I Was Trying to Buy This Agency But…
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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.
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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.
