Preparing your Agency for a Profitable Exit

Agency owners share many qualities: courage, creativity, and a wealth of ambition that often exceed the hours available in their busy days. While juggling the demands of day-to-day operations—a challenge a fine-tuned finance team can help with (more on that later)—they face the universal reality they will exit their business. On some days, the thought of closing the door for the last time might feel like a relief.

But most days, owners want more than just to hand over the keys and walk away. Owning and operating an independent firm is a complex blend of challenges and rewards but ultimately  the goal is a lucrative exit that makes up for all the effort and sacrifices made in building the business. 

We aren’t going to tell you how to exit your business, but we are going to explain how to prepare your agency today for a profitable exit – whenever the time is right for you. 

• How strong finance is an investment in your future, not a cost center
• What good financial management in an agency looks like
• Maximizing your agency’s value beyond a strong financial foundation

Finance is a Catalyst, Not a Cost 

Finance can often get the cold shoulder, seen as a necessary evil rather than the growth engine it truly can be when done well. It’s tempting to skimp on this front, especially when it feels both costly and difficult to find the right talent mix. (We are working on a detailed article about this but for now, here’s more about who you don’t want at the financial helm of your firm.) But this isn’t where you want to hold back, as you will inevitably stifle your agency’s potential before it even gets off the ground. More importantly, the opportunity cost of not investing in finance is generally far greater than most owners realize, some of which include the following: 

• Wasted time and effort: Imagine your billable team members bogged down with manual data entry in endless spreadsheets, grappling with inconsistent billing practices, and chasing overdue invoices that slipped through the cracks. Countless hours are squandered fixing mistakes and double-checking figures—hours that could have been spent driving your agency’s growth. This inefficiency leads to a scarcity mindset, which keeps the business small and highly reliant on a few key team members.
• Hindered decision-making: This might sting a bit but it’s a truth that needs airing: immature accounting undermines sound decision-making. Said another way – basic bookkeeping stunts growth. Often, revenue and expenses are so inconsistently recorded, you can’t tell what you’re reading when looking at your financial statements.  Expenses aren’t consistently categorized, revenue isn’t matched to the period where the work was completed and there is no visibility to project, client, or service-level profitability.  Without reliable data,  forcing you to rely on gut feelings or misleading indicators like your bank balance—which, let’s face it, often paints an inaccurate picture of your agency’s health.
• Costly trial and error: Operating without established financial best practices invites costly mistakes. Agencies can find themselves hiring too soon or too late, overspending on freelancers due to inadequate workload forecasting, underpricing services, or allowing client services to overrun because early warning data isn’t visible.  Trial and error is exhausting and not only drains resources but also accelerates burnout among your team.

Investing in strong financial processes, best practice financial reporting, scalable systems early on will improve profitability, increase confidence and speed of decision-making, instill trust internally and externally, and keep the billable team members and non-finance leadership team members focussed on growth. Sound financial management isn’t just about compliance or avoiding penalties; it’s about unlocking an agency’s full potential. By recognizing finance as a strategic asset and prioritizing it from the start, agencies can position themselves for scalable growth, smart decision-making, and a culture that values financial smarts.

Key Elements of Good Financial Management in an Agency

We know from the last section why good finance is a catalyst for growth. Let’s break down what that looks like in practice. 

Strong Financial Reporting

Effective financial reporting translates accounting and operational data into actionable insights relevant for leadership to quickly assess how the business is performing against best practice key ratios. 

• Which clients are most or least profitable?
• Where are the opportunities and risks?
• What patterns are we seeing in the results – MoM (month-over-month) or YoY (year-over-year) changes at various levels—company-wide, per client, or even per employee.

These reports should be delivered in a consistent format and on a regular schedule with consistently applied business rules that are well-established and well-applied. For example, if COGS always means  third-party costs required to deliver the revenue, excluding direct labor costs (contractor or full-time), then COGS ALWAYS means this, and everyone can trust it. And trust is the whole point here – accurate and timely financial reporting instills confidence in the leadership, allowing them to rely on the reported data to guide major business decisions.

Here are three examples of what good reporting looks like.

Project-Based Accounting

To understand the profitability of each job and client, you must use project-based accounting. Project-based accounting means every revenue transaction and every project related cost is attached to a project.  By doing so, you can easily create a series of mini P&L’s for every project you deliver.Why does this matter?

• It helps you understand what is working well, what should be improved
• With clear financial data on each project, you can make better decisions about resource allocation, pricing, and even client/job selection, ultimately leading to better financial outcomes. 
• It doesn’t take that much more time to do project-based accounting for an exponentially better outcome

In essence, project-based accounting doesn’t just track financials more intricately; it serves as a navigational tool, guiding firms toward more profitable and strategic decisions.

Accrual-Based Financial Reporting

Accrual-based financial reporting is essential for internal statements in professional services firms, especially the firms that have the good fortune of invoicing clients in advance. But with this great opportunity comes great responsibility, as if you don’t account for advance billings properly, you could find you’ve spent money that doesn’t belong to you. Accrual accounting records revenues when earned and expenses when incurred, regardless of when the client is billed, the cash is received or when vendor invoices are received and paid.  Accrual accounting is the best way to offer a true representation of a firm’s financial health. Here are three key things to remember when you are adopting accrual accounting: 

• Revenue should be recognized when the work is done not when it is billed or paid
• Accruals should be made for hard costs billed but not received
• Staff costs should reflect employment costs in the month as if your team was paid for the full month, not what actually went through payroll

With a more accurate view of financial performance, leaders can make better strategic decisions that reflect the actual economic activities of the firm.

Integration of Finance and Operations

In many agencies, especially smaller ones where everyone wears many hats, the finance function can overlap significantly with operations. To be effective, the finance team needs to be familiar with daily operations to ensure financial statements accurately reflect operational nuances. But it doesn’t always work well when the tables are turned. We’ll explain. 

• Dual Role: Initially, finance professionals often handle both finance and operations roles, especially in smaller agencies. This continues until the firm grows sufficiently to warrant separate specialized teams. Unfortunately having an operations resource lead the finance seat usually doesn’t work as they lack the accounting training to get the accounting right.
  
• System Setup and Administration: The finance team needs to be involved in setting up and managing operation systems. This ensures that business rules are properly established and followed, correct rates are being set up in the system,and the system is optimized to deliver necessary information for both the business (time and cost reports, resource planning, etc) and financial decision-making.
  
• Data Integration for Reporting: Effective financial reporting relies on the integration of data from both the accounting system (like revenue and costs) and operations systems (such as time spent by job and billable hours by team member). Integrating  these data points into thoughtfully summarized reporting is essential for leadership, otherwise it becomes a scavenger hunt to find the story in the data and the users of the statements end up reverting back to using their bank balance for decision making.

Transparency and Accountability

Building a profitable firm is a team effort and it starts with embedding transparency and accountability into the financial processes. This helps foster a culture of collective responsibility and continuous improvement. When all team members have access to the financial information they need to manage their engagements effectively, they can set clear financial targets for different aspects of the business, such as revenue by client or the resources needed to deliver services, and ensure these targets are well communicated and understood across the organization.

The finance team plays a pivotal role by providing management reporting to measure performance against the firm’s goals.  The finance team should also be able to teach the account team how to use the financial data to make decisions.  They think they need a new team member to support all of the work coming up?  A good finance team member will show them how to calculate the capacity of their team, compare that to their future forecast and reasonability test their recommendations.  By doing so, it becomes more of a discussion around forecasts and facts then reacting to feelings.  Additionally, establishing a regular schedule of forecasting and financial reporting helps create a rhythm of accountability, where team members can review and compare their expected outcomes with actual results, learn from discrepancies, and refine their approaches.  The goal is continuous improvement, vs. perfection.

A system to cascade accountability can help build an intrinsically accountable team. Finance can be a leader in making this happen – where accountability is viewed positively—as a pathway to personal and collective success—rather than as a punishment. Be more “carrot” than “stick”  which in our experience, leads to more productive and positive outcomes. 

Building a Finance Team That Fits

A finance team that truly fits your agency goes beyond the basics of good controllership; it requires a business savvy, commercially-minded accountant to help you lead your business to a profitable exit. In the creative happy chaos of an agency, where financial and strategic decisions are super connected, you need accountants who can think beyond traditional roles and understand the broader business implications of their work.

Finance is the connective tissue that binds all other departments – strategy, operations, people, and marketing – and its members need to be more than just guardians of the budget; they must be integrators and facilitators within the business. This requires building strong relationships and trust across all departments, believed to be enablers rather than obstacles of success.

They need to understand standard accounting practices such as GAAP, accrual vs cash accounting, budgeting and forecasting and have a working knowledge of tax and payroll. But they also need to know when to step outside the margins of the “rule book” and exercise some professional judgement when it’s required. This does not mean producing factually incorrect financial statements. Don’t even go there. But it does mean allowing the team to work without a signed estimate for a client based on a client’s reliable payment history or adapting financial strategies to meet the unique needs of the business.

The capability to navigate the “grey areas” of running an independent firm with sound judgment and an understanding of business strategy is what makes a finance team truly fit for an agency. It’s not just about ensuring financial accuracy but about contributing to the strategic discussions that define the agency’s path forward. A well-integrated finance team not only supports but actively drives the agency’s success, making its role indispensable in an independent firm.

Optimizing for Profitability

In the early stages of a business, experimentation with positioning, product, process, and pricing is common and essential for learning. Over time, with more confidence in your ideal client profile, strong positioning, core proven processes and profitable pricing, it’s time to mature to the point where you get to say “no”. You have earned the financial strength and fortitude to identify wrong-fit clients, unprofitable engagements and just say no. You have the courage to be patient, to strategically select and acquire clients who align well with your positioning and are likely to be profitable.

Well-run agencies achieve consistent EBITDA margins of 20-30% on an accrual basis, which indicates not just profitability but the maturity of their operations and decision-making processes. If an agency continues to grow but struggles to meet these EBITDA benchmarks, it’s important to delve into the underlying causes. Understanding and addressing these root causes rather than merely pursuing growth for growth’s sake is essential for sustaining long-term success and profitability.

Preparing for a Profitable Exit Requires More Than a Strong Finance Solution

Having a strong finance team—whether in-house or outsourced—and consistently admirable financial results are clearly important elements when planning for your eventual exit. But of course, there is more to it. 

Beyond Finance: Maximizing Agency Value for a Successful Exit

Build an Agency That Can Operate Without You:  Strategic buyers look for agencies that can function independently of their founders. This involves cultivating a leadership team capable of making decisions and managing key client relationships without your direct involvement. This makes your agency more attractive to buyers but also enhances its overall operational resilience.

Develop Scalable Processes and Document Them: Your agency’s processes are its operating system. Well-defined and scalable processes that are thoroughly documented make your agency easier to scale and more likely to be profitable. These processes serve as a blueprint that ensures consistent client experience and efficiency, making your agency an attractive proposition for potential buyers.

Balance Your Client Portfolio:  Diversify your client base to minimize dependence on any single client. Ideally, no one client should contribute more than 20% of your agency’s gross profit (also known as AGI/Net Revenue) This balance reduces risk and increases the stability of your revenue streams, making your business more sustainable and appealing in the marketplace.

Incorporate Recurring Revenue Models: This is becoming harder for independent agencies where clients are notoriously project based.  Try to integrate retainers, ongoing service contracts (like web maintenance), or subscription-based services to build more predictable revenue streams.

Invest in Sales and Marketing: While referrals are important, building a reliable system for lead generation ensures a consistent flow of potential new business. An agency with a rich pipeline of well-matched leads is inherently more valuable and demonstrates market relevance and the potential for growth.

Cultivate Relationships with Potential Buyers: Begin identifying and nurturing relationships with potential buyers early in your journey. This network might include complementary firms, industry thought leaders, or private equity firms active in your sector. Building these relationships can provide you with valuable insights and position your agency favorably when you’re ready to exit.

Ready to Start Planning for Tomorrow, Today? 

Let’s revisit Greg Alexander – who said “Professional service firms are bought, not sold.”  Whether you’re contemplating a future sale or simply aiming to bolster the value of your agency, we’ve outlined several core essential strategies to help you have the most profitable exit. 

• Finance as a Growth Engine: Investing in strong financial processes and systems early can save your agency from inefficiencies and pave the way for scalable growth and smarter decision-making early.
• Comprehensive Financial Management: From project-based accounting to accrual-based financial reporting, these practices provide more accurate insights into your agency’s financial health for better decision-making.
• Operational Integration: Ensure your financial reporting reflects the true nuances of your agency’s day-to-day activities, aiding in more informed strategic decisions.
• Building a Proactive Finance Team: Your finance team should not only be skilled in traditional accounting practices but also in navigating the strategic nuances of the business.
• Strategic Positioning and Scalability: Establishing a strong market position and developing scalable processes are a few ways to make your agency appealing to prospective buyers. 

Fiscally takes a modern, advisory-led approach to empowering high-performing owner-operated firms to reach new levels of financial success. Specializing in end-to-end accounting, advisory and payroll solutions, we focus exclusively on the creative industry.

Say hello@thinkfiscally.com if you want to learn more about how we work with agencies, and subscribe here to stay informed on insights and updates on what’s to come as we build a collaborative community of business-savvy finance professionals and finance-forward agency leaders.

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