Articles

Managing for Success

Why Principals Are Looking at Succession Options Again
By David C. Baker

I’ve fielded more inquiries about succession recently than at any time in the last two decades. By succession, I’m including merger, acquisition, closure, transfer to key employee(s), and acqui-hire transactions. It’s worth looking at what might be behind this trend:

  1. Being the principal of a creative firm is no longer a life sentence but rather a life pursuit for 10 or 20 years. If you start early enough, and if you don’t flame out financially, there’s ample opportunity to do something else. Since nobody else is working for their entire career at the same place, why should a principal?

  2. Unless you close your firm, of course, there has to be someone to hand that baton to, and that person is the new buyer– already in your firm or not– who often doesn’t really want to start something from scratch, inventing the flat tire over and over again. They are more like the “franchise entrepreneurs” who want a head start, systems, processes, templates, and momentum. They like the client base and the team that you’ve assembled together, and success seems more assured in their mind if they can buy the firm from you. The money and risk are separate issues.

  3. Entrepreneurial ability is no longer like an athletic career that peaks at 25 years old. Because of that, the departing principal might still has entrepreneurial life left in the tank, and it means that the key employee in their 30s or 40s who buys the firm isn’t starting too late. In other words, sellers have another option after their agency life, instead of just hanging on, and buyers didn’t necessarily miss that narrow window if they didn’t start their own firm earlier.

  4. Principals are more weary of the competition hitting them from every angle these days. The big firms are reaching down for smaller accounts than ever before. The small scrappy firms are using newer service offerings as Trojan Horses and have enough MVC (minimally viable credibility) to give you a run for the money. That’s happening in UX, paid digital, social impact, SEO, app dev, and “agile” everything.

  5. Transactions are more flexible, too. You can’t even find 5-year earnouts and the traditional cash/note/earnout percentages don’t all look the same. Terms are flexible. Earnouts are flexible and simpler. There’s just a welcome lack of monolithic deals that mirror each other. Gorilla clients are even buying the agencies that serve them, whereas in the past they never wanted to buy their own revenue and had no use for the other clients that came with the purchased agency.

  6. There’s less stigma around orderly dissolutions, which is a really good thing. We’ve been so fixated on how others define success that we box ourselves into corners.

  7. Non-traditional sources of funding are available. The good ol’ SBA loan is still a mainstay, but more sellers are willing to carry the note, more equity can be tapped from a buyer’s home, and in general there’s just more money everywhere.

  8. Principals are redefining success for themselves, largely in currencies other than money. It’s all good and I welcome this more thoughtful approach to life, where appropriate.

This article has been written by David C. Baker of ReCourses, Inc. ReCourses, Inc. is the leading management consulting firm that works exclusively with small service providers in the marketing industry. For more information, please visit www.recourses.com.