Run Your Business Like You’re Selling It
Why should you run your freelance or small agency business as if you were going to sell it?
Think of it this way. What do buyers pay for?
All the things that make a good business. So why not adopt these “good business” rules for yourself now?
Think of this as the “Three P’s”. Buyers look at:
Profit
People
Processes
Even if you’re not selling your business, this is where you should be looking too.
How Profitable is Your Business?
The first P is Profit.
Before we look at actual numbers, let’s define “profit”. For our purposes, profit is what is left over after you’ve paid all taxes and expenses, including your salary. Wait, what? Does profit only come after your salary? Yup.
Consider this: even if you’re a solo freelancer, you’re a business (whether or not you’re incorporated).
Think of yourself as an employee of your business. That means, you get a salary from your company. How much should your salary be?
Of course, it’s essential to look at your gross billing, but that’s not your profit.
Let’s run some numbers. To make the math easy, let’s say your gross billing last year was $100,000. Assume you had $10,000 in expenses, so you’re at $90,000. Let’s say taxes on the $90,000 were 25% ($22,500), which leaves you with $67,500.
You need a reasonable salary, so give yourself $60,000. That leaves $7,500 in profit, which you could leave in “the company”. So, on billings of $100,000, you had a 7.5% profit.
Why think of profit this way? Why not just take the $67,500? Who cares about the concept of profit in a one-person company?
Three reasons. As a solo freelancer, you need to build up a financial cushion. There will be times when your billing isn’t what it should be, and you need something to fall back on.
So, leave something “in the company”, and consider it your profit.
Secondly, it helps you think more seriously about your business. Taking all the money is the equivalent of having a job. You don’t have a business, you’ve simply created a job for yourself. Paying yourself a salary is a change in perspective.
Lastly, if you decide to grow by forming a company with more people in it, you’ll have to start thinking this way. If you take on a partner, you’ll have to draw salaries from the company and leave something in the bank. If you have employees or contractors, you’ll have to pay them. So, pay yourself the same way.
I wrote about finding a business partner, and why you should consider it, here.
Would Someone Buy Your One-Person Company?
It’s happened, but it’s not too likely. However, they may want to partner with you. Having your financials in order will help you at this stage.
It’s one way of proving that you work in a disciplined fashion where you take a salary and show a profit.
In an Agency, it’s The Profit That Keeps it Running
Once you have more than one person, you’ll be responsible for paying others.
You need to show a profit. That’s after all salaries, including your own, and all expenses.
That’s why you need to build profits into every estimate. It’s not enough to think about paying the bills. You need something left over.
Without profits, without money in the bank, you’ll soon be out of business. One slow period could sink the company.
Profit is Critical to Purchasers
If you are indeed selling your company, the purchasers want to know that they’re buying a successful organization. Profit is a key indicator of success.
Before you meet with purchasers, you’ll work with your accountant to ensure your books are in order. You’ll tie up any financial loose ends.
Purchasers will look for a business that is growing and has potential for further growth. They’ll want reassurance that this growth will be profitable.
Do You Have the Right People Doing the Right Things?
The second P is People. Let’s start with solo freelancers. Are you working on the ideal projects for ideal clients? Are you confident and efficient in your offerings?
“Ideal projects and clients” suggests that you’ve developed a profitable niche with lots of room to grow. That would mean you have a steady stream of jobs from existing clients and the ability to attract new ones. I wrote about how to pick a high-paying niche here.
“Ideal projects and clients” is the way to profitability.
If you don’t have the right projects or the best clients, you’re likely struggling to work efficiently. Everything is more of a challenge than it should be.
Or, to look at it another way, you may not be the right person for your current work. Maybe it’s time to focus somewhere else.
In an agency, the right people for the right projects is critical. This is where you have to be selective about the work you take on and the employees you hire to do that work.
I’ve seen both solo freelancers and agencies accept the wrong jobs. Although everyone wants to stretch their capabilities, you have to know your boundaries to stay efficient and profitable.
Purchasers See the Effects of Having the Right People
If you’re selling your company, purchasers aren’t specifically concerned about your employees. They know that people come and go, and they may want to bring in some of their people.
So, while they’re buying your company, they’re not buying your people.
But, they will look at the types of projects you do, how efficiently you turn them out, and what profits you generate. These are the net results of having the right people in place.
And that ties into the third “P”—processes.
Do You Have Written Processes for Your Work?
Most freelancers and small agencies don’t have written processes. It seems unnecessary, right? You know how you do your work. You adjust as needed. Why bother writing it down?
Three reasons. First, writing down your processes forces you to think about them. You’ll examine what you’re doing and how you’re doing it.
Do you even have processes, or is every job a random walk in the woods?
Even for yourself, it’s worth writing out your processes and the steps you take from the beginning to the end of the job.
You might want to look at this from two perspectives: what you’re doing and what you should be doing. In other words, current procedures versus ideal processes.
Look at everything, starting with how you take in jobs. Consider how you estimate them. Then look at how you do the work, handle the revisions, and finally, the billing and collecting.
In each of those steps, there are many variations to consider for your processes. A few examples:
Do you insist on written briefs, or will you accept verbal briefs? Which are you doing now, and which would you rather have?
Do you get a deposit, or are you collecting payment only when you’ve completed the job? There are many variations on how you could get paid. What would be your ideal process here? I wrote about the best pricing models for creative services here.
Have you defined the number of revisions included in your Terms and Conditions? Do you even have Ts and Cs? Are you constantly fighting scope creep? Endless scope creep suggests you don’t have Terms and Conditions for this.
Employees, Contractors, and Partners Want Processes
Processes represent security. We all want some security, don’t we? A new employee wants to know how you do things at the company. What do you expect of them? Where do they fit in? After they’ve done their part of a project, what happens next?
Contractors want to understand your processes to make it easy to work with you. Like employees, they want to know how you do things. Do they need a purchase order? Can they bill you for a deposit? Who do they report to?
Any partner in the company wants to ensure that everyone in management (that’s you) is following the same set of processes. It’s chaos for employees if individuals in management do things in entirely different ways.
Written processes answer these questions for everyone. Onboarding new people becomes more straightforward. Results are more consistent. People are happier, knowing what they should be doing.
Purchasers Like to See Processes
It’s easy to understand why a purchaser would want to see your processes. Processes show that you’re organized. They outline how you work with others. Inevitably, strong processes are a mark of a business set for profitable growth.
But most importantly, having defined processes means that others can step in and be successful by following the outlined steps. The company’s success doesn’t depend on you or a few specific people.
If your processes live only in your head, and everything depends on you… well, few people will be interested in buying that, because of course sooner or later, you’ll be leaving.
Not Selling Your Business? That Could Change Tomorrow!
Quick story: in my first agency, we were five years old. We’d grown from two partners to a team of about 30. We were going about our business until one day I got a phone call.
“Hi, my name is ‘Susan Smith’. I'm with ‘global mega-agency headquartered in New York’, and I wonder whether we could have lunch.”
Sure.
Jump to the end: they had been following us and were interested in buying our company. Would we consider selling?
For the first time, we thought seriously of being acquired.
We did sell our company, but not to them. (That’s another story.)
The point is, how you think about your company can change overnight if someone comes along with a serious offer to buy it. You may decide not to, but perhaps you’ll entertain the idea.
In any case, it’s good to be prepared.
What Happens to Most Small Companies at the End?
Nothing. They fade away and disappear. No one buys them. There’s no exit strategy, no pot of gold at the end. They simply close up shop. Their clients find someone else to work with.
Why? Because they haven’t planned for anything else.
Depending on your perspective, that might be fine. Maybe you’ll think you’ve had a good run, and now it’s time to move on.
But wouldn’t it be better if you could cash out? Get a dividend for all that hard work over the years?
Think about it, even if leaving it all behind is far into the future: profit, people, and processes.
Learn more about profit, people, and processes in my book, How to Start a Successful Creative Agency. It’s the essential business guide for graphic designers, copywriters, filmmakers, photographers, and programmers.
Buy the Book Here
Over 300 pages and 23 chapters, available at Amazon (Paper & Kindle), Kobo (ebook), Apple Books (ebook), and Gumroad (PDF).
The book is packed with useful information to help creatives start and grow their business.
Practical Guide, Valuable Insights
“Utilize the wisdom and enjoy the humour shared in this practical guide on how to grow and scale a creative agency. Though I have already been in business for a while and skipped over some of the start-up pieces, I was able to gain valuable insights on how to grow, scale and price my creative services. Valuable insights from an entrepreneur who has sold two agencies and shares his playbook.”
Suzanne Huber, Digital Marketing Strategist
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This chapter covers essential areas such as Clients vs. Projects, Corporate Clients vs. Small Business Clients, How to Create an Opportunity Document, Benefits of Finding a Niche… and much more.
Questions? On Twitter, I’m @StroteBook. D.M.s are always open. Ask away.