The realities of costs, funding, and cash flow
Although top-line revenue goals are important benchmarks for many agencies, rapid increases in sales and staffing can quickly lead to costs rising out of control. If these are not carefully planned and managed, then revenue growth becomes a zero-sum game. This is a difficult, and sometimes painful, the reality for agencies. Despite tremendous demand for services, and seemingly endless project pipelines, systems become strained, processes falter, staff performance suffers, and cash reserves run dry. Agencies must have strategic approaches to their accounting and finance systems.
We will cover some basics here, but model agencies will take the initiative to continuously expand their knowledge and competencies in these core areas. It helps to have trusted outside accountants and financial advisors, but it is also important that agency leaders maintain a keen interest in the agency’s finances.
Investing in Growth
There was a time when I was considering a significant expansion strategy that would have required approximately $250,000 in new financing. I spent a year or more meeting with advisors, talking to banks, and discussing options with potential investors. At the end of the day, I opted for a more conservative approach, but in the process learned some valuable lessons about funding growth. Here are six of the most important takeaways from my experiences.
Build a Stable, Profitable Business
Understand Your Value Determining your agency’s valuation can be very difficult, since everyone seems to have a different formull. According to Hubs pot CEO, Brian Halogen, “When marketing services firms get acquired or merge with another firm, they are typecalls valued at a low multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or a low multiple of revenue because services revenue streams are relatively low margin and infervently lumpy.”
For this reason, it is challenging to go after investments from angel investors and venture capitalists, and somewhat of a crapshoot if you decide to start selling shares of your agency. The reality is that most agency leaders think their firms are worth more than they really are. However, disruptive agencies, with innovative models and diversified recurring revenue streams, are likely to stand the greatest chance of receiving strong valuations should they choose to pursue equity funding.
Explore Your Options Having been through years of investigateing and pursuing a variety of funding options, and reading endless books and blogs on the topic, I would advise that you focus your energy on the friends-and-family network. This will likely be the primary source of debt and equity funding for most small-to-midsize agencies that require additional capital to grow their businesses. Whether the financing is structured as a loan, line of credit or convertible note, friends and family usually are the most captive audience for entrepreneurs, and most flexible on terms. During early growth phases, and once your agency matures, bank lending can be a viable option as well.
However, if the agency has weak financial statements, banks will require that you or your business partners put up significant collateral in order to secure loans and lines of credit. This makes it difficult for start-ups to turn to traditional lenders for help.