In the play No Exit by Jean-Paul Sartre, three deceased characters find themselves in an unexpected Hell, a plain room where they are seated together, no instruments of torture in sight. As they learn more about each other and are exposed to their respective manipulations and fits of anger and sarcasm, it’s clear that eternal damnation is coexistence with other people, hence the famous line: “Hell is other people.”
I found myself thinking about this play after being prompted during a virtual conference of agencies to imagine a constraint when it came to running an agency business: imagine that you could never exit your agency and that you’d have to, for the rest of your days, keep working on it–what would you do differently if this became the reality?
Types of Exits
To exit an agency, as an owner, means to leave it permanently. There are a few different ways to exit.
An agency owner can shut the agency down by laying off all the employees, winding down client relationships, and literally closing the books on the business.
Alternatively, an agency owner can facilitate a buy-out within the company or by bringing in someone who ultimately takes over and buys the owner out over time. In either case, the owner would hand over the reins while collecting payment until the agreed upon amount has been fulfilled.
The exit that most agency owners have in mind when we talk about “exiting” is to sell the company to a buyer. This will likely mean a “successful” outcome where the agency owner gets some kind of lump sum and/or a payment plan. Depending on the arrangement, the owner might be able to hand over the keys and walk away the day the papers are signed or become an employee for the next 3-5 years in order to “earn out” the agreed upon amount contingent on hitting certain benchmarks.
Assuming you’ve built a reputable company with a strong roster of clients, impressive finances that show continued growth, and a talented team, it’s likely that there will be interested buyers. Here are some of the common buyer types I’ve seen over the years in following my industry, especially when it comes to digital firms:
- Larger agency: a much larger and fast-growing agency may be looking to establish a foothold in a certain geographical market or some kind of specialty and buying your agency can help them quickly ramp up.
- Holding company: holding companies come in various shapes and sizes ranging from large public corporations with hundreds of agencies or a smaller family of complementary agencies that may operate in a niche or region. These companies are looking to add a profitable agency to their mix to grow their top and bottom lines while also hoping there’s some synergies.
- Roll-up company: this is usually a holding company with little to no money that hopes to trade the hope of a fantastic future (going IPO or selling to a larger company) for your agency’s allegiance to a nascent holding company banner. There’s often very little cash that trades hands and most of the deal is tied to stock ownership in the larger roll-up entity.
- Client-side buyer: this is when one of your largest clients realizes you’ve become so indispensable to their operations that it makes most sense to buy your entire company and absorb the agency’s personnel. The lite version of this is the acquihire of key personnel with some financial assistance to shut down the firm and lay off the rest of the team. I’ve usually seen this with tech companies and financial institutions.
- Multinational IT consulting firm: these are companies like Accenture, Deloitte, and IBM that have well-established consulting practices and are looking to expand their digital offering by absorbing agencies and agency holding companies.
- Private equity / investment firm: these are usually buyers who are looking to add new cashflow-generating assets to their portfolios and feel good about the agency’s margins and ability to grow profitably long term. PE firms come in all kinds of shapes and sizes as well with some focused on buying and fusing different portfolio companies and others playing a more hands-off role as long as the agency keeps costs low and keeps on spitting out cash. Family offices, search funds, and other investment groups also fit this mold where an agency can be just one of many business targets they’re looking at.
The exits that get the press coverage and adulation typically result from a transaction with one of the buyers above. And it makes total sense. The selling process, with all the due diligence and uncertainties, are said to be very stressful, and to make it to the other side with a completed deal is a huge accomplishment.
What If There is No Exit?
Some years ago, as we started to overcome some years of flat revenue, posted greater profits, and started to pay each other more in owner compensation, my co-founder Sei-Wook and I started to run some numbers on what an exit would look like financially. Using rough valuation metrics gleaned from reading and talking to different folks in the industry, we figured that 1x-1.5x on revenue or 5x-7x on EBITDA seemed to be a good rule of thumb to see what Barrel would fetch with potential buyers.
Given our size and where we were at as a company, the numbers, while not terrible, weren’t all that motivating. And this was before factoring in the other reasons for not wanting to sell: headaches during due diligence that could devalue the company, poor chemistry with the buyers, potential for deal to die after putting in much work, earn out clauses that would make us employees for years, uncertainty over our employees’ future, etc.
In fact, if we kept at it, grew the business, and increased profits, it was possible that in 10-years’ time (or less, depending on how optimistic we were with our model), we could be making more than the sale amount while still being owners of the company.
Truth is, we never explicitly built and ran the business with the intention of selling but at the same time, we also never explicitly talked about the longer term view of things and what it would mean to build a company for 10, 15, 20+ years on top of the decade-plus we already spent on it.
And this realization got us to explore a related but different topic: why not just assume we’ll run this business forever and make decisions with a longer-term perspective? In other words, how would we run things differently if we knew we had no exit?
The answers flowed easily with this constraint, with some things already being the case or in the works and others being more aspirational:
- A robust, diverse, and capable leadership team with ever-growing opportunities for team members to step up and grow within the business
- Unbreakable trust and love among the partners
- Great work-life balance with plenty of personal time to spend with loved ones
- A profitable and growing business that keeps costs under control and rewards leadership and the team really well
- Strong and trusting relationship with clients with work that motivates our team to bring their very best
- Positive impact on our industry and our communities through knowledge share, volunteer service, and charitable giving
- An unending pipeline of great talent that expands our team’s capabilities, brings fresh perspectives, and nurtures the next generation of leaders
At a glance, these answers are no different than the ones to a question like: “What makes for a great, lasting business?” And I think that’s part of the point of this exercise–when you have an eye towards the exit and feel like there is an eventual out, it’s hard to commit fully to building something that’s meant to be sustainable and long-lasting. The immediate incentive is to build something that would make the company attractive to a buyer, and that in turn, can lead to sacrifices in work-life balance, in relationships with team members, and in general pressure put upon oneself to speed things up and get to the finish line.
The Inevitable But Unknowable Exit
Some years ago, I used to idolize a digital firm that seemed to have it all. They worked with major corporations on what sounded like incredibly lucrative projects, they had all kinds of amazing perks for their employees as well as a stunning office in a great location, and they were growing fast. I even heard one of their partners mention somewhere that because they made so much in profits, they created some investment vehicles to allocate excess capital outside of the company for the benefit of the partners. This all sounded amazing.
However, all wasn’t well. Apparently, the leadership team didn’t get along and couldn’t stand each other. Despite the success, the growth, and the stellar client roster, work at the company for these partners became unbearable. Not too long after hearing about their issues, I saw a news release from the company announcing that it was being acquired and folded into a bigger company. Perhaps the offer was too attractive to pass up. Perhaps this was the best way for the partners to resolve their differences and design their eventual departures.
This story is a variation on the agency exit that I’ve heard dozens of times over the years*. These stories follow the arc of an unraveling marriage–as time passes and people change, growing more and more distant from each other, communication falters, there’s an inability to have honest conversations, interactions swing between perfunctory to resentment-filled tension, and the people involved are quick to blame each other for anything that goes wrong. These inevitably result in “irreconcilable differences” and the prospect of a well-paid exit seems like the best way out. It’s Sartre’s play in reverse: other people become Hell, and as a result, everyone looks for that exit door.
In less dramatic cases, the “breakup” may be less tense and a more gradual shift that ends with an amicable resolution: a co-owner in the business may leave and sell their piece of the business to those staying on or the partners may all agree to part ways and find a buyer to take over.
As I’ve embraced the concept of the “no exit” approach to running this business, I’m also of the mind that we don’t know what the future holds, that our priorities and interests may change, and that things may happen in our lives that alter our paths from where we imagine them to go today.
And at a certain point, even if we manage to happily run the business with a “no exit” approach for multiple decades, there will come a time when an exit of some kind will inevitably occur. My wish is that we conduct ourselves and the business in a way that, whenever the exit comes and whether or not there’s any money attached to that exit, we’re filled with gratitude, good memories, and no regrets. In other words, making smart decisions with a long-term view and conducting ourselves in a way that’ll help us build a great and lasting business.
* Of course, not all agency exit stories are necessarily marriages gone bad and people wanting out. There are other variations of the agency exit where partners truly do see synergies with a potential buyer and stick around to make it work, sometimes with astounding success where the partners end up accelerating the growth of their agency or moving up within the larger org and working on projects of scale and impact that they may never have reached as an independent firm.