I Was Trying to Buy This Agency But…

Summary

• I was exploring the idea of buying a marketing agency to help my portfolio companies grow, as they need more marketing resources.
• I found that many agencies are subpar, but I eventually discovered one that seemed impressive, with no client churn and annual revenue of $4-5 million.
• The agency claimed to have over 50 clients, but in reality, they only had six.
• Upon calling these six clients, I learned that two were considering canceling their services.
• Understanding that if two clients left, revenue would drop by 33%, I realized all or most of the agency’s profit margins could be at risk.
• The lack of client diversification made the business too risky, so I decided not to pursue the acquisition.

Video

How To Take Action

I suggest, when you’re thinking about investing or enhancing your business, always start by understanding the real numbers. Look beyond what's being presented to you. If it’s a marketing agency you’re considering, first verify the client list and actual revenue figures. This low-cost step ensures you know the risks involved.

A good way of assessing business stability is by checking client retention. Call up the clients directly if possible and have a conversation about their experience and future plans. This provides you with firsthand insights on potential retention.

Diversification is crucial. Whether you're buying a business or running one, rely on a broad client base rather than a few major ones. This keeps your business safer from big revenue drops if a client decides to leave.

For anyone in business, maintaining a diverse range of clients not only reduces risk but also boosts stability and long-term profitability without significant extra costs.

Lastly, if you’re in growth mode, consider building relationships with reliable partners or contractors rather than immediately opting to acquire a new business. This can be more cost and time-effective, providing the same benefits without the stress and unpredictability of managing a new entity.

These steps save you from potentially disastrous investments and help build a more stable foundation for growth.

Full Transcript

I was trying to buy an agency because I have all these portfolio companies that are growing and they need more marketing and so it'd be really cool if we had a marketing agency in the portfolio that could help with that the problem is most of them are shitty and so I was just sifting through marketing agencies I finally found one that I really liked and I was like wow they have like no churn they're making four 5 million a year and it was like a solid business I had been told that there was you know 50 some clients well that 50 some actually turned out to be six and so we had six clients generating all that money for that business business so I said like let me get the phone numbers for their clients I'm just going to call the six of them and talk to them when I called up six of them two of them told me that they were thinking about canceling and I was like yeah this I'm out of it because what does that mean if six people drive all the revenue and two of them disappear then that means the business cuts by 33% Lord knows that might be all of the profit margin of an agency which means my profit goes from maybe you know 35 or 40% a month to zero and so me as somebody who actually was looking at buying this business said hell no I'm not touching that with a 10-ft pole because there was no diversification at all