Are you getting ready to sell your agency? Are you looking into potential buyers? How will you protect your interests in an M&A process? Today’s guest has a lot of experience, and even a book, in this area having sold the same agency twice and coming out mostly unscathed from the initial failed deal. He’ll share some of the good, the bad, and the ugly aspects of selling your agency and the challenges of managing a large agency team. Tune in to gain valuable insights on navigating the process of selling your agency.
David Rodnitzky is a digital marketer who started and later sold 3Q Digital, a team of 500+ rockstar/ninja/guru online marketing pros who offer expertise in online analytics, decision science, strategic consulting, creative, and conversion rate optimization. He also founded Agentic Shift, a boutique consulting firm dedicated to helping agency founders successfully exit their businesses through mergers or acquisitions (M&A).
Recently, David poured all his M&A expertise into his new book, Selling Your Marketing Agency, which you can get on Amazon.
In this episode, we’ll discuss:
The Key to managing an agency team of over 100 people.
An ironclad acquisition contract clause that will save your agency.
Lessons to help you avoid pitfalls in the M&A process.
E2M Solutions: Today's episode of the Smart Agency Masterclass is sponsored by E2M Solutions, a web design, and development agency that has provided white-label services for the past 10 years to agencies all over the world. Check out e2msolutions.com/smartagency and get 10% off for the first three months of service.
Accidental Agency Owner in Search Engine MarketingAccording to David, he sort of glammed into the world of search engine marketing after started in digital marketing in 2000. He worked at a series of startups in Silicon Valley, for about eight years and moved on to a company where he found the culture was not one he agreed with. He was traveling to India three times a year to manage a team while his wife was pregnant and decided it was not a smart family decision. So he quit and set up shop in a coffee house in Pacifica, California.
Soon people started calling him to help them with search engine marketing consulting and he had an agency. That agency Today is 3Q Digital, part of a bigger organization called DEPT.
The Key to Managing Over 100 People: Maintaining Consistency of Quality and ProcessesFor David, it’s a lot harder to go from managing two people to 25 people than it is to go from 25 people to 100 people. No individual can manage hundreds of people. You can only dedicate so many hours per week to checking in with your team. In this sense, he has learned the importance of maintaining consistency of quality when it comes to the people he hires, as well the importance of processes.
Most agency owners would agree it's relatively easy to manage and monitor two or three employees and make sure that they are doing a great job. However, the more people you hire, the more you have to delegate that responsibility and the less you sort of know about how well your team is performing. So David has learned to remain constantly obsessed with quality on the team.
As to delegating, processes will be key to maintaining quality, and unfortunately, most agencies don't have many processes. At David’s agency, when a client is onboarded, the success or failure of that client is based on the person assigned to that account. The results could vary since everyone has their unique ideas. That’s why you’ll need a solid process to ensure consistency because you can't have a brand without consistent results.
An Ironclad Acquisition Clause to Save Your Agency from RuinInitially, David wasn’t planning on selling his agency, until the offers came pouring in unsolicited. So he hired an investment banker to keep track of these inbound leads and screen them to determine which ones were legitimate buyers.
At this point, David decided to do a "mini process" where he sent letters to some potential buyers hoping to get official offers. The idea was to create a competitive environment and increase his company’s perceived value. The result was three great offers with one clear winner. This offer was a lot higher than David had expected, as its owners were bent on buying an agency. In the end, they took the offer for $30 million in cash and $35 in an earnout over three years.
But business veterans know big payouts often come with equally big headaches. So before ink hit paper, David negotiated an ironclad clause: until the full earnout paid out, he would retain absolute authority on all agencies like finances, sales, and hiring. Furthermore, if the company failed to meet the initial terms David would have the option to buy the agency back. He’d soon confirm adding that clause was the right decision.
Earnout Loopholes and Buying Back the Agency to RebuildUnder the deal signed with their new parent company, David would get his earnout if he managed to double the agency’s revenue in three years. They had to get from $17 million in revenue to $35 million in three years. Looking back, David believes the buyers didn’t think they’d be able to do it. However, after about a year and a half, it became clear the agency would reach that goal.
Unfortunately, the parent company was now facing some economic struggles and it became clear they’d be unable to pay the $35 million. This led to a second process that was the opposite of the first one. With their parent company struggling and trying to sell just two years after acquiring them, no one seemed interested in buying.
Finally, saving his agency came down to securing a $5 million loan to buy it back. Under this deal, they would give the parent company $5 million in cash immediately and remove the $35 million debt obligation, to which they agreed.
David took the company back and focused on scaling it and nine months later he got purchase offers once again. In the end, he sold under a traditional private equity deal.
More Lessons on the Agency M&A ProcessHaving sold his company once, David was prepared for the push and pull of negotiations and figured he’d had to make some compromises. He focused on making sure his interests were protected after the deal was done. “People are very nice during the M&A proves, but afterward it’s the contract that speaks,” he says.
Whatever the negotiation point you want to secure, David recommends getting it in writing. You’ll occasionally see a different side of people when money is involved, which is why he recommends working with people you trust and hiring the best lawyers you can. You can’t anticipate any wrongdoings, but you can protect yourself to the best of your ability by looking at every corner case before the deal is signed.
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