The Consulting Growth Podcast
Joe O'Mahoney is Professor of Consulting at Cardiff University and a growth & exit advisor to boutique consultancies. Joe researches, teaches, publishes and consults about the consulting industry.
In the CONSULTING GROWTH PODCAST he interviews founders that have successfully grown or sold their firms, acquirers who have bought firms, and a host of growth experts to help you avoid the mistakes, and learn the insights of others who have been there and done that.
Find out more at www.joeomahoney.com
The Consulting Growth Podcast
The Second Bite Strategy | Todd Taskey & Prof. Joe O'Mahoney
What if selling your business wasn't the end of your wealth creation journey, but rather the beginning? In this fascinating conversation with Todd Taskey, M&A advisor and host of the Second Bite Podcast, we explore how marketing agency founders can transform a business sale into an extraordinary wealth-building opportunity.
Todd reveals the three currencies every business seller receives – cash, earn-out, and equity – and explains why that third component often becomes the most valuable. Through real-world examples like Social SEO (which grew from $2M to $16M in EBIT DA after acquisition) and Endrock Solutions (whose founder went from running a 20-person team to becoming Chief Growth Officer at a 1,700-person powerhouse), Todd illustrates how the "second bite" strategy works in practice.
The conversation dives deep into the human elements that make or break these deals. We explore how personality fit between sellers and buyers determines long-term success, why private equity firms in the agency space focus on growth rather than cost-cutting, and the art of structuring earn-outs that actually motivate founders post-acquisition. Todd shares his counterintuitive advice for presenting conservative growth projections during sale negotiations to ensure achievable earn-outs later.
We also tackle how AI and automation are reshaping the value equation for professional service firms. Rather than threatening agency values, these technologies may actually increase profitability by enabling firms to serve more clients with fewer people. Todd offers practical wisdom on why agency owners should focus on employee and client retention metrics as the true indicators of business quality, and how to distinguish between building a lifestyle business versus building to sell.
Whether you're years away from an exit or actively considering one, this episode provides invaluable insights into maximizing the value of what you've built while creating alignment between your personal goals and your business strategy. The path to extraordinary wealth might just involve taking a smaller slice of a much bigger pie.
Prof. Joe O'Mahoney helps boutique consultancies scale and exit. Joe's research, writing, speaking and insights can be found at www.joeomahoney.com
Welcome to the Consulting.
Speaker 2:Growth.
Speaker 1:Podcast. I'm Professor Gero Armani, ceo of Equity Sherpa. We help owners of consultancies quadruple the equity value of their firms over a two to four year period. If you'd like to know how we do this, visit equitysherpacom. Welcome back to the Consulting Growth Podcast. I have the pleasure today of being joined by Todd Taskey. He, as well as being a partner with Tower Partners and a very experienced M&A advisor plus angel investor, also runs a fantastic podcast which, if you haven't listened to, I very much recommend you do. It's called the Second Byte Podcast and we'll get into a little bit about that later. But welcome, todd.
Speaker 2:Thank you, Joe. I'm super excited to talk with you and your audience.
Speaker 1:Tell us as a bit of an intro. Just tell us a little bit about yourself, because I know your LinkedIn profile kind of jumps in at the angel investor stage. But I'm guessing you've been around the block a few times.
Speaker 2:Yeah, I spend all of my time working with entrepreneurs, mostly marketing agency founders, and we help them create transactions where they can sell their business and still, in addition to getting a significant portion of cash, get a significant upside by hanging on to or getting equity in the larger buyer, and we only and always represent the seller, and our clients are usually between a million of EBITDA and 5 million or 6 million of EBITDA in that range.
Speaker 1:Yeah right, so this is what would be called an equity role, isn't it? So, in effect, somebody selling a bit of their company, or probably most of their company, and then getting a smaller share in a bigger pie.
Speaker 2:The right way to think about it is that somebody is going to sell 100% of their business. Sure, yeah. And when they sell 100%, there's three forms of currency that the buyer uses. Number one is cash, always our favorite. Number two is earn out. And number three is equity yeah, equity, yeah. And then those are the components, and each of them has their own complication, other than other than cash, which is pretty easy and straightforward.
Speaker 1:Yeah, yeah, it's. I mean, I'm always impressed you managed to get so many, uh, so many, guests with that who have, who have done that or who are doing that, because it then they're not a common breed. I mean, I I don't know about your experience, but mine is that very often people like to sell. They have to do the earn out because very often it's tied to whatever deal they're doing, but then, as soon as they can, they want to disappear. So does it take a certain type of person who's keen just to keep going?
Speaker 2:I think it's more of a timeframe in their evolution.
Speaker 1:Okay.
Speaker 2:And this is what I mean. So I'll give you one example, if I can. Yeah great, I'll give you two examples on either end of the spectrum. So we have a bunch of deal trophies over here and we did a transaction. It was Thanksgiving week of 2019. And we sold a company called Social SEO and those guys were doing roughly 2 million of EBITDA on 10 million of revenue.
Speaker 1:Nice.
Speaker 2:We got roughly four times that amount, the EBITDA, in cash at close Nice. We got another million paid out a year later. That was the earn out Right and they kept about 40% of the business.
Speaker 1:Okay.
Speaker 2:They sold to a private equity group. Fast forward to 2024, end of 24 last year. There's 16 million of EBITDA. There's 16 million of.
Speaker 2:EBITDA Wow, wow, yeah. They've done four acquisitions. They've grown in ways they didn't think were possible on their own, and these this was part of the vision of the founder and the CEO that wanted to grow a business and realized, a they didn't have the skillset to do it. B they didn't want to use their money to do it and C they didn't have the relationships for financing and for debt and for integration and all those other things. So that's been a terrific success and so, as I like to describe it in that example, that client wanted to continue to build the business in their image and likeness.
Speaker 1:Yeah.
Speaker 2:We know what we're doing. We have the systems. I'll worry about utilization rate, I'll worry about the HR manual, I'll worry about receivables. I'll do all of that. I just need some help to grow faster. All of that, I just need some help to grow faster. And so, in a very real sense, they still continue to own the business. They own a smaller portion of the business and now that business is much larger I would say a business like that their equity piece is probably four or five times as valuable as what they got at close.
Speaker 1:Right.
Speaker 2:The other end of the spectrum. We have a deal over here called Endrock Solutions. We sold Endrock to a great company called Power Digital about a year ago, and so my guy at Endrock does conversion rate optimization.
Speaker 1:Okay.
Speaker 2:That's a narrow strip in an overall marketing solution, and so they did a transaction with Power Digital and our guys took half of the money in cash and half of the money in stock.
Speaker 1:Yeah.
Speaker 2:Ned was running a business with 20 some odd employees. He's now the chief growth officer of Power Digital. They have 1,700 people, wow, okay. And he's doing all sorts of things with clients that he never would have imagined he could have gotten to. Yeah, he got a nice amount of cash, so the pressure's off, if you will. And the thing I hear most, joe, from people is I didn't realize you could do this. I thought if I sold the business, I was going to be an employee for a year or two years in a boring job that I don't really like, and then I would retire from that. And that's just not what our guys like to do.
Speaker 1:I'm dealing with a deal at the moment which is not dissimilar. So they'll get a chunk of cash, they'll get another chunk after the earn out and they get a percentage of the firm that's buying them. That's part of a private equity roll-up. So, for those of you that don't know are listening to this, private equity will make their money by combining several similar types of companies that perhaps have synergies, and they'll typically pay an EBITDA of a multiple seven, a multiple of five to seven on EBITDA and then when they sell the big company, they'll get a much bigger multiple. So they kind of arbitrage. It Is that roll up something that is commonly behind these second bite deals.
Speaker 2:So I'll parse the words for just a minute when I think of a roll up. I'll parse the words for just a minute when I think of a roll-up. So let's talk about somebody that does SEO work here in the States, and a roll-up means you do SEO and you're 2 million of EBITDA. I'm going to buy a whole bunch of SEO companies and now we'll be 10 million of EBITDA as an SEO. That's what I define as a rollout.
Speaker 2:We don't do those as much as what private equity would describe as a buy and build and create an arc of services. So we'll take your 2 million of EBITDA in SEO, but the next company we buy is going to do social media marketing, and then we're going to do one that does paid marketing, and then we're going to do one that does paid media, and then we're going to do one that does email marketing maybe a HubSpot agency and so we will now not only be able to cross sell, but we'll be able to offer a fuller suite of service, which typically allows us to go upstream to larger clients.
Speaker 1:Yeah, yeah. I think it's something that almost needs to be a course that owners of firms can go on to help explain all these terms, because it helps explain the logic of private equity especially.
Speaker 2:You know it's interesting. I'll plug the Second Byte podcast that you had mentioned before. So we have a series right now called PE Insights. Oh, I'm listening to it. It's interesting. I'll plug the Second Byte podcast that you had mentioned before. So we have a series right now called PE Insights.
Speaker 1:Oh, I'm listening to it. It's fantastic, thank you.
Speaker 2:Yeah, really good. Yeah, so we ask I have what? Eight guests on there, all private equities from different firms, and I ask them one question and then each person answers that. So it's topical from that perspective. You can get some insights that way. Also, I mentioned Ned McPherson. He was on the podcast. You can listen to him talk about his experience. The purpose for the podcast was to create an environment joke kind of like you're doing for founders to hear these stories directly from other founders. And we encourage on the podcast people talk about good, bad, what worked, what didn't, what was worse, what was better. You know those kinds of things.
Speaker 1:Yeah, brilliant. Listen, I need to apologize to you because I've I gave you a sort of approximate questions that we'd be talking about and then we veered off completely. Those are the best ones, right, a whole load of definitions, but, um, I'm blaming my adhd, uh, on that. Um, okay, so let's, um, let's talk about what. There you go. You mentioned, sometimes things go wrong. What, what? One of the most common things you see, um, you know, somebody will have built a what we would call a small, successful people business. They go for the second bite, either as part of a roll-up or a buy and build or some other structure, but then it doesn't work out. Um, let's, let's forget about the externality things that can't be controlled within that firm at the moment.
Speaker 2:What, what internal things often go wrong with those types of deals you know the as I like to describe it when you do a second bite transaction. It's art and science, and the science is relatively easy because it's pretty straightforward EBITDA times multiple equals payment, how much is going when, and all like that. The art part to it is understanding why people fit with others. Okay, do you mean personality?
Speaker 1:wise, yes, and desire wise why people fit with others.
Speaker 2:Okay. Do you mean? Personality wise, yes, and desire wise, okay. And and so a couple of thoughts. We have some clients I call them low ego clients. I just want to win. I don't care what my title is, I don't care what my and I just as long as the money I've rolled into this new venture. I rolled in 2 million. I want it to be worth 10 million at some point. Just tell me who I report to and what I should say. And then I have others that say listen, I am in charge here, this is my thing, you're helping me build it, and that's fine too, and I appreciate those people. Those people are not worse than the first group.
Speaker 2:But if you take two of those, people and put them together, you're going to have a problem. So part of it is understanding how those people fit. And I think when we go through a process, we talk to a lot of potential buyers. When I talk to a client for the first time and they say I want to do this or this or this, I used to give that a lot of credence. And now I realize there's no basis for you to tell me what you think you want to do, because, beyond the numbers and the title and the job description, so much of it depends on the people you're going to be in business with.
Speaker 2:And you may really like those guys and I've had this happen many times. After a call they'll say geez, joe, these are the smartest guys I've ever listened to. If I could be in business with them, I would love to. And, by the way, you start to get this belief that if these guys were running the business our business that I own a part of I think we'd be dramatically better off than if I was running it.
Speaker 1:Yeah.
Speaker 2:Because then I could just focus on sales, or I could just focus on technology or just focus on what my core is right. So what happens when you do a process? I want to get the best results for my client in terms of economics. I also want them to have certainty around the deal that they've chosen, that they could say if I did this deal in the summer of 25, it was the best value with the best buyer. And I know that, not because I had one offer and I liked it. I know that because we had four or five offers. We spoke to 20. I am completely certain this is where I belong. I've seen all of that Right and so when you have that, you wind up with a better result.
Speaker 1:Yes, yes, definitely. Okay, there's a follow-on question here, which is how do you, how do you assess that? Because I struggle with this, because I've and you will have had the same. You get some founders. They just want the person that's going to be giving them the most money, so the best financial deal, and there's nothing wrong with that at all. Sometimes you look at that person and think, well, you're not going to work well under someone, or you probably don't want to do an earn out and you're going to struggle hitting the targets and all the rest of it. You probably don't want to do an earn out and you're going to struggle hitting the targets and all the rest of it, so that that that people bit. Is that something that you you seek to not manage but advise on? When it comes to personality types and yes.
Speaker 2:So and there's a couple of different ideas in here Number one usually. What will happen? Let's just make it up and say we have four offers for a business and offer number one is the highest one, obviously, and so the client wants that. I always ask them if all of the offers were the same, who would you choose? Oh, clearly I would take number three. I mean that's the best fit, I liked them the most, blah, blah, blah. We will go back to number three and say oh yeah, good news. Our guy wants to do a deal with you, wants to be a part of what you're doing, wants this, wants this. Challenge is you're. You are not the best offer.
Speaker 2:So my client has said if you can do this, then they'll sign. It's the best fit and there's just so much that goes into it from our end. If we brought all these people along properly and they know that there's multiple other buyers, or at least multiple other interested people, that gives me validation as the buyer. We thought we'd offer 10. You're saying that other smart guys offered 11?
Speaker 2:Well, maybe it was us, maybe we missed something, and usually buyers won't fumble a really good fit over a little bit of money and a little bit of money, it could be meaningful, right? So we'll go grab all of it, and this is one of the mistakes I think people make. That is not something you're going to negotiate at the end right now, because I'm a good negotiator at the end right now because I'm a good negotiator. That thing should have been happening from the very first call, and I'm talking about before you got on. I'm talking about the first time I called them and, as I always tell clients, I'm working on a chessboard. I know you're looking for one buyer. To get that one buyer, I need a few things on the chessboard that I can move around, because I think I know what the outcome will be if we can accomplish those things, because we've done that so often.
Speaker 1:Yeah, it's a nice way of putting it. I like the chessboard analogy, yeah.
Speaker 2:Right, and you become more confident when you have three offers than if you have one. Sure, yeah, right, and. And so that might you. I've been on calls where that, where the client has said, todd, I would just never go work for those guys, and I'll say, great, I don't need you to go work for them, but I need an offer from them. So I'm going to keep progressing and they understand the process.
Speaker 1:Yeah, okay, okay. Well, again a sub-question, jumping back to what we were talking about earlier the presence of private equity in these deals. Now, I think we both remember a time when private equity was hardly on the cards at all, and they've got more and more involved, not just as direct investors, but also backing companies that are buying, encouraging them to buy other firms. Now, a lot of my clients have an instinctive reaction against the simple phrase private equity because they haven't had a great reputation traditionally, against the simple phrase private equity because they haven't had a great reputation traditionally, and I'm sure you and I could also point fingers, uh, to private equity firms that you wouldn't touch with a barge pole, because they they treat people, businesses, like tech businesses or or whatever they're there. So how do you? What from a buyer's perspective? Sorry from a buyer's perspective, sorry from a seller's perspective how can I? What should I look for in a good private equity firm? Or, conversely, what should I be looking for in someone that I should be avoiding?
Speaker 2:Yeah, so there's a couple of things. In the US we have Inc Magazine and they rank the 50 founder friendly private equity groups. Do they?
Speaker 2:I don't know if they have anything like that in the UK. Otherwise, you just need to do a little bit more homework. We have spent 20 years developing these relationships and our requirement is that. But here's the bigger picture. All of this stuff that people form their opinions around private equity are larger transactions that you read about in the Financial Times or the Wall Street Journal. In many of those, private equity comes in and says you guys shouldn't be doing all this crazy stuff, and a lot of that crazy stuff is being over levered. Too many humans, too much expense, so they get the reputation for making cuts and making life harder.
Speaker 2:In the space that I deal with, you can't cut your way to a profitable business. You need to grow that business. And to grow a services business, we need more good people, not fewer good people. Most of the people we deal with will create wealth for themselves, the private equity group and the private equity group investors by building a valuable business, not by squeezing a couple hundred grand out of the entrepreneur at the closing table, and so, from that standpoint, that's number one. Number two would be again going back to positioning and longevity.
Speaker 2:Once you sign an LOI, the first thing that happens is you do a quality of earnings and they check your financials. It's the most important thing. Every deal lives or dies based on quality of earnings, and so you certainly, as a side note, you want to have your quality of earnings accurate. But it's a bumpy road and if you're a $2 million EBITDA business, I can guarantee quality of earnings won't come out at $2 million. It might be $1.977. It might be $2.015, but it won't be exactly exactly 2 million. So it's going to be a little bit different and there's ways we plan for that in advance, right, one way is if the buyer knows. Like we described, there were four offers. I raised mine to get this deal and everybody else is just waiting for me to fumble it. And now earnings came in a little bit weak, not because of revenue recognition or because of gap accounting or whatever is 150,000 less than we thought I want their first thought to be. I am not putting this deal at risk for 150,000 to be, I'm just not going to do it. So, so, so that's all you know all that mishmash goes into it, but knowing what the outcome is going to be when you get into it at the beginning, you can position these things along the way so that you don't have those, you know, kind of surprise and hurdles. I'll give you one tip. This is a great tip for your listeners.
Speaker 2:A lot of times, when people put a deck together to talk about the company, they'll show a huge year, a banner year in the current year and then next I'll make it up. You've been growing 10% a year. Next year we're going to grow 25%. They do this because they think it makes the business more attractive. Number one it does not make the business any more attractive. Number two I don't believe it. As the buyer, I do not believe it.
Speaker 2:But here's what happens you get an offer, you get cash and you get earn out. And just as you said, joe, so what do I have to do to get the earn out? Oh, I mean, I don't know. Whatever you told us you would do, what's in the debt? They act like they don't know. What did you guys put in the debt?
Speaker 2:Now, this fictitious number you made up because you thought it would make the company more sexy now becomes the requirement to get your earn out. This is why people don't get earn out. Not because their private equity group is screwing them, because they have set these false expectations that they knew from the beginning they couldn't get. So we do the opposite. If they've been doing 10%, we put in 10, we put in five. If somebody's been growing at 20% a year, the next year we put in 10% growth.
Speaker 2:And eventually the buyer usually during the calls will ask hey, so you guys doing 20% a year, how come you put in 10% for next year? And this is one of the few things I coach my clients on. Their response is well, that's how we do it. We always strive for 10% growth and then we work as hard as we can to outperform that. That's nice. I like that. Listen at our size, we don't spend a lot of time making up fictitious numbers about what we think the future will be. Sure, we have some rigor and we plan, but 10% growth is usually what our bogey is. And we plan, but 10% growth is usually what our bogey is. That's why, on most of these trophies over here, our clients get almost all of their earn out, if not all of their earn out.
Speaker 1:That's quite a statement, because earn outs I mean full earn outs especially are a very rare beast. So well done on managing those expectations.
Speaker 2:And that's one. Let me give you the second thing that I think is helpful. We always have a ramp on the earnout, not a cliff. Good, yeah, right. So I'll give you a simple example. You're 2 million of EBITDA and you have to grow to get your earn out 10 percent. So next year you have to do 2.2 of EBITDA and if you do, the earn out is a million dollars. Ok, if that's a cliff, meaning if you get one point, nine, five or scratch, you get 2.15, you get zero. That's terrible. That encourages wrong behavior on both sides.
Speaker 2:So what we do is we say, okay, so the earn out's a million. We have to grow the hurdles 2 million and we have to grow to 2.2 to get the full earn out. That's 200,000. So for every dollar of EBITDA over 2 million, we get $5. So if we do the full 2.2, that's 200 times five, that's a million bucks. If we only got to 2.1, that's 100 times five. At least we got 500 grand.
Speaker 2:Now, depending on your earn out, we would if it's, let's say, it's a two-year earn out, whatever we didn't get. So if we only got 500 the first year, we can get that other 500 at the end of the second year. If we outperform and if we did 2.2 or 2.3, we don't get paid extra, but the 100 of EBITDA that we got over goes into our bank to start next year, goes into our bank to start next year. Right, if you sell that before you're doing LOIs to the buyer, it's a piece of cake to accomplish. Yeah, because, as we always tell, I always tell the buyer you will look like a champion, because every buyer will give you lip service. We want you to get the earn out right, because that means you're performing well, and on and on Say great, let's put some meat behind, let's put some substance in there. Give us a ramp, give us the ability to make up and catch up right. Give us the ability to you know on and on from it and when you can accomplish that. That's why our folks get it.
Speaker 1:That's great, and it's so much more motivating as well, isn't it? We both will have seen sellers who miss the first year targets, but because of the structure of the deal, they just want to go home now. They don't want anything to do with it.
Speaker 2:I've asked clients that all the time. So you just bought Joe's company and he missed the $2 million EBITDA and now he's got to grow more the next year to get anything. What do? $2 million EBITDA, and now he's got to grow more the next year to get anything. What do you think he's going to do? I mean, do you think he'll stay? Why would he? Joe's been an entrepreneur his entire life and he just missed. He's angry with you, right, and he'll leave for sure. And by the time he realizes which is not going to take him a full year he'll realize in month eight or nine we're not going to get the earn out and he will just leave.
Speaker 1:Yeah, it's a huge waste, and it used to be quite.
Speaker 2:I see less of it these days, but again, it requires an investor, buyer, who's open to sense, which isn't always the case, true, and if they're not open to sense which isn't always the case, but true and and if they're not open to sense, joe, they should not be your buyer. No, agreed, right, we will. We'll go find a better buyer listen.
Speaker 1:I want to. I want to um ask a question around um it's, especially as you focus more on the marketing side of professional services. Um, in consulting, we're seeing a huge amount uh around ai and automation, uh, productization and it's. It's slightly scary for some, for some owners, because they know they should probably be thinking about it or maybe even doing it, but not sure where to start, how to prioritize and all the rest of it. Obviously, in marketing there's a strong quant side, which data analytics has been around there for a long time. But in terms of, uh say, using ai to improve operations, to offer new services or automation, whatever it is, how are you seeing sellers successfully responding to that and successfully making changes in the firm that might push up the multiple a little bit?
Speaker 2:up the multiple a little bit. So great question. I don't know how. I mean ai and having ai infused in your business is here. It's been here, so if you're not there, you should get there pretty quickly. What we will see, what I, what I see amongst my clients is that they can serve more clients with fewer people, and a lot of the work that people don't like to do filling in cells and doing analytics and so forth has been eliminated, and so companies, in theory, will become more profitable. In theory will become more profitable, so the multiple might stay the same, but the EBITDA, the profit mark, should go up, which makes the company more valuable. That very simple description should have everybody listening.
Speaker 2:Figuring out what do I do with AI. What do I do with AI is pretty tricky. I'll throw out one thing. I have the founder of Power Digital, which is now. I mean their transaction they did with private equity had them roughly $600 million of value created from scratch. A gentleman named Grayson LaFrenz is the CEO and the founder there. A gentleman named Grayson LaFrenz is the CEO and the founder there.
Speaker 2:Also was a guest on the podcast. He has started a new, so now he's executive chairman at Power Digital and they've got a tremendous management team there that's running everything, so he's not left with a lot to do. So he created a business called Cadre and if your listeners want to check it out, it's gocadreai and what they do is help folks like you're talking about your clients figure out what AI technology they they should be implementing and how to do it in a services business, from a guy who has built hundreds of millions of dollars of wealth doing exactly that Right. So, and yeah so, gocadre Grayson LaFrenz is his name.
Speaker 2:I'm sure you'll put it in your in your show notes, joe, and and they, you know they'll talk to you and get you set up and, and you know, help you figure it out. But you know, ai is is clearly there. It's clearly, I think, in consulting firms and marketing firms, going to make all of them more profitable. And then the question will become does that mean I am a more profitable consulting firm or will I reduce my cost to get more market share?
Speaker 1:Sure.
Speaker 2:Yeah, and that'll be decided on an individual basis. I would guess people think it's easier to sell a cheaper number, so I would imagine that cost will potentially go down to the end consumer, but it will be a great boom for the services industry for sure.
Speaker 1:And how about sort of the productization side of it? So, um, I know buyers and investors like to put firms in boxes and traditionally they've had a sas box, they've had a tech box and they've had a professional services box. Now those those, um, with different multiples, with each associated with each. Now those boundaries are being blurred. What's your advice to firms that have a bit of a product box or a bit of a SaaS box, but they're mostly still people? Do you ever encourage them to spend a couple of years building out the product side of things so that they can be classified as more of a SaaS firm? Or is it more complicated than that?
Speaker 2:It's a leading question yes. So here's the rule of the road. You are what your revenue says you are. I've sold firms that have great data platforms and they have some SAS subscription to that and it's 8% or 10% of revenue. That's not a SAS business, that's an agency services business. You're going to be paid and it's going to be valued as a service. That's it. So here's the other thing. So I'll give you a specific example.
Speaker 2:We sold this company, sproutword. Oh, yeah, I know them. Yeah, okay, so SproutWord is a D2C. They do marketing for direct to consumer brands. They have a data platform, so large D2C brands can ingest their own data and then make media purchases based on that. It's fantastic. And we did a transaction and Matt said to me here's the thing today I think we might have the best data platform, data analytics platform out there in the market next year. It'll be pretty good. The year after that it'll be the same thing everybody else has. Sure Unless we spend a crap load of money to keep evolving that we don't have a crap load of money, and the money we've spent so far is my money, and that's hard.
Speaker 1:Yeah.
Speaker 2:So we did a great transaction for them. We got a services multiple on that business.
Speaker 1:Yep.
Speaker 2:And we got the high end of the range as a multiple because they had cool technology, okay, and it gave somebody else a jumpstart down that road, and so that's what I would say the notion that you have some cool technology. To be fair, everybody has cool technology, and if it's, what I need to know is that your cool technology can produce money.
Speaker 1:Yep.
Speaker 2:That's what makes a SaaS company valuable, software company valuable. Not that the software is awesome, it's that they have so much revenue coming off of that software.
Speaker 1:Yeah, I think that it's a really good piece of advice for small firms that perhaps they started as people firms, or still are people firms primarily, and they've got a product that they developed that perhaps is selling reasonably well. But that thing you said where actually at the moment it's best in class because no one's thought of it or it's still in someone's garage, but next year, meh, and then the year after we're nobody because we haven't got the funding to put into it.
Speaker 2:Yeah, and the other thing to keep in mind, joe, is that if you're a services business with some technology to it, the buyer is a services business. Software and SaaS businesses don't want human beings. Sure, I'm not going to buy a business that has 50 humans, for God's sakes, right. And those people pay a certain multiple for businesses. If you go to the SaaS world, they're going to say 80% of your revenue is from service. We're not going to pay a SaaS multiple. So you're stuck on this in-between where you spent a lot of money to be something that you're not. If it gives you a competitive advantage so that your clients stay and you have better retention and you become more profitable because you can do more with less people, that reflects itself in your financials and we can get the multiple off of those financials.
Speaker 1:Yeah, and of course, the other thing that is worth emphasizing here is that, even with the cost of AI and coding and automation approaching zero, I've still seen a lot more failures than I have successes when it comes to people. $50 billion to improve their offering.
Speaker 2:OpenAI, gronk, gemini they're all spending at record levels. All you have to do is let them do their thing and then figure out how to implement it in your business to get results for your clients yeah, I don't know if you saw uh recently uh y combinator put out a call for full stack uh professional service firms in effect.
Speaker 1:So ai first, you know a thin cohort of senior people, but mostly ai led, and I found that quite interesting because it does kind of throw the gauntlet down to that traditional leverage model of people, businesses it reminds me of of you know, 15 years ago, when marketing agencies said that they were digital first.
Speaker 2:Yeah, sure, okay, right, it's an evolution of the same thing. The magnitude here feels like it's going to be significantly different. We're a ways away from it having. I mean, we've got compute and energy challenges to the AI industry that they've got to figure out, and on and on from there. So, like everything, as they say, we overestimate the near-term impact and we underestimate the long-term impact. I think, if your listeners stay focused on serving their clients really well, ai will be a tool that will help them do that.
Speaker 1:Really nice advice, love that. I want to move on to DD, because it's something that is the theme that comes up quite consistently in your podcast and it's something that a couple of my clients are going through at the moment, and I think we both know what a pain in the neck it can be. But when it goes wrong, what? So? What are the most common red flags that you would see derailing an otherwise good DD process?
Speaker 2:Yeah, I mean. So much of it comes down to your financials, right? So having I'll ask people all the time so tell me about your finance function. Are you in pretty good? I mean, are you pretty good? Yeah, I think so is the answer I get. That means no.
Speaker 1:Yeah, okay.
Speaker 2:I need somebody to say oh my God, you should see. You know, jennifer, our CFO is a rock star, right? Somebody needs to be on top of your financials because in the US it will be gap on an accrual basis. Are you gap and accrual? I think so. That means you're not Right. The response I need is, of course. I mean, how else would I do it Right?
Speaker 2:So many people do cash. You can be a cash-based taxpayer, but your books have to be accrual because your buyer, when they eventually sell, is going to be held to that standard. So it needs to match up right? So there's plenty of good folks, smart folks, that can help there. It will seem like an expense. It may be the best way for you to fully understand your business If you haven't been spending money there to make sure that you know and understand that, and if you think about it this way, if your business sells for five or six times EBITDA and you have a good finance person that helps you find an extra $50,000 of EBITDA that's a quarter of a million dollars I'm sure you're not paying that finance person a quarter of a million dollars to run that function for you. So it's an automatic return for you to know and understand your financials well.
Speaker 1:Yeah, and they're your best buddy when it comes to those interviews and you know presentations that you have to do yeah.
Speaker 2:Especially if you have them in the loop. The other tricky part about due diligence is that it is a second job, yep, and a lot of people let them distracted from their first job. Due diligence is going to take 60-ish days, 75 days. You cannot have your revenues drop off during that period Absolutely not, because the buyer will be concerned.
Speaker 1:It will either blow up your deal or they're going to want to shift some component of your deal either blow up your deal or they're going to want to shift some component of your deal, yeah, yeah, which is why we like to see owners who aren't responsible for 99% of the sales or at least have someone who can manage that process for you.
Speaker 2:Yeah, and I will say this that doesn't intimidate me at all. I've got a lot of clients like that. The question for them becomes and I've had plenty of people that say you know, I thought if I could go back to just being a sales guy, so I don't have to worry about utilization rates, I don't have to worry about accounts receivable, I don't have to worry about somebody being on vacation and jobs. If I could just do sales again, man, that would be a beautiful life for me. And jobs get. If I could just do sales again, man, that would be a beautiful life for me. But to your point, you need to make sure the process is being managed. You need to bring people in, which is always. A lot of times founders get scared to tell somebody we're considering a sale of the business, so they don't tell anyone. They try to do all the due diligence themselves. It's really hard.
Speaker 1:Yep, yes, I have a client going through it, or a couple of clients going through it at the moment, and it's a beast, and that's when everything goes well. Yes, good, okay. People always like to share the great stories, but I was wondering if you could share a near-death deal story, something that almost collapsed.
Speaker 2:Yeah, you know this is an interesting one, joe, because a lot of times people say you know, if you want to walk away from your business without an earn-out or other restraints, hire a professional CEO and have them run the business. We just sold a business last month where the three owners are not active in the business. They're actually attorneys and they work in their law practice. They have a legal marketing firm and they have a CEO that runs that business.
Speaker 1:Okay.
Speaker 2:The challenge becomes any buyer, as they go through the due diligence process, is looking for risk, and they're looking for key person risk. So, for example, if the CEO you mentioned is 100% responsible for sales, that makes me nervous. What if he gets hit by a truck In this particular case? What if the CEO leaves? Because if he leaves we've got a real problem. So when they hired the CEO, they did not have an employment agreement with a non-compete, so we had so number one, number two, the person they gave the. The person didn't have any equity ownership. Okay, they gave him a nice bonus, about 10, so the deal was roughly 15 million. He got 1.5 million. At close, actually, I think he got 1.3, 1.2 and then he got some equity. Yeah, 1.2 is ordinary income, so after tax it it's several hundred grand. It's a little bit more than one times annual.
Speaker 2:The buyer wanted a long non-compete. This CEO has been in this industry his entire career. What if I don't like it here? So where we got to, just so you know. So this was all sorts of negotiation because at one point it was over, at one point it just wasn't going to work. Okay. Well, the buyer said listen, if we terminate him without cause, no, non-compete, he can compete against us tomorrow. Okay, the buyer was willing to do that because the ceo was so valuable to business it would make no sense for us to fire him. Yeah, we need him, right.
Speaker 2:But this buyer was like for all the things we talked about at the beginning, what if I don't like it? Here? It's owned by private equity. What if it's bad? What if it's? And they said, listen, we're not going to let the guy quit and then go compete against us. We just wrote a check for $12 million, right? So behind the scenes, we worked it out that one of the lawyers said that they would hire him, the CEO, to run the law firm and pay him a certain salary if he did in fact quit over this period of time. And blah, blah, blah okay so there's, there's always solutions.
Speaker 2:That's a big part of what we do is just figure solve problems right, and there's a bunch of different. You know constituents that need problems solved for along the way. Um, but that would be one where you think and again, we did one couple years of years ago. They have two key salespeople. One of them makes 700 grand, one makes 500 grand. Right, they both understood during the transaction. The buyer wanted them to have an employment agreement. Because they didn't, the buyer, the seller, never felt like he needed it because I'm paying one 700, one 500. Where are they going to go In a new environment? The buyer said these guys need to have an employment agreement and a non-compete and both of them extorted money from my client. Might be a little bit strong, but it sure felt like that Strong negotiation, yeah, and it was a bunch of work to get it to work itself out and we did. But that's an example that comes with a touch of advice, so that one almost died and we were able to resuscitate it by just thinking creatively about what the problems are and how to solve.
Speaker 2:Yeah, the number one reason why deals fall apart is because you're a $2 million EBITDA business. We went through and you're selling for five times, that's $10 million. We went through due diligence. Turns out you're only $1.8 million. If the buyer is willing, they'll still do that deal. Five times $1.8 eight is $9 million. These guys are screwing me, f them, I'm not doing it. Private equity is always like this blah blah blah. Private equity will say we did an audit of the firm and you're just not. You're not doing it on gap, it's not accrued properly. Just look here. This is why it's a million eight. It doesn't matter. People are pissed. Yeah, right, so, um, so that's just another thought great.
Speaker 1:Yes, yeah, it's. It's as much emotion and art as it is, you know, science and logic, isn't it? It's a?
Speaker 2:tricky it's, and that's why we we keep all these and display them right. Every single deal is important to our clients. They're difficult, they're emotional, they're challenging, they're rewarding, they're frustrating, they're exciting. All of that jumbled up into one big pot.
Speaker 1:Yeah, interesting job. Listen, okay, listen, todd, thank you. Last question for you, tricky one. Looking back on 20-odd years of your experience in M&A and also hosting the Second Byte podcast, what is the one piece of advice you wish every founder of a people firm heard on day one?
Speaker 2:I thought about that. Thanks, I've got two quick things. Number one people always talk about clients that love us or people love it here. Those are data points. Every company has somebody that's been here for 12 years or eight years. What is your employee retention? That is a metric that will tell me, as the buyer, what it's like inside your shop. We don't ever and the decks we do. We never talk about culture and how great it is here. When we show the org chart, we show how long people have been here. Yeah, that's what culture is right. There's a reason why number one. Number two what's your retention? Your customer retention? I don't care. You've had somebody here since the day you opened up. Everybody has those guys I'm talking about. Of your revenue, how much of it recurs on a regular basis or whatever the case is? The second, the biggest thing. So I think that would be it. Pay attention to those key metrics in your business and in the services business. Those are two of the big ones.
Speaker 1:Yep.
Speaker 2:And so I would think that's it, and then I would say decisions than if you're building something because I can pay my car, I can pay my wife a salary, I can employ my kids, I can do good work and I'll just take as much money as I can. Those are different decisions, because they'll lead you down a different path. Yeah Right, and I think what you will find for your folks that have built a good business, that there are options for them before they want to exit, which means they don't have to keep 100 percent ownership of their business and that chunk of their wealth locked up in the business for that entire period of time of their wealth locked up in the business for that entire period of time.
Speaker 1:Yeah, two great bits of advice, and I think we both will have had people come to us I realize we do slightly different things but who say I've built this business up over 40 years and I've now decided it's time to sell. And sometimes you've got to give them some bad news because they haven't built it to sell. They've built've got to give them some bad news because they haven't built it to sell. They've built it as a lifestyle business and the transition from A to B isn't easy.
Speaker 2:Yeah, and sometimes when people get straight information like you deliver, then they realize I'm not going to make this sellable. I'll just take as much money from the business as I can over the next five years and that'll be my exit strategy.
Speaker 1:Todd listen. Thank you so much for your time and advice. If our listeners need to find you, where can they get hold of you?
Speaker 2:LinkedIn is you can. Linkedin is the best you can track me down on linkedin um tower partners. You can find me there. Second bite podcast you can find me there all over the place yeah, so I'm not that. I'm pretty easy to find. Linkedin is great because it's easy and um and we can connect there. T-a-s-k-e-y is how you spell my last name. Reach out, tell me if you heard us on the podcast and I'd be happy to connect and stay in touch and chat if need be thanks for your time, todd.
Speaker 1:Take care of yourself. Thank you, joe, it was great.
