Building an Agency That’s Easy to Scale But Hard to Duplicate
By Tim Williams
If you’re building a business you plan to sell someday, to maximize its value, you must go well beyond the checklist provided by M&A consultants. Labor-based businesses like agencies can make poor investments because their main assets—client relationships and talent—can be fleeting. Acquisitions in other sectors usually come with more concrete assets—products, patents, licenses, and other forms of intellectual property. However, few agencies have developed these kinds of assets. Because they are tethered to the hourly rate, agencies as businesses lack the ability to scale; increasing revenue means increasing staff—a form of anti-scaling.
Non-scalable businesses aren’t attractive acquisition candidates. They are also consigned to an existence of suboptimal profit margins, limiting their ability to compete for the best talent—the bedrock of professional services.
The Price of Entry
Another reason agencies generally have low multiples in the M&A world is that it’s so easy to enter and exit the agency business, hence the old joke that the only things you need to start an agency are a phone and a computer. With the recent arrival of AI, perhaps we should add to this short list “a subscription to ChatGPT.” There are now a few notable examples of agencies with zero employees and zero freelancers—just an enterprising founder who knows how to leverage the power of Large Language Models.
It is, of course, possible to change course by implementing a business model that allows the firm to derive its income from offerings that are not directly tied to hourly billing. The simplest version of this is charging for outputs (deliverables) instead of inputs (hours). The most elegant way to package this type of model is to sell programs and “products”—solutions to client business problems that can be delivered in a repeatable way.
The ideas and concepts that result from these programs are always unique and custom, but the delivery framework is standardized. In effect, the offerings of the firm are products consisting of services bundled in a uniquely valuable way. To a potential investor or acquirer, these products are assets that transcend the typical bullet-point list of competencies available from other agencies. In monetary terms, the multiple applied to these types of acquisitions can be up to 12 times EBITDA—twice the average for agencies with traditional business models.
Becoming Inimitable
Much of the value of these productized assets comes from the fact that unique programs and products are difficult to duplicate, which gives these firms a considerable competitive advantage.
Effective agency product development follows this sequence:
Begin by defining the types of client problems the firm is best suited to solve. While your initial mental list might be 50 items long, employ AI to help you find the patterns and commonalities in these problems. Some of the largest agencies on the planet have whittled this list down to 12—or even four.
Design prototypes of programs that can effectively solve these problems. These programs are comprised of products that serve as building blocks. Not every named program will be identical when applied to specific clients; rather, you will pick and choose from the most salient product building blocks.
Apply pricing to the programs, not to the people or hours that go into delivering them. Consider that programs and their supporting products come in different “sizes”—small, medium, and large.
Construct your website and new business materials to feature the client problems your firm is best suited to address and the corresponding programs you have designed to solve them.
No End-to-End
A productized business model requires agencies to come to grips with the fact that their promise of “full-service, full-funnel, or end-to-end” offerings is untenable and unrealistic. It’s not an overstatement to say that the vast majority of agencies—even large ones with established reputations—operate within a very reactive business model designed around responding to client requests.
Scopes of work have become scattered laundry lists of diverse deliverables in search of a strategy. Frenetic agency teams are in heads-down production mode, busy filling job orders ranging from big-budget television projects designed for mass audiences to one-off social media posts aimed at micro-targets. This kind of mindset and operating model has made the agency industry highly commoditized and homogeneous.
The solution to this state of affairs is for agencies to take a top-down approach to marketing, which is the essence of a productized business model. Offering solution-based programs and products in place of lists of service-based competencies shifts the focus from doing more things faster (the current bottom-up approach followed by most brand marketers) to doing fewer things better, starting with a clearer understanding of the problem the marketing program is supposed to solve.
