Developing a Successful Exit Strategy with Todd Taskey

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Diving into today's episode of Agency Journey, Let me tell you real quickly about our sponsor, Aribi. Aribi is a super cool on one marketing analytics tool. They've got Google Analytics squarely in their sites right now. And I can remember setting up Google Analytics as a sophomore in college and thinking this was just the coolest, coolest platform. And as it's matured, it's still super powerful, but it's become so complex to deal with. And Aribi has a value prop totally aside from this. But what I absolutely love about my experience plugging Aribi into zenpilot.com is I didn't have to mess around with setting up what events I wanted to capture and tracking all my changes. And if I messed up with View, then it would, it would delete all the data that I had. I just plugged it in, it crawled it captured all our, all of our events, made it super easy to see our funnel. And it just works at Living. You'll see, for example, how many people read the definitive guide to click up for agencies, a blog post that I wrote, I don't know, six months ago. See where those folks come from, how that influences the buying process, the funnel, the way that it works out. So super excited to have Aribi as a sponsor. You can check it out. Go to Aribi IO AgencyJourney. It's all one word. If you spin up a free trial there, use the coupon code agencyjourney. Same thing, all one word. That'll give you 20% off any plan, which is super generous of them. And remember, they can track all of our conversions, so check them out. That's a re IO we appreciate their sponsorship. Let's get on with the episode. All right, welcome into another episode of Agency Journey. This week I have the pleasure of bringing Todd Taske onto the podcast. Todd is an M and A advisor and has worked with a number of agencies and he's in a little bit different space than a number of the M and A advisors who at least personally, not through the agency space, but who have been connected to where most of them are not focused on agency or the. The that end of the market. So, Todd, I'm super excited to have you on dig into your story and talk a lot today about the path for agencies. Talk about the way to maximize the enterprise value of the. The thing that they're working so hard to build. But appreciate you having on. Welcome to the podcast.

Excellent. I'm super happy to be here.

Cool.

So let's, let's start here, which is quick Bio, I guess in terms of the firm that you're in, maybe not even bio, but how did you get into the M and A space?

You know, I spent my first 20 years as a financial planner. I was a certified financial planner. And we built a small firm that we sold to a group. That group was later acquired by Goldman Sachs. Had a couple people that I knew that wanted some help. And a lot of my practice was around working with and helping entrepreneurs. So there was kind of a natural segue, you know, from that perspective.

Yep, that makes sense. So, and then from an agency side or how did you get into this, the market that you're in specifically and the types of opportunities that you're focused on now?

You know, I. I think in a lot of business you get attracted to similar type personalities.

Yep.

You know, agency owners seem to fit largely a psychographic and a demographic that it maybe matches up with mine. So I've enjoyed working with those people. I like and understand that business well, I'm fascinated by the space, so. And then, you know, success to get success and we go on from there.

Yep.

So we got introduced originally by a good friend, Jeremy Wise of Rise25. And as it turns out, there's some other folks who we've got in common in terms of kind of shared clients who we've worked with. And so it's cool to have anytime that there's connections around, hey, there's kind of people that we know. That was how we got connected to. One of my friends, Joey Gilkey from Sales Driven Agency, works with a couple agencies where they were crossover and he was kind of consistently producing good results on the sales side. So I was super excited to talk to you today and dig into what you're seeing around agency path. So let's start in terms of the way the agencies build businesses and grow in the exit plan. Very rare. I mean, you know this as well as anybody, but for the audience as well, agencies pretty much come from one of two places. Either someone was in the agency world and they got tired of having a boss who was making all the money, perceived money, and so they go out and start their own thing. Or it's someone who just happened to be talented in one area. They started as a freelance and then decided, I've got more demand here than I want and maybe intentionally or unintentionally I thought, well, I need to start hiring people. And there's a lot of accidental agency owners out there as well. Nobody goes into the agency business saying, let me build an agency business because that's a really valuable asset to sell someday, but that needs to get learned somewhere along the way. So you were just kind of explaining how you think about the paths for agency owners in terms of building it out. Maybe talk a little bit about how agencies can think about what they've built and the journey that they're going on to maximize.

Sure.

So quick backdrop that I think is important. And we've been doing digital marketing transactions for several years now and we've seen this shift of private equity drives a lot of transactions, either directly or with portfolio companies that they add more onto. Private equity understands now because as all your listeners know, last year for the first time we had 51% of all spend was in digital. That's projected to go up. Nobody thinks it's going backwards. Five years ago, private equity buyers would say to me, yeah, but when we hit a recession, I don't know what's going to happen to this business. Now we have the answer to that.

Right.

It's going to bounce back quicker than any other business. So private equity has religion in this space. Private equity realizes that this is the future of marketing and advertising. And so there's tremendous tailwinds from that standpoint. So that should be a great message for all of your listeners and even the accidental guys. Many of these deal trophies over my shoulder are agencies that were very valuable to different degrees. And so helping to uncover that value and create that value, I think is a lot of what you do. Maximizing that at the end. Doing a successful transaction is what we do. Most of the people we work with have EBITDA net profit, let's call it between a million and 3 million.

Right.

So somewhere between a million and 3 million of EBITDA. And so after you get over the hump of oh my God, can we survive? The question for a lot of guys is what's the best path forward for my business? And as I tell people all the time, the road from a million of EBITDA to 5 million of EBITDA is a very well worn path.

Right.

Lots of people have done this. It is not a straight path by any stretch and it's not an easy path.

Right.

And if you want to go do that on your own, absolutely, you should. But one of the things that we represent as an alternative to that is instead of doing that, growing the agency, keeping all of your wealth tied up in the agency, and then spending some of your future income on growing the agency and all the challenges that come with that, what if we could plug into a place where we could become an important part of their overall solution and participate in the upside equity of that business and get cash at close. And so, for example, right at the end of the year, we did a transaction. We helped our client, a company called Bayshore Solutions, a very good HubSpot partner, and we sold them to a larger HubSpot partner. And those guys are doing tremendous work and will do exciting things going forward.

Right.

We have a deal that should be closing here in the next week where we have clients that does email marketing for e commerce customers only. Very nice, narrow focus, right? Fits in this nice box. We put a nice bow on the box and then I can show it around to a bunch of people.

Right?

And what a lot of larger companies are looking for is what they would call to complete an arc of services. A lot of people hear this term a roll up strategy. And a roll up strategy is not, I think, the right way to think of it. A lot of private equity groups use the term buy and build. They don't want to buy five SEO agencies to be a bigger SEO agency. But what they will do is buy an SEO shop, pay per click, shop, content, social, email. They've got this arc of services where they can manage one client through. Across all of these things. What we see is that as EBITDA gets larger, right? So if you're at a million dollars of EBITDA and you have a lot of recurring revenue and you have good client retention at a million bucks, you could trade for somewhere between six and maybe up to six and a half or seven times on EBITDA. If you're over 3 million, definitely you're at 8 plus on EBITDA. If you get over 10 million of EBITDA, that's a 12, 13, 14 times business. So the way I look at it when I talk to my clients, let's just make it up and say you're a million bucks. Let's say that's five and a half, six, six and a half times even. How can we turn those chips that you have that equity into not six times, but 12 times even? Well, there's two ways to do it. Grow from a million to 10 million of you, right? That is a lifelong journey. Number two, sell those chips to somebody and take some cash now and then exchange your chips for those chips.

Right?

And so we did a transaction, a group that we have under letter of intent now the buyer has 18 million of EBITDA. They're a digital marketing firm. They really don't do performance. They don't do performance well at All. And they want more than just one performance shop. So if there's anybody listening that's doing performance that likes the idea, would love to talk to them. They will plug into that. The kind of the structure that we have for them is that they'll get roughly two thirds in cash and one third in equity in the new company. And when that new company, the buyer, when they sell in, I would guess a couple of years, they'll get cashed out at a much larger multiple. So they get what they get today and then they'll have that second bite in the future. So those are some of the alternatives when you have a business, and I know you spend a lot of your time talking to clients about this, not talking about three or four guys scrambling around trying to serve customers as best they can. I'm talking about people that have processes and accounting rigor and know what it is that they're doing and know who they're doing it for so that they can point to recurring revenue and retention and good customers.

Right.

I'm going to click into one thing that you said there around recurring revenue and retention, when you think of that. So the difference between 5x and a 6x multiple. What? Because that comes up all the time with agencies. You know, HubSpot made an awful lot of money by pitching agencies and moving over to retainers and, and getting that recurring revenue and I mean the pros.

And cons business to manage, right?

Well, yeah, pros and cons of all that. So what percent in terms of. And I don't know that there's specific numbers, but there's probably some loose numbers that you might have. Obviously these all work in harmony together. So just. Because if you've got high recurring revenue but low client retention, then you might as well do projects. But when you say recurring revenue, is that like, what are some good numbers that maybe agencies could be shooting for? Is it 70%, 80%? Obviously it depends on the business.

Yeah. I mean, so there's obviously some nuance in here. And this is what bankers do, right?

Yep.

The higher the number, the better. And we've got some groups that we're working with now where they've got almost 100% recurring revenue because that's what their model is.

Right.

Nothing's completely that pure because especially if you're doing web dev.

Right.

Or you're enhancing a website. But the key to that is, and we will stress this, anytime we put a presentation or a deck together, 100% of revenue comes from recurring revenue clients. So we've got These guys that pay us 2,000amonth, 8,000amonth, whatever the number would be. And those people we will do web development for.

Right.

If somebody calls up and says, hey, can you do web dev for us? That's a great. That's all we need. The answer is no, we don't do that. So there's recurring revenue, contraction and recurring revenue and then there's banker speak for what we call reoccurring revenue.

Right.

Because these guys and you know, some clients you can control on your contract and some clients say we will send you our contract and you'll sign it or we're going to go to those guys.

Right.

So some of those people, you know, they will come back year after year after year, but they only sign one year contract, your one year engagements. So we'll bill that as reoccurring revenue. And then the buyer will say, well, how long have you had these guys? We had them for seven years. Oh, all right. Well that makes a difference than somebody that has renewed once.

Right?

So the higher the better. Always the higher the better. And that is clearly something worthwhile to adjust your business model to because it becomes easier to manage the business when you have as much of it under contract as possible.

Yep, that makes sense. And then from a retention side, you know, I come from the software world where we were building a project management tool for agencies prior to. Prior to, kind of the pivot to what we're doing now is then pilot or we're servicing on top of someone else's software largely. And at the time I was so discouraged because it was so hard to get churned below 5% monthly, which is not atypical in early stage software and services should be more stickier than that. But are there retention numbers or metrics that you're looking at? And do you typically look at it and present it to PE firms the same way where it's monthly churn like in software or do you talk through annual.

Yeah, and there's a whole bunch of ways to slice that.

Right.

So it's 2%. Our retention is 98%. That sounds great. 98% flat.

Yeah.

90% a month, right. Well that's 2% times 12 is 24. So you're like 76%.

Right, right.

98 sounds way better. That's number one. Number two, are you talking about revenue or you're talking about logos? Are you talking about clients? I mean, what's the measure here?

Right. And.

I think that you want to present honestly. I'll tell you, we sold a business Two years ago, a really good business. We sold it eight and a half times on ebitda. They were like three and a half million of ebitda. Their retention was not good. And so there's two things. Number one, they offered SEO, they offered pay per click, and they were just starting to offer email. Their retention was so much better when they had two service lines. And for the people that also had email marketing, which was new to them, they'd only been doing it for six months, but they hadn't lost any yet. Yeah. So you tie these people in better. So. And you see all these things start to support one another.

Right.

So you have more service lines. What we sold on this when it eventually sold to a private equity group and it's been a great transaction for everybody since. I said to the private equity buyer, there is so much opportunity. Here they are, their, their retention can be improved. All you have to do is spend 40 grand on a really good person, have them just follow their 100 job is retention. That number will go up, the value of the company will go up, blah, blah, blah. And this is what private equity does. It's part of one of the chapters of the playbook. Of course we're going to improve retention and if we have to spend 40 or 50 grand, not a problem, we'll go do that.

Right.

So that is definitely low hanging fruit to look at. The higher the better for both. And I think the message is, because I've sold plenty of companies where I've said, listen, you know why retention's down, you know why utilization is not where it should be. You know what, because it's hard when you're a 4 million, 5 million 8 million revenue company. It's hard to do all these things right. If they were part of a $50 million business where you guys have a bigger bench, where will you guys have more? All of these things, oh my God, this is going to be fantastic for them. These guys fit into you perfectly. So if you have a weakness, raise your hand and say, this is part of the reason why we want to do a transaction. We've been working at this. I know if we had, if we do SEO, I know if we had pay per click, social and email, we would retain people better. Yep, that's a five year project for us. If we could plug into that and be part of you guys and blah, blah, geez, it'd be fantastic.

Yep, makes a lot of sense. What are you seeing? So that's helpful. I mean, ultimately what you're getting at is ltv. But a specific way that you get to LTV between retention and how much of it is recurring revenue. What's the software speak? I guess arpu. But average contract value from a margin perspective on these businesses and growth rate, because I would assume those are two of the other big variables. How fast are you growing and then how profitably are you growing at the same time?

Yeah. So how fast you're growing is not as important. Right. It's part of the story. I've got a couple groups now that have been flat for the last three years.

Yeah.

That's part of the reason we're selling.

Right.

It's just understand who you are and sell in. It doesn't make you bad, doesn't make the company bad.

Right.

And I've said many times, you know why they keep doing 9 million a year, they're doing really well. I mean, they're making 18% or 22%. Both owners are making a bunch of money. They have a boat, they get to go on vacation.

Right.

This is perfect for you as the buyer. Perfect.

Right.

These guys, if you could get rid of some of the distractions for them around running a business and have them focus just on the stuff they're best at. My goodness, off to the races we go. Right.

On the margin side, how big a rule does that? Obviously it's going to impact.

Yeah, yeah. So a well run agency should be in the high teens. EBITDA percentage could be in the low 20s. I've got a couple now that are in the 30s. Here's an important point. I'm glad, I'm glad we're stumbling on this. If you're doing 2 or 3 million bucks of EBITDA of revenue, you should. At 3 or 4, you could be doing 35, 40% EBITDA margins. You don't have a CFO, you don't have a head of HR. Maybe you don't even have office space right now.

Right.

There's a lot of things you don't have. You don't just stair step your way up from 5 million of revenue to 10 million of revenue.

Right.

At some point, and everybody knows this, I gotta hire a head of sales, I gotta hire somebody that can manage the finance function here.

Right.

You've got these important hires along the way. So if you're thinking, okay, from 1 million to 5 million, it's gonna go down somewhere for sure when I make these investments. And somebody's got to go home and tell my partner at home that, hey, by the way, we're not doing distributions for two.

Right.

I'm not going to do that. So these are the decisions that you have to make. And when you look out that people have made at some point. And so that is another kind of vector point to say we're going to invest in these people, we're going to hope like hell the COO and the head of sales that we hired are going to turn out. That is so much more difficult than people realize. I'm sure you see this all the time. And so if it goes perfectly, it's going to take two years for us to start to see the return on that investment and then to get EBITDA to grow from that number.

Right.

So that's a big commitment around time.

Yep.

Yeah, that makes a lot of sense. I think that an accelerating growth, just like Adam Rundle from Clever Profits will often say, accelerating a business is just like a car. The faster you want to accelerate, the more your fuel efficiency goes down. Your margin is not going to stay the same margin as you continue to grow.

Yeah. And then you just sell into it. As long as you're aware of it. What to follow on that analogy, if you show up at the shop or at the gas station and they say, wow, how come you're filling up again so soon to say, I don't know, I just ran out of gas. That is not the answer people are looking for. You say, well, geez, I was going 85 miles an hour on the highway and so my efficiency went down. Oh, geez, that makes sense. I understand.

Sure.

I understand why B. I know, you know, and if you're going to be part of my team, I want a guy that knows what he's doing.

Right, Right.

Yeah.

Understands what's. What's going on. Well, this is kind of the perfect segue into the piece that we're already kind of getting into it, but talking through. So if I'm an agency, right Now I'm at 10 people. We're doing a million 1, 2, 15 maybe, depending on how well run we are in top line, which means on the bottom side, we're doing somewhere between 200 and 500 and EBITDA. Are there things that people in those shoes right now should be thinking about from a. I want to tackle this on a couple of different vectors from a corporate structure. Do you care at all about what corporate structure they come into a deal with?

I mean, I don't, because I'll sell whatever it is. Yep, they do. Because there's tax efficiency. From that standpoint, most people are set up as An S Corp or an llc, so it doesn't much matter. And with either of those, we can set up the transaction to be tax efficient from either perspective. So that part's pretty easy.

From a financial perspective, obviously the message is, hey, keep good books and probably get that off your plate as early as possible so that somebody else is responsible for it. But anything that's tripped up, deals or that causes you problems from a financial.

Perspective, one thing that interesting thing is a concept of deferred revenue. So deferred revenue, explain it 101.

Right.

You do a website for somebody and it costs 50 grand to do the website. Somebody pays you. I'll make it real simple. 50 grand up front.

Right.

People don't really do that, but they pens you 50 grand up front. So what do you do? You put 50 grand in the bank. Hallelujah, we just book 50 grand. This, by the way, happened in November. GAAP, generally accepted accounting Principles, says no, no, no. Because the day you booked it, the 50 grand, you have to go to your balance sheet and put a line item called deferred revenue for 50 because you haven't earned the 50 yet. You haven't done any work. Yep, in theory, you'll earn 10 grand a month for the next five months. And in theory, November and December gets booked to this year. January, February, March gets booked next year. That's how Gap accounting works. Most people I work with say, oh, I understand. I'm not going to do that though, because it's just way too much work. That's ridiculous.

Right, right.

Here's, here's why it's important. If we're going to close a transaction following up on this example, on December 31st, and I'm the buyer, there's 30 grand of work that has to be done, and I get no money for that. I have to pay the people salaries to do the development. That's not fair. So I want the right amount of money for that. How much should it be? Well, just, it's on the balance sheet. It's deferred revenue. So when the deal closes, there should be a line item for deferred revenue since most guys aren't doing it. When we get to a deal, there's a concept of working capital. You have to leave some cash in the business, and that makes the amount of cash you have to leave in the business higher. People get pissed off at that. Sellers get pissed off at that.

Right, that makes sense. And it sounds like what you're saying is that's important. It's an important concept to know about the exit at some point, but not necessarily. Is your recommendation that agencies are practicing that the entire way or just that they're prepared for that at exit?

My recommendation is you should be practicing that along the way.

Yep.

My follow up comments would be if in fact you do, you're the only one doing it.

Exactly. Right. Right.

Don't worry about that. Be aware that there will be a concept of deferred revenue. Depending on your size, it'll be a few tens of thousands of dollars.

Right.

And so here's just last quick example. Last two deals we closed, we closed on the last day of the month. I'm going to oversimplify this, but the. And these guys have all recurring revenue.

Right.

They do SEO. All recurring revenue. They charge a month in advance.

Right.

So they charge on the first of the month or the.

Yeah. The upcoming.

For the entire month. So we're closing a deal tomorrow, the 21st. Most of those people paid on the 1st.

Right.

There's 10 days, but there's a month.

Left of work, a week left of work that has to be done.

Right.

So who's paying for that? Who's paying those salaries?

Right.

And it gets that granular. Here's a bigger problem. What if you charge a month to start and a month in advance?

Yeah.

Then you're holding on to now I have a whole month that I've got in advance that when they quit, I have to deliver work on.

Yep.

So, and, and so that's, you know, my one into almost an entire month of revenue is deferred revenue. Wow.

Right.

That could be a really big number.

Yep.

Right.

But it's, you know, it's just something to be aware of.

Yeah.

Big concept. And then I guess the other vector. There's a couple different pieces here, but from a team structure and management perspective, I'm assuming that you run into situations and maybe you're probably close to the point, but I'm assuming that a lot of, especially on the million dollar side, agency owner's still relatively integral to the day to day.

Sure.

Yeah.

And by the way, if you say I'm really not. Nobody believes that.

Yeah.

Right.

Right.

It's just not true.

Right.

Even. Even if you're doing 3 or 4 or 5 million of EBITDA.

Yep.

Not true.

From outside of that, are there key hires that you've seen buyers want to have in place by the time you go to sell? We want you to have someone else who's the head of client services or director of client services. Are there any key Functions that maybe stand out more than other ones.

You know, I would say no in terms of key functions. Yep. But what I do want to know is I'm buying this business. You're doing a million and a half of EBITDA.

Right.

You're doing 6 million of revenue, a million and a half of EBITDA. I'm willing to pay a fair price for it. I expect to get a million and a half of EBITDA this year, next year, and the year after. And I expect that number to grow.

Right.

Tell me how that's going to happen. Tell me how it's been happening. Demonstrate it, show it, tell me it's going to continue. Yep.

Right.

And if. If you've had clients for years, if your retention is high, if you're a best place to work, if your Yelp reviews are good, if you've had retention in employees for a long period of time.

Right.

All that goes to that story. Nobody's perfect in any of those things. And again, it's harder when you're smaller. Just, you know, sell into it, lean into it.

Yep.

That makes sense. And there's so many more questions I could ask. Todd. This has been super helpful. So let's point, people. If someone's at that point, they're million dollars, close to a million dollars plus of EBITDA right now and curious about exploring the path. What's the best place for them to learn more and reach out?

Yeah.

Thank you for that. So Potomac Business Capital is the website.

Yep.

You can find me on.

All spelled out right, Potomacbusinesscapital.com.

Yep.

We'll put it in the show Notes.

Yeah, I'm Todd. Potomac Business Capital. You can send me an email. You can find me on LinkedIn. I've got lots. You see this over here over my shoulder? I get a whole other board over here of people that I have spoken with that have said, hey, I don't know that I'm quite ready to do a full process where I want to go find somebody, but if you had something like this for me, man, I'd like to hear about it. And we'll spend time talking to them to understand what this really means.

And.

Keep our eye open.

Right.

So we're always happy to talk. It is very difficult to. To find the right transaction that one of your listeners is going to be excited about. If they're below a million, they're 850 or 950 or something. If they're close, then, you know, we can work that out because they're going to be at million next year in the future.

Right.

Especially if they're working with guys like you and the others that you mentioned that are really helping them grow their practice. So we can show a road to that. That's great. But you know, we're, we're happy to have the conversation, happy to have People connect on LinkedIn and just stay in touch that way and grow from there.

Awesome. Cool. We'll put that info in the show notes. We won't.

Great.

Your email address in the show notes, probably.

Thanks.

Just so you're not getting a ton of spam, but awesome. Well, I appreciate you coming on and sharing your time.

Great. I enjoyed it. Thank you.