Should you start your own agency because your boss is making too much off of your work?

Agency Leadership Podcast

It must be nice to own an agency because then you’re earning the big bucks, right?

Many agency employees complain that clients pay so much more than they are making, so the owner must be reaping a huge profit.

It makes it easy to think that setting out on your own and working for clients directly is the right answer.

In this episode, Chip and Gini discuss the realities of quitting your job to start your own agency, emphasizing the importance of understanding the costs of owning a business, and how as an owner it’s up to you to communicate transparently to your team how revenue is not the same as profit.

Key takeaways

• Chip Griffin: “Revenue does not equal what’s in your pocket.”
• Gini Dietrich: “In most cases, your agency owner boss is not making any money.”
• Chip Griffin: “Too often, it’s not so much that the employees feel that they’re being underpaid. It’s that they feel like they are not being respected sufficiently.”
• Gini Dietrich: “It used to really bother me that I would train interns to have them go work for other agencies. And then I realized that if we treated young professionals well, we were going to see that benefit us in the long run.”

Related

• What to think about when starting your agency
• ALP 1: Starting your own agency

View Transcript

The following is a computer-generated transcript. Please listen to the audio to confirm accuracy.

Chip Griffin: Hello and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin

Gini Dietrich: and I’m Gini Dietrich.

Chip Griffin: And Gini, you know, today I think that, that I’m going to just, I’m going to ditch you on this podcast. I’m going to go it on my own. I’m going to, because I can make so much more money. I can take all of the money that we’re currently getting for this podcast and I can take it all for myself.

Yes, you can. That’s how it works, right?

Gini Dietrich: Totally. How it works is exactly how it works. We, we saw a, conversation on Threads of all places, about a young professional who said my salary was 52, 500 at a creative agency. I asked for a raise due to my higher performance. Management said, we’ll think about it.

I left the job, started my own creative business. I made 56, 000 in the next six months. There’s often more risk staying where people don’t respect you, he says. What’s amazing about this conversation, though, are the comments, because, you know, you’re, you’re not supposed to read the comments, but. They’re pretty amazing on this one.

Chip Griffin: The comments were absolutely fabulous on this.

Gini Dietrich: Yeah.

Chip Griffin: And the original poster, you know, got into the back and forth of some of them as well. Which doesn’t always happen. Sometimes the original poster just sits back and lets the comments fly. Yeah. But in this case, they decided to engage. And look, I mean, this is probably true of some of our listeners, right?

Maybe they, they were sitting in an agency and they said, geez, you know, I can’t believe that, you know, my agency is bringing in all this revenue and I’m doing all the work. And so I’m going to go out on my own. So it is a very common story for how people get started in the agency world. The reality though is that there’s a lot more that goes into this than, geez, you know, I’m, I’m making 56, 000 and they’re billing me out at, you know, 120, 000.

And so now I can just make 120, 000 if I go out on my own.

I think that there are two important messages here. One is if you are thinking about going out on your own and starting your own agency, make sure that you sit down and do the math. And it’s not based on the revenue that your current agency is getting necessarily.

There are a lot of other things that go into it. And revenue does not equal what’s in your pocket just doesn’t. And the second thing is as an agency owner, you need to be educating your team about this agency math, which of course means you need to understand it yourself first, but you need to make sure your team understands that there is all of these other things that come into play.

And that all of this money that’s coming into the agency is not going into the owner’s pocket, because I think that’s a common misconception. Jeez, we’ve got a, we’ve got a six figure client, you know, my, my agency owner boss is just rolling in money. Not true. In all likelihood.

Gini Dietrich: In most cases, your agency owner boss is not making any money.

Which is to our dismay, but that is the general case is that they’re not paying themselves. So there’s, there’s a big misconception about that. I mean, even for me, when I worked right before the agency job I had right before I went out on my own, we, we had built a PR firm inside an ad agency out of nothing.

And we, we went from zero to 2 million in like nine months. And I, I thought, well, if I can do it for them, I can certainly do it for me. Turns out a little bit harder to do it for yourself when A, you don’t have the resources of the, the big agency behind you. You don’t have the clients that the ad agency had that was just tacking on PR.

You didn’t have a team. Like there are all these things that go into it that I certainly didn’t consider. You know, my, for me, my big thing was, can I replace my salary and my benefits if I go out on my own and that was, that was the trigger for me. but also I didn’t, it took me more than six months to build a 2 million or bigger business.

Just, and I didn’t do it as fast as I did it inside the agency because I didn’t have all those other things. So I think there is a miss big misconception among employees. Either our own or those who are thinking about going out on their own. That, that there’s, it’s like, it’s all rainbows and unicorns and everything’s going to be fine.

And that’s just not the case.

Chip Griffin: And I think that there are the idea that the revenue that the agency is getting is equal to what you would make. I mean, that’s first thing that, that you need to understand is simply not true. So if you’re making 50, 000 in an agency, you don’t have to go out and just get 50, 000 worth of revenue in order to match that. Right. Even, even if let’s assume that you are able to do all of the work yourself. So you don’t have to subcontract any of it. You still have higher taxes in all likelihood as a business owner. You will have all of the the overhead expenses of running the business, you’re now going to need to pay for probably a domain name and a website and hosting and all of these things that go into it.

And the costs of your cell phone and computers, that’s now all on your shoulders and not on someone else. So even, even before you think about all of the other costs that it takes to service a particular account, all of these things are coming into play and are coming straight out of your pocket from that revenue.

So if you’re, if you’re looking to match that 50, 000 in salary, you need to get all of that. And oh, by the way, you mentioned benefits. You now need to figure out how to pay for those benefits. That’s right. And, and you also need to figure out, can you even get those benefits? Because particularly these days, it is really, really difficult as a self employed individual to get any kind of decent health insurance. And so even if you can find it, it probably isn’t going to be particularly cheap and/or it may not be nearly as good as what you have from your current employer. And so you need to factor all of these things in. I’m not discouraging anybody from starting a business.

I’m a huge supporter of entrepreneurship, but you need to understand what you’re getting into and not just go in wearing the rose colored glasses of saying, Hey, my agency is making all sorts of money on the back of my labor.

Gini Dietrich: Well, like, I mean, he said, I, I, I made 56, 000 in the next six months. Well, actually you didn’t make 56, 000.

That might be the revenue that you, you brought in, but after taxes, you probably made 28 and then you had to pay for a computer and a phone to your point. And, you know, he probably, I’m, I’m going to guess this person isn’t, has not done benefits yet. but probably on COBRA or something right now. So he’s not thinking about it, but you know, now you’re down to 20 grand.

In six months. And Oh, as it turns out, you actually did make more money at the agency and didn’t have all these other things to think about. So as agency owners, I think it’s really important for us to educate our team on what goes into it. And, you know, I, I made the joke earlier that most agency owners don’t pay themselves, but it’s true.

Like we find that with many of our clients, right? I have, I have agency owner clients. You have agency owner clients. I have friends who run agencies. And one of the very first questions I asked them is. How much are you paying yourself? And it’s, it’s terrible. It’s terrible. It’s not 600, 000 a year. It’s not a million bucks a year.

It’s 50, 000 a year. One person I talked to a couple of weeks ago said I’d really like to get to 80 or 90. And I was like, what?! You have 30 years of experience, 80 or 90… people with five years of experience make more money than that. So. I think it’s really important for you to sit down. And one of the things you can do if you don’t want to sit, if you don’t want to like be completely transparent about all of your financials, which is fine.

I think you can do a pie chart and show them percentages. So if we have a dollar, you know, 20 percent goes to benefits and 20 percent goes to technology and like break it all down. And, you know, 50 Then it goes to your salary and break it all down for them. So they see in the pie chart for every dollar, 50 cents of that goes to their salaries and then they start to understand, ah, okay.

I may still want to go out on my own someday, but now at least I understand that you’re not pocketing all this money and I’m getting nothing.

Chip Griffin: Right. And, and I mean, it is discouraging the number of small agency owners who make less than six figures. Yeah. Because my view is if you were going to be an agency owner in the United States in 2024, you really, your, your base Target should be a hundred thousand.

Gini Dietrich: At least.

Chip Griffin: Part of the problem is we’re talking to a lot of people who are making 60, 70, 80, but that’s the total comp they’re taking out of the business. That’s not, that’s not just their salary and they’re taking a whole lot more through benefits and retirement contributions and profits and all of that kind of stuff.

That’s their total number. And too many agency owners are paying themselves by looking at the bank account at the end of the month and say, Hey, how much can I take out? Yeah. Yeah. And that’s a problem. And worse, what that often means is, they’re not even the highest paid person in their agency.

Gini Dietrich: That’s right.

That’s right.

Chip Griffin: And I oftentimes will have an owner say to me, well, I, you know, I, I don’t mind cause you know, so and so is really good and I wouldn’t want to lose them and all that. I said, that’s fine, but you need to understand that on some level you will begin to resent them at some point, not because they’re not a good person, not because they’re not doing a great job, but because at some point you sit there and say, why am I taking all of this risk and stress?

And yet Sally’s making more than I am. Right? You don’t want that.

Gini Dietrich: No, you don’t. No, you do not. I hope you hear this, my friends, because this is very important. You do not want that.

Chip Griffin: It is vitally important. But, but to your point, I think that, you know, owners are afraid to talk with their teams about the finances of the business.

And as you say, you don’t necessarily have to share exact dollars and cents. I don’t necessarily think there’s anything wrong with that in most cases.

Gini Dietrich: No, I agree. Yeah.

Chip Griffin: But, but at whatever level of transparency you can get to, and if that means sharing percentages and a pie chart and helping people to understand, here is how it’s all divvied up.

And even with the profit number, helping them to understand that you don’t get 100 percent of those profits as the owner. Some of that goes to taxes. Some of that goes to the rainy day fund that hopefully you have so that you can smooth things over when a client doesn’t pay a bill on time or when you’ve got some unexpected expense or when any number of different things happens.

And so if they understand those things, they become smarter employees. They can help make better decisions alongside you, give you better advice, better suggestions, Because now they are part of the communications structure and not just some pawn that you are directing around the chessboard. And I think that’s, that’s where a lot of the frustrations come in and it came through in this individual’s case when he talked about respect.

Gini Dietrich: Right.

Chip Griffin: And I think that, that too often, it’s not so much that the employees feel that they’re being underpaid. It’s that they feel like they are not being respected sufficiently.

Gini Dietrich: That’s right.

Chip Griffin: Some of that may be overblown, but we need to, we need to be aware of it and we need to think about it. And we need to make sure that, that we’re having these conversations with our team.

And perhaps instead of just saying, if someone asks for a raise, I’ll think about it, have a conversation with them about some of these things. And, you know, what is it, you know, what are the trigger points for that individual’s next raise? If it’s that they already got a raise three months ago, then say that, right?

We just gave you because I mean, employees are doing that more and more these days where they get a raise three months later, they come back and ask for another one.

Gini Dietrich: Yep.

Chip Griffin: And, and you as an agency, you simply can’t be giving raises that frequently, because you will quickly escalate to a point where you cannot price correctly to generate the kinds of profits that you need to scale and thrive and all of that. But you need to say that and say, look, you know, it was three months ago.

You know, we generally do raises on an annual schedule. Or, you know, the raise, your next raise is likely to come when you’re ready for the next level. You know, you get a promotion. Here’s what we’re looking for when we get to that, or here’s what the agency will look like. You know, when we get two more clients, we’re going to need to build out another team.

We’ll have you run that team. Your salary will go help them to understand what their future looks like and ask them what they want their future to be. Right. Because if you’re having that kind of a dialogue, people are much more likely to feel that level of respect and understand your decisions, why you can’t give them a raise every three months and you know, double their salary in a year and you know, all, I mean, these things are not uncommon, unfortunately, they’re not uncommon.

And so you have to be prepared to have these conversations and not simply say, I can’t believe you’re asking me this, go away.

Gini Dietrich: Right? Yeah. Yeah. Yeah. I think it’s really fair to have the conversation. I actually had. You’re reminding me of a, an intern that we hired. You know, we used to have a really robust intern program where we would bring in four interns every summer.

and they would actually compete for a full time job. And so we brought them all in. We paid them all 30 bucks an hour. They all had the same, everything. Like nobody was paid any more. Nobody had any more, more responsibilities. It was all exactly equal. And about 90 days in or at six weeks into the internship.

One of the young men came to me and he said, I really need a raise. And I said, okay, help me understand why. And he said, well, I can’t pay my rent. I can’t pay my credit card bills. And I maxed out my credit card bills with this girl. And he goes into this whole thing. And I was like, this is not my problem.

And so I said to him, okay. And in a learning moment, I was hoping, help me understand what you’ve done differently than your cohort to deserve this raise. And he goes, well, nothing actually, so and so is doing better on social media than I am. And so and so is doing better on content. And I was like.

I’m having a really hard time understanding why I should give you a raise. Like the whole, the whole point is that you’re all paid exactly the same and you compete for this for, for one full time job. So go out there and compete for the job and you can have it in six weeks, but we’re not. And he got mad and put on the, on the spot.

He was like, well, then I quit. And I was like, well, that’s okay. Chopping your nose off to spite your face. Okay. And he quit. He walked out the door.

Chip Griffin: But that tells you everything you needed to know about that individual as an employee.

Gini Dietrich: Of course, of course, of course. But like. I think the, the idea there, and I was trying to get him to say, well, I’ve I’m working more hours or I’m billing more time or, you know, I’m handling this client and like couldn’t get, he was like, well, no, actually so and so is doing.

And I was like, you’re not giving me any reason except that you maxed out your credit card bills to impress a girl. Like that’s not my problem.

Chip Griffin: Right. Very weird to share that with your employer.

Gini Dietrich: Oh yeah. His. Yeah. Yes.

Chip Griffin: I mean, interns asking for raises is right there. Just,special.

Gini Dietrich: Yeah. So I think, you know, providing that learning moment, that coaching moment to say, Okay, help me understand, you know, what you’re doing that’s different from your cohort or what kinds of things have you taken on that are not in your job description or just ask the question and ask more and more and more.

Why, why, why, why, why to get to the bottom of it? And maybe it’s because they maxed out their credit card bills to impress a girl.

Chip Griffin: Well, and, and, you know, one of the things that I see is a lot of owners are afraid to share information with their teams or help understand agency math because they’re afraid that someone will take that information and leave and start their own agency.

Gini Dietrich: Or they don’t understand it themselves.

Chip Griffin: Well, yes. I mean, that, that is obviously a fundamental problem. If you do not understand your own books, your own numbers, you don’t understand, you really need to get a handle on that because that’s how you price correctly. And as we’ve talked about before, the two main things that cause agencies to have agency owners in particular, to have additional stress is they’re not pricing correctly and they’re not communicating correctly.

That’s right. And if you can solve those two issues. then everything else will tend to fall into line around it. Not everything. There’s still other things you have to deal with. You still have to deal with the whole hiring stuff and managing people and specific client service issues and all that kind of stuff.

But, but the big, the biggest changes you can make is to get pricing correct and get your internal and external communications squared away. Those will make a larger difference. But you shouldn’t be afraid that educating your team is going to cause someone to leave. Because first of all, if they’re going to leave, they’re going to leave, right?

Secondly, if you’ve helped them to do a good job of that, you then have an opportunity in all likelihood to partner with them somewhere down the road on some kind of project. And so to me, It’s a victory if I have an employee who goes off and starts their own business, as long as they’re not going and trying to, you know, take half of the team with them and all that kind of stuff.

And there are ways to protect yourself around that, part of which is how you manage them. Because if you manage your team with respect, they’re, they’re much less likely to decide, I want to go out on my own or so and so went out on their own. We’re all going with him or her to whatever business they’re starting.

And so, So keep an eye on that. I mean, you cannot just sit there and look at your team as labor hours and say, I’m going to get as much out of them as I can. And then complain when they decide to leave. It is a two way street. We need to be helping level up our team, not just for us, but, but frankly, for wherever they’re going in the future, because they’re not going to stay with you forever. And if they do stay with you forever, oftentimes that creates problems because they generally haven’t grown as fast as their salary has, if they’re with you that long.

And so that means your pricing is now all out of whack. So there’s, there’s a healthy amount of turnover that can help and bringing in new people, brings in new ideas, increases your network by having alumni all over the place, whether they’re on the client side or agency side somewhere, it’s more opportunities if you’ve treated them well while they worked with you to be able to find new chances for revenue or projects or ideas going forward.

Gini Dietrich: Yeah. And, and, you know, it’s a small world, you never know. You never know when you’re going to run into somebody or something’s going to happen. Maybe they, they go out on their own and then they decide it’s not for them and they go to work for a corporation and you’re in the running for an agency for that business.

Like you just never know. So I agree with you, you know, it used to really bother me that I would train interns to have them go work for other agencies. And then I realized that. I have a long career and if we treated those, those interns, well, if we treated young professionals, well, we were going to, to see that benefit us in the long run.

And it has for sure benefited us in the long run.

Chip Griffin: Absolutely. And if you are that employee who’s thinking about going out on your own, make sure that you understand the agency math before you go. Make sure that you have a clear idea of what it will take revenue wise, to get you to the numbers that put you where you need to be to meet your own financial requirements.

That may be less than what you’re actually making today. It may be the same. It could be more. Who knows? But you need to be able to sit down and confidently say, I understand what it’s going to take me to get there. And I have a path forward where I think I can generate the revenue that I need in order to accomplish that.

Because if you go out just because you’re frustrated or just because you see all of this money flowing through your agency and you think, well, I need a piece of that. That’s not well thought out. That’s not the right reason to go start your own business. And you’re much more likely to run into problems. Even if you just generate some good revenue out of the gate as this individual seems to have done.

Although I, again, I don’t think it’s enough to match what he did before based on the way he described it, but maybe it is. But doing that for six months is very, very different from being able to do it in a sustainable way over the longterm. And you need to think through things like, Hey, now, if I’m responsible for this client, how do I take time off?

How do I have to pay someone in order to fill in for me? Or is the kind of work I’m doing something that I can put on hold for a week so I can take a holiday. These are all the kinds of things that you need to be thoughtful about before you just jump in out of frustration or because you see dollar signs. Because if that’s why you’re doing it, you’re much less likely to meet the kind of success that you want to have.

Gini Dietrich: Yeah. I really wish, the one big regret I have about going out on my own is that I did not understand the business side of the agency at all. And I wish I had spent time learning that first, but yeah. It was a very expensive, very long lesson.

Chip Griffin: I mean, the good news is anyone who’s thinking about starting their own agency today can just go listen to all of our podcasts.

We have, I don’t know, a couple hundred of them, I think, at this point, and you can go listen to all of them and you’ll get a pretty decent education. You’ll get some weird stories along the way and some really corny anecdotes and all of that kind of stuff, but there’s also some good nuggets in there that you can take away and hopefully Go in a little bit more educated than you or I were when we started out our own businesses.

Gini Dietrich: For sure. Yep. Yeah.

Chip Griffin: So with that, we will draw this episode to a close so that you can go listen to some of those in the archive. I’m Chip Griffin.

Gini Dietrich: I’m Gini Dietrich.

Chip Griffin: And it depends.