Introduction

For most people, selling their house is the biggest financial decision they will make. If you’re the owner of a marketing agency or B2B consulting company, selling your business (also known as exiting) can end up being a (much) larger financial decision.

In many cases, exiting a business can create a life changing amount of money. In fact, here are 2 big, related epiphanies I wish I knew sooner:

1. You almost always make more money selling the business than you will running it.

2. In almost all cases, you can only create a substantial change in your lifestyle by selling a business (in fact, exiting a business is the most common factor with wealthy people). One of my clients shared that, prior to their exit, the most they ever had in their bank account was $19,000 (approximately). After the exit, their bank account grew by $2 million.

Who This Is For

This blog post is for the founder who:

1. Wishes to build a digital agency or B2B consulting firm that can be sold for 7 figures or more.

2. Is looking at selling their agency in the near future (3 to 12 months) and needs help to avoid expensive mistakes.

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By digital agency or B2B consulting firm, I mean a company that delivers marketing services and similar for other companies, and these service often include:

• Paid ads management on Facebook, Google, YouTube or similar platforms

• Search engine optimization (SEO)

• Reputation management

• Social media management

• Email marketing and/or list management

• Website design

• B2B advisory work (strategic planning, CEO coaching and similar)

• IT services including managed service providers (MSPs)

For brevity, I will use the term “agency” to include all the company types listed above vs. using “B2B firm”, “IT firm” and so forth.

Selling your business requires careful planning and doing many activities that are often counterintuitive. Most owners usually only sell once so they rarely have prior experience on this process.

Thus, this blog post is intended to help provide a roadmap so you can avoid expensive mistakes that can end up costing you hundreds of thousands or even millions of dollars. It’s quite common to make a lot of mistakes, and many of these mistakes can wipe out months or years of hard work and sacrifice.

When I sold my first business, an IT B2B consulting firm, not knowing some of the things I am sharing here cost me over $400,000 in cash. My goal is to help you avoid similar expensive mistakes.

By the way, at the time, I had an M&A [merges and acquisitions] lawyer and a high end accounting firm help me. An M&A lawyer, it turns out, is often not the same an M&A advisor.

In business and in life, the most expensive lessons are from the things you don't know you don't know.

The lessons and tips in this blog post are from regularly helping agency owners exit and having exited my own. All of this information is based on real world lessons (and mistakes) vs. big abstract concepts typically found in most business books.

You can skip ahead to the section you want to read below.

An exitable agency is a financially healthy agency you can sell at terms you desire and is in alignment with your life goals. This definition then has 3 parts:

1. Financially healthy

2. At terms you desire

3. In alignment with your life goals

Let’s look at each in further detail.

Financially Healthy
An agency is exitable if it’s growing, has strong margins and has little if any debt. If the business is declining, it’s still exitable but there will be a massive discount on the sales price. Thus, selling such an agency rarely helps you accomplish #2 from above.

At Terms You Desire
If the business is financially healthy, then the likelihood of you getting the terms you want (financial and others) is far more likely to happen. When you sell, be clear on what your terms are including sales price, how much you’re willing to stay on and the length of the non-compete period (these are further explored in the “Deal Elements” section).

Make sure you’re clear on what your terms are so you can weigh the offer against these terms. It helps to identify your deal breakers so that you can quickly determine if an offer triggers any of those deal breakers so you can weed it out.

As an example, many agency owners do not want to relocate as part of their exit or stay on past the transition period. Others may insist that the buyer keep the name of the existing business for a certain period of time. Many owners prioritize the cultural fit as the #1 factor. Cultural fit refers to how the owner treats their customers, employees and vendors.

Only you can determine what that list is, and working with an exit specialist can surface this list.

In Alignment With Your Life Goals
You spent years building your agency so when you sell, it’s best that you’re clear on why you’re selling and what life goals need to be met so you can satisfied with the outcome. These life goals can include a monetary amount, whether you’re willing to work for the acquirer for an extended period. Not being clear on this can create emotional and financial regrets.

For example, you may have one offer at a higher price but it requires you to work at the acquiring firm for 2 years and another without that requirement. If your life goal is to move on, then you’ll be more more satisfied with the lower offer because it’s in alignment with your goal.

Exiting a business can be a life changing decision, and it’s best to be proactive vs. reactive about the process. Here is a list of things you should reflect on before you start the exit process.

• Why are you selling and why now? See the “When To Sell Your Agency” section for a complete list.

• Is your agency exitable? See the “What Is An Exitable Agency?” section for more details.

• What are you going to do after you exit? Many owners have a vague idea that they will retire and, speaking from personal experience, get so bored after a few weeks that they end up working again. If you’re not clear, here are some suggestions to get clarity.

• Speak with fellow owners who have exited

• Join a mastermind which discusses the exit process and the post-exit process (by the way. most masterminds don’t cover these topics in any depth mainly because most mastermind hosts don’t have this experience or don’t even know why it’s such a big deal)

• Meditate

• Pray

• Work with an exit specialist

• Have you done the proper tax planning? Exiting a business often creates a life changing amount of money and a huge tax bill. With proper tax planning, you can defer this gain (seek the advice of a tax professional that has experience with exits).

• Are you prepared for a potential loss of identity? By the time they exit, many owners will have spent thousands, maybe tens of thousands of hours, on the business which then creates an identity. Exiting can result in a loss of identity, which results in confusion and pain. When I exited, I was lost for a few weeks because I was so used to being the owner.

• Have you decided if you want to share the gains with anybody else? Some owners end up rewarding key employees even if these employees didn’t own equity in the business.

Overall, exiting a business is much an emotional process as well as a financial one. Make sure you treat the journey accordingly.

One of the most common mistakes many agency owners make is to max out sales and then sell. By then, that’s too late since the agency can only go down, and an agency with declining sales is very difficult to sell.

Ideally, you would want to sell while sales are still climbing, and you have to resist the temptation to squeeze out everything possible from the business. A buyer is buying the agency based on its past performance and its potential for future growth. If you’ve maxed out the growth, then the buyer knows they’re buying a business that’s going down.

Likewise, you need a minimum amount of historical performance before you can realistically get any real value from it. At minimum, here’s what I recommend most agency owners to have:

For a more comprehensive list, see the “Things That Will Add $500K Or More To Your Sales Price” section.

Having said that, if you find that you’re no longer excited about running the business, then it’s best to get help or even consider selling. Staying around the business longer usually only ends up sabotaging it so even if you don’t get top dollars, it’s best to sell and move on.

In my experience, here is a list of reasons why agency owners look at selling:

Why Owners Sell

1. Lifestyle changes - the owner is having a baby, their health [or the health of a loved one] is declining, they're reaching retirement age, etc.

2. Loss of 1 or more key employees - sales immediately dip when this happens.

3. Divorce - some owners have to exit to raise money for divorce fees and alimony.

4. Bored - the owner feels like they’re growing through the motions.

5. Industry changes - there’s 1 or more new platforms that require the agency to upgrade its abilities.

6. Mentally tired - the owner has been carrying the business, and it’s taken its toll.

7. Bragging rights – one MSP (managed service provider, a company that provides outsourced IT services) owner shared that his goal was “40 by 40” which meant to exit for 40 million by 40 years old (my team and I are exploring if we can help him accomplish “40 by 35” to save 5 years off his timeline).

8. Personal growth - when I sold my own firm, this was a big motivator. I felt I had taken the business as far as I could with my own resources, and selling to come on board as a C-level executive at the acquiring business gave me an opportunity to acquire new leadership skills including managing almost 80 employees.

9. Growth opportunities for your staff - another big reason I exited to a much bigger firm was I wanted career growth opportunities for my employees that I simply couldn’t provide at my own firm.

10. Liquidity - some owners want to sell a portion or all of the business to have a certain level of liquid capital.

11. Diversification - most business owners have over 80% of their net worth tied up in their business, and selling in part or in whole is a way to diversify their net worth.

12. Financial planning - some owners want to sell so they can pass the funds to their heirs.

13. Seed capital to launch a new business - I helped more than one agency owner sell so they can use that capital to fund another business (usually a SAAs business). Likewise, this is the same formula used by the richest man in the world, Elon Musk.

Reasons 1 - 6 usually result in a forced sale, which means you won’t get anywhere top dollars. In M&A circles, a buyer is taught to look for a motivated seller to get a steep discount.

Avoid being a motivated seller at all costs because it can cost you hundreds of thousands of dollars or more. Your mental state is compromised and you rarely get what you want.

Understanding why buyers acquire agencies helps you refine and market your agency so it’s most desirable to the buyer. This is a key point: ultimately, it’s the buyer who determines the final price vs. industry norms.

Here’s a list of reasons why buyers acquire agencies so you can better understand the buyer psychology and maximize your exit.

Acquiring More Customers That Match Their Current Profile
Many acquirers, especially other agencies, often buy an agency so they can acquire more customers in the industries they already serve. This is usually done in cases where the buyer is looking to consolidate a particular industry (usually via a rollup).

Attracting Higher End Talent
A lot of agencies, until they get to a certain size, can’t really attract top notch talent, mainly because a lot of potential employees don’t see a career path. So the employee may initially go work at a small company because they like the culture and informality.

But three years or five years in, reality kicks in and the employee realizes they’ve hit the ceiling at this company since the next level up is being the owner. So to attract a lot of talent, an agency realizes that they have to get bigger for the simple reason that top talent just may not be attracted to a smaller company due to limited career opportunities.

A big reason why I sold my agency was because I realized that I couldn’t provide a career path for my employees and I knew that selling was the only way to break that ceiling for them.

Entering a New Industry
Years ago, eBay bought PayPal because they realized that a lot of their sellers were using PayPal to accept payments. Thus, eBay bought PayPal to effectively enter the e-payment industry. Similarly, your agency may have knowledge in a particular niche that a buyer may want to acquire.

Entering a New Geography
A buyer may have market share in their country but they may not have any presence in the country your agency is based in. So the buyer buys an agency in that country because it’s faster than trying to start a company from scratch in that country. I often talk to European-based buyers who want to buy a US-based company for this reason.

Getting New Products Or Services To Sell to Existing Channels
In this case, the buyer has core offerings, and they are referring out other client needs to outside partners. For example, one of my clients, a PR firm, has been referring out their clients to referral partners for paid ads management.

Getting Additional Financing Options
Bigger companies often have access to loan packages that smaller businesses don’t have. Some of these are offered through mezzanine banks and similar. Many of these loans are available as interest vs. principal plus interest.

Thus, many companies will buy another company just so they can get access to cheaper capital. Warren Buffett is one of the richest men in the world, and a big reason for his success is he has access to capital cheaper than anybody else.

Career Change
Some buyers just may want to change careers because they’re burnt out with what they’re doing after 10 to 20 years in corporate America. An agency is more attractive than most other choices – such as a restaurant franchise – because it lets the owner work from anywhere and allows them to use their managerial skills.

Exiting At A Higher Valuation Faster
They want to grow their top line and bottom line so they can increase their multiple, thus enabling them to exit at a higher price. Also, growth through acquisitions is often faster than organic growth so this can also speed up the exit timetable for the buyer as well.

Bringing Marketing In House
Some buyers spend so much on marketing – ecommerce companies and investment funds for example – that it makes economic sense to buy an agency and bring the talent in house. This improves margins and it can also remove this strategic capability from the marketplace (ideally, a competitor was using this same agency and buying the agency then weakens the competitor).

Depending on how far off you’re looking at selling, you may be able to add 6 to 7 figures to your valuation with some simple steps. Below is a checklist that my team and I implement for ourselves and for our advisory clients to drive up the valuation of each agency exit.

1. Structure The Business So That It Can Run Without The Owner
A buyer rarely wants to buy a job so they want to see that the agency can run with as little involvement from the owner as possible. This means hiring a team and delegating day to day operations as much as possible. Day to day operations includes delivery, sales and marketing (nothing scares a buyer more than hearing that you’re the one doing all the work and/or you’re the #1 salesperson at your agency).

2. Increase Your Overall Revenue And Improve Your Margins Simultaneously
All else being equal, a business with a higher net margin will be more valuable than one with a lower margin. You can improve your margins by

• Raising your fees

• Productizing your services

• Lowering your customer acquisition costs - add in followup sequences, reactivate past clients, etc.

• Converting fixed costs to variable costs

• Lowering your overhead - this means negotiating better terms with your vendors, not cutting your team’s salaries. Some areas you may want to look at include your office supplies, your healthcare vendors and your credit card processor. As a simple example, if your agency can command a 3X multiple, that means each dollar of profit adds $3 to your sales price.

3. Increase The % Of Revenue From One-time To Recurring
One of the best ways to increase the valuation of a business is to add recurring income. Recurring income creates more predictable cash flow, which then lowers the risk and drives up the valuation. Ideally, 100% of your revenue should come from recurring sales, but that’s not always possible. The goal then is to make as much of your overall sales be recurring vs. one-time.

If your agency is doing projects that are quoted once, consider adopting a model where clients can pay a flat fee and get unlimited support for that service. A good example of this is Design Pickle, a design agency valued at a multiple of their annual sales whereas most agencies in that space are valued at 1X to 2X of their annual profit.

Likewise, software platforms such as GoHighLevel enable you to create recurring income by injecting your processes into their platform and then signing up your customers onto your customized version of GoHighLevel.

4. Create Intellectual Property
Disney bought Marvel Comics for $4 billion because of Marvel’s intellectual property (IP), mainly their library of Marvel characters, which Disney has used to launch movies, theme park rides, etc. Unfortunately, most agencies don’t have a similar level of IP.

However, you can still create IP in the form of:

• Marketing materials (webinars, presentations, questionnaires, etc.)

• Lead generation assets (Facebook ads, Facebook account, etc.)

• Sales processes (scripts, training videos, etc.)

• SOPs for client delivery including onboarding, day to day operations, staff training, etc. Even better, your SOPs and delivery model are built on a white label platform such as GoHighLevel.

5. Create High Barriers Of Entry
Companies that have high barriers are harder to knock off and thus are more valuable (Warren Buffett calls this process "building a moat around your business"). High barriers of entry can be

• Domain knowledge - your agency may specialize in the medical industry, which has a high learning curve.

• Marketing or geography exclusivity - for example, you may be one of the few companies in your area that’s allowed to be certified on a software platform.

• Expertise in multiple disciplines - your agency can run ads, do copywriting, build funnels, write video scripts, do video production, etc.

• Preferred pricing with key suppliers - you can outsource part or most of your delivery to overseas teams which cuts your delivery costs by 30 to 50% (or even more).

• Intellectual property (see above).

  

6. Maximize The Lifetime Value (LTV) Of Each Customer
Identify why clients are leaving and plug those holes. Also, find a way to sell more to the same client using white label vendors or strategic partnerships. The more ways a client spends money with you, the less likely they are going to leave.

Too many sellers focus on the price and not enough on the deal elements. Most offers for agencies include the following 6 elements:

1. Sales price

2. Cash at closing

3. Owner financing

4. Earn out

5. Consulting fee

6. Non compete

These 6 elements are further explored below. 1,2 and 6 are in all exit agreements. 3, 4 and 5 are optional although common.

1. The Sales Price
The sales price is what your agency is valued at. This is not necessarily the cash you, as the seller, get at closing.

2. Cash At Closing
Cash at closing is the amount that’s made to you on the closing date. Ideally, 100% of the sales price is available as cash at closing but many buyers will want to ask you to finance part of the purchase using owner financing also known as seller financing.

3. Owner Financing (Optional But Common)
Owner financing also known as seller financing is when you act as a bank to the buyer and provide financing. A buyer would do this for cash flow reasons and also to have reassurance that the business doesn’t have any complications that couldn’t be identified during due diligence.

When I help a client exit, my goal is to get 70% or more of cash at the closing (this requires the business be healthy, growing and also have a high % of recurring sales).

4. Earn Out (Optional)
An earn out is a conditional payment in addition to the sales price (the carrot version) or as part of the sales price (the stick) only if certain milestones are met.

An example of the carrot version of an earn out is a deal I worked on where the seller was offered $2 million at closing and an opportunity to earn an additional $450,000 if the seller can hit a certain level of profit in the next 12 months. Thus, the $450,000 was similar to a performance bonus on top of the $2 million cash at closing.

An example of the stick version would be the same deal where the seller is paid $500,000 and only earns the additional $1.5 million if they hit certain milestones.

Milestones can include profit growth, sales growth, additional clients, etc.

5. Consulting Fee (Optional)
It’s common for a buyer to ask the seller to help with the transition, and a transition period usually lasts a few weeks. However, in some cases, the buyer may want the seller to stay around longer so a consulting fee is sometimes added as a separate agreement. I helped a client add $60,000 to their exit price by explaining to the buyer (an investment fund with multiple companies) that the seller can help train their other CEOs on the seller’s growth methodology.

6. Non Compete
Most buyers will want to have a broad 5 year non compete, and I usually help negotiate it down to 3 years with a much more narrow scope.

While there are many things you can do to boost your exit price, it only takes a few things to kill the deal, knock off $100,000 or more from your valuation or tie up your payment in complex earn out structures.

1. Unrealistic Expectations
Many sellers hear (usually second hand) that a colleague or a stranger sell a business and use that as the baseline for their asking. “John Doe sold their business for x dollars. Mine is at least as good so my business is worth at least that if not more.” What’s often overlooked are the following:

1. John’s net margin is way higher

2. John sold to a strategic vs. a financial buyer

3. John has a SAAS business vs. an agency (SAAS companies tend to have way higher multiples)

I’ve had to pass on more that one potential client because they had an exit price not based on any real market data, and they were adamant about getting that price.

2. Messy Or Incomplete Financial Records
A buyer’s #1 priority is risk management so if your financial records are incomplete or you can’t prove your sales with bank statements and credit card receipts, the buyer will definitely knock down the price substantially. If they can’t verify the sales and profit numbers, there’s no way they will pay a premium or even at all.

3. Too Much Revenue Concentration
As a rule of thumb, a buyer doesn’t want to see more than 15% of your overall sales concentrated on a single client due to the exposure. This holds true even if the client has been one for years and/or they have a signed contract: the exposure is too great. While this may not kill the deal, it will definitely affect the valuation or the buyer will hold back a portion of the purchase price and pay it over an extended period (usually 12 to 18 months).

4. Roller Coaster Sales
Roller coaster sales is a sign of poor business development and/or a lack of recurring revenue. In either case, this is a red flag to a buyer, and they will adjust the price accordingly or pass entirely.

5. Being Overly Dependent On The Owner Or Referrals
Many agency owners brag about how they don’t have to do marketing because they get all their sales from referrals and/or they do their own business development. A new owner is unlikely to do all the manual labor – speaking, posting on social media and similar – required to do business development. Likewise, referrals are too unpredictable. If you don’t have a proven way of getting new clients without it being dependent on you, then most buyers will adjust the price accordingly or pass entirely.

6. No Long Term Contracts With Clients
A buyer wants predictability so if there are no long term contracts with key clients, then that’s a key area of concern.

7. Poor Retention
A key report that a buyer will ask for is a retention report. If they see more than 5% churn month over month, that will be a concern for them since it’s an indication that clients may not be satisfied with the agency or the service is not important enough for the client to keep on paying.

8. Overdependency On One Client Acquisition Method
If the agency has only client acquisition method, then this is also a red flag.

9. Low Client Lifetime Value
If the agency’s clients have a low lifetime value, then this limits how much marketing a buyer can invest to acquire new customers. This is a big reason why so many agency owners depend on referrals because their client lifetime value won’t support paid marketing.

10. Overly High Customer Acquisition Costs
If the customer acquisition cost is too high, then that eats into the margin and/or it takes longer for the agency to recoup its marketing cost, which cuts into the cash flow.

11. No Standardized Packages
If the agency is doing custom work with every client, this is also a red flag since it affects scalability, training costs and ultimately margins.

12. No Management Team
If the owner is doing sales, delivery and business development (not uncommon by the way), then the buyer doesn’t see buying a business: they see buying a job, and most will pass, especially if they already own an agency.

13. Sales Trending Downward
Most buyers know that there is seasonality to each agency but if sales are trending downward over time, then only the bravest buyers will proceed.

14. Little Or No Recurring Revenue
If your sales are dependent on long sales processes vs. recurring income, then most buyers will discount the price as well. Most buyers would prefer a business with slightly less overall revenue if the bulk of the revenue is recurring vs. one-time.

Just as your clients outsource their marketing to you or a firm like yours, a key decision you need to make is if you wish to sell the business yourself or outsource the work. This section will give you a quick checklist to help you decide that.

Before going too deep into this, it’s helpful to establish some basic terminology.

1. A mentor or growth advisor can help you grow your agency and/or B2B firm. Most mentors don’t have M&A experience at which point you should hire also consider hiring an M&A advisor.

2. An M&A advisor is somebody who helps you with preparing the business specifically to sell. If you know you’re going to sell in the next 6 to 18 months, it’s best to engage one immediately. They may or may not have experience running an agency (it’s better if they do).

3. A business broker or exit specialist is somebody who bring pre-qualified buyers and helps guide the process until an exit is completed.

This assessment will help you decide if you should do the exit yourself or outsource it. Each question is further explained below under “Quiz Questions” below.

Here’s the list of recommended actions based on your score.

Quiz Questions

1. Have you ever sold a business?
Selling a business is a highly complex business transaction (others include buying a company, raising capital or going public), and most business owners greatly underestimate how complex and time consuming the process is. Many business owners think it can be done in weeks and it just requires contacting a few people when the reality is usually far different. :)

If your goal is to sell for 7 figures or more, a single mistake can cost you $100,000 or more. On my first exit, I made a mistake that cost me $400,000 of cash, and I had a very high-priced M&A lawyer that I mistakenly thought was also an advisor. It turned out his role was to help ensure compliance, not help me come up with the best deal that fit my goals and needs.

In many ways, doing it yourself is almost as time consuming as running your own business: many business owners have shared it’s like a second full time job where you don’t know what you’re doing most of the time.

Below is a partial outline of my Smooth Exit(tm) process when my team and I help our client exit for 7 figures or more.

Then the real work begins as the deal goes into due diligence. :)

In short, if you’ve never sold a business (and even if you have), I recommend hiring a broker / exit specialist not just for time reasons but also for objectivity.

2. Do you have a team that can handle sales and operations day to day?
As mentioned above, selling a business is very time consuming and can easily cause you to lose focus on growing the business. Quite often, focusing on selling the business on your own results in the business dropping in sales unless you have an existing team to handle that. Many agency owners shared that selling a business on their own is, at times, like having a second full time job with a very steep learning curve.

If sales drop because you don’t have a team to handle day to day operations and sales, then your sales will drop. This then makes the business that much harder to sell since a declining business is a red flag and only the most adventurous buyers will dig deeper. If you don’t want to risk a drop in sales, it’s best to hire a broker / exit specialist.

3. Can you remain objective during negotiations?
If you’re a business owner, you probably know how to negotiate and a key part of negotiating is being objective. I’ve seen agency owners (who can negotiate a 5 or 6 figure project) go from level headed to being very emotional when it comes to selling their agency because they suddenly say things like:

• “It’s my baby.”

• “I can’t believe they only offered that [low of a price].”

• “Do they know how many hours I’ve put into this?”

• “Yeah, we had some bad months but look at the good months we have.”

• “This has amazing potential. Why can’t they see that?”

In short, they become almost irrational which then really affects their ability to negotiate calmly. Behind the scenes, I’ve had to calm down more than one agency owner because they got upset because a potential buyer simply pointed out that their margin is lower than other agencies, their churn is higher than usual or similar.

It’s one thing to negotiate with a client on agency services, and it’s a totally different thing to negotiate the sale of something you’ve spent years building.

4. Do you understand deal structuring for an exit?
Most agency owners will focus on the price and or multiple when that’s only a portion of the overall exit package and deal structure. There is the earn out, the non compete, payment terms and a host of other deal elements. By the way, many buyers know that sellers focus on the multiple. Knowing this, the buyer gives a higher multiple and extend an higher one to win you over and put multiple conditions on you getting the entire amount.

However, it’s quite possible for you to get a higher valuation or higher exit price from one buyer and end up with less than a lower valuation or lower price from another buyer.

Most agency owners will have one exit during their career whereas many buyers have more experience so inherently, most agency owners are at a disadvantage when it comes to exiting and deal structuring.

5. Do you have access to buyers who will buy your business?
Unless you’ve been doing exits for an extended period, it’s unlikely you have access to a group of buyers. This is why having the right broker / exit specialist can make a huge difference in getting your agency sold and at the terms you want. Statistically, only 20% of businesses sell. Having the right broker / exit specialist can dramatically increase that percentage.

This section captures the most common questions I have gotten from having worked with many agency owners when it comes to exit planning and exiting.

When should I sell my agency / consulting business?
See the “When To Sell My Agency” section.

What does EBITDA mean?
EBITDA is an acronym for earning before tax, interest, depreciation and amortization. It’s a finance term that takes the regular profit and loss (P&L) statement and then makes adjustments based on the factors just listed.

Investment firms usually don’t get involved in day to day operations so they hire an Operator or General Manager for that role. Thus, if you’re not taking a salary, then the buyer would add a line item to your P&L for the market salary of an Operator or General Manager, thus reducing your overall profit. A buyer that’s looking to run the day to day would use an SDE metric instead (see below).

Please note that EBITDA is not a term by accountants nor does it show up on your tax return: it’s a metric invented by M&A firms so they can compare P&L statements across different industries in a normalized fashion.

If finance is not your strong suit, it’s best to get help from an M&A advisor or an accountant that’s M&A savvy to calculate your EBITDA.

What does SDE mean?
SDE is an acronym for Seller’s Discretionary Earnings. It’s similar to EBITDA and is usually used with firms at $1 million or under in annual sales. SDE measures how much cash flow the business can generate if the owner is running day to day operations. To keep things simple, you calculate the SDE by taking the P&L and then add back one-time or unusual charges. Broadly speaking, the SDE is usually higher than the net profit.

Like the EBITDA metric, SDE is not a term used by accountants nor does it show up on your tax return: it’s a metric that’s calculated from your P&L through a process called recasting.

What does the term “multiple” mean?
“Multiple” is a number used on the SDE or EBITDA to come up with the sales price. As your EBITDA increases past certain thresholds, your multiple increases. Investment funds use this phenomenon to rapidly create wealth by buying smaller companies at a lower multiple and integrating them to form a larger one with a (much) higher multiple.

What’s an earnout?
An earnout has 2 meanings:

1. An additional bonus for hitting additional milestones (the carrot version)

2. A way for the buyer to offer you a high price with many restrictions on the balance (the stick version)

An example of #1 (the carrot version) is a buyer who wanted to buy my client’s business for $2 million (paid at closing) and my client could earn up to $450,000 if certain financial milestones were met. Thus, the $450,000 can be viewed as a bonus.

An example of #2 (the stick version) is another deal where the buyer offered $1.5 million but only $300,000 at closing and the seller had to hit many milestones to earn the $1.2 million. Thus, almost 80% of the asking price was conditional.

What does recasting mean?
Recasting is taking your profit and loss (P&L) statement and then adding back one-time or exceptional expenses to create a higher number. Conversely, if you’re not paying yourself a salary, it means adding an expense to hire an Operator or General Manager, thus lowering your overall profit. Recasting is not a process done for tax purposes: it’s only done for M&A purposes (exit or acquisition).

How do I determine my valuation?
For a financial buyer, your valuation is your EBITDA or SDE multiplied by a multiple. As of this writing, this multiple ranges from 2X to 3X if your business is doing less than $1 million in annual sales and 3X and higher if it’s doing more than one million in sales.

Note that these are ranges, and the final valuation is based on many other factors. See the “Things You Can Do To Add $500K Or More To Your Sales Price” section for more info. For a strategic buyer, your EBITDA or SDE is one factor. Other factors can include your IP, your proprietary process, the skills of your staff and many others.

When I sold my B2B firm, my strategic buyer valued my firm based on my IP, my process and the skills of my staff as well as my physical location. Other buyers valued my business purely on my EBITDA, and at the time, that was quite low due to my expansion efforts.

What is a financial buyer? What is a strategic buyer?
A financial buyer is one that determines your valuation price purely on financial metrics (almost always a multiple of your SDE or EBITDA).

A strategic buyer is one that determines your valuation price based on a host of factors. See the related question above, “How do I determine my valuation?”.

How will I get paid?
See the “Deal Elements” section.

Do I have to stick around and work for the acquiring company?
A buyer will always ask for a transition period (usually 6-12 weeks). Past that, you can negotiate whether you wish to be around or not. Some earnouts require you to be around while others don’t. In some cases, the buyer may pay you as a consultant past the transition period. I helped a client get an additional $60,000 in consulting fees because the buyer, an investment fund, wanted the seller to train their other companies in their portfolio.

What are some tax implications I should be aware of? NOTE: *** This is not tax advice. ***
Selling your agency results in capital gains, and the tax bill can be sizable. Working with the right tax professional can greatly mitigate this tax bill.

Do I need to meet my buyer face to face?
As of this writing, most buyers are comfortable buying 7 and 8 figure agencies and B2B consulting firms using virtual meetings. In one case, I am in the US, the buyer is in the US, the due diligence firm the buyer hired is in India and the seller is in Australia.

Why would a buyer be interested in acquiring my agency vs. building their own?
In most cases, it comes down to speed and risk management. Under many scenarios, it’s far faster and less risky for a buyer to buy vs. build from scratch. See the “Why Buyer Acquire Agencies” section for more details.

How long does the process take?
If you’re ready to sell, the business is healthy and you’re using an experienced broker / exit specialist, plan on 4 to 6 months from the agreement being signed with the broker / exit specialist to being paid. If you’re doing it yourself and learning along the way, it can take 18 to 24 months due to the steep learning curve.

Should I tell my employees I’m selling?
You should only tell your employees, even your senior management team, during the later stages of selling (close to a letter of intent). This avoid distractions and uncertainty among your staff, which can lead to them searching for new jobs and unraveling the entire exit.

If you have an employee responsible for financials, then you need to include that person as early as possible since they will be helping to prepare the P&L, balance sheet and similar for the buyer.

Should I tell my clients I’m selling?
While you never want to hide material facts from your clients, telling them too early risks losing their business. Similar to your employees, only tell your clients when you’re close to a letter of intent and reassure your clients that they’re a priority to you regardless of what’s happening or will happen.

How can I increase my exit price?
See the “Things You Can Do To Add $500K Or More To Your Business” section.

Should I do this myself or hire an advisor?
See the “Should You Outsource Your Exit?” section for more information.

What’s the difference between an advisor and a broker / exit specialist?
An advisor advises you on how to grow the business and preps it for sale. They rarely implement the necessary or have the connections to get it sold: that’s the role of a broker / exit specialist. See the “Should You Outsource Your Exit?” section for more information.

Alex Nghiem helps digital agencies and B2B consulting firms exit for 7 figures or more by connecting them to qualified buyers. He’s authored and co-authored 5 books including his latest, Growth Through Acquisitions: How To Grow 300% Faster Than Your Competitors.

His clients have included investor groups, Inc 500 CEOs and Fortune 500 companies including BellSouth, Bank of America and Carnival Cruise Lines. His previous business (an IT agency) was sold to a VC-funded firm and also listed on the Fast 500, a list of the 500 fastest growing private tech companies. At the acquiring company, he became the Chief Technical Officer and managed close to $20 million of billable revenues.

In addition, he’s been featured in business publications and taught at leading institutions such as Forbes.com, Acquisition Aficionado, University of California, and Cornell University.

Alex Nghiem
Exit Specialist
Creator of the SmoothExit™ process

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