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Do you need an outside investor if you set up your own agency?

This week, our resident agony (Dutch) uncle discusses the pros and cons of getting outside investment when setting up a new agency.

Question: A colleague and I are definitely going to set up our own agency this year. Should we 'go it alone' or get an outside investor?

Answer: Firstly, good luck! I think it is a good time to go for it and set up your own shop. Fortune favours the brave and, having done it myself, it’s really good fun and a great journey to go on.

If you have an investor involved you’ll be giving up equity in exchange for their money. That’s the deal. Whilst the company is a start-up and doesn’t have any value right now, it might feel like there’s no downside to that arrangement. But in a year or two’s time when business is hopefully booming, you may feel a bit of regret at having parted with a chunk of ‘your baby’ in return for the funding to get it off the ground initially.

If the person investing the money adds value to the business then that’s a separate matter and I think that could be quite appealing. For example, if they bring experience because they had built and grown an agency themselves, or they could furnish you with lots of new clients, that might be valuable in its own right.

The key question to ask yourselves though is: how quickly do you want to scale up? If you want a gradual, steady growth for your agency then you can probably fund that out of cashflow, reducing the need for someone else’s money. But if you want to go for it from day one, employ a team of people from outset and accelerate away from the starting blocks as quickly as possible, then some extra capital to burn through is useful.

Whatever route you choose, the best deals I’ve come across have been where there is ratchet mechanic of some description that in effect lets the founder get equity back from the investor as the business grows.

So, with every say £250k of profit growth then 10% of the shares are given back to the founders. A win-win for all parties.

Written by Graham Goodkind who is a Dutch uncle – a new type of non-exec business adviser – to several agencies in the marketing services sector, in addition to being founder and chairman of Frank.

If you have got a question for our agony (Dutch) uncle regarding any issue relating to the running, operations, business or financial aspect of a PR agency, either as an owner, manager or executive, then email and your question will be featured in a coming issue.

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