Asked to invest in a marketing agency whose retainer churn worries me

Coming from construction, hiring two people ahead of the revenue is the thing that kills small shops. He's asking you to fund payroll for capacity he doesn't have clients for yet. What's the actual plan for filling the two new buyers' time, and what happens to margin in month four if it isn't filled?

The 31 percent concentration is the number I'd price on, not the tenure. If those two are wholesalers, their spend tracks their deal flow and deal flow moves with the market. Two clients who are themselves cyclical is a lot of correlated risk in a $71,000 book.

If you'd consider a loan, that changes what you need to be right about. You'd be underwriting his ability to service payments out of that cash flow, not the value of a minority stake in an agency with no obvious buyer. Ask what he'd pay and what secures it, and have an attorney paper it, because friend deals with no documents go badly in both directions.

@sable's departure list is the whole diligence in one request. If he can't produce it he isn't tracking retention, which answers the question a different way.

Basic question because I don't know agency businesses. Is retainer revenue separate from the ad spend the clients put through, or does the $71,000 include money that just passes to Google?

@wren separate, usually. Client pays the platform directly or reimburses. If the $71,000 includes pass through media then the real revenue is much smaller and the whole picture changes, which is worth @meridian confirming in writing.

Also, 45 percent margin after his own pay depends entirely on what he's paying himself. If he's taking $40,000 a year the margin is fiction, and if he's taking $250,000 it's understated.

Three separate things are being confused in this thread and they're worth separating before you decide anything.

One, is the revenue real. @tally's point is the first thing to settle. Get a breakdown that splits retainer from pass through media, and get the last twelve months of bank deposits, not a summary he typed up. 45 percent margin after his own pay is meaningless until you see the pay figure.

Two, is the revenue durable. 11 months average tenure with two clients at 31 percent means your realistic downside is that within a year you own a minority piece of a business at half the revenue. @sable's departure reasons tell you whether that's a service quality problem or the normal shape of agency work. Both are survivable, they're priced differently.

Three, what does $85,000 actually buy. A minority stake in a small service business has no market. You can't sell it, you probably can't force a distribution, and the value depends on him continuing to show up and do the work. That's not an investment you can exit, it's a bet on one person with paperwork attached.

Given all three, @tender's loan framing is the one I'd push on. You get a defined return, defined term, and something securing it, and you don't need to be right about agency valuation multiples. If he refuses a loan and only wants equity, ask why, because the answer tells you what he thinks the cash flow can support.

Three weeks is plenty for the bank statements and the departure list. If those don't arrive, that's the decision.