Hanging Out the Shingle: Should You Start Your Own Agency?
Authored by: Kristi M. Tafalla, JD, MS, ChFC, CFP(r)
At some point, most people look at the owner(s) of their company and the client income coming in and think, “You know, I could do this all by myself. I would make more money, and no one would tell me what to do. It would be great!” In the advertising world, where freelance work is abundant, this especially is the case. While running your own company has many rewards, it is not as easy and fun as it sounds. To be successful, it takes a lot of planning, hard work, and in the case of MonkeyTag, a highly skilled management team comprised of several people with different skill sets. I have been a part of numerous successful startup companies. Having been at the ground floor of those companies, I’ve learned a few things along the way. So, here are a few things you may want to consider before you decide to quit your job and go at it alone!
1. Teamwork makes the dream work. One of the key factors I have seen in successful businesses is a diverse management team. It is rare for one person to have the required skillset to run a successful business on their own. Going into business with several people can spread out the risk, the work, and the reward. I would look for individuals with different skillsets. Let’s be real – while it sounds great for two super creative people to start a business together – the agency will not go far if no one knows how to attract or manage a client, how to bill that client, or how to manage the revenue and expenses of the company. If you plan to start up a business on your own and without partners, you need to assess your own skillset and seek experts in the areas you are weakest. You can outsource this, but it will cost money. So, plan your startup capital accordingly.
2. Cash flow. Right now, you probably receive a steady pay check every few weeks. When you own your own company, income fluctuates while most of your direct expenses stay the same. You may not get paid for months, and then all of the sudden you earn a huge payout. While you are waiting for that payout, you must pay vendors, rent, utilities, taxes, employees, etc. If you haven’t managed your cash flow, you won’t be able to pay your bills. Trust me, your employees won’t stay with you long if you’re writing them IOU’s instead of paychecks. At MonkeyTag, we keep enough cash on hand to pay at least 6 months’ worth of expenses (oftentimes, we have enough to pay up to 12 months). As your business grows, your expenses will too – so keeping that safety net becomes harder and harder to do, but the ebbs and flows of income have to be managed so that you can weather the storm when payments don’t come in.
3. Taxes & filing requirements. With current income tax rates as high as 37%, social security taxes at 7.65%, the unemployment taxes required for employees, and franchise taxes (if applicable), you can easily send half of your income to the government. Unlike being an employee where taxes are withheld from your paycheck, you are responsible for remitting these dollars to the government at scheduled times. Failure to do so can result in penalties and interests. You also must file various reports with the state and federal government throughout the year – and the larger you get – the more you have to file! All of this takes time, energy, and money. It is fairly easy to outsource these responsibilities, and I encourage you to budget for that if you won’t have someone on staff that can handle it.
4. Employees. While overseeing other people might sound awesome, employees are expensive and require more work for you. You must pay their salary, taxes (as mentioned above), and purchase equipment on which they can work. To be competitive in today’s market, you also have to offer your employees paid time off, holidays, insurance, and various other employee benefits (and the more you offer, the more expensive it gets). For example, if MonkeyTag were to hire someone making $50,000 per year, the actual cost per year would be somewhere closer to $65,000 ($50,000 salary + $3,900 in social security taxes + $6,000 insurance + $1,500 education reimbursement + $1,800 retirement contribution once eligible + $600 parking reimbursement + $1,500 meals). We also spend on average $3,000 for a new hire’s equipment, plus increases in unemployment taxes and workman’s compensation insurance premiums. With holidays and vacation, even new employees at MonkeyTag get four weeks off per year – which means we pay the employees even if they aren’t working. It’s great when you are the employee getting paid not to work, but it’s a whole different thing when you’re the employer and you are paying others not to work! Employees also require supervision and training, which you must do or outsource to someone else.
5. Client diversification. If you do some research, you will find that most clients change agencies on average every 4 – 7 years (it just depends on what source you read). Snagging one large client is awesome when it happens, but in this day and age, that client probably won’t stay with you forever. Therefore, you must constantly worry about getting new clients and protecting your relationship with your existing clients. In the agency world, we unfortunately see the ramifications of poor client diversification all the time. Who doesn’t know someone that worked for a big agency and was working on a big account only to later be laid off the moment that agency lost the account? These types of problems can often be mitigated with proper cash flow and continuous business development.
6. Pressure & stress. Do you like your Friday nights? Yeah, me too. But if you are self-employed, you can forget about enjoying your Friday nights. When you are self-employed, there is never a weekend off or a vacation day. Even if you are on vacation, you really aren’t because you are always on call. At the end of the day, you (as owner) are the one responsible if an employee bails on a project, if something goes wrong, if a client is unhappy, if an employee is unhappy, etc. In addition, once you hire employees, you have a responsibility to make sure those employees get paid. You have a responsibility to your clients to make sure the work gets done. If you have business partners or grow enough to have senior management in place, then you can often achieve a work/life balance, but truthfully, you are never really free. That pressure/stress is often too much for some people.
7. Exit plan. My guess is you don’t want to work forever. As a financial planner, I know too well that single owner/employee companies rarely have any sale value. You may freelance, work independently for years and make good money, but the value in that business is you. And since people can’t buy you, they usually aren’t interested in paying any significant amount of money for your client base because buying you out doesn’t guarantee that your clients will stay with them. So, you need to save for retirement as your exit plan. This can easily be done if you plan and manage your cash flow and save appropriately. If you can grow your business to a significant client base and employees, then you may be able to sell your company to a larger agency because only the owner changes, not the day-to-day contact people. However, this often requires the owner/seller to spend at least a few years working for the buyer – which from experience I can tell you is often painful after years of independence.
I will be honest; growing something from nothing is very rewarding. It is amazing to see an idea form and grow into a full-fledged business. But that growth doesn’t happen overnight, and it doesn’t happen without hard work and perseverance. Success is not guaranteed. In fact, when the Small Business Association posts statistics like 30% of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first 10, you realize that success is actually unlikely. If you’ve been thinking of going at it alone, take some of these issues into consideration and hopefully, through careful planning and hard work, you can be in the 34% of businesses that make it past the 10-year mark!
*The attached information is for education purposes only. It is not intended to be legal or tax advice. It does not constitute an attorney/client relationship. Please contact an attorney/CPA to address your specific legal/tax needs.