Readers of “The E-Myth” book series by Michael Gerber understand that most business owners really own a job and not a business. If an agency owner has this mindset, he or she is probably mostly concerned about growing their personal income.
But for growing agency owners who want to run their agencies as a business, what they get paid is a secondary concern. Of course, business owners want to make a living! And they hope to make a better one than they could as an employee. Otherwise why take the risk? Entrepreneurs, as opposed to a typical business owner, are also concerned with building value.
This type of owner realizes that someday the opportunity to sell the agency will present itself. Or the opportunity to buy another agency will. They realize that agency profitability will be a key component in either situation.
Agency buyers want to know not only how much revenue an agency produces, but they are keenly interested in how much profit it makes. Revenue is just the beginning of value. Profit is the thing that creates it.
There are lots of benchmarking studies that can be consulted to tell an owner what the “average” or even “best practices” agency generates in profit. The smart entrepreneurial agency owner consults these regularly and tries to operate his business to be better than that!
Typical small agency margins historically have been in the ten percent range. This has included bonus income. Agency owners, who want to maximize their agency’s value or prepare for acquisitions or other opportunities for growth, typically operate their business to double that number or more.
Even in a small agency where the owner has no serious plans to exit immediately, profit should be a concern. For one thing, it imposes financial discipline. For another, it shields the agency against the vagaries of income fluctuations due to market conditions or weather.
In the end though, buyers of agencies want to see that the agency is profitable and that all the money isn’t being spent. They will look most favorably (i.e., pay more) for agencies that consistently generate profits in the twenty percent or higher range.
Perhaps you’re thinking that to do that you’ll have to cut your salary or your commission level. But remember profit is just another way to pay yourself as the owner. Also remember that how you account for the money left over after all the other expenses are paid (profit) is a critical component of agency value.