There are more agency businesses in the United States than there ever have been before.
Advertising alone saw a 4.1% growth in agency numbers between 2022 and 2023, with 89,912 agencies in business by the end of last year. Better yet – revenues support that growth.
According to Statista, digital agencies made a combined revenue of $30.6 billion in 2022. That’s five times more than they’d made a decade previous. Simply put, the numbers add up. And you, as somebody who’s interested in starting a new business, can see that the agency model could be key to your success.
That leaves you with a question:
Where can you find out how to start an agency?
That’s where this guide comes in. We’ll walk you through what agencies are and the steps you must follow to create one.
The agency business model falls squarely in the service category. Typically, it involves bringing together a team of specialized experts within a specific niche to deliver a set of services. Take digital marketing as an example. In a digital agency, you’ll have a host of experts. Content creators. Ad experts. Web developers and designers. Search engine optimization (SEO) specialists. Each provides a specific service for which you can charge money.
The nature of the service can vary, of course.
For instance, in the B2C space, an agency may help with personal matters relating to finance, real estate, or travel. In B2B, agencies typically specialize in completing tasks that a company doesn’t want to do in-house. Again, the digital marketing agency example works well here. Rather than building an in-house digital team – which costs a lot of money – a company may hire an agency to handle digital for them.
So, think of yourself as a service provider.
The trick lies in finding a service that people actually want and then building an agency business around that service.
The truth is that almost any type of service can be transformed into an agency business model. A few have been discussed already – finances, real estate, and digital marketing. You even have agency potential within the services that fall under the digital marketing umbrella. For example, many agencies focus solely on content creation, which is just one aspect of digital marketing. The same goes for SEO, social media, and online ads – all can be seeds from which an agency can grow.
The key lies in finding a service that experiences demand.
Once you have that, you can move on to how to start an agency in earnest. That will involve building a team – filled with talented specialists – and finding agency software to help you run the business.
This is a difficult question to answer.
Your startup costs may vary massively depending on the type and size of agency you create. After all, an agency that only offers one service and has a couple of employees costs less to start than a multi-service agency.
However, some estimates may give you an idea of what you can expect to spend. According to SurferSEO – which provides content optimization tools for digital agencies – the average cost of starting a digital agency falls within a high range:
$730 to $29,100.
Those costs include any involved in setting up a website, as well as the money you pay for agency management software. The website alone can be a substantial cost. Expect to spend around $20 for a domain name, as well as ongoing costs for web hosting and development.
Other costs are more business-related, such as the cost of incorporation. This varies depending on your state and business structure. Throw in office space – assuming you don’t operate a work-from-home model – marketing, and the cost of hiring people and the money soon adds up.
So, what’s the upside?
Assuming you’re capable of providing a high-quality service, you can make back those costs fairly quickly. You just need to know how to start an agency in a way that minimizes startup costs and sets you up for future success.
You’re ready to take the plunge. Agency ownership seems like the right choice for you. With these steps – covering everything from choosing a niche to choosing a pricing model – you’ll have that agency set up in no time.
What is a niche?
In agency terms, it’s a specialized segment within a market that requires a specific service. And as an agency owner, you can think of your niche as the reason why your agency exists at all.
The niche could be anything.
Sticking with the digital marketing agency example, your niche may be content marketing. You could drill even further down. For instance, content marketing for accounting businesses would be a very specific niche to follow. If you have experience in the accounting field, it’s also a niche to which you can bring a high level of authority.
And therein lies the key to choosing a niche:
Start with what you know and build your agency around that.
If you know accounting, you have a market to which you can sell services. Whether you’re developing websites or providing back-office services, your niche guides you on the activities you perform. It also helps you determine what type of clients you take on.
No agency should try to be everything to everybody. That’s a recipe for failure. You overstretch into services and industries with which you aren’t familiar. Pick a niche and create a set of services for that niche.
A statement in the previous section is worth repeating here:
No agency should try to be everything to everybody.
Apply that line of thinking when determining your audience. In other words, you’re not trying to sell your services to everybody. Instead, you’re providing services to people experiencing a specific type of pain that you’re capable of healing.
Let’s stick with the digital marketing for accounting example mentioned earlier.
In this case, the pain would likely be that an accounting firm knows its way around numbers but can’t advertise itself to save its life. They don’t know how to build an online reputation. They can’t run ads – at least not successful ones – that appeal to their market. The company needs guidance from people who understand both the online world and their industry.
That’s where you step in.
If you have accounting experience – or a qualification, such as a CPA’s license – you have instant authority. Build on that with services relevant to the firms experiencing digital marketing pain and you have a target audience.
That’s just one example.
Ultimately, choosing your audience comes down to what you know, what problems you can solve, and how large the market is for your solutions.
Software can make or break your agency.
If you need proof, consider this – agencies that use project management software have a 92% success rate.
The reason being that their software allows them to oversee every stage of a project. They can track budgets – often with a helpful dashboard – and allocate resources appropriately. Their software may also introduce automation, cutting down on manual tasks such as contacting clients or maintaining document folders.
Expand this line of thinking to your entire agency.
For instance, agency management software – such as Bonsai – can provide the tools you need to run your entire business. Beyond project management, you get tools for overseeing finances and managing clients. Invoicing. Banking. Customer relationship management. You’ll need software to handle it all to free up your time – and your people’s – to work on projects.
The trick lies in finding the right software.
Look for an all-in-one solution when trying to figure out how to start an agency. You’ll reduce siloing – which is when you have disparate and unconnected software – and have a central place to see your agency’s data.
With your niche, audience, and software in place, you move on to something crucial:
Picking the appropriate business entity for your agency.
This is an unavoidable step. Every business needs to be officially registered with the state in which it operates. Usually, this means sending Articles of Incorporation or Articles of Organization to the secretary of state. However, the process – and specific documents – vary depending on where you operate.
What doesn’t vary is the types of business structures from which you can choose, each of which comes with pros and cons.
As the easiest business structure to create, a sole proprietorship is often favored by one-man bands. In the agency context, this is usually only a good choice if you have no employees. It’s also worth noting that the sole proprietorship model has serious liability downsides:
The business isn’t a separate entity from you.
As such, all debts, liabilities, and legal challenges you may face aren’t kept within the business structure.
Think of a general partnership as being the same as a sole proprietorship, only with multiple owners. The structure can work well for a small agency. However, you’ll still face the liability issue – the partners are responsible for the company’s debts.
With an LLC, you partially separate the business from its owners.
You get personal liability protection, meaning you’re not personally responsible for the company’s debts and liabilities. For example, let’s assume a project falls through and your agency is in debt to a creditor. That creditor – in most cases – can’t pursue your personal assets, such as your home to repay that debt.
This protection isn’t absolute.
A creditor can request a charging order from a judge to claim against your personal assets if they can’t collect from the business.
A C Corporation provides full liability protection – the agency’s debts and liabilities stay within the business. The trade-off is twofold:
You have to create a more formal business structure and you’ll likely be subject to double taxation. For the latter issue, that means the agency pays tax on its earnings. Then, you pay tax on the income you receive from the agency.
With your business structure decided, you move on to the next crucial question:
How will you be paid for the services you provide?
Your decision affects how you’ll use your agency invoicing software, as well as how you use your resources. There are several options here.
The simplest form of payment, a flat rate sees you charge a set fee for your service. That may be a one-off fee – such as a flat rate for web design – or an ongoing fee for services like SEO. While this simplifies your invoicing, it can also create cash flow problems. For instance, a project that experiences scope creep could result in you doing far more work than you’re paid to do.
Rather than billing a flat fee, you bill for the hours that you – and your people – work on the project. The upshot is that you invoice more accurately because you’re covering every hour that you work. However, time tracking can become an issue – a client may dispute the hours you claim to have worked.
Software can come to the rescue again.
Time-tracking software – especially when linked to a client portal – can offer the proof a client needs to see.
With the commission model, you don’t get paid until you achieve a certain objective for the client. In SEO, for example, that objective may be getting X number of keywords onto the first page of Google.
It’s a model that can help a client feel more confident in a new agency. They’re under no obligation to pay until they receive what you promise to them. The issue is that the model doesn’t work for every service you may provide. Plus, of course, you may not get paid for hours upon hours of work if you don’t meet a goal in the specified timeframe.
Inefficiency can destroy a budding agency.
That’s proven in Formstack’s “2022 State of Digital Maturity” report. Surveying 2,000 people, it found that inefficient processes can cost a business up to $1.3 million per year. Those inefficiencies often come from having manual processes for work that could be automated, such as invoice creation. Or – in the worst cases – it can come from simply not having processes at all:
Every project is handled differently.
To counter this inefficiency, your agency needs to have processes in place for everything. How do you onboard a new client? What steps need to be taken to ensure successful delivery of your services? The idea is to create consistency at every stage of the business. Otherwise, you’re left with a ramshackle approach that’s different for every client and extremely time-consuming.
It’s a good idea to have somebody in charge of overseeing your processes – even if it’s you – to ensure they’re followed. You’ll also find the data delivered by agency management software to be revealing. It’ll highlight bottlenecks and slowdowns that may suggest your processes either aren’t being followed or require improvement.
Yes, the talent that drives your business is crucial. You need people – specialists who know more than you especially – to deliver your services to clients. Sticking with the digital agency concept, that could mean web designers, content creators, and SEO gurus.
But these aren’t the only people your agency needs.
Your back-office staff should include an accountant, bookkeeper, and credit controller. You don’t necessarily need to hire these people full-time, especially for a new agency. Finding freelancers – or hiring an agency yourself – can be a more cost-effective solution.
The key is that you have these people in place and that they’re able to work with your invoicing software. After all, there’s no point knowing how to start an agency, if you can’t keep it running behind the scenes.
You have an agency structure and you know what services you’re going to offer to your clients. You’re almost ready to find those clients, only you’re missing one thing:
A vision for where the agency is headed.
Specifically, a three-year vision in which you define where you want the agency to be three years from now. That vision isn’t absolute. You’re not a failure if you don’t achieve it. However, it gives you a tangible objective to aim for, which can motivate the changes you make to your agency as you scale.
The exact nature of that vision will vary depending on you.
For instance, the three-year vision may be to have 50 clients, 25 of whom are on recurring contracts for your services. Alternatively, it may be to hit a certain revenue figure or to grow until you have X number of employees. The point is to have a goal in mind that serves as a motivator for everything you do in your agency.
Finally, you’re ready for the exciting part of agency ownership:
Finding clients.
The initial clients you find will be the bedrock for your future growth. However, this period is also an opportunity for you to solidify your processes and payment structure. Allowing your early clients to get away with receiving more for less money may keep them happy. But it’ll create a standard inside your business of overdelivering that will hurt you in the long run.
Consider this period as a test drive of what you’ve built in the previous eight steps. If something isn’t working – such as your projects continuously going over scope – you know you have changes to make.
As for actually finding those first clients, you have tons of options:
Of course, keeping your clients organized is also key. A good CRM software – ideally one that allows you to create client portals – helps you manage the clients you find.
There’s one aspect of starting an agency that isn’t covered in these nine steps:
You.
Specifically, your mindset going into the agency creation process. As the owner of the new agency, you have to accept that the initial stages will be a lot of work. Creating a balance between that work and your personal life will be tough. You may even not achieve that balance for months – or even several years – into the process.
Don’t let the sheer scale of the work ahead grind you down. Temper your expectations and keep a positive attitude throughout. And remember – the right agency management software can relieve the initial (and ongoing) burdens you experience.
Learn how to kickstart your journey into agency ownership with our comprehensive guide.
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