There is a conversation that I seem to have over and over again with agency owners.
They tell me about their business, and how they are growing.
Every year more revenue and more employees.
Yet their personal income is still low…
They keep “reinvesting in the business” and if they could just make it over this next hump, then their profits would go up and they could take home more pay.
This conversation happens time and time again…
In this article, I want to share why an agency owner with a low personal income needs to make some serious changes.
An agency is a terrible asset
So many agency owners justify taking low salaries because they are “building a company.” Here is the problem though, most agencies aren’t really a sellable company.
Unless you have standardized your services to the point where they do not require your personal involvement, your agency probably won’t sell.
And even if you have removed yourself, it still won’t sell for very much, because the agency model is still such a risky acquisition due to how dependent it is on people.
Even if you have $2M+ in revenue, if every job is custom, your agency is still a terrible asset…
Unless you have a predictable and repeatable business that can run 100% without you, your agency is probably not worth much at all.
And for most agency model businesses, that is the harsh reality.
“But we are different and I am systematizing…”
Great, but the truth is that the agency model is still mostly crap when it comes to being a sellable asset.
One of my friends ran a video production agency. They even niched their firm down and created a productized service. They were doing everything right in terms of building an agency to sell.
And what happened…?
They got acquired by a larger agency and he STILL had a multiple year “earn out” where he had to work for the acquirer if he wanted to get his full compensation from the acquisition.
Yes. He got acquired and did earn something for his asset, but overall it was still lower than expected for having such a productized business.
I have heard this same story time and time again from those who sell their agencies...
An agency is not a valuable asset. It’s a hard and risky job.
Now, there are benefits to running an agency or consultancy.
You have freedom to work for yourself.
You can earn more if you choose to.
And you are in far more control of your future.
In so many ways, having an agency is better than having a job.
BUT, if your are not taking home a good personal income, then running an agency is basically like working a really hard job for low pay…
There are two ways to profit from owning a company
Are you building an asset or are you in this for cash flow?
Building an asset
You are creating a company worth a high value so you cash out big when you sell. This is how most startups and software companies operate. They scrape by, barely profitable for a long time with the goal of having a large exit or selling to someone for a great multiple.
Most agencies are NOT great assets.
You are building a business that generates monthly and quarterly profit that can pay out to the owners. For an agency or consulting firm, this is most likely your reality.
Many agency owners never make this distinction of asset vs cash flow. This means they basically spend all the revenue they earn, never pull a profit from their business AND never make it to an acquisition.
Doing all that hard work for no reward is just silly.
How to maximizing cash flow
The fastest way to do improve your cash is to cut your expenses. Below are few links for additional reading on cutting your expenses:
- http://nathanbarry.com/cash/ - Quick read that drives home an important message
- Profit First - Great book on rethinking how you manage your business finances
The bottom line
“Investing back into the business” is good, to an extent.
But don’t reinvest to the point where you are scraping by on a terrible income while running your agency.
If you end up building a sellable asset, then that is great, but don’t count on it. Many agencies never reach that point.
Instead, cut your expenses so you can increase profit and grow your personal income.