OpenAI developing a search engine, A company wants to buy Neil’s company, and more

You saw OpenAI is developing a search engine now?

Yeah, uh, they're gonna announce it on Monday, so we don't even know the details as of this recording yet. Yeah.

But yeah, it's funny, people talk about how Google and search is dead, but yet OpenAI is now building a search engine.

Humans, I think as long as humans are curious, we're just gonna keep searching for things. So don't think any search engines are going away, guys.

I think they're just gonna change.

Yeah.

And you gotta adapt with the times. But funny enough, you know, it's just like we talked about adapting with the times. I was talking with a bank that I use. So I use this bank called CIBC. They're a Canadian bank. Really amazing. They provide our corporate debt. And the guy I work with, his name is Nick. Now Nick is in charge of like their private equity portfolio and stuff like that. He doesn't tell me anything that's like secretive or anything that I shouldn't know, but like he'll send me like reports of multiples over time, 2023 versus 2024.

He'll tell me about like M&A.

M&A stats. 80+% of the M&A that companies are doing are tuck-ins, private equity firms. 20% are new platform plays. The numbers are drastically down. He was saying that numbers in 2024 for the start of the year are lower and worse than 2023.

Wait, you should explain what a platform is.

A platform is like a larger corporation, and then you can tuck in smaller ones into growing them. And I'll give you a great example of this. So let's say I own NP Digital, right? We're a global ad agency where we get hit up by large corporations to do marketing. And let's say we focus on SEO and paid ads and social media marketing and all these kinds of different marketing services. And let's just make up a scenario that we didn't have a service like conversion rate optimization. We do, but let's just imagine we didn't. So a private equity company would be like, wait, this company's already large and at scale. We'll buy NP Digital, they'll be our platform. And then we're going to buy a conversion rate optimization company and tuck them in. And to make math simple, let's make up a number. Let's say I do $10 million, $50 million in revenue, no, $50 million in revenue and $10 million in profit. And a CRO agency is doing $5 million in revenue and $1 million in profit. Combined, in theory, you'd be at $55 million in revenue and $11 million in profit. Private equity company will be like, wait, we can take all of Neil's customers at NP Digital and sell them on CRO and all the customers in the CRO agency and sell them SEO, paid advertising, social media, email marketing, et cetera. And then it ends up becoming, wait, we turned this $55 million into $60 million and now we turned it in from $11 million in profit to $12 million.

And you get a better multiple.

Better multiple. And now we're going to buy Amazon marketing agency and do the same thing. And then we're going to end up buying a television advertising company that focuses on connected TV and do the same thing. And you start adding them in, you're compounding. That's why private equity says 1 1 3, because they're cutting costs and creating growth by cross-selling.

Good example of this was Tenuity. Yeah.

A great example was Tenuity. But funny enough, when we're talking about you know, getting things done in a bad market and being creative, especially with marketing and stuff like that. You know, it comes to show right now when I was talking with Nick from CIBC, people actually aren't doing much M&A. I actually think the big opportunity, you and I have talked about this on previous podcasts, is really to figure out if you want to grow faster, just buy the growth. And we gave the example earlier of the creative strategy and dude, You've done M&A deals. I know you personally have, you have, you personally have money, but when you've had businesses and the businesses are more cash restrained and you didn't want to use your personal money, what are some methods that you use to get these deals over the line?

Oh, simple. So one is there's an element of seller financing where you get the seller to carry the note, right? Where, you know, let's say, let's say you owe, you pay $200,000, simple round numbers. It's a million dollar deal. You put $200,000 down. Right. Um, and then the rest of the $800,000 might be paid over the next, you know, 3, 4, or 5 years or so. Right. Um, and then the $200,000 is like, well, how do I get the $200,000? Well, you can, you can go get debt, you can go to your friends and family, get some money, raise some money, you can use your money on your balance sheet if you have money on your balance sheet. So there's a lot of ways to do this. You can factor your revenue as well if you want to do that.

Wait, what's that?

So factoring your like invoice factoring is basically you take your revenue and I like how Neil asked it in a way to get me to explain to everyone.

No, no, I honestly don't know what it is.

Oh, so factoring is just like, okay, let's say you drive $100,000 in revenue, right, each month. You can basically— there's these invoice factoring companies that will give you like, you know, a certain percentage up to that month's revenue. They'll just charge you interest on it. So, they might charge you like a higher interest rate like 10% to 15% or so. But you can factor your revenue like that. And they might give you revenue for the next year or so. Just looking at your last 1, 2, 3 years of revenue.

You're talking about like a cap chase?

Yeah. Could be a cap chase or a PIPE or something like that. Yeah.

Or like— so like revenue-based financing.

Right. Yeah. But it's basically like factoring. So, yeah.

Got it. So you're just taking your receivables.

Founder Path does that too.

They're just giving you the cash in advance.

Yeah, yeah, yeah. You just pay a fat interest rate. But there's just so many ways to do this, right? Like earlier you're like, oh yeah, you give the 2x upfront and 3x later. And then like, you know, the rest of it's in stock. It's like there's so many ways to play this. I think the terms matter more than the price.

And what I've found is when you're doing these deals, if you get them pregnant, like you get them—

What do you mean by that?

So in private equity, they say like once they get excited by the deal and you're sending them paperwork and all this, You know, and then you start beating them up, they're more likely to still accept the deal because like they already started thinking about how they're going to spend the money and all this. We don't really do that. And we also don't do a lot of the creative deal structuring. Our deals tend to be, you know, we tend to buy a lot of companies for 5, 6x EBITDA. Yours is simple. Yeah, we just, we're just like, here's your 5x upfront, you get 1 at the end of year 1 or year 2.

And they're like, Neil doesn't try to play around with these shenanigans. I think maybe 12 years ago, Neil might have messed around, but now This is mature Neil. He doesn't mess around with these.

Good companies don't want to do creative deals. They want clean deals.

And the bigger the company, the cleaner the deal.

Yeah. And we won't play tons of games, you know, like if we really love the business, we'll pay 6x upfront, we'll pay 7x. We've even paid 8x upfront. We're very flexible if we just like the business.

8x was for the software, no?

8x was a software, but it wasn't a growing software. So it was expensive, high churn too.

But it worked out.

My final multiple on that when I bought it for 8x, I'm probably at like 2.6x right now. So, you know, it went from 8 to making the money back in 2.6 years for what I paid for it.

Oh, that's not terrible.

And I used on that deal, I used 100% financing.

What kind of financing?

At that time it was Capchase. And then I converted it over to CIBC.

Oh, got it. Yeah, yeah, yeah, yeah, yeah.

And my rate is really amazing. It's like 3.25% plus SOFR. SOFR is high right now, but in a normal economy, I'd be paying like 6% interest only. What is SOFR? SOFR is, you know, the rate that all these banks go by.

Why don't they just call it the interest rate?

Yeah, it's interest rate. So SOFR stands for— I had to Google it— Secured Overnight Financing Rate. And if I look at SOFR data from the Federal Reserve, Today it is 5.3%. So if I'm paying 3.25%, it's roughly 8.55% that I'm paying in interest, but it's interest only. So it's not bad. But these days, when we typically do a deal, we mainly use cash, or we'll at least try to do like 50-60% cash. So then it just makes economics much better. And so the rest of it—

You know what we're talking about right now is really just be Be fearful when others are greedy and be greedy when others are fearful. And I think certainly in the agency space right now, people are definitely fearful and playing defense a little bit. People are scared. You know, in our little community, which is doing $5,000 in MRR now, a lot of people are— don't clap at me. It's our community clapping at me.

But you did all the work.

Yes, I did. Because I know what it takes to start things up for this type of stuff. So, I'm good. There's certain situations where I have to play Batman sometimes and then Neil plays Robin and sometimes I play Robin and he plays Batman. You know who came up with that expression?

No.

Heaton Shaw. Either Batman or Robin, Batman or Robin. It just depends, right, in partnerships. But, um, so all that to say is sentiment's not good right now. And I think now is a good time to start talking to people. Just make sure— I'll just experience share here— make sure you do your due diligence. Don't count on the brokers to bail you out because the brokers have their own incentives, right? If I'm a broker, I just want to close the deals as quickly as possible. Spend time doing your due diligence. Make sure you have a lot of great detail-oriented people around you and make sure that it's a culture fit. Make sure that you're meeting with their people, their clients. If you can meet some of their— you need to meet their leaders. You need to meet some of their clients. Hopefully you need to understand how their culture works because at the end of the day, I think of your organization, my organization, at the end of the day, it's all chaos. It just depends on how chaotic it is. So yeah. Yeah. All right, everyone, quick message from the Agency Owners Association. So this is the peer group for agency owners that Neil and I both put together. This is for people that are doing 6 figures, 7 figures, 8 figures, even 9 figures. as well, and we're all here to help you grow your agency faster. In this group, we share leads, we share learnings with each other. It's a community where people can ask questions, their most burning questions personally, professionally. We'll share templates, reports, things like that. We're constantly adding more value to the group. I will tell you that the price is continuing to increase. The good news is that there's no long-term commitment, so you can just learn more by going to marketingschool.io/agency. Once again, that's marketingschool.io/agency to learn more, and we hope to see you inside.

All right, so check this out. I, I won't reveal the company name, but You should actually end up running this strategy. So I've been on calls with India because some India company's been trying to buy us. Also, I have to—

Buy you?

Yeah, buy us.

The whole thing?

The whole thing.

Okay.

And I also wake up early because I have to deal with India, Australia, and all the other countries, mainly Europe and India and places in Asia that we're working with. So back in early April, a company hits us up. And you're talking about a really well-funded company that's funded by most of the trillion-dollar companies in the public markets. So this company's not worth $1 billion or $2 billion. They're worth multiple, multiple, multiple billions. They have tons of cash. They raised well over $1 billion. They can raise more. So the, you know, Banger hits me up. Banger's like, hey, I got a perfect company for you. These guys want to acquire you. And I was like, he's like, can you send me 3-year financials going forward? So you probably know my response. What do you think my response was when I first got that?

I feel like you would say yes.

I said, it's okay, we'll pass. Because I didn't want to do the work.

Because then if anything, I thought you would say yes and have someone else do the work.

That's why I just didn't even care to deal with it.

Yeah.

I also didn't want to end up selling to them or merging with them or anything like that.

Yep.

So then I get a call a week later.

Explain why real quick, because we talked about this a lot. I think it's always good to reinforce this. Why?

I don't want distractions. I just want to focus on what I see as a long-term vision and just keep going. And everything else is a distraction.

Because if you were to sell, you would go back and do the same thing again. So why do it? Bingo.

You got it right. It has nothing to do with the money anymore. It has everything to do with more so purpose and fulfillment in life. And if I sold it, I would have to go sign something new to start all over. And then I had to figure out some purpose and fulfillment in my life. And it's not just about doing a business that makes money. I like the challenge, but it's about doing something you truly love. And that is, I think that's hard to find.

Yeah. Well, you just like, for me, I just want to get better and better and better. Right. And to me, like how well you do in business is actually like your level of personal growth. And so why not just keep playing?

That's right. Yeah. So then I tell them no. I get a call less than a week later, and the guy's like, "The founders want to talk to you." And I'm like, "Well, I don't want to talk to them." He's like, "You should talk to them." I was like, "All right." So he sets up the call for Monday morning, and they're just like three a.m. That call was four thirty. I've had calls with them many times over the week. So then, you know, they start talking, and they're just like their analogy did not make sense. But really nice guys. I won't mention the company name. And they were just like, you know, when a pretty person marries a pretty person, you have pretty kids and this is a beautiful marriage and everyone prospers. I think what they were trying to say— I'm not trying to poke fun at them. There's cultural differences. I think what they were trying to say is when you have a good marriage, the couple brings each other up, right? And they both perform even better. When you have a terrible marriage, it results in a divorce. I'm assuming that's what they were trying to say in the analogy.

Yeah.

Either way, smart guys, even though their analogy may not make sense to me, You know, their company is way bigger than mine and they're much more successful, right? So you can't knock them for it. And we're going through it and they're just like, look, you shouldn't sell to private equity. You shouldn't sell to anyone. We think you have a beautiful company. We have a beautiful company. We think this is going to be an amazing marriage.

And to clarify, they're an agency?

They're not an agency.

They're a conglomerate?

They're a massive social/media company. Okay, right. So they control a lot of the eyeballs just purely in India, um, and they're all funded by mainly American money. So then when, when you look at this company— and when I say funded by America, I'm talking about like the big publicly traded, uh, organization, trillion-plus-dollar companies. So when you look at them, I was like, look, this is cool and all, and they're just like, we want to buy 51%. I was like, Dude, I don't see how this is going to be because even if you raise over $1 billion, you spent a lot of that money. And I was like, one, I don't think you guys have the cash, which at the end they didn't. And then they ended up proposing something that was really interesting because I was just waiting for them to propose whatever they wanted. I didn't want to do all the diligence and everything. I was like, look, if you're really interested, send something, I'll discuss with my team and we go from there. I actually enjoyed this process. The reason I enjoyed this process was because of the deal they sent me. And I was like, huh.

Oh, you got a new structure that you can play with?

I won't use this structure, but I think this would work really well for you.

Okay.

So the structure that they ended up sending me is crazy multiple.

I get it.

2 times your cash upfront, your EBITDA. So if your EBITDA is $1 million, They would give you $2 million upfront. You would get 5 times total cash of EBITDA upfront, the rest in rollover equity. So 75, so let's say if they value at 20 times profit, they would give you 5 times in cash, 2 times upfront, 3 times, 1x each year for 3 years.

Okay, do I need to hit milestones?

No, so you're pretty much giving them their own profits.

Okay, got it.

Right?

Yeah.

So you pretty much bought the company for 2 times profit upfront. 3x over 3 years, you're giving them their own money.

Over the next 3 years.

So it's not like you're paying much because there's depreciation and stuff when you're buying these businesses. And then they're giving you 75% in, uh, or no, uh, in stock at whatever valuation, right? So you can manufacture a really crazy—

So it's really 2x.

Really, they're giving you 2x, right? And I knew it wasn't going to work in the first place because I'm like, you guys did not raise— just because someone raises $1 billion doesn't mean you have $1 billion sitting on your balance sheet. And they raised more than $1 billion. But still, you knew that you raise it in rounds and you use the money over time. And my response to them was like, this won't work. Thank you. You know, like, take care and have a good one.

Pretty much, right?

I was trying to be nice, but I already knew I didn't care to get on the phone or deal with it. I was like, this is just not going to work. Let's just cut it here.

Yeah.

And I'm happy I didn't really do any work for this because I didn't care to do a transaction. It was like, if you want to do something, do whatever you want. And then if my team and I want to perform or proceed forward, we'll give you everything or we'll give you the rest of the information. But the reason I I like this experience is if you're trying to do M&A and you don't have tons of cash on your balance sheet, that doesn't mean you're not rich. A lot of people have used their money for other things or earmarked for operations or expansion or whatever it may be. You can do a deal where you're giving people equity, but you're giving some of their cash back to them.

Yeah.

So they're maintaining that, but then they're getting equity in your overall company.

Yeah.

So it's just like, let's say Nick Shockerford's agency, right? Like, hey dude, you're going to run this anyways for the next 5 years. Our agency's bigger. I'm making it up. I don't know the size of his agency, but let's say your agency is bigger. You're just like, I'm going to give you 20% of my agency. We cross-sell, we grow each other's, we cut costs, streamline. You can keep the profit for the next 5 years in your agency and you're getting share in this overall holding company. And then at the end we merge it.

Yep.

You start doing that with quite a few players. Sure. You can still be the majority owner. But after 5 years, you have all this cash flow coming from all these other agencies. And you got a much bigger piece of the pie.

I like— so, so you know why I like this? So by the way, everyone, so Neil obviously doesn't accept this deal because it's not a very good deal for Neil at the end of the day, right? But this works for other people, like, nor do you need the cash too, right? But there's actually a lot of agencies right now that are— or any— there's a lot of businesses that are struggling right now where if you present a deal to them like this, There's a good chance that they might take it, right? So the structure, the structure of the deal matters quite a bit. And even, even this situation where Neil got the 2x upfront and 3x profits, and then he tied it over. So he took that strategy. And then he changed that strategy up a little bit. It's like, oh, you can actually apply this to multiple agencies that you're looking to tuck in, and then just give them those profits, right? That's actually pretty smart too.

So, and then you're keeping yours even though you're diluting percentage-wise. You're saying, hey, I'm going to keep my, you know, you're keeping your distributions, they're keeping theirs. But over time, you're taking over their distributions and you're giving them a percentage in the overall company. I think that is a great way because then you have the cross-selling and the synergies and you can make a killing doing this strategy.

You know, there's some agencies that we know in the LA area that will go unnamed right now that were literally— they just did a lot of deals similar to this. They probably structured it similar to this too.

All right.

So I wanted to take a second to tell you about Leveling Up Founders. This is an event/mastermind for people doing 7, 8, 9 figures. These are founders that are doing that amount, and we've been doing this event for a couple of years now. We've had amazing speakers, but more than anything, it's about the people. What I mean by that is like-minded people want to hang out with like-minded people, and this is the best spot to connect with people of a certain caliber. And we vet every single person that comes through. So if people are even though they make a lot of money, but their character, we don't really align with that, we're not necessarily going to let them in. We did this event in Beverly Hills, and it's happening in the beginning of August. All you have to do to learn more about it is just go to levelingup.com/founders. Again, it's levelingup.com/founders if you want to hang out with amazing people. Neil, my podcast co-host, is going to be there. I'm going to be there. People like Syed Balkhi, he will be there as well. And again, it's going to be a great time. levelingup.com/founders. founders to learn more. And we'll see you inside. This tweet is from Mike Beckham. Mike Beckham. So he says, interesting dynamic. American workers advocate strongly for remote work because you're talking about global company, company, right? So American workers advocate strongly for remote work, but it undermines their key competitive advantage compared to international workers. Over time, I think most American workers will push for in-person work environments to protect jobs from outsourcing. I thought that was an interesting take because we have a mutual friend. You need to sneeze or something? Sneeze, sneeze.

No, no, that's good.

Okay. So, so we have a mutual friend. I mean, you know, he invested into this, this one company where they help a lot with offshoring and nearshoring. And we're seeing a lot more of these, right? And, you know, all the people, again, all the people that advocate for remote work, it's like, well, you know, guess what? If you're going to advocate for remote work, we're going to hire from other countries and other nearby countries where the costs are cheaper, right? And That mutual friend of ours, we actually a couple mutual friends are just like, oh yeah, not only do we not hire from California, Colorado, and New York anymore, we don't hire from the US anymore. Wow. Yeah.

But there's so much, so many amazing people in the United States.

I would hire the core strategic thinkers and leaders in the United States for sure. For sure.

And then you can outsource a lot of the other stuff.

Yeah.

We're finding amazing talent everywhere. But what we find is whether they're in India, or whether they're in Brazil, or the US, or, you know, Hungry, they're still expensive. Yeah, just good people aren't cheap.

I mean, look, Google has started to lay off US employees and hire the same roles in Mexico.

Really?

So here, here, let me read this one to you. This one's from Unusual Whales. I follow a lot of random Twitter accounts. So breaking, Google has started to lay off hundreds of quote unquote core employees and has started hiring the same roles in cheaper countries like India and Mexico, per CNBC. Alphabet has been slashing headcount since early last year when the company announced plans to eliminate about 12,000 jobs or 6% of its workforce. And then, you know, Alex Becker, right? So Alex Becker responded here. He's like, American tech employees are wildly overpaid and do very little actual work. Surprised they didn't do this sooner. So it is what it is, man. So that is it for today. Please don't forget to rate, review, subscribe. Go to marketingschool.io/agency if you want to grow your agency faster. And, uh, yeah, do all that other stuff.

Make sure you go there. Next time you do a call, let me know. I'll join the call.

Oh, there you go. Join it. Um, once we get to around 50-ish paying members or so, we're going to do the call with Neil and, uh, Yeah, it's going to be a good time. Catch you later.

We're pretty close to that already, right?

We're at like 39, right?

Yeah. So join, would love to do it. And I can break down all the stuff that we're doing to grow. And we're growing fast. To give you an idea, we'll go from start of this year, 750 employees. My guess is we'll end the year with 1,200.

Yep. And we're going to keep— guys, we're continuing to jack up the price too. So it was $149 a month. Now it's $199 a month. And it's going to keep going up depending on the value that we add to it. So join now. And catch you later. Bye. Bye.