to sell?\n\n\n[00:03:30]\nHenry:\n[00:04:00]\nIt’s hard to generalize but there are a number of reasons that they… the owner hasn’t reinvested his profits in the company instead of reinvesting the increased profit he takes a higher salary or a bigger draw. As you get middle aged and older you have to start thinking about succession planning. You have to think about replacing yourself. That’s kind of a corollary to basic management 101 is that when you hire you want to hire somebody who’s as smart or smarter than you are. Not everybody. It takes all kinds of people to run a successful business. There are some people that do what they’re told and they do it well. That’s a real find.\n\n\n[00:04:30]\nThey’re never going to go above that. They have to be told what to do. You need those kinds of people that you tell what to do and they go off and they do it. You also want people who have a little bit more… Isn’t simply intelligence, it’s just drive. Two people with the same amount of intelligence. Once just like to be, “Just direct me, tell me what to do and I’ll do it.” And the other guy goes, “Well, wait a minute. Let’s do it differently. Let’s do it this way.”\n\n\n[00:05:00]\nThose guys fall into the people who know what they’re talking about and the people that have no clue. They just think that they’re supposed to be energetic and question everything and that what makes them the go-getter that will rise up the ranks.\n\n\n\nIn some cases they’re correct and other cases they’re mistaken. They just don’t have the ability. All of the, it takes all kinds of skillsets to build a scalable and up-gradable business.\n\n\n[00:05:30]\nLack of succession doesn’t just mean you pick the guys, kind of buy you out, it means who’s going to replace you so that you don’t have to be mired in day to day details for any particular client, you can work on the business as a whole. It’s a distinction that’s a [inaudible 00:05:47] phrase, which is, “Work on the business rather than in the business.”\n\n\n\nOne of the other things is….\n\n\n[00:06:00]\nAndy Baldacci:\nNot to butt in too much but for that area though, it’s when the succession so that planning, I know a lot of agencies, they’re so busy delivering work, finding new clients and they’re in that cycle. At what point do you think it’s… when is it too early to start doing the succession planning, or should that be done almost from day one.\n\n\nHenry Corona:\n[00:06:30]\nIf you define succession planning as, “I’m the owner, I need a number one guy that’s going to replace me eventually that I can trust and I can groom to take over for me.” That’s pretty one dimensional. What I probably said badly was start hiring people who are smarter than you are or as smart. Start delegating a responsibility to people, to your employees, who seem capable and able to fulfill the responsibilities.\n\n\n[00:07:00]\nStart doing it at an early stage so that your practised. So that you have a sense and then most importantly, so that you make somes mistakes when all the chips aren’t on the table.\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\n[00:07:30][00:08:00]\nHiring and firing is a real critical skill that… there are all kinds of adages about how you do this or how you do that. To some degree people are different and so you have to train yourself by making some mistakes. Better to make the mistakes of hiring the wrong people at the early stages. You start right from the beginning, just keep that in mind that you’re going to train yourself to manage people for succession. As the years go by and the business grows, God willing the business grows, then you have real succession, ownership kind of issues rather than management issues.\n\n\n\nYou prepared yourself and you’ve done it in your business and you’ve learned the way that’s right for you.\n\n\nAndy Baldacci:\n[00:08:30]\nRight. IT’s one of those things where it’s like if you do, in the beginning when you’re just starting out, when you’re getting a lot of clients, more than you can handle and you start making those first hires. A lot of people will often rely heavily on just freelancers, contractors, to kind of outsource some of that work so that they can take on more projects but the trouble is that if you’re only hiring people that, as you were saying, that will just strictly follow instructions, is going to be very hard for you to find the time to work on the business because you, by necessity, have to be in the business because no one else is.\n\n\n[00:09:00]\nHenry Corona:\n[00:09:30]\nYeah. One of the ways to think about this, and we all know people like this, you can get so good at doing stuff that you know it’s going to take you time and a half to train somebody to do what you can do in half the time. That’s also an investment in your business, isn’t it. You have to bring along people to take over. Sometimes you’ve got to spend more time than you would just doing it, to teach the other guy how to do it. If you’ve done that right, you’ve picked the right person once he or she takes over, now you’ve got much more time to get the bigger client, to work on your business. To do all of those things.\n\n\nAndy Baldacci:\n[00:10:00]\nWhen you said that, when you said that that’s an investment that made me think of the question about the first mistake. You talked about [inaudible 00:09:53] making, not reinvesting profits into the agency. When I first heard that, in terms of traditional business sale, I would think that the owner taking out.. if there’s more profits that are coming out of the business that would make it a more valuable business.\n\n\n\nDoes investing the profits, reinvesting the profits, does that directly impact the valuation or is it making those reinvestments allow you to grow the agency in another way. What is so important about the reinvestment of profits.\n\n\n[00:10:30]\nHenry Corona:\nEverybody is faced with the dilemma of hiring ahead of behind or after revenue. You’ve got client number one who’s good enough, now you’ve got client number two who’s a little bigger and you know that you’re going to need two more people, or three more people to handle number two client.\n\n\n[00:11:00]\nWhen do you hire him? Do you hire him, do you go to that client and say, “I’ve got these people on staff.” Or do you go to that client and lie about “I’ve got it, I’ve got it covered. No problem.”\n\n\n\nYou may have a cover because you have the freelancers that are doing it.\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\n[00:11:30]\nIf you’re making.. if you want to continue making a profit you have to assure somebody that you can do the job and bring the people in underneath. It’s generally less expensive over time for big… as revenue grows, to have employees versus contractors. However, there’s cash. I have a friend\/client in the Midwest who has an agency and he started up… he’s probably made it, he would tell you that he’s made every mistake that’s possible to make, he’s made it.\n\n\n[00:12:00]\nRight now he’s getting a lot of new business and he thought he would sell his way out of the deficit. He hired all the hired and then he could truthfully say, “I got these people sitting on cubicals in my office right now, we can do this.” The growth wasn’t happening fast enough and even though on paper his income looks rally good his cash is strapped. That’s a dilemma I’m sure some of your listeners are going to identify with.\n\n\n[00:12:30]\nIt’s a dilemma that isn’t an easy fix. You have to manage this, this is, there’s another adage, is if this were simple, if it were easy, your in-laws would be doing it.\n\n\n\nIt’s not.\n\n\nAndy Baldacci:\nRight.\n\n\n[00:13:00]\nHenry Corona:\n[00:13:30]\nIt’s hard. That’s part of why an outside objective assessment is useful at times and worth the extra money that you’re paying out. It isn’t productive but then you’re getting a more accurate… The assessment, the objective, the outside assessment, is going to be less about personalities. It’s going to be more about productivity. Sometimes when you have a team that you’ve assembled and you guys are all working together you feel a camaraderie and this guys got my back.\n\n\n\nThis guy may have your back but he’s not confident.\n\n\nAndy Baldacci:\nRight. It’s easy to be too close to the problem.\n\n\nHenry Corona:\nRight, right. That’s a convoluted answer to a simple question.\n\n\nAndy Baldacci:\n[00:14:00]\nSometimes that’s necessary and I think it makes sense because in my mind, when I was thinking about reinvesting the profits I was thinking this in a very literal sense as that would lower profits if you just kept pouring it back in the business. It does enable the growth that you do need to sustain to really get to where you want to be if you want to make the sale.\n\n\n\nWith those first two out of the way were there any other mistakes that you often see. Again, not to generalize, but are there any mistakes you often see agency owners making that make it harder for them to sell.\n\n\n[00:14:30]\nHenry Corona:\nGetting too many small clients. When you’re first opening up, if you’ve got the dry cleaner on the corner, this is good, you know.\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\n[00:15:00]\nYou guys paying me. I get a discount on my dry cleaning. It’s a small business and a small retailer. Maybe it’s a local chain of four stores and you’re banking on this people growing, or this business growing and then you’re billing will expand. What happens… I have a direct parallel in my business, my consulting business.\n\n\n[00:15:30]\nI take every client seriously. I view almost every assignment as requiring a similar amount of time. That’s not entirely true because if somebody’s got complex systems it’s going to be much more involved than a larger business. The smaller ones I think of as… it’s actually more important to the small business owner to get to solve a problem, to correct it, a mistake, that it is for the larger business that, “Ah, it’s just one, it’s one, it’s 1% of my revenue. If I screwed it up I screwed it up. What are you going to do.”\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\n[00:16:00]\n[00:16:30]\nFor the small business owner to make a mistake, it’s 55% of the business, it’s 25%. It’s a big deal and it’s his livelihood. I can’t charge the same rate to a small business that I would to a large organized. If it’s a $20 million AGI agency we’ve got some latitude there. If it’s a $200,000 agency we don’t have a lot of extra money and we don’t have a lot of room for mistakes.\n\n\n\nI work, probably, I go to a lower scale working with agencies than some of my competitors do. I don’t do a lot of small business work because it takes up the same amount of time.\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\nI have to watch my business as well.\n\n\n[00:17:00]\nAndy Baldacci:\nWhen someone is working with too many small clients. Is the reason why that prevents a sale, is that just simply because their revenue is not going to be as high or is there more of an inherit issue to that. Is that something acquirers just don’t want to deal with because they know they’re not going to make much money on it or what specifically about that is the problem.\n\n\nHenry Corona:\nThe acquisition part is secondary.\n\n\nAndy Baldacci:\nOkay, right.\n\n\n[00:17:30]\nHenry Corona:\n[00:18:00]\nLet’s just say our primary purpose is to make a profit and to increase the profit margin. If you do that then you have options. If you’re not making any money you don’t have any options except the want ads. When you have a lot of small clients you fill up your day with small client problems. You don’t have time and you begin to take on the profile of a small business and you don’t think big enough.\n\n\n[00:18:30]\nThe problem at the point of acquisition is there are a lot of different kinds of buyers. There are some buyers that are strictly financial, there are others that are strategic and putting a network together and want an agglomeration of agencies. Some want a completely integrated network where they’re all under a single name, everybody’s working together. There are, well, let’s just take those kinds.\n\n\n[00:19:00]\nThe one that’s putting the agency network together and wants everybody to integrate wants to make sure that you don’t have… the agency he’s acquiring or they’re acquiring is not too dependent one client because if that client leaves everything falls apart.\n\n\n\nThey want three or four, three legged or four legged stool.\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\nThat kind of has some.. four is better than three because if you lose one you can still kind of balance.\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\n[00:19:30]\nAnd keep going. If you have too many it’s not going to be as profitable. Are you familiar with an allocation of overhead, that concept.\n\n\nAndy Baldacci:\nNot specifically. I’d be curious if you could expand on that.\n\n\nHenry Corona:\n[00:20:00]\nOkay. It costs you money to service but it also costs you money, overhead, to house your services. Your fees have to be a combination of if you’re doing this on an hourly basis and everybody speaks about and aspires to billing by value, that’s harder to do. Let’s recognize that that’s maybe the best thing to do but it’s difficult to get that.\n\n\n[00:20:30]\nHourly. You and I are going, i work for you, you send me out and we divide up my salary by some number of hours in the course of a year and then it comes to get to my direct cost. In addition to my direct cost.\n\n\n[00:21:00]\nLet’s keep it really simple. Let’s say you’re paying me $10,000 because you’re kind of cheap. You’re not. You’re paying me $10,000. I’m going to put in 1,000 hours let’s say. You’re paying me 10 that’s $10\/h, 1,000 hours.\n\n\n[00:21:30]\nYour cost, you have to pay me $10\/h to cover my big salary of $10,000. Then in addition to that you’ve got… I’m your employee, you decide, because you really like me, I’m your employee. Now you’ve got withholding and all of that stuff. Let’s figure 20%, just to keep things simple. That means that my $10,000 salary is really a $12,000 cost.\n\n\nAndy Baldacci:\nYep.\n\n\nHenry Corona:\n[00:22:00]\nInstead of $10\/h, you know, for the thousand hours that I’m working, it’s $12 an hour. You’ve got rent and you’re paying for my parking and then you’re paying… you’ve got the electricity and you’ve got to buy me a computer and you have to pay for… Add it up.\n\n\nAndy Baldacci:\nExactly. It’s not just… it doesn’t come down to just your salary.\n\n\nHenry Corona:\nExactly. Traditionally, historically, you’d figure rule of thumb, salary times two covers basic overhead.\n\n\nAndy Baldacci:\nOh, okay.\n\n\n[00:22:30]\nHenry Corona:\nNow you’re at two times $10\/h or whatever it is. So now it’s $20. Where’s your profit in there. You’re pricing me out. If it’s $20\/h you still have an extra $10 but in theory that extra $10 is all your cost.\n\n\nAndy Baldacci:\nExactly.\n\n\n[00:23:00]\nHenry Corona:\nYou have to add. What you do is say, “Okay, I’m going to add 50% for my profit.” I’m going to make $5 on every hour I bill you out for. I’m going to charge the client $25. That’s the thinking more or less. That’s extremely simplistic.\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\nBut that’s…\n\n\nAndy Baldacci:\nThen you also have to think about the utilization rate and all those other things that go into it and charging enough to maintain your margins with the small clients, that alone is just going to be very difficult.\n\n\n[00:23:30]\nHenry Corona:\nRight. The other part is you have to make sure, you have to pay attention to how much time I’m spending on this stuff because even if you’re only paying me $10,000 but half the time I’m body surfing or at the pool.\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\nYou’re losing money.\n\n\n[00:24:00]\nAndy Baldacci:\nRight. I like how back when I first [inaudible 00:23:59] you said it’s about acquisitions second. I really think that’s what all of these mistakes are. That’s what they come back to. It’s not as though check these boxes and acquirers are going to love you because you checked the boxes. It’s because if you can avoid these mistakes you’ve built a highly profitable agency.\n\n\nHenry Corona:\nYeah.\n\n\nAndy Baldacci:\nThat is was ultimately matters.\n\n\nHenry Corona:\n[00:24:30]\nRight. At the end of the day you’re making.. and now you’ve made, let’s say you’re making 25% so now in theory, the acquirer would be really happy. The financial buyers are not going to buy you unless you’re making $3, $4, $5,000,000 in net income a year. I would guess that some of your smaller agency listenership would be very far away from making $5,000,000 in net income. Everybody would love to make that, right.\n\n\nAndy Baldacci:\nRight.\n\n\n[00:25:00]\nHenry Corona:\nRecognize the financial buyers in a more traditional, conventional sense in that range, not range. The traditional financial investors will be looking for a return on their investment, but, they also, these capital group that some in and buy assign yearly fees to you. On the order of $3, $4, $500,000.\n\n\n[00:25:30]\nYou have got to be making enough to pay that to them so they…\n\n\nAndy Baldacci:\nWhat are the fees for. What are they, I guess you have labels.\n\n\nHenry Corona:\nThey’r adminsitrator fees, they’re reporting fees.\n\n\nAndy Baldacci:\nOkay.\n\n\nHenry Corona:\n[00:26:00]\nThey will arrange the acquisition through a combination of debt and inequity. The debt has to be reported, there’s certain reporting requirements that these companies, that the banks or the financing sources, the primary sources have. They have to receive certain reports and the capital group has to, has just paid you a bunch of money and they’re going to make money too, on your deal.\n\n\n[00:26:30]\n[00:27:00]\nThe network groups, they’re a little different but they’re still an overhead issue. You’ve heard that big agencies can’t afford to take small clients. It’s because their overhead is so honorous that they lose money if they take a small client. That’s why it’s an opportunity for smaller businesses to take it and make money. They’ll make money because their overhead is not high. Their overhead allocation is much lower and on the other hand what’ll happen is their people will tend to be less expert, maybe less professional but certainly less expert than the bigger agency. Senior people that they can trot into a problem solving meeting. Sometimes they don’t even match up, there’s just no comparison.\n\n\n\nThe smaller clients will hire the smaller agency because they can afford to hire it.\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\n[00:27:30]\nGenerally what they do at the smallest levels, even up to $1,000,000 in billing, I think, I think the owners are the key people and generally what happens is the owners have a common story, they say, I’m on your business or one of my partners is on your business. We take you seriosuly, you are important to us. Any business owner wants to hear that, I’m important.\n\n\nAndy Baldacci:\nRight.\n\n\n[00:28:00]\nHenry Corona:\nThis is great, I’ll pay him. I’ll pay him to continue being important. That’s the [inaudible 00:28:00] that you go through. Anyway, I don’t know if we’ve beat that.\n\n\nAndy Baldacci:\n[00:28:30]\nI think that was important and one thing I want to go back to though is that when you were talking about the nitty gritty details of a typical sale and about the fees that were added on. A lot of those things, to me, that was something I wasn’t aware of and I’m sure a lot of listeners weren’t either. Do you mind if we dive into what an actual sale, if you get to that point, what it typically looks like. I know it varies by size, by specific type of agency, but is there a general process that selling an agency follows.\n\n\nHenry Corona:\n[00:29:00]\nYeah. These ten or so steps are the way to kind of characterize this. First of all you determine that the buyer and seller have something in common and there’s what typically referred to as chemistry but that they’d like to to the deal, they like each other well enough to do something. You speak generally about value and so liking somebody is okay but the next step is establishing, agreeing, that you’re going to move forward so that’s number two.\n\n\n[00:29:30]\nNumber three is you discuss the value. If the seller is thinking $5,000,000 I’m going to sell this for $5,000,000 and the buyer is thinking I’m going to buy this for $2 they’re probably not going to go beyond step three. You have to discuss value and agree on it. General structure, not the specific details but you have to talk. The structure is just as important as the amount, If somebody says I’m going to give you $10,000,000 and you have to work ten years for me and then I’m going to give it all to you in ten years then you say, “Thanks a lot, no.”\n\n\nAndy Baldacci:\nYeah.\n\n\n[00:30:00]\nHenry Corona:\nHow much down payment, what do I have to do if there’s an earnout, what do I have to do. What happens if I fall below my hurdle rate, I have to get to $1,500,000 in income what happens if I get to $1,000,000.\n\n\nAndy Baldacci:\nFor the hurdle rate, that’s the number they have to earn above in order to satisfy that part of the deal or what exactly is that.\n\n\n[00:30:30]\nHenry Corona:\nHurdle rates means on a number of other things. It’s really the minimum earnings level that you have to get each year if you’re in an earnout structure. We can come back to that but let’s stay on what the process is.\n\n\nAndy Baldacci:\nAll right.\n\n\nHenry Corona:\n[00:31:00]\nOnce they’ve agreed in principal then a letter of intent will be issued. Sometimes it’s just a letter of interest that doesn’t have any commitment. Generally that has the smart experienced buyers will put what’s called a stand still provision in any LOI, even if it’s only a comfort letter that is just barely a letter of interest and not any specific, you’ll still ask, they’ll still require the candidate for acquisition to agree that they will not talk to anybody else for 90 days.\n\n\nAndy Baldacci:\nOkay.\n\n\nHenry Corona:\nSo that they can get full attention and they get this deal done.\n\n\n[00:31:30]\nOnce that’s been signed and that involves a lawyer, by the way, that’s the first part where you have to have legal advice. I have seen enough of these that I can assess them but I do think that a lawyer needs to become familiar and this is the stage typically bring them in.\n\n\n[00:32:00]\nIf everybody is professional and experienced, what you expect is you meet to plan the process. How you’re going to do this. One of the important parts will be establishing who’s preparing all of the documents, how do they report, what’s the timing, all of that kind of stuff. They identify the role of your key executives.\n\n\n[00:32:30]\nWe go back to the beginning of our little chat here and we talk about not reinvesting in the business. If you decided you weren’t going to hire Sally but you’re going to go ahead and hire Henry because he’s cheap. I’m not going to hire Sally because she’s way too expensive. Besides, I have boat payments to make. I’ve got the house, I’ve got the vacation we’ve planned, I’ve got… That’s great, but you’re not reinvesting. You should have hired Sally, not Henry because Sally is much better at her job than Henry is at the job.\n\n\n[00:33:00]\nEarly in the process. This is only the fourth or fifth step. \n\n\n\n\n\n\n\n\n\n\n\n\n\n\nHenry Corona:\n[00:33:30]\nThis is just the fourth of fifth step and we’re already looking internally at who’s doing what. Then once you’ve agreed on that you move to the next step so step 6 is \n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\nHenry Corona:\n[00:34:30]\nYou agree and proceed and you form your key agency staff but only the key agency and you try to keep it without, not to be general knowledge to your competitors, they’ll find out. You enter into the due diligence stage and that’s where you need the accounting analysis, this is part of what I do and you need the lawyer in there to make sure that the contracts are right.\n\n\n\nYou will inevitably have some conflicts so it figures that there’s another full step where you’re confirming compliance, eliminating conflicts and agreeing. That’s a touchy point. That’s a point where you can just throw your hands up and say forget it, I’m out of here.\n\n\nAndy Baldacci:\nRight.\n\n\nHenry Corona:\n[00:35:00]\nThe next step is once everything’s been agreed to it need to show up in a legal document exactly as it was agreed to. That’s, again, a legal issue, you have to have your lawyers there and to make sure that everything you agree to is reflected accurately.\n\n\n\nLastly you go to closing. That’s, I think it’s about ten steps. Yeah, it is ten.\n\n\nAndy Baldacci:\n[00:35:30]\nI’ll count them up afterwards, yeah. That gave a lot of insight into the process because I think especially for someone who hasn’t gone through that in any type of business, there’s a lot more to it than one would expect. It makes sense when you think about why when you’re doing a big purchase like this with so many variables, you need to do your due diligence. You need to make sure everything’s very clear. There is still a lot involved in the process.\n\n\n[00:36:00]\nHenry Corona:\nRight. You know, Andy, the small agencies… If we were looking at ten or twenty agencies, all between… the digital firms that you tend to work with. They’re all between $200,000 and $500,000 maybe a little higher. They’re [inaudible 00:36:15] in that kind of range.\n\n\n\nThe majority of those will never grow to be a substantial size big enough to be acquired. Did you get that.\n\n\n[00:36:30]\nAndy Baldacci:\nYes. You were saying that typically, especially for the financial partners, they’re looking at $3-$5,000,000 in net income a year.\n\n\nHenry Corona:\nYeah.\n\n\nAndy Baldacci:\nAt least.\n\n\nHenry Corona:\n[00:37:00]\nLet’s not get caught up, too, on that. I know a buyers group that will buy down to $1,000,000 or a little bit lower but they don’t have any big charges. They have a philosophy of integrated and they’re buying clients. If the small agency has a significant part of a large client, they’re interested.\n\n\nAndy Baldacci:\nInteresting.\n\n\nHenry Corona:\n[00:37:30]\nIf it’s only making $750,000 they might listen. If it’s making $1,500,000 they will listen. They will explore. My job… try to do that right up front as quickly as possile because it’s just bad for business if I’m making empty promises.\n\n\nAndy Baldacci:\nSorry Henry, I hate to say that I think you actually cut out for a lot of that. The last thing I heard was you said your job, you said if they’re at $1,500,000 they will listen and then you said your job is.\n\n\n[00:38:00]\nHenry Corona:\n[00:38:30]\nOh. My job? My job is to counsel a small agency or a small business, small digital business and help them make realistic choices. Those ten steps that we were talking about in an acquisition, it’s a similar process that an agency, a small digital shop, might have to go through in order to join, to be merged into, a more general service agency that doesn’t have the strength and the experience that the digital shop has in the internet channel.\n\n\n[00:39:00]\nYou need to pay attention, you can’t do this, you can do it any way you want, actually. In general, you have to be very careful about what the terms are when you’re absorbed up into a larger advertising agency, for example. That’s the fate that… that’s probably a good option for many small startup digital shops, just to become part of a larger unit and then grow there and become the key digital tech guy.\n\n\n[00:39:30]\nI think if the world continues as it is, technology will be more and more important in the future. Moreso than now. As important as it is today, it’s going be more critical.\n\n\nAndy Baldacci:\n[00:40:00]\nRight. If you can position your agency, even if you are on the smaller side, if you can position your agency as someone with skills, significant technical skills, expertise, experience, everything that another agency is lacking then there is an opportunity for not necessarily a complete acquisition exit but for a merger of some sorts. Is that what you’re getting at?\n\n\nHenry Corona:\nYeah. I think that that’s a realistic choice for the majority of people in the digital space. As opposed to, “We’re going to build this up into a juggernaut and somebody’s going to pay us big bucks.”\n\n\nAndy Baldacci:\n[00:40:30]\nRight. I do think, most listeners of this show, even if they are on the smaller side of things they do have goals to get bigger, to expand. The aspect of a merger is something I haven’t considered much of. I’m curious to explore that a little bit in the minutes we have left. You said that this is something where you need to be very careful about the terms of the deal. What considerations need to be taken when figuring out what those terms are.\n\n\nHenry Corona:\n[00:41:00]\nThe terms are how much equity the smaller digital firm can earn as part of the bigger agency. For example, here in South Florida there’s a general advertising agency that bought a digital tech firm about 16-17 years ago.\n\n\nAndy Baldacci:\nYeah.\n\n\n[00:41:30]\nHenry Corona:\nThe owner got 15% of the overall business at the time of… he didn’t take a lot of cash, he took equity.\n\n\nAndy Baldacci:\nOkay.\n\n\nHenry Corona:\nNow the business is about to be sold, he’s a major partner and that’s the outcome. The good part.\n\n\nAndy Baldacci:\nI see. A lot of it will be balancing the considerations of how much cash do you want up front versus equity in making sure that it’s a balance that soothes sort of your needs but also your profile.\n\n\n[00:42:00]\nHenry Corona:\nYes. Remember that, as part of the bigger agency, you now have more security than you had before you were just on your own. Have more resources that you can… There are a lot of benefits but you have to be careful and make the right choice. That’s the whole idea about who you hook your wagon to.\n\n\n[00:42:30]\nAndy Baldacci:\nRight. I’m curious how Finansor, how your company and your services and your consulting, how does that fit in. How do you help clients navigate this process today.\n\n\nHenry Corona:\n[00:43:00]\nI would call in from, I got a call from an agency that isn’t… the owner’s 60 and he wants to sell. He knows he’s got to work for a while to sell. He hires me to come in, I do a valuation and then we identify half a dozen candidates who could, in his area, acquire him. That’s one way to do the process.\n\n\n[00:43:30]\n[00:44:00]\nAnother way is I did a valuation of an agency that was willing to sell, I had a buyer, I knew of a buyer who would be interested in buying, provided the financials were right. The agency hired me, we did an assessment and the value that I came up with was too low to interest the seller. We were looking at a real world option to sell but we didn’t have enough profit. My job was to tell him, here’s what the business is worth and this is why. Here, if you could change these several things we can come back to the well. California.\n\n\n[00:44:30]\nWho has been offered. They’re giving him a very good valuation on the surface but there’s no cash.\n\n\nAndy Baldacci:\nOkay.\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\nAndy Baldacci:\nIf people want to hear more about the service you have to offer, where should they go to hear more about what you do, get into contact you, anything like that.\n\n\n[00:46:00]\nHenry Corona:\nThey can go to FinanceSU that’s the landing page and it has my numbers, you can just call me or email me, I’m glad to take all calls and we can discuss what your situation is.\n\n\nAndy Baldacci:\n[00:46:30]\nPerfect. Henry. What I’ll do is I’ll hopefully get all this edited up so that no one has any idea about the connection issues that we went through. I’ll get everything linked up in the show notes and I’ll put that out.\n\n\n\nI just want to say thank you for taking the time to chat with me today, I really appreciate it.\n\n\nHenry Corona:\nThank you very much, I appreciate the opportunity. Okay.\n\n\n\nWant to learn more?\nWhether it is coming up with a valuation, or digging into the terms to make sure the deal is as good as the valuation makes it seem, Henry helps agency owners navigate all of their options when it comes to selling their agency or merging with another agency.\nIf you want to talk to Henry and get his advice on your own situation, he is happy to help. Just visit his website at FinanceSur.com for all of his contact information.\nThanks for listening!\nDo you plan on selling your agency? After listening to this episode, do you see anything holding you back? I’d love to hear your thoughts in the comments below.