Should You Start an Agency or Stick with Freelancing?
So you’re a creative or expert and want to start an agency so you can spend more time doing what you love and make more money.
It feels like the only way to grow your business and make more money is to build and hire a team. All the internet gurus and ads you’re served are constantly telling you, “It’s time to get yourself out of the day to day!” You dream of going on vacation and not worry that the whole business is going to burn down without you. You’ve been told it’s “Who Not How” and that you need to build a team to be considered a real CEO.
But going from being a freelancer and building a creative agency, expanding your professional services firm, or growing a consulting team changes your business fundamentally.
Building an agency changes:
The responsibility you have as the business owner
The requirements for marketing and sales now that you have people on the payroll, even if they aren’t W2 employees
The revenue, profit, and cash flow - meaning you might actually make less profit in the short term as an owner
Counterintuitively, starting an agency in search of financial and time-based freedom (”now I don’t have to be the one replying to clients when I’m on vacation!”) can actually lead to less financial freedom and more headaches in your business at certain stages of growth.
Especially if you set up an agency that doesn’t match your goals for your business.
So before deciding if you should freelance or start an agency, first determine the type of agency you want to build.
Agency Business Model #1: The Collaborator or Partner
This model is perfect for freelancers who are ready to expand their scope of work and what they can take on for their clients - but aren’t interested in or aren’t ready to hire.
In this model, you’re collaborating with a team of other highly trained complementary specialists to develop strategy or execute specialty aspects of the business outside of your scope. Think a web designer partnering with a copywriter, a brand photographer, or SEO expert. You can bring them in as a subcontractor, essentially “white labeling” their service, or refer out to that other provider, but maintain connection to that part of the project as the ultimate creative director.
Pros: In this model, you get to represent a larger scope of work for your clients, but you don’t have to staff a team, especially if all of your projects don’t have this niche service. You bring significant value to your clients by having a vetted list of providers you trust to work on quality, on time, on budget and in sync with your projects. You also get to maintain ultimate flexibility in the macro sense; you don’t have anyone on payroll, so you can have more ebbs and flows with your client load, even though you take on the entire delivery.
Cons: You have to build a large rolodex of preferred providers, as your go-to collaborator might be booked on projects. You’ll likely make less margin on the parts of the project you outsource, as those business owners need to charge enough for the project to be profitable for them. And this involves more collaboration on how to organize the project, since these collaborators aren’t on your team.
Agency Business Model #2: The “Everything But…” Agency
In this model, you’re one in control, but you’ve brought on administrative support. You’re still doing the client-facing work while outsourcing and delegating administrative tasks. The person you hire might be called a “design assistant”, “executive assistant”, or “client services assistant”. To the client, you appear as a solo creative, strategist, or consultant, but you have a team supporting you to reduce the burden of administrative tasks.
A social media agency might hire an assistant to schedule recurring meetings and handle social media scheduling. A podcast pitching agency may have a customer service person to do podcast research, handle follow up pitch sequences, send calendar invites and compile podcast briefs, while you maintain all strategy, podcast matching, and writing pitch content.
Pros: You start to get the benefits of delegation without having to delegate any of the creative work! This model can free you up for more time spent on business development so you can go after those higher-value clients.
Cons: In this model, you’re still required to be reasonably plugged in with your clients on time-sensitive work, without someone else having the strategic eye to handle things on your behalf if you need to take time away. It’s hard for you to scale, because you’re the only one doing the strategic client work, but this model can be very profitable.
However, to be the most profitable for you, there must be a large volume of repetitive, straightforward “doing-style” work that consistently fills a full- or part-time role. If your team members are underutilized, because there actually isn’t enough consistent work for them, you’ll feel the pressure to keep their hours (and their pay) consistent and fill up their time with internal busy work that sucks cost and isn’t priced into your work.
This work could be repeatable work with retainer clients: a marketing agency that produces graphics designed from templates, due each month.
Or this could be straightforward administrative work for project-based clients: an interior design agency that has a design associate scheduling installations, following up on outstanding proposals and billing, maintaining inbound product tracking information, and taking measurements.
With this hire, it’s time to lock in your processes! When anyone is brought on to the team, it’s time for clear processes and coordination on tasks in a digital task or project manager.
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Agency Business Model #3: The Strategist/Creative Director
This model is the typical “micro-agency” model: the agency owner still maintains the strategy and/or creative direction, while your team members manage ongoing client-facing production tasks. In this model, your team is also starting to manage client communications and project management as the day-to-day contact with your clients.
This model is probably the trickiest stage of growth: while it allows you the potential to grow with more of the routine activity handled by your team members, hiring those team members puts a strain on your finances. They have to be strategic enough to manage clients, detailed enough to keep tabs on all of the little tasks for the client, and have to be affordable for you as the agency owner!
This model calls for either training your team and documenting your methods and “secret sauce” - codifying the expertise and pattern-matching that you’ve cultivated over years and years - or limiting your client roster and pricing high enough to make this model profitable. (Which means evaluating your target market, positioning, and offer structure as well).
And because you’re bringing on more expensive team members, you need to increase your total revenue to maintain your owner pay and profit. This means more marketing, more clients, or a revisiting of your positioning and pricing, all while you’re handling the additional training and leadership of your new team members.
That’s why this model is tricky.
Let’s assume you have a:
Customer Service Team Member at $25/hr, 20 hrs/week = $2,250 per month
Production Specialist at $50/hr, 20 hrs/week = $4,000 per month
Client Account Manager at $60/hr, 20 hrs/week = $4,800 per month
Owner Pay at $5,000 per month
Your total labor cost = ~$16,000 per month, not including employer taxes that you should be paying on yourself at a minimum.
According to Greg Crabtree, your revenue should be at least ~2x your labor costs, meaning that you’ll need $30K+ of revenue consistently per month to keep everyone paid, including you at a market wage, and make a profit. This covers operating expenses, marketing expenses, taxes, and profit.
If your business doesn’t have the client profile, lead flow, and business model to generate that revenue, the squeeze typically comes from reduced owner pay or profit distributions.
Additionally in this example model, there’s no overlap and duplication - so you’ll need to cross train your team members for when people go on vacation, get sick, potentially get a new job, or otherwise are out of the office.
This is what I call the “micro-agency chasm” - where most agency owners get stuck. It’s important to decide if you want to push through to the other side and keep growing or if you want to go back to a different agency model.
Pros: In this model you can step away for longer stretches of time, knowing that your team members can handle most day-to-day communications without you. This is a required stage to future growth! You do get to grow your revenue, expand your impact, and do more of what you love to do within the business.
Cons: Other than the financial pressures above, the firm dances the tightrope with hiring and quality control - managing without being a micro-manager. Your responsibility shifts from doing the agency work to managing other team members.
You’re training them on leading projects with your firm’s strategic point of view, developing processes for a larger team, setting and keeping an eye on all performance metrics, and maintaining quality as you hire team members. You have to do this all while keeping a solid business development pipeline to keep your team utilized.
This model works especially well with Monthly Recurring Revenue-style businesses with a high-proportion of repeatable work. Consider accounting firms, where the bookkeeping activities are routine, the strategy happens less frequently, and clients stay with you for years. It’s harder to make this agency sustainable when the ratio of project-based work or upfront design is a higher proportion of work than the ongoing, repeatable deliverables. This is also a hard model to run if you have to consistently bring on new clients because the duration of your engagements are shorter.
Agency Business Model #4: The Rainmaker
At this point, you’ve accomplished three things:
You’ve built a client base and marketing engine that gets you $50+K revenue months (which lets you hire a creative director, see below)
You have productized your service or clearly articulated your methodology, strategic tools, and processes so someone else can lead strategy and creative development for client projects
You have hired a creative director or other leader that can handle client onboarding and strategic direction setting without you
So what does this mean for you? You get to shift from client work to framework and intellectual property development, business development and marketing!
Imagine Chris Do with The Futur, Simone Severino with Strategy Sprints, or CEOs of other large advertising agencies: these firms run through structured processes that can be managed by others. You still manage the relationships with your largest clients, but more at a macro-level versus in the day-to-day project management level. Your job shifts to building partnerships, building out public-facing intellectual property, securing press and ongoing media presence, and running a financially solid business.
On the creative side, you’re turning your work and methodologies into books, case studies, white papers, even Harvard Business Review articles. You spend your time hiring and managing team members, managing cash flow, and maintaining smooth operations. You probably have a team member that helps you manage your business operations like an Integrator.
Pros: You’re out of the day-to-day operations of the client work! This means you can pass the “Fiji test” outlined by Jenny Blake: “Think about if you or anyone of your team got whisked to Fiji for three weeks with no devices, no wifi connection, or ability to communicate with you. Could someone else step into the role and seamlessly do the work?” You can step away from the business for a month or season without the core function of the business ceasing to operate.
Cons: Secretly, you like doing the hands-on work with your clients, being more involved in the transformation for you clients. Which means you are usually tempted to dive back into the details without something else to focus on. In this stage, you have to avoid getting bored, cope with the newly wide-open space on your calendar, and figure out how to stay invested in trends and keep the client attraction machine running for ongoing financial stability. But you can’t ignore the business management (managing cash and profit, building culture, and developing your team members), even if it’s work you aren’t confident or enjoy doing.
Agency Business Model #5: The Brand
You’ve ceased to be involved with even the operations of the business at this point, as you’ve hired a GM to manage the whole business.
Just like Donald Miller of Storybrand, you turn from the agency leader to the chief brand ambassador. You’re out of the operations of the agency and left to figure out what else to do with your time!
(Which of course means you’ve built a brand agency that can support at least a six-figure GM salary as well as your owner salary and target profit distribution. At this point, you’re probably well over the $1-2M mark for revenue, closer to $5-$10M).
You’re responsible for the creative direction of the firm’s brand and assets, even as you step away from being involved with the work for any one client.
You’re making sure that your firm stays relevant in the face of technological, economic, or marketing changes, setting overall agency strategy and high-level initiatives. Yet, your team carries those out while you have public-facing duties like speaking, writing, and being involved with asset creation and marketing collateral.
The final avenue for growth at this stage often includes licensing others to deliver the work on your behalf, expanding your influence without expanding your own company footprint.
Pros: This is the ultimate pinnacle for most agency owners who dream of having a saleable business asset that creates money
Cons: …IF you’re able to standardize or productize your service, build a sustaining business development engine and do this all with profit and paying your people a fair wage.
As you can see, there’s a number of agency models that might fit for you as you decide to start your agency.
What’s right for you?