Why Agencies Need to Live By The 40% Rule

Every well-run agency is consistently looking at their mix of clients and where their revenue is coming from.  The better understanding you have of your current revenue forecast, the better prepared you will be for any bump or turn on the road ahead.  During our last webinar (Driving Agency Growth and Building Value Before the Sale) we discussed navigating this winding road by making sure your agency is following the 40% rule.  The rule is simple:  No more than 40% of your agency’s revenue can come from one client.

Now I know there are a lot of small agencies out there that got their start by landing one big client that contributes most of the revenue to your overall agency, and naturally, we all want more clients.  While it’s easy for me here to say “diversify!” I fully understand that it is entirely something else to put into practice.  There are so many reasons why you need to live by this 40% Rule and do everything you can to make sure your agency isn’t in this typical position, but here’s a few:

A wide building is sturdier than a tall one.

  • I would much rather have 10 equal size clients, rather than 2 super clients because turnover happens.  It does not matter how great your service is, how good your ROI is for your client, or how much the client loves you as a person, they are going to turnover at some point.  It’s a lot easier to manage turnover from a revenue and employee standpoint if we have 10 clients, rather than 2.

Having to cut employees because of a lack of work is simply the worst.

  • It breeds resentment and negativity in those employees that get to stay, and it’s an all around un-fun part of business.  If we can mitigate that need by having 10 smaller clients rather than 2 large, we can not only give our employees peace of mind, but we can show them that we are doing everything we can to give them stability and room to grow.

We aren’t beholden to bad deals.

  • I’m sure we have all at some point left an initial fee negotiation, in the beginning, feeling like we made a good deal, only to find out that this client is way more work than we bargained for.  We then either need to change the scope of the work or raise the fee.  This normally goes over like a lead balloon, so we need to be able to walk away from a bad deal, and by having the account only represent 10% of your revenue verse 60%, you give yourself the ability to actually walk away if necessary.

It makes our agency more valuable.

  • Charles Fallon of SI Partners talked specifically how when acquirers are evaluating agencies and looking at their value multiplier, that number goes up if client diversity exists.  This means that any acquirer is willing to pay you more money for your agency if they can see a larger range of clients by revenue and type.  More money is a good thing, right?

If you find yourself in a position of being over that 40% threshold, it’s probably time to begin thinking about your new business development plans.  Waiting for referrals will get you killed, so putting a new business process in place that can consistently generate new clients for your team should be an absolute priority for any agency that wants to be more stable, more predictable, and more valuable.

Matt Chollet

As EVP of Agency Development, Matt works alongside agencies on a daily basis, helping them implement new business processes that help generate qualified conversations with their most sought after prospects.