Predictable growth stages for agencies (featuring Brad Farris)

Understanding the evolution of your business and the challenges you face at each step along the way
Brad Farris

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Agency businesses have some challenges unique to the individual owners and circumstances. But many of the growing pains are predictable and follow patterns established by other similar businesses.

Leaders can take comfort in knowing that they are not likely the first to experience any particular challenge, nor are other agencies immune from the obstacles.

Brad Farris has spent decades advising businesses and helping them overcome these growing pains so that they can continue to thrive. In this episode of Chats with Chip, Brad shares his observations on each of the key stages that agencies experience, along with advice on how to forge ahead at every step.

Resources

About Brad Farris

Brad Farris guides business owners through the pitfalls and joys of growing their business. Brad is a speaker and author. Brad is passionate about business and helping business owners find better ways to do things, make more money and enjoy life more.

Transcript

The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.

CHIP: Hello, and welcome to another episode of the Chats with Chip Podcast. I am your host, Chip Griffin. And my guest today is Brad Farris with Anchor Advisors. Welcome to the show, Brad. Thanks. I’m glad to be here. It is great to have you here. But Can Can you remind me why I have you here? What is it? What is it that you do?

BRAD: I help small agencies to get bigger. I particularly focused on working with agencies that have have gone over a million in in service revenue, and want to get to that three to $5 million range. And and what I’ve found is that there’s a real barrier between like a million 1.5 million, where people get stalled out, and there’s some things that I can help them with that can get them up to that $3 to $5 million place much faster.

CHIP: Well, you just did a great job of reminding what we were talking about because we had talked about life cycles of agency businesses. And so you’ve had a nice segue right away. It’s almost like you have your own podcast. I know how to do this.

BRAD: I do actually I have a podcast. That’s true. But the life cycle thing has been interesting. Not too long in this year. And in 2019, I started playing around with this idea that sort of like there are human growth life cycles, you know, we’ve got toddlers, and then we’ve got school age kids, and we got teenagers, and then we’ve got proto adults or whatever you want to call them after that, that businesses go through similar phases, and tend to have similar challenges within those phases. And then they run up against barriers that help that make it hard for them to get into that next phase. And as I started laying it out, I did some some original research this year to try to validate some of this. And people are finding it to be a useful framework to help them to think about where they are in their business growth.

CHIP: Now, Brad, you’re going to start giving us consultants a bad name, if you do research and put actual facts and evidence and

BRAD: I know, right, I have to keep that in my hat.

CHIP: Yeah, we’re just supposed to state the obvious and make everybody happy.

BRAD: Can I borrow your watch and tell you what time it is? Exactly,

CHIP: exactly. Okay, so so you so you did this research? And and what did this research tell you?

BRAD: Well, I kind of laid out four phases of, of business growth. And the first phase is the startup phase. And that’s something that everybody’s pretty familiar with, you know, the startup phases from the day that you kind of go out on your own. You’re in that startup phase, and the question that you need to answer in the startup phase is viability, like is this business going to survive? And we do that by running after sales as fast as we possibly can? We say we try to save money generally, unless we were venture funded, in which case we earn brownie points for burning money, but let’s assume that we’re self funded. And so but

CHIP: if you’re an agency that has venture funding, please call to find out how you did that.

BRAD: I have seen a couple people raise money for agencies recently and I’m like really, okay.

CHIP: Those investors are not the ones you read in the newspapers.

BRAD: So So the goal of that baby phase is viability, and we’re trying to gain enough sales to make sure that we never run out of money. Right? And, and most people think that that startup phase is going to last them about a year, 18 months. That’s what their business plan says. But in reality, when I look at how long people stay in that, in that startup phase, it’s really about four years. People don’t like it when I say that, but somewhere between four and five years, people get to the point where they’re like, Oh, I’m not going to start with this anymore. I can, like, I can think about the fact that that there’s a future to this business and I have to do something beyond just selling. Chip. Do you remember having come across that point in in any of the businesses you were a part of? Absolutely. And

CHIP: you know, frankly, and as I think about it in the the agency lens, it’s Most people who come to the agency business myself included when I first got there 20 plus years ago, I started almost as a freelancer, a contractor, and then said, oh, wow, this is actually this could be a business, right? I could actually, I could actually hire people, I could actually have profits. It’s not just, you know, finding a way to be employed. And I And to me, that’s one of the extra things that you have versus say, a software startup or something like that, that you have, it’s because you are, you’re still very much tied to being almost an employee for the first, you know, several years of your agency life, right.

BRAD: And business owners in general running a lot of hats, but in that startup phase, you’re wearing a lot of hats, right? You’re, you’re selling it, you’re delivering it, you’re collecting it, your accounting for it, you know, you’re you’re kind of doing it all,

CHIP: but it’s so much easier today than it then it used to be oh my gosh, she’s good and bad, right? I mean, I think it increases more people to go down this path. You know, because I mean, when I first started out, you know, it actually took a real investment of time to do even basic things like bookkeeping. Now you just, you know, get QuickBooks Online and right, bada boom, Bada bing, I’m done with it. My game today. credit cards. And I still remember the first time I accepted credit cards and the process you had to go through Oh my god.

BRAD: It was crazy, wasn’t it? I mean, like the bank, Paul. I don’t know what the bank thought I was going to do, but but like they want us they came out and visited my office to make sure that it was real. But like, it was very weird. It was very weird.

CHIP: Absolutely. And they made me have the full machine even though I wasn’t even going to use it. Right. And yeah, so it’s, it’s so much easier today. And so it, you’re wearing all those hats. But, you know, there’s, you can have more big business scale much quicker.

BRAD: Yes. So at the end of that startup phase, you’ve probably hired three, four people. You know that you’re at the end of the startup phase, because you feel like you can reliably produce new clients, right? Like you have a process of lead generation and selling that on a pretty reliable basis produces new clients, and you’re starting to believe that your business has some predictability to it, right. It’s that sort of moves you into the growth phase. growth phase. One of the things that’s characteristic about each of these phases is the lesson you learned in the last phase can hold you back from growing and the next phase. So like the startup phase, when you were all about sales, and you were kind of chasing anything that had money in the growth phase, what we need to do is to focus down now that we’ve found some kind of repeatable service, hopefully around a target market, right? We need to do more of that thing. So we become what more well known in that target market, right, we need to develop a reputation and a track record of success and a focus on some sort of repeatable value that we’re producing to the to the outside world.

CHIP: And I think that’s a great point that you’re making there that, that you really have to change your mindset as you move from one level to next, particularly as the owner and you need to pivot what you’re doing. That’s right. A lot of the rest of your team will continue doing some of the same things, but you need to make the big pivot that’s

BRAD: right because the other thing that happens as you go into the growth phase is that in the in the startup phase flexibility was the thing that held your business together, right, everybody had to wear multiple hats, not just you, but everybody was wearing a zillion hats. But as you get into the growth phase, you actually want to have some accountability, because you want to be able to deliver things on time you want that predictability in your business to to expand and to grow. And that means that people have to be focused on doing a certain task. And so you have to give up some of that flexibility in order to gain accountability. In other words, if the person who’s doing payroll is also doing, you know, shipping boxes out the door, then that person is faced with a choice between which of these do I get done? Do I ship the boxes out the door or do I get the payroll back, right? And you don’t want to have you know, you the payroll has to be done on a certain day.

CHIP: And so, getting a lot of trouble and lose all your

BRAD: So, so we want to we need to start dividing those hats up. So We have accountability so that we can say to that person, hey, you know, it’s Tuesday, we got to get payroll out today, you know, there’s nothing in your way, let’s get it done. So switching from that flexibility mindset to the accountability mindset creates scalability allows us to grow the business by hiring people who have a track record of doing something over and over again. So So instead of taking your, you know, intern and making that your new account manager, you actually go out and hire someone who has account management experience, who has a track record of success doing that, and you’re going to pay more for that person, but they’re going to allow you to grow the business, you’re gonna have to train them, they’re gonna, they’re gonna know what they’re doing and take off right

CHIP: away. When and that’s, that’s another good point there because you do, to some extent get get what you pay for. And, you know, you have to be very careful about saying, Well, you know, I just I’m just going to get more bodies in here because it’s not about bodies. It’s getting the right bodies, particularly in that growth phase. Right.

BRAD: The The other thing that people That sometimes what will take people into the growth phase is one big client. You’ve been part of those agencies that had a big client that grew you into that growth phase. I have had those agencies.

And and how’d that work out for you Chip?

CHIP: A lot of heartburn. That’s right.

BRAD: That’s right. Because that one big client actually keeps you from making changes in the business, because you’re constantly serving that big client instead of serving the needs that the business has. Right. And so

CHIP: go ahead. Well, I was just gonna say I mean, I you have to be be willing to risk any of your clients as right as you move into this phase. So you can’t regardless of their size, you can’t feel like Gosh, the with the changes I’m making, you know, maybe I’m taking myself out of it personally, which is one of those big things you need to do and owners have a really hard time doing. If you if you’re if you’re not willing to put your business at risk your your clients at risk, you’re not going to be able to grow effectively.

BRAD: That’s right. And in particular, if you’ve got that One big client, you really, you have to feed the rest of your business overly. And I don’t know how to describe that. But like, you have to put two or three times the energy, that it that it’s going to pay back into those other parts of the business like, because it always pays back to put more energy into that one big client until they go. Right?

CHIP: Well, and the reality is if you have one big client, particularly in that startup phase, you’re almost not really a business, you’re really more of an employee or an outsource department, right? But you’re but your behavior, your mindset is much more employee like if you are that dependent on one one big player. And so that’s, that’s something you want to get out of as quickly as you can. Because otherwise you won’t be able to make decisions for the business you’ll make decisions for survival.

BRAD: That’s exactly right. So if you’re able to gain some focus, you’ve eliminated some of those distractions that the startup phase brought in for you and you’re starting to hire some better employees. Hopefully You’re growing the business. Now this is this is around that time when you’re crossing through the million dollar barrier. And one of the challenges there in them between 1,000,002 million is that you can’t really hire enough of those good people. And so there’s a real stress on the business owner, where they’re at the top end, delivering a lot of value to clients and spending a lot of time running the business. And so really being disciplined about about delegating about getting things off your plate, making sure that like you said, You’re not doing your own bookkeeping or IT or any of those things that you did, you know, save money as a startup, you really need to invest in uncluttered your plate so that you can put as much value into growing the business as you can. That’s one of the things that helps you to kind of get through that. The other thing it can

CHIP: be like though, too, because to some extent, some of those administrative tasks are things that can be soothing to a business owner. You know, it’s it’s something they feel like they have control over competence. Yeah. And, and, and yeah, so they just feel like, Well, you know, I need to keep doing this I, you know, I want to protect it and it’s it really just gives them that satisfaction that I have control over this one small area. That’s exactly

BRAD: right. Because you do get to a point where at the end of the day, you look back and you say, what did I get done today? All I really did was help other people to get their work done. Right. And I have to end up having conversations with with business owners in this phase where I say, well, that is your job. Now. Your job is to help other people get their their work done. Your job is to go to meetings and make phone calls, right? It’s not to do the thing.

CHIP: And in that growth phase, you’re you’re transitioning yourself out of the client work. So for an agency owner, that’s a that’s a really tough shift. has, you know, you know, and and so you’ve been critical to not just winning the business but servicing the business in the startup phase. Now it’s that gradual letting go yes. And I think that’s, that is the probably the single biggest thing that holds back agencies from moving to the next level in this growth phase.

BRAD: One of the other things in this growth phase that’s critical is that when you found that product market fit, and you’re narrowing down your focus is that you start to raise prices. Because you’re going to need to hire those more competent people. And you’re going to need to offload things off of your plate, you need more margin in able to afford those people. And so I see a lot of people get stuck in this phase because they can’t afford to hire the good people they want to hire. And that’s because they’re not charging enough money. Right? They’re just not asking for enough for their services.

CHIP: And they’ve been under charging probably for years. Yes,

BRAD: we’re over delivering that. A lot of people will say, Well, look, look, my hourly rate is you know, $225 an hour. Yeah, but you bill for a third of the hours you’re delivering so you know what’s really going on there.

CHIP: Doesn’t matter how you get there. You can tell it’s glass half full glass half empty, you want to call it over servicing or undercharging either way. There’s a mismatch between what you’re delivering and what you’re collecting.

BRAD: That’s right. And that takes a lot of courage to raise prices. But the funny thing that I find is that when people start raising prices, it’s actually easier for them to close new business at the higher price than it wasn’t the lower price because they’re promising more value to their clients, and their their clients are perceiving, they have more confidence that they’re going to solve the problem because they’re asking more for it.

CHIP: Alright, so so as as we’re starting to look ahead, how do we break out of that growth phase into the next level.

BRAD: So then the stabilization phase comes somewhere between the three to $5 million range, where you’re kind of you’re a young adult business now. And you’ve you’ve developed this scalability, you know, the business that you’re in, you can you can get it on a reliable basis. And now you’re starting to build the systems on the inside of the business. Whereas before you’re operating with five or six different pieces of software and you you’ve got spreadsheets to pull it all together in that bigger business, you’re really starting to get metrics down and you’re starting to hold people accountable on a higher level. And the CEOs job changes now, to where before, they were, you know, they were the manager of some departments, they were talking directly to clients. Now their job is really to manage through their middle management team. And so they’re they’re really just to support lead point people in a direction, hold people accountable. And they’re really much less involved in the day to day of what’s going on in the business.

CHIP: And so, I mean, at what point do they need to start thinking about a real layer of middle management? I mean, obviously, you can have it even pretty small if you’ve got a pod, right, right. But that’s different from setting up a full layer of middle management, right? Where do you think that comes in?

BRAD: Through the growth phase, I want people to start hiring middle management. And so, you know, in an agency, you’re going to have, you know, a director of accounts at that point, and you’ve got a creative director or someone who’s operating in the creative realm that that is that is leading the creative team, you might have, you know, a group of writers or a group of art people or, or a digital department, like you’re going to have department heads in those areas. When you get to the stabilization phase. Now you’re talking about having a CFO, right or, or a CEO who’s handling the operations for you, you’ve got a much higher level of management that’s more that director or C level VP or C level, but that were there overseeing things and they’re accountable for everything that goes on in those areas.

CHIP: And where do you think they should be thinking about, you know, things like succession planning, or a number two, particularly in the in the agency world, which I think is a little bit different from operating businesses? If yes,

BRAD: so let’s talk about partnerships because that’s how this usually comes up. My first, the first thing I say to people about partnerships is if you get a partner, eventually you’re going to lose a partner. Right? And so you need to set your partnership up in a way that it’s possible to get in And get out of Yes, right that you want to get people into it in a consistent way. And you want to be able to get people out of it in a consistent way. And so if you have a partnership that’s built, so that you can get people in and out of them, then oftentimes somewhere around that $3 million range, people are starting to clamor for partnership. And I want to hold them off as much as I can. A lot of times I’m doing more like Phantom stock or stock appreciation rights to give people the feeling of ownership without them actually being owners.

But around that

CHIP: whole lot less complicated to do paperwork last too, by the way.

BRAD: And a lot of people when they ask for equity, don’t realize that they’re gonna have to sign the lease, you know, and like, they’re on the hook for the debt. And if somebody slips and falls, they get sued and all those kinds of things. So a lot of people that ask you for equity don’t really want equity when you sit down and talk to them about it. Right. And when you explain the tax consequences are potential tax

CHIP: consequences. Yeah.

BRAD: Why Why do you say my answer? Come as x when you only pay me why

CHIP: that has ended many a partnership conversation I’ve had with employees over the years.

BRAD: It is it’s funny people that have been business owners for a long time that I still have to explain to them why they’re their accountant tells them their income is so much higher than the actual money that they took out. Right.

But but the succession planning,

it really depends on where you are in your own entrepreneurial ship journey. I mean, I’ve talked to people in their 80s that are like, I’m not ready to quit. Now for them, I still think you need a succession plan because whether you’re ready to quit or not, sooner or later, you’re gonna quit.

CHIP: You may not be given a choice, well, you won’t be given a choice at some point.

BRAD: And I’ve talked to people in their 30s they’re like, No, I want to be out in three years. Right? And so once you start when when you feel like you have a plan, you need to you need to make a plan to have that happen. And what I always say to people is it takes longer than you think, to make that transition and you don’t always get to pick the day. Generally, the market picks the day, right? If you’re if, unless you’re selling to your employees, and or you’re willing to sell it at a low value, you want to sell it at a time when the market values your business highly and you don’t always know when that’s going to be. And so starting early to build relationships with people who might be acquirers and whether that’s a big holding company or, you know, some sort of a line business, but to have conversations with those people, three, four or five years before you’re ready to sell, because you don’t really know when, when it’s going to come up for them. And when it does come up, you want them to think, Hey, I should call Chip. You know, he talked to us about that. And so having those feelers out early, I think is always a good idea.

CHIP: Yeah. And look, I think it’s important for agency owners to be thinking about having someone who can run the business for them, whether you call it true succession planning or right you know, so much earlier than they think in part because you just don’t know what’s going to happen. And if you don’t have that, It makes it harder to sell. But frankly, on the it’s kind of morbid, but you have to think about not if you die, because everybody’s like, oh, if I die, whatever, you know, I’ve got life insurance. It’s what happens if I get hit by the bus, but it doesn’t take me out. It doesn’t kill. You want to go on vacation? Or no, no, your parents gets sick or whatever. I mean, there are a lot of circumstances in which you might want to take a break. Right. But to me, from a business owners perspective, the worst case scenario is where you become unable to do your job, but you’re still dependent upon the income from it. And so those are the scenarios that that can be helped if you thought these things through Yeah, in advance, right.

BRAD: You know, and in that same vein, no one likes to talk about disability insurance, but for business owners, something like 50% of workers will be in a position of drawing disability insurance at some point in their career. And it’s it can be expensive, but as a business owner, like you said, If you can’t work, where’s the money going to come from? And so to have something that you can draw on in those situations, can be important.

CHIP: Well, and frankly, you know, there are other and we’ve kind of get a little bit of field here. But there are other basics that you need to be thinking about in those scenarios. Like, does someone else have access to the bank account? Yes. Right, because so many agency owners don’t let anybody else have any access to the bank accounts, because they don’t, you know, they don’t trust the employees enough to say, okay, you have five, maybe he’s not employed, but maybe it’s a spouse or I don’t know, but somebody needs to have access. Because that’s, I mean, if something happens to you, and nobody can access it, yeah, you’re in a lot of trouble. That’s,

BRAD: well, we’re like your employees are in a lot of trouble.

CHIP: But again, depending on what what the situations are you just disabled right, you know, versus So anyway, it’s, it’s, these are things that are worth thinking about, particularly in a, you know, an agency business where it’s it is about you and what you’ve built, more so than something some widget that you’re manufacturing or those kinds of things,

BRAD: right. Well, one of the things that that you and I were talking about before we got on the air was how Just looking at these phases can help people to feel like they’re in a situation that’s normal, right? Like, oh, this is why this is so confusing, because what I learned before isn’t really working for me anymore. But yeah, that’s that’s what happens when you’re changing from one phase to another. And, and that it’s not a smooth slope, right? People want to think about growing their business like walking up a hill, where really it’s more like leaping from one rock to the next, right where you gather, strengthen one rock, rock, and then you make a big leap to the next one, and then you make another big leap to the next one. And so that’s that’s just the way growing a business is and unfortunately, no one tells you that at the outset,

CHIP: and having built a number of businesses, I can tell you, it happens with every single one of them. You may think it’s not going to because all I know how to do this, but you inevitably and the reasons end up being slightly different from one business to the next. But you always end up with those, those hurdles that are difficult to clear and it continues. Even as you get bigger. I mean, I’ve been involved with some businesses around 150 employees, and that’s another threshold and most agencies aren’t going to get there. So, you know, we won’t kill a lot of time on that on this episode. But you know, there are these thresholds, even as you continue to get larger and larger that you bump up against. And it becomes challenging for a variety of reasons to move to that next level.

BRAD: Well be just like raising two kids is different. Growing two businesses is different, right? But every single one has its own characteristics. And you’ve kind of gotta roll with what you got. And you got to go through these phases, no matter how much experience you have, like you said,

CHIP: Yeah, and, and frankly, sometimes you have an advantage in that first business, because you don’t know what you don’t know. And you haven’t developed all these convictions. And so, you know, you’re, you’re willing to take more risks, as opposed to later on where you’re like, wow, you know, I know that’s not going to work out. But sometimes it doesn’t that second business, you know,

BRAD: you never know. It’s true. It’s very much true. Yeah.

CHIP: So as we sort of reach near the end of our time here, are there other things about these growth phases that you think helpful for people to be thinking about?

BRAD: Well, I have a little chart that I put together that’s just helping me to think about them. And so if you’re listening and you’re thinking, I want to dig a little bit more deeply into this, if you go to anchor advisors com slash business life cycle, it’ll link you over to a Google Doc, you know, to put your email in or anything that just gives you an overview of the things that I’m thinking about there. And I would love to hear your feedback about does this match your experience? Is this a helpful framework for you I it’s really, like I said something that I’ve only been working with for about the last year and, and I want to make sure that it is something that people are finding value in and that it’s connecting with their experience. So I would love to hear people’s

CHIP: feedback. And hopefully the listeners do find some value in it. I would encourage you to click over and look at it I’ve had a chance to use it as my cheat sheet for this episode. So that I looked semi smart. And so I Brad I appreciate you sharing it with me in advance so that you know I could I could play along and seemed like I had some knowledge on me.

BRAD: Well, you’ve got plenty of knowledge.

CHIP: Well, you know, it’s it’s like anything else any kind of consulting, whether it’s PR consulting, marketing, consulting or agency consulting, you fake it till you make it. So, if folks are interested in learning more about Java, she will include that the link to the business life cycles, but are there other places they should try to connect with you online?

BRAD: So the two other places if I have an ongoing email conversation with with leaders of small agencies at anchor advisors, com slash conversation, and that’ll just join you into an email conversation that I have with other agency leaders. And then you mentioned earlier, Jill Saltzman and I host the Breaking Down Your Business podcast. So if you’re a business podcast, or if this is your jam, go over and grab an episode of breaking down your business and see if it’s your thing. It’s kind of it’s half morning zoo, half business podcast, so You know, you know it’s got plenty energy for you.

CHIP: It is probably the most high energy podcast I listened to it is I listened to it religiously It is a good one when I’m working out because it definitely keeps my energy level up. So, Brad, I really appreciate you taking the time to share your wisdom with our listeners here. And we’ll include links to all of these in the show notes. So if if you are actually on your workout right now you don’t have to stop or slip off your treadmill. We we’ve got the links right there in the show notes, just visit agency leadership calm for those. So with that my guest today has been Brad Farris with Anchor Advisors.

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