Why Most Firms In This Space Are "Owner-Operators" And What That Means

Why are there virtually no outside investors in this space? You know, people who want to invest in a firm without actually running it? And what are the implications of that unique feature of our field? Here are some thoughts on this subject and why I think our industry is unique.

1. Principals are Entrepreneurs and Don't Want a Boss. If you've had an honest conversation with yourself, you know what a lousy employee you'd be. You're not afraid of hard work, but you don't like to be told what to do, you don't like restrictions and policies, and you want to change your mind and go in another direction quickly. You like making promises that are unhinged from reality and you absolutely love swooping in at the last minute and driving your team batshit crazy. All this means that the idea of an external investor who wants a say in how you do things won't likely fly.
2. You Don't Make Enough Money to Keep An Investor Interested. Now, this isn't true for some of you. I haven't done a scientific study, but one-third of my clients are making a lot of money. As in $350k/year on a very regular basis, before end of year profit distributions, and a fair percentage are way above a half million. But many of you are in the $200-350k/yr range, and the profit after that wouldn't offset the risk of investment.
3. You Love The Work...And Your Firms Are Small. The obvious connection between those two things is that few of you grew up as little kids dreaming about running a 100-person firm and dealing with personnel, the bank, and ERP decisions every day. No, you wanted to write or photograph or design or code or put a media plan together. The "people" part came later when the marketplace hinted that you should grow, and you reluctantly pivoted a little bit away from the work toward building a business that did the work. But every stage of growth put more distance between you and the work; some of you loved the change and other's didn't. The lack of management systems/processes meant that you were always a little "self-sizing" as the weaker kids (on the team) got flung off the merry ground and only the strong kids could hang on.
4. The Barrier To Entry Is Non-Existent. You'd typically only buy a business because it's a lot of hassle to start one. Think nuclear facility or bank or utility, and not a lawn-mowing business or a stand at the farmer's market or a restaurant...or a firm like yours. There's no certification, no governing body, no specific education requirements. Today you could be an employee on the client-side, and tomorrow you could own a fully-functioning firm. If I want to own a creative firm, I'm probably just going to start it. The lack of "regulatory capture" for this field is good for everybody, generally, but it also means that there is no protective moat around your firm.

The illustration above borrows from the trucking industry: owner-operators. While our industry—based on body count—is probably 98% owner-operators, in the trucking industry that percentage is only 9%. Those owner-operators that own and drive their own trucks make an average of $50k/yr and drive an average of 101,000 miles/year. But they are in a field with tight regulation and heavy capital requirements, which is why it attracts investors.

It's a very different world, but what does that mean? Here are a few thoughts:

• Be Very Careful About Letting A Non-Owner Run Your Firm. It is nearly always bound to fail, mainly because the very narrow Venn Diagram overlap for the perfect person to run it is a tricky combination. They must be entrepreneurial enough to run it capably, but not so entrepreneurial that they don't think they need you any more, meaning they'll take it from you. This is particularly true if you are far enough removed that you've lost sufficient connection with your team and your clients.
• Buyers Are Looking For Well-Run Firms. After my comments above, I wouldn't blame you for wondering why there's even any M/A activity at all! But there is, and nearly all of it revolves around sellers who run their firms as if they will sell them, even if they never do. That means having a strong lead gen system that isn't accidental or dependent on WOM; clear roles and processes and reporting relationships; strong evidence of client growth; a healthy client mix; transparent quality of earnings; consistent profits at 20% or more; and so on.

Here's the bottom line: the "agency" (another term in economics) you have is a remarkable gift from the gods. Use it to run a firm exactly as you like. There are virtually no external barriers to building a remarkable firm that you love being in charge of.