Strategies for entering new industries, Acquiring distressed agencies for market entry, and more

So this next episode is covering a portion of our Agency Owners Association 1.5-hour call that Neil and I did. So if you're an agency owner and, or if you're looking to just learn more about how to scale an agency, there are a lot of questions that we get from the community members in here. This is basically a sneak preview into how the group works and one of the major benefits of the group. So if you're interested, please listen. And without further ado, here is the episode. All right, Adam, let's move over to you.

Thanks, Eric. Hey, Neal, good to meet you. Quick question. Have you ever taken equity as compensation?

And if you've done that, how did you do it and how did it go?

Sure.

Pleasure to meet you as well. I've done a lot of deals in the past where I take equity in exchange for helping them grow. I haven't had one that's worked out. And here's why. Sometimes the equity doesn't work and both people just part ways. It could be the product doesn't work as well, or they didn't get as much traffic as they expected or as many conversions. The ones that have worked from a monetary standpoint, which funny enough, in my case, if I've done 5 deals, at least 80% of them work, so call it 4 plus, Where they're generating a positive ROI and I'm generating a positive ROI. But what I found in the 80% that works out from a financial aspect for me, because I made way more than I would've with charging fees, they eventually don't like it and they wish they just paid me the fees. And then they eventually get upset and we end up parting ways and it just doesn't work out. Even if you have legal contracts and all this, if you're a minority owner, it's just a pain. The bigger corporations don't want to do it because they're too large and they can just afford to pay agency. I'm not saying it's not possible. I'm just saying I haven't figured out a way to do it where it continually works and someone wants to keep paying me, you know, on year 2 and year 3. Typically when someone does that on year 1, you know, first 6 months, there's no issue. Once the numbers start really climbing up within 12 months, issues arise. I've never seen it just work out well.

The problem too with equity is it's kind of like a lottery ticket. Some of the deals that Neil's talking about, these are pretty significant startups, like companies that have the trajectory to become really big. That's where it becomes a pain in the butt. But yeah, any equity deals I've done have gone in that— they've more or less all been lottery tickets.

So yeah, and it works out really well when they're small, but when they start getting big and they're writing you like a 6-figure check a month, they don't like it. Yeah, I can see that.

We deal with a lot of indie brands, could be a beauty brand or some new beverage, and they're trying to figure out, you know, how to pay for services in a different way or how to get the cost down. And so I was just wondering, you know, if I should be bringing up this subject or let them bring it up.

It's like, oh, you can, you know, do it this way.

We discount things by 20% in exchange for whatever your last evaluation was.

But I don't know.

Any insights? I'd love to hear them.

You're better off just taking the money and the 20% and not doing any equity stuff. It's just too complex.

All right, Kevin, let's go to you. What is your question? Kevin McGrew.

Yeah.

Hey, Neil.

Nice to finally talk with you. My question is about NPS kind of feedback from clients to improve You know, agency performance and get some feedback. But yeah, how do you get and use maybe NPS or other types of feedback from clients to improve your agencies and also, you know, for employees to get feedback? Yeah, any ideas there would be great.

So we use NPS in 2 main ways. One, of course, internally to see how happy our team is, and we try to improve upon Anything we can based on the comments received. The second way is we do it with our customers as well to see if they're happier over time, to see if we're really improving the service. And we look for comments on where areas we can improve. There's not much more to it. And there's something most people get wrong with NPS. They think the higher the NPS, the better your retention and churn is. Not necessarily. We have a higher NPS now than what we did when we started the company, and our churn is higher in the last 12 months and even 24 months than it historically has been due to economic conditions that we can't control.

Is there a frequency, a cadence that you do that with, with your clients, or it's just kind of one time?

No, we usually do it at least twice a year.

Okay.

Thank you.

All right, cool. Elian, you had your hand raised twice, so I'm not going to let that go. So Elian, you can read off your question. What is it? Oh, did he disappear?

Oh yeah, yeah. Do you hear me now?

Yeah, we can hear you.

Yep, yep. Thank you. So it's more like a marketing question. So the thing is that if you could only offer one marketing service, To, for example, e-commerce brands that would have the greatest impact, which service would it be? And if you have any second or third services, then I want to know.

That's a loaded question because if— and pleasure to meet you, by the way. That's a loaded question because if an e-commerce brand has no sales, they need traffic. What form of traffic? It could be paid ads depending on the product, may work better, and you can use the social networks like TikTok and Instagram, or it could be a product that sells better on Amazon. Or if they have tons of traffic, it may be that their site isn't optimized for conversions, that the conversion optimization would have a bigger effect in driving more revenue. I don't ever think in marketing there's one channel that is better than the other. I look at it as what does the company need? And you got to look at things kind of like a doctor. in which you have to do a diagnostic or diagnosis on your patient. In this case, it would be a website and figure out what do they need to get themselves to the next level. And it's kind of like a teeter-totter in marketing. Oh, let me drive more traffic. We're getting more traffic. Let's focus more on conversion. You focus more on conversion. Oh, the conversion rate's higher. Now let's focus on getting more traffic because now we can afford to pay more for the traffic. So this will help us scale more. Oh, we got more traffic. What else can we do in conversion optimization? Well, we already did a lot of this stuff. There's not much, that much leverage. Oh, but let's add in upsells and downsells. Although that's not conversion optimization, you're creating a funnel, so you're increasing your average revenue per user. Oh, that's now getting people to spend more per purchase. Let's drive more traffic now. All right, you know, what else can we do to maximize? Well, let's increase our LTV by focusing on our email campaigns to get people to keep coming back and buying more and more and adding subscription options, right? So it's kind of a balance and you have to adjust your approach to marketing based on where someone is within their business.

Right. Yeah. Thank you.

Does that help?

Yeah. The reason I asked that was because we have to focus on one niche because I ran a full-stack marketing agency for a year and that dragged me quite crazy and because a lot of work with a very small budget.

And, uh, so that's why— sorry to cut you off. I, I get what you're saying. You're looking for the best service. Let me actually rephrase your question and ask you a question. You've been doing full-stack marketing. What's the number one service that people have been really happy with you with that they love more than any of the other services you offer?

Um, frankly, for me, there was nothing very special that we— that they really loved. Uh, they love the fact that they started to see results by doing, by working with us. What's the reason? So what I'm saying here is that the companies that I was working with is Japanese brands, they want to go global, they don't know anything about marketing, or they don't know anything about global markets. What's the, what's, where am I selling or not? They just need revenue from these international markets. And I'm doing that for, and I'm doing for them using different platforms, depend, as you said, depending on the product. Uh, and usually it's very diverse and I don't have any one specific service that I, um, really, I really like and I really excel at. And I haven't got any feedback from them.

I got to take a minute to tell you about the Agency Owners Association. This is a peer group for agency owners. Think YPO or EO, but for agency owners. And I just wanted to read you a couple of testimonials. So This first one comes from Carrie, and we asked her, what do you like most about the group? She said, having a group of people to discuss and bounce ideas. The leads are great too. Yes, we share leads in this group as well. This one from Ollie, and he says, the ability to really post whatever I want and need, and the group responds. Great experienced members. Getting a lot of insights from conversations with other members. Getting a lot of value from sessions from Eric. Getting advice from others as well. And so if you want to grow your agency faster and you want a peer group to do so, just go to marketingschool.io/agency. This is a group that both Neil and I created, and our hope here is to create a vibrant community of agency owners and do a lot more with it in the future. So again, marketingschool.io/agency, and we'll see you inside.

So why do you want to focus on one service? It sounds like what you're doing for these companies, and I remember you talking about this last time we did a call together, because I remember very specifically you focused on bringing Japanese companies to the rest of the world.

Yeah.

And you're doing different services, it's working. Why do you want to focus just on one service? Your model's working. What's wrong?

I need to hire a lot of people and that eats a lot of profit. That's the really big thing. And for you—

You don't need a— I'll teach you how to solve this. I get your problem. Your real problem is you're doing Paid Facebook, Amazon marketing, SEO, email marketing, CRO, et cetera. And it varies per client. So if you had to hire 10 people to help you out to take off the workload, there goes all your profit. Well, what you want to end up doing is, A, make sure you're charging proportionally so you can actually build a team and produce better results. So you can have people who specialize. No offense to you, no matter how good of a marketer you are, no one's the best at everything. That's extremely rare. So that'll provide your customers better results. You need to make sure you're charging them enough. The second thing is, is you don't necessarily need full-time people for all those roles. So what you want to find is contractors and consultants who can help you out and scale as you go. And these are individuals like freelancers, not other corporations that you're outsourcing to. That way, you know, your profit margins are still healthy. So that way you're only paying people for the work that is needed for the clients that they're actually working on versus having them all full-time. And if you still can't make the economics work that way, that means you're not charging clients the appropriate amount, and you should try to eventually optimize for 20% margins. If you're at 40-50% profitability margins, that's not realistic as an agency. You need to actually take them down and make your profit by scaling up and generating more revenue.

Yeah. As a side note, by the way, a lot of agencies that are smaller, they like to brag about their 50, 60% profit margins. That's not real to Neil's point, right? Because at a certain point, as you continue to get bigger, it'll balance out where you should probably be around 20, maybe if you're lucky, 25, 30% or so. But that's also rare. All right.

What's your margins?

For me, it's 60. 60, sometimes 80% per month.

Yeah, so the problem isn't how much clients are paying. The problem is your margins. And you just have to live with it because your margins are extremely high, but you're probably doing all the work yourself and no team. And that's unrealistic to scale the revenue. It only makes sense hiring and doing this if you know you can close 3, 4, or 5 times the amount of clients. Because then your revenue is higher and then it makes up for the profit loss.

Yeah, gotta do a lot of acquisition. Yeah.

All right, cool. Um, so before we go to you, David, um, I'm gonna go to Mario. Mario, what do you got?

Hey, thanks, Eric. Um, so here's a question. We've been doing business for about 14, 15 years and our 2 main industries have been Well, industries is a loaded word, but we've been working with publishers and B2B SaaS quite a lot. So the question is both of these have been hit hard either by helpful content update or the pandemic, major layoffs and stuff. And we have opportunities to jump into different industries now. Let's say sustainability or construction or the military space. So, you know, we have some form of contracts or referrals or so, but proof of work is not there, right? We may have like One client we've done some stuff for, but not enough credibility. So in cases like that, kind of what's the workaround for it? Is it, you know, discounted work for some clients in order to start? Is it like small acquisitions of related players? Is it, you know, hire a couple people from a space that have the background credibility, have done something, strategic collaborations and like profit share? Kind of what are the ways to penetrate a new space quickly and kind of show proof of work that you can deliver, but you just don't have the case studies yet?

You actually named all the solutions yourself. The quickest one would be acquisition, and acquisition doesn't have to be expensive. You can use their own capital to do seller-based financing and pay them, or you can get a government loan. A lot of them in different countries have SBA and stuff like that. Or what's funny is you can look for competitors or They're kind of competitors because they offer the same services, but they do it in a different vertical, but they don't run a financially sound business. Like someone could have $2 million in revenue and little to no profit, like 50 grand or 100 grand because they don't know how to run the business side. And you can buy one of those and you can fix the business side and then you're off into the races. And that would be the cheapest way to go into a new market. That's what I would actually recommend. If you can run the business side and you already know operations, how to do it profitably, go find someone who has the clients, the case studies, but they're not really making much money on the revenue side. Or profitability side and then expand from there.

The number one challenge for businesses is hiring. And more specifically, the number one thing I get asked for all the time is, Eric, where can I go find an amazing marketer? And the reality is right now, when you think about the world, we have inflation. That also means wage inflation right now. And it means that when it comes to hiring talent, you can't spend as much as you would have in the last couple of years because it's just become too cost prohibitive. And so We've partnered with one of the best offshore recruiting firms when it comes to marketing. They've been a great asset for us and I believe that they will be a great asset for you. All you have to do is go to marketingschool.io/hire. Again, it's marketingschool.io/hire to learn more. You can fill out the form there and we're going to place you with the best marketing hires that we can help you find.

And just a final one, what would you say is a normal multiple right now, like in 2024? Because in my experience, like 3 years ago it was, Let's say 2x revenue and right now it's like 4x EBITDA or so, but it's like for cases like this when they're like breaking—

What size, Mario? Like what, what, what even?

I would say a smaller one just for, you know, agencies that are distressed just so that you can take a portfolio for like a 5% agency or so. So, you know, it could be anywhere from like $500,000 to $1 million, I would say like—

In revenue or profit?

In revenue.

Oh, in revenue.

If that's the revenue, agencies have never really traded on a multiple of revenue. If anyone ever pitched you that, they're just trying to get you to pay a multiple of revenue. They've always traded on a multiple of profit for the longest time since I could remember, more than 10, 15 years. That's never really changed. What if someone's that small? You're not paying more than 2, 3 times profit, if that. Oh, that's— yeah.

What is the profit on the $500, Mario?

Well, we are just exporting. Yeah, we are just exporting 2 of these and they're more or less break-even and they're unable to keep the team. So I would say they're break-even, if not even losing money.

Oh yeah. Oh, there you go. So they're break-even losing money. You should discount it even more.

No, you don't even have to pay any money. You just go to the founders and be like, look, times are tough. What I'm going to do is, what's your salary? Oh, I'm going to actually give you a good salary to work on this business and I'm going to end up taking it over and acquiring it. And at least you have a really good job. And if they don't want to stay there, then you can just give them like $50 grand and tell them to move along. They're not making any money anyways.

Neil, what was that broker called? Madison Alley? Is that it?

Yeah, but they don't deal with agencies this size.

No, no, but that's not what I'm talking about. So Madison Alley, Mario. So he's actually— I listened to— I actually— so Neil, I don't know if I told you this, but I listened to a podcast with him a couple weeks ago and he was just— I think it was like a 2023 podcast, but he was kind of naming the multiples, right? So You know, if you're doing like $500K or whatever, you're lucky if you get 2-3x. $500K in profit, you're lucky if you get 2-3x. And then it starts to scale up as you get bigger. You know, obviously it's, you're not getting the 15 to 20x that we saw like in 2022, but you, you have to have like a much higher EBITDA. We're talking you start to go above $5 million, $10 million, whatever. Um, but in this case, Neil's solution is the best one. It's like, hey, I'm just gonna take this thing off your plate. I'll give you a, a, a stable living. And, uh, that's, that seems like a good deal to me. So.

Pretty cool. Thanks, guys. Appreciate it.

Cool. Well, look, I think that's it for today. Ezra's gonna send you guys a survey just to see what we can do better here. How you— what you— please be brutally honest with us, and we look forward to doing the next one.

Thank you.

Have a great weekend.

Bye, guys. Very much appreciate it.

Thanks, guys.

Thank you.