Growing Through Acquisition When does it make sense to acquire payroll companies

I will not rein you in if you meander, for the record.

And I think you're our first repeat guest that does not work at Guru.

So man, that's pretty solid ground to be on, Mr. Morley. Appreciate you joining me.

And what we're going to do here—

Yeah, brother. Sorry, I didn't mean to talk over you.

What we're going to do is really have a conversation the same way you and I would have it if we went out and got lunch today and I said to you, Matt, One of the ways that we're considering growing in 2022 is by acquiring some other payroll companies.

Can you tell me about your experience there? Can you, you know, share what some of the pitfalls might be, what the process might look like, what things to look out for? Is it a good idea, bad idea? And let's just have a conversation about it. And, and is this a good growth strategy?

So let's start right there. I'm coming to you today, man.

I'm saying, Matt, we're thinking about acquiring some other payroll companies around the country to grow our business. What are your thoughts on this?

Well, I think like the first question to answer is, should we grow that way, or should we grow through organic growth? In other words, like, should we use our cash flow to reinvest in the business and grow organically, or should we acquire another firm which could tie up cash flow anywhere from, you know, 3 to 10 years, um, some portion of cash flow for, for 3 to 10 years? Oh, go ahead.

No, that's interesting.

And even just as you start there and you think about deploying capital and you say, okay, hey, if I'm going to buy a book of business for $500,000 and I'm going to get that, whatever that annual recurring revenue is from that book of business, whatever percentage stays versus if I were to deploy $500,000 in marketing or sales, how would my return be on that?

So that's a good first thought. What are your general thoughts on that right out of the gate?

Well, let's move on to the second assumption. Let's assume for now that the acquisition goes well, that it's successful, and that you're able to integrate the other company and run it as or more profitably than the previous owner. Just, I mean, that's really— I don't know if we need to go there right now, but that's really the biggest— if, if you were to say, should we do— should we acquire or not? Then I would say you can make it work financially. Where we've seen the hiccups is you, you know, redline it on the financing based on, you know, rose-colored glass glasses and assumptions. And then you end up even if, you know, you don't give yourself much of a margin of safety at all. I think maybe that's something to factor in here is if you're going to acquire another company, You know, there's a reason buyer— like, let's take the sellers, put ourselves in the seller's shoes for a minute. When we know going into a negotiation that, uh, the buyer is going to want to buy your company for the lowest amount possible that you would agree to, that is because they're trying to build in a margin of safety. I think we're in an environment right now where we just see these crazy valuations coming out and investors paying more than we could possibly imagine for companies. Um, but where that's going to run into problem— they're going to run into problems later on when they don't have any margin to make that, to make that acquisition work. So we're big proponents of figure out what you can pay and figure out what you should pay. What you can pay is what the absolute most you can afford and what you should pay is, you know, 100% of the time less than that. Um, so really taking it back to that marketing question, let's think about it that way. You, you probably, if you're not already, you could be calculating your customer acquisition cost. It's a great analogy for buying another business, especially in the payroll industry. Is your customer acquisition cost higher or lower through an acquisition than through, you know, pay-per-click kind of things? Um, I don't know what your sense is on that, but I think that may be a good way to frame it because those are really, when it comes down to it, your two choices for growing, growing your, uh, your book of business.

Yeah, I guess it brings to mind, so would ADP only have an acquisition strategy if that were a lower cost to acquire customers instead of having the tens of thousands of foot soldiers that they put out on the street instead of only acquiring local and regional players? But also at that scale, unrealistic that you could acquire at the level of small regional and local payroll providers that would keep them growing at the level that they've committed to the street.

So probably not a great analogy, but definitely something to chew on there. So when I think about this, it's interesting because that perspective right from the start of saying, okay, hey, look, if I'm going to deploy, I'll use that half a million dollar number.

If I'm going to deploy half a million dollars for a book of business, let's figure out, I mean, that's probably going to be, you know, about $500,000 a year in annual revenue because it's probably a 1-to-1 multiplier for a co—

one that size, maybe 2x max. Like you said, right now people are probably paying 2 to 3x for a book that size because things are crazy right now. Um, which, you know, average deal size we'll say is $2,500 per year. So that's 200 clients for your average little payroll book of business. So I acquire 200 clients, 10% attrition year over year.

So I'm losing, you know, even the best of us have 90% client retention. I'm going to lose 10% of that business year over year and it's going to trail off even though I paid for it. And then also, so I got to compare that versus going out of marketing and finding new clients.

Let me ask you a kind of unrelated but related question.

How many deals have you actually sat in on from either the buy or sell side at this stage in your career?

Matt, I wish, I really wish I had that number off the top of my head. Um, we work on different kinds of transactions, not just— I mean, the deal that we think about probably when you think I'm going to sell my business is, or I'm going to buy another business, is, um, like a third party, someone that you might know, but they're not— you're not— they're not working in your business, you're not working in their business, it's just another company to buy. Um, what we work on a lot also, we work on those, but we also work on transitions internally. So management groups and, um, and like next generation, like the current owner's kids and stuff. I, in all sincerity, I've lost count, um, of, of that.

It'd probably be fair to call you a deal master at this point, right? I mean, is that the term? Is that what you put on your LinkedIn header? Deal master, um, M&A expert? Ninja, dare I say deal guru.

Isn't there some great irony in the fact that I actually hate that word guru as it relates to people referring to themselves as a guru, and then I went ahead and named my company that? That's your company. Mm-hmm. Yeah.

A little bit ironic.

Yeah. Yeah. Well, I'm a—

There must have been a reason you were asking me about that though.

I was just trying to set some context for the folks listening in. So, you represent both.

And if you didn't listen to the first episode with Matt, I highly recommend you check it out because we do get into his background a little bit there. But But Matt, you know, helps both companies that are, you know, selling or buying, for lack of better, uh, you know, just to simplify things, and, and how they structure the deal and the strategy that they're going to have, whether they're planning on selling in 3 to 5 years or it's time to go right now. Uh, they help them prepare for that, and, and vice versa on the folks that are making acquisitions.

So, all right, so, so let's say you can't talk me out of, um, the acquisition model, and I'm going to— it's just like the house I'm building right now. I'm going to ignore all of the headwinds of the market and just go straight into a huge life decision anyway.

As you can tell from everything I'm saying so far, I make great decisions, very well thought out.

And so I want to go out and acquire. How do I know? And how do I— well, let's start with how do I find deals, right? So if I'm somebody who's out and I'm just looking for companies to acquire, I mean, what do you see when folks are out and they're trying to find deals?

Because obviously people aren't, you know, listing a payroll company on BizBuySell or whatever the posting sites are? Where do I go and find deals?

Hmm, you have a lot of avenues to go and do that. You know, one is BizBuySell, and it's a lot like— I know, Matt, you just said it. I think in general you're exactly right. There's hardly anything worth looking at on there, but it's kind of like if you do a screen on Yahoo Finance or whatever, like you're going to come up with the 10,000 or so publicly traded things you can buy, and you're going to start narrowing it down to your criteria. So I think it— if you're just starting out and you want to get a sense of what the market is like, at least go search BizBuySell and see what's going on in that lower, lower end of the, of the market. Um, otherwise you can go the route of soliciting of investment bankers or business brokers kind of searching for you. And I'll just put put us in the shoes of the buyer and not worry about selling right now. Even brokers and investment bankers will be on the lookout for things that you say you might want to buy. The other way that we've seen is so much more successful is it's somebody that you know, or somebody you admire, or somebody you just in your industry You're not going to know unless you ask. And it's funny, the times when either we're representing or working with a potential seller or a potential buyer, and either of them might think, well, there's no way that, you know, they would ever do that. And then you just ask the question, you'd be surprised about the answer. Um, good.

What do you think is the best way to ask that question? It's funny you say that, just because I talked to somebody recently who They were like, yeah, we've acquired two other payroll companies in the last two years.

And I was like, wow, how did you find those? And he was like, it just happened to be conversational where, you know, I mentioned to them, hey, if you guys are ever looking to move on, let us know, we're in acquisition mode. And it was just that simple. It was, hey, as a matter of fact, you know, we are interested and we like you guys and we'd love to, you know, we have a trust level that already exists because of a preexisting relationship.

So, And is it that simple in how you phrase it? Are you a little bit more direct?

Like, what's your— what are your thoughts there?

I think that if it's— if you've already got a relationship with that person, even if it's just a, you know, we met at a conference 3 years ago, I think I would— I would trust your gut. If it's a person who is direct, I mean, chances are they're not thinking about it. You know, like, so you asking them might be the first time they think about it. So if they're a really direct person, then you could probably be direct with them. If they're kind of more introverted or whatever— and Matt, you know this, I'm not a psychologist, psychiatrist, counselor, anything like that. I'm just saying based on my experience, when someone hears that, if, if they're kind of a very direct person, they'll answer you directly, yes or no. More introverted person, you might want to plant some seeds before you try and harvest that, that crop. Just over time, get them thinking. And it's really on that, and this may work for the direct folks to ask them what their plans are after they exit their business.

I like that.

I mean, you, you make them start thinking about what does life after business look like.

I'm laughing because I actually reached out to a local guy here once. I don't know what gave me the idea that maybe they were looking to exit, or maybe I just started getting FOMO of, you know, they're definitely not young guys and they are, you know, I remember back when I was at ADP, there were always somebody that the ADP folks were keeping on their tickler list of like, hey, you know, they got 2, 3, 400 accounts, whatever it is, like, we want to make sure that if they We're waiting right there.

And I was like, oh man, you know, that would, that would crush me if these guys ended up selling and they went to ADP and then ADP picks up 300, 400 more accounts in my space. Like, that'd be terrible.

So I just floated it out to the guy, I think over LinkedIn or email, and he got very defensive and was not really— he, uh, it opened up a conversation though that we haven't had.

And, and, you know, when we first started, I reached out to all the local guys and I was just trying to make a Hey, look, my model is not going to be to take business from you. And I hope that it's the same from your side. Our model is to take— but there's two companies that represent nearly 2 million small businesses that we can all feed our families off of if we can either prevent them from getting deals or take deals from them. And I'm perfectly comfortable with that.

And he was like the only one that didn't respond to those inquiries to sit down and have lunch or coffee or whatever. So it's been kind of fair game ever since.

And then that might have been what made that not such a great angle to then also ask to buy them. Um, but if you're listening to this, you know who you are, and I still want to be there for you should you ever retire. I love you very deeply.

All right, so nice recovery. Okay, so, all right, so once again, I'm, I'm, I'm gonna ignore the market. I'm going to pay top dollar. How do I— All right, so I'm looking for deals, conversation.

I think that is also the thing too, is not being scared to raise your hand and let people know.

We've tried some of the signaling in the past.

We haven't had a lot of deal flow from it, but just making sure I'm connected to a ton of bureau owners, raising my hand up of, hey, we're acquiring companies if you guys are trying to get out.

Um, any other thoughts on ways of, of kind of smoking some folks out of their caves as it relates to possible acquisition targets?

I, I think I'll double down on build— if you're building a relationship with them, continue to ask. And, and if you— I mean, really, if you can genuinely want to understand what their objectives are for, you know, what's their timeline What do they want out of an exit? Um, also qualify them. That's a big part of buying, is not just qualifying the business but qualifying the seller. Because if you've been through the deal process before, this won't surprise you, but a lot more deals get started than are successfully completed. A lot, and anything really can throw it off the rails. It's not really about— I don't think I've ever been part of something where somebody said, where somebody got upset because of a negotiation stance and they were shouting and yelling. I haven't really seen that. Interestingly, it more falls apart, um, in the process of documenting everything because you're going through think about it almost like a reverse prenup. I mean, not a divorce, but like you're, you're getting into this arrangement with someone else. And it's, it's got all these stipulations in there about what happens if then all these different conditions, you've got to cert— or the seller has to certify that to their knowledge, you know, dot, dot, dot, hundreds of little sentences about that. So It's a process just full of opportunities to fail. Kind of our job in that is to, is if it is what our client wants is to keep it together and find some way to keep it together. But yeah, did I answer your question?

I don't remember what my question was. No, that's great.

So the, so it's interesting. Let's talk about the different kinds of acquisitions from the perspective of our industry specifically, and I know that there's some more technical language for this. Most acquisitions are people want to buy your book of business, right?

Like, let's go back to the 800-pound gorilla. Like, ADP doesn't want to buy your best practices and your software and your, you know, IP. They want your clients. They're going to put them into the machine. I mean, quite frankly, they don't care if you're profitable because they're going to put it into the machine and they're going to squeeze it out the other side. They're going to pay you on top line because that's all they care about. Assuming— I mean, they're going to put it into the formula and say, okay, are they paying our market rate? Can we get, can we get more? Can, you know, is it going to be too, too deeply discounted? And then if so, our multipliers are going to vary based on that. And it is interesting because that's sort of the conundrum for all of us, right?

Is like, they're going to pay the highest multiplier.

Like, I was just pulling up some, some payroll companies that have sold over here, just happen to stumble across a few with a quick Google search.

Like, you know, this one was listed, they had sales in 2019 of $600,000 and they were asking $600,000.

But they did— looks like they got a big tax and accounting side of this, which does not play as well. No, it does not give any indication of what percentage of revenue is from tax and accounting versus payroll. Um, but it sold, you know, another one was listed at $185,000 that had $150K in revenue. And so, you know, when you're, when you're under a million, that's definitely a higher risk margin for them, and they're gonna not quite give you this high of a multiplier.

And I know the expectation is they're going to keep 90% of that business, or the hope, right, is that they're going to keep 90% of it during the transition. Because if they buy the book of business, then they know that basically that client has to sign with them after the acquisi— you know, it's not really an acquisition. What is that? What does that call? Is that an asset sale?

Yeah, that'd be an asset purchase. I was just about to say, you know, we've we've noticed a big uptick in stock purchases. And not like we— not like it's a market trend, but just in our own client base, we've noticed a lot more stock purchases and sales versus asset purchases and sales. And a lot of it comes down to what you're saying, which is you don't have to repaper anybody if you know, if you buy the stock in a lot of cases. Some contracts have transferability built into them, which is something to really consider if you're thinking of selling any time ever, is make sure there's a clause that says if somebody wants to come and buy your business, they don't have to repaper all of your accounts. They can just— you can just transfer them over. I don't know what the regulatory landscape is for payroll services or if that's even possible to do without repapering, but it would remove— I mean, talk about like trying to make an acquisition successful. I think that would be a big one is like, how do you reduce the complexity and the friction during the 3 to 6 months that you're transitioning you know, from their business to yours.

I think we covered a good bit of that in the last episode where we talked about how to drive value up. I don't know that we touched on that particularly, that aspect of transferability of contract, but definitely a big one. And even we saw it recently. I mean, we had to transfer our contracts from Guru and ERG were two separate entities, and we had to migrate them to one entity.

And, you know, we thankfully had that transferability in the contracts and didn't have to go through and repaper everybody. So, um, Right. I was going to ask you what that term repaper meant for clarification for everyone, and then you said it enough times with enough context that I think that we can just— I'm adding that to my vernacular moving forward. I'm going to repaper all kinds of stuff. It's going to be dope.

All right. So for us, who is a good— I don't know what the word I'm looking for here, but prospect for acquiring companies as a growth strategy. When does it make sense for a business to say, all right, acquisitions are a great model for us?

And that's a super broad, vague question. I understand that. But like, what are some of the things you look for and say, okay, hey Matt, here are some boxes you check or don't check that make you set up well to acquire and consume other companies into yours?

Well, that is a general and broad question. I will try to answer it, but it's so case by case. It is so case by case. It really depends on who you're going after. I think one of the— let's look at a different kind of example. Like, we, we call them roll-ups, but these, it can be regional or national consolidators. ADP, to go back to that example, they're like a giant. I mean, they're, they're more than just a consolidator, they're a market leader. But usually in, in industries that have a decent number of companies operating regionally and nationally, there will start to be, uh, or develop groups that are specifically there to roll up, you know, companies within an industry. They are a lot— they are kind of in between. Like you said, ADP will just go and buy a business and, you know, let's say they just fire everybody and use their own staff to service those accounts and they're done. These regional firms understand they still need the owner in place, um, at least for a little bit. And a lot of them don't even pay cash, they'll just roll you into the larger group's equity. So you just exchange your equity for their equity. Um, but they're kind of in between in that, like, if ADP's funnel is like this wide— and now it's, it's outside of my camera view— like, if their funnel's this wide, the regional guys' firms are probably this wide. If you're a single firm and you've never made any acquisitions before, your funnel probably needs to be like this, because so much of it comes down to, can you work with the founder? Is the founder interested in transitioning it to you and making sure that you get the value that you're paying for? Um, do you— are they prepared to exit? In other words, you can get into it and they'll realize Oh, shoot, you're going to pay me about 3 times what I usually take home every year. And that's, I mean, 3 years. Hopefully I'm going to live more than 3 years.

Oh, it almost sounds like we've gone down that road before, Matt.

Man, you said it, but I mean, I've seen it, you know, many, many times where they've got to have planning in place or they've got to have some kind of idea of like, here's what I want, here's what I need. Um, because it's similar to sales in this way. You want to get to an answer quicker because if you waste your time evaluating an acquisition and trying to make it work when you know that it really won't, I mean, that is a huge waste of time. Um, and, and, you know, you, you miss the customer part of the customer acquisition cost formula. You just end up with acquisition costs. So qualifying upfront, knowing this is the type of company that you want to own, they have the type of clients you want to work with, and they have the type of owner that you want to work with on the transition. I mean, those are big— those are really difficult things to find on their own, and finding them all at once If you do find that, that's where I'd say even if you don't have an acquisition strategy, consider acquiring that company. On the other side of it, on your own company, I think there's times where if you have a lot of excess capacity and, and a lot of smaller services firms have this issue where like it's a chicken and the egg, like you can't add another person without also adding a ton more revenue until, you know, adding one more person doesn't mean adding, you know, increasing your total team by 20%. If adding one person increases your team by 1%, then I think it's a little bit different of a, of a thing. But I'd just say if you have, if you've added people and it's— you're not filling out your, your, um, like you're not growing the revenue to meet that extra capacity. Acquisition is one way to do that. I would not say it's a good reason to start, um, if you weren't already thinking about it, but it is a good thing to think about is how much more could we be doing. And if it would take you 5 years to grow that level of business organically but you can do it all today through an acquisition. It's definitely something to consider.

That's really interesting.

A couple things you touched on there.

The— I always call it, when you're small business, it's like that stair step, right? Where it's always—

we're never at the right point when you come to staffing, you know, for the first 20 hires, I would, I would say, until somebody represents, you know, less than 5% of the business. I like the way you put that, of like, okay, hey, if they're going to be 10% of your company, you know, that, that's going to require, what, 30% revenue to account for that depending on what your target annualized revenue is per FTE.

And so yeah, very interesting way to look at that.

Now I want to talk about how to finance the deals, and I want to go back to just for some context, I kind of gave what might come across as an inside joke or something there a couple minutes ago, but Matt and I looked at a deal a couple years back.

Looked tremendous for, for really for both parties. I mean, it was kind of a win-win. It was proposed to us in a way that was a win for the owner, um, it was a win for us. Uh, however, there were just some glaring issues that were seemingly obvious, and Matt kind of alluded to it, where it was like, hey, this isn't retirement-type money for this individual, but yet they don't really want to go take a second bite at the apple afterwards.

And so the timing was the big thing.

And so if they're not ready If it's not enough to retire, they don't have the next phase lined up.

Like, those are some simple things you can vet out before, to Matt's point, you go and spend money on lawyers and consultants and CPAs to analyze whether or not it's a good deal. Like, sometimes you just got to be more, I guess, aggressive in your question asking or, or, or have a little bit more direct line of questioning. We had a lot of conversations, so I don't know that that was the issue. I think it's just, um, you know, like you said, sun will reach every component of the deal by the time the day sets. And so that, that's something to to keep in mind when you're going through these is that they're not, they're not going to leave any stone unturned from their side, and neither are you by the time this thing is over.

Right. All right, so here's my proposed strategy if I were to go and acquire, uh, payroll companies in 2022.

And so I want you to tell me how good or bad the strategy is at a high level.

So, so for us, we offer PEO and ASO services.

So on average, these are services that go more from the $50 to $100 per employee per month versus the traditional payroll model, which is, you know, probably averaging like $10 per employee per month.

So the strategy would be to say, hey, we want to go out and acquire multiple small payroll books of business that are on the same software as us.

So thereby trying to reduce as much of the friction as possible in the transition, remove the owner from the equation as quickly as possible. Uh, once the, the accounts are trans— transitioned over to us, we're not too concerned about an earnout. We're more concerned about, um, you know, obviously capturing as much of the business as possible, but then just allowing them to move on with their lives or, you know, grow the other side of their business. Most of these folks probably going to be accountants or, you know, folks that offer payroll, but it's not their core business. They got 20, 30 accounts, 40, 50, 100 accounts, whatever it, but it's more of a distraction than a, um, than a core component of their business.

And then obviously we want to then land and expand, right? And so we want to, uh, try to, to land these accounts, certainly retain them as long as possible on whatever solutions they're on, but then upsell them on our suite of services, whether that be, you know, HR software.

We've got our HR platform we built out. We've got our HR services. We've got benefits, all, all those fun things.

And so, you know, it, it's a speed-to-market issue is what it solves, right?

So I can't go out and book 50 accounts next quarter without hiring, you know, multiple sales reps and training them and dealing with all the overhead that relates to that. So, so that's the, the thought process behind it.

However, you know, the big snag is financing.

So I'm not sitting on millions of dollars. So I'd like to, to come back to you. I think that's a big component of all this is how you finance these deals and And what are some of the ways that people, you know, if they're doing it with debt, if they're doing it with, you know, is the owner financing it and getting some sort of earnout over time, the financing, or is it just, hey, if you don't have the cash on hand, like for the first one, you shouldn't be playing with this at all.

So first, let's address the strategy. Poke holes in that. Where can that go haywire on me?

What would your biggest concern be based on the high-level bullets I gave you there?

I mean, I don't really have any concerns. I'd like to see how that would play out. I, I might keep the owners on a little bit longer, or at least you have a consulting agreement where you can bring them in if you need to, at least through the retention period. And then correct me if I'm wrong, but usually in your industry, there's some component of a holdback for retention. So if there's a retention goal of like 70%, or if there's a retention goal of 90% and they— and you only reach 70 on their book, then they might lose out on some portion of the deal that was held back to cover retention.

Yeah, and that can be as brief as 90 days, um, sometimes longer.

Okay, well, that— I mean, to me, that's what I would, I would really make sure of, um, just keeping them available, maybe not around, but available. Um, also it depends on if you're going to keep their employees on, are you going to keep their location. Um, just a lot of moving parts to consider. No, no, not going to keep their employees unless they're, unless they're awesome.

Um, so Yes, obviously great opportunities to acquire talent.

However, you know, from my experience of kicking around a few of these, it's been more of a, hey, that's going to come with its own set of challenges that are, how do we integrate these people into our culture and our way of doing business, you know, and get them out of the, hey, this is how we do things mentality. And sometimes that becomes more of a challenge than it's worth. And now anecdotally, I don't have that experience with the owners, but however, You know, when we've gone down this path in the past, obviously I've sought a lot of great counsel, and, and most folks are like, yeah, you cannot keep the owner around for too long after the fact because it just becomes too many chiefs kind of a thing. And they—

oh yeah, definitely the owner, you got to get them out sooner than later. But I think maybe our definition of sooner is different.

Yeah, yeah, yeah. And I think that's part I'm—

I don't know enough about, right, is how soon, you know, There's that two sides of the coin, right? You sell your business, nobody wants the 2-year earnout, but it's also part of the deal, right? Is just most times, you know, when it comes time to sell, they're not going to be able to just pick up all the pieces of your business and move it forward.

You know, if with some of these smaller ones, 20, 30, 40, 50 accounts that are doing payroll only, you know, might be a little bit easier.

But yeah, still obviously need that, that transfer of knowledge.

What about funding or what about financing that strategy?

Okay. So, let's talk about—

Well, I'm asking if you'd give me some money, I think.

Do you have some money?

I'm just trying to think about how am I going to get all those Bitcoins out of cold storage? That's what I'm—

Dude, you should have put your money in Ethereum.

Yeah. Unfortunately, I do not have my own merchant bank, but so let's say, let's keep it like companies that are maybe $5 million in revenue or below, or $5 million in value and below. Like the best tool there is, uh, you know, from my, from my perspective, is the SBA 7 loan program. Um, it's worked. Like, it is a bear to get through, but if you've taken anybody through— if you've been through it once or taken anybody through it once, then it becomes a lot more clear, like, why they might be asking for the same thing 3 or 4 times. And you just have to have it all in one place so you can get it to them when they ask for it. Uh, but, but I— and I think some people are concerned about, like, you know, privacy or or government interference in their business with this, with SBA 7, I don't— I can't address that. I haven't really seen it hurt anybody. But if you feel that way, this might not be the option for you. But the benefits are, even if you could get a loan from a bank based on the cash flow of the other business, that was enough. You still are probably going to have like maybe max like 5 to 7 year amortization. With the SBA 7 program, you can have amortization of 10 years if it's just a business, and it can be, I think, up to like 30 years if there's real estate, up to 15 years with no prepayment penalty, which is, which is actually a big, a big deal right now because the banks can't get interest. So they've kind of been whammying, whammying people with, uh, prepayment penalties because not many people look for those. So that's something to look out for. It's not what we're talking about here, but if you're going to get a loan, look and see if there's a prepayment penalty. You can usually negotiate it out of the loan, um, but no prepayment penalty for less than 15 years maturity. A 10-year maturity, which means your cash flow It's just, it's a lot less, uh, it gives you more margin of safety to, if something goes wrong, if you can have half the debt service that you would have had with a 5-year loan because you now have a 10-year loan. To me, in the beginning stages of, of acquiring and implementing or running another business in addition to yours, the margin of safety is worth the cost of the interest that you would pay over the additional 5 years, especially at the rates today. One of the issues with the SBA loans is that they have variable rates, which means you've got to be ready for a little bit of fluctuation in your, in your debt service. But still, I think it's, it's the best deal out there right now.

So what about if I start stacking? So let's say I make that first acquisition, and the second one comes 6 months later because I've been planting so many seeds, can I go Is the SBA, how friendly are they to me coming back and saying, yep, I need another million dollars right now because I just found another deal and here's the logistics on this one?

Yep, you can do that. You can have multiple SBA loans. I don't know what the limit is. I'm sure there is one. I think it'd be really hard to hit it though.

I'm curious about this because obviously OPM is the play, right?

You would want to do this with other people's money because I mean, If you're listening to this and you're sitting on just stacks of cash to go out and make multiple acquisitions, that's dope. You should come and make us an offer we can't refuse. But most of us are going to need to leverage other people's money to really build out a good acquisition strategy.

So what about this? I mean, are there cases of— obviously, it's much more glamorous and popular now to raise an investment round.

In our industry, that is only done, and I don't want to say only, but mostly done if you're building a tech stack and you have, you know, a hyper-aggressive strategy, which is, uh, you know, one other path that's a whole other episode altogether. But do you think that there's the opportunity to go out and pitch investors on, hey, here's my strategy, I'm going to go out and acquire, you know, X number of payroll units over the next 24 months from these types of targets, and, you know, here's what the ROI is on that, and then it's part of this 5-year strategy where we're gonna acquire, we're gonna blow this thing up as much as we can, and then we're going to sell it off, uh, because we know that once we're over this revenue marker, our multiplier goes up. And so therefore it's going to create that liquidity event that you need as an investor.

Um, is that a strategy that you think could play?

Maybe, uh, if you're meeting with the right group of potential investors, but I would take it back to, you know, like the finance, the evaluation of what would be better. You know, I'm gonna say this and I'll qualify it with there's probably cases where this is not the case, but like 99% of the time, debt is cheaper than equity. And it's especially something that younger or smaller companies, it's difficult to envision that because the only equity you might have had so far is your own. And if I'm a founder, it feels a lot cheaper for me to put more cash into my business than to borrow more cash from a bank. But in reality, it is still cheaper 99% of the time from, from a bank. It's the same with, with outside equity. Even the best terms, you're still giving up a piece of something that could have been all yours, and we would prefer to, to consider not doing that before we get there. Does that make sense?

No.

Okay, so if we don't— it's okay, I know, I like— it makes sense in my head, but when it came out, I was the last part you lost me a little bit. So we don't want— so if we know that equity is 99% of the time is going to be more expensive than debt, then we want to try it. We want to exhaust all the debt options first. And there's so many debt options on the way to equity. If you don't find one that works, it's probably the market telling you that your strategy is not going to work and you can choose to listen or not. But I think that's part of why when you take that leap from the debt to the equity, equity investors want more of the pie or preference or whatever they get. Because they recognize, like, you probably exhausted all your other options before you came to talk to this, you know, whoever it happens to be.

Well, and that That makes sense from a logical perspective because the only argument for going the equity route would be less risk to you as an individual, right? Because you're not having to put second mortgages on your house and that debt's not— If it all blows up and goes to zero when you had $2 million in equity investment, then that was just a bad bet by the investors. Whereas if it all goes to zero with $2 million in debt-based investment, then you're— or debt-based debt, excuse me— then you owe $2 million. So very different outcome, which yes, is probably worth the tax, if you will, of taking the equity round.

But to your point, if you've got a clear strategy, these are— I listened to an interview the other day with a guy who founded 1-800-GOT-JUNK, really fascinating guy.

I don't remember his name off the top of my head, but it was great interview, and I definitely recommend people check it out. But it was like they started consuming all these other businesses because they were just like, look, all we're doing is we've got proven processes that we're going to implement across really boring industries that are going to help to, you know, once again squeeze that dollar from the top line to the bottom line and delight customers in a way they're not used to.

Which is the opportunity that we have, quite frankly. When you think about there's 16,000 people or companies in America that process payroll, 15,000 of them are probably doing it pretty poorly.

And so, you know, there's an opportunity for the remaining 1,000 to actually delight people in a way that they're not used to and make it something that's modern and elegant and fun and kind of add some unique twist to something that's pretty boring.

So, all right. So what do you think about my strategy, Matt? I mean, you think we should plow forward with this?

I mean, I'll give you my favorite answer.

It depends. Ah, you kill me. Uh, all you consultants come out with the it depends answers, man. Come on, you sound like an HR guy.

That's what I have to tell our clients all the time too. It's like, uh, well, you know, should we do this? Well, it depends. That's fine, it's fine.

It's an educated— it's an educated risk. I wouldn't even call it like an educated guess. You shouldn't be guessing. But you are taking educated risk on, like, what kind of danger are you putting your existing business in by trying to bolt another one onto it or another 2 or another 10? There was— and also the strategy itself can get thrown off. So, what if you get one acquisition in and then your funding source says, your source of equity funding says—

Well, in my example here, I'm going to go your first route with debt funding because I don't think that equity—

Honestly, it's just, it's too— I'd rather take my lumps from the banks than sit here and get 500 nos from investors because it's not sexy enough for them.

At the end of the day is what really is going to be the thing, right? Is it's just— well, one of the challenges that we've always seen and why we bootstrapped our own software is like the message of, hey, we're just going to execute and we're going to master the blocking and tackling, is not one that resonates with people that want to place massive bets, right?

Yeah, I, I hear what you're saying, and I think not right now, but I think in the future we could get back to a point where people are valuing their capital a little bit more dearly, um, and, and interested in businesses that, that actually generate cash flow. Um, but I understand that.

Uh, so I'm gonna march forward with the DAP-based model. Um, now let me ask you this. Let's turn this in and we'll wrap up here in just a minute, but Let's go back to what my first option was to say, all right, so if I'm going to take a million and acquire a book of business, or half a million was the first example, could I go get a loan with my business plan that says I need half a million dollars to organically grow my book of business and here's the plan? What's my likelihood of success versus saying I'm going to buy this proven asset versus here's my plan to grow, I'm going to go hire these 5 salespeople and I'm going to implement this infrastructure and XYZ.

Like, does that—

is that an option with an SBA loan?

Man, I, uh, sorry, I got completely lost in your question because I was thinking about how right you are that it could be difficult. Yeah. All right, can you ask that one more time? Because I was I was stuck on something else you said.

That's all right. I mean, I know you've been drinking for most of the day, so I'll speak slower.

I mean, it's 4:30 in the afternoon, y'all.

You gotta understand, Matt's into his 6th bourbon by now.

So the—

I'm just playing, he's, he's more of a weed guy.

But so the, uh, could I go to the bank, or what would my likelihood of success be, uh, in—

let's kind of, let's wrap each one of these up, right? Of like half a $500,000 for an acquisition versus $500,000 for the business plan that's going to reap the same results as the acquisition but requires hiring, process, etc.? Like, what's my likelihood of success on either one of those hitting as far as getting the loan in the first place?

You won't— I don't think you would get a loan if you said, I need, uh, $500,000 to grow my business organically over 3 to 5 years. Because if I were a bank, I would say you at first, that's what I was thinking, like, that's crazy. I hadn't thought about it that way. But I think the reason the bank would say no is because you could fund it out of your own cash flow over the 3 to 5 years. The issue with an acquisition is you've got to fund it all at once. And it's either in, like, for, for most businesses are going to be under $5 million in revenue, it's either going to be funded via you know, bank or SBA debt or seller's note. And no seller really, as that we've come across, would want to take— would want to transfer all the value of the business over to you, but still retain the majority of the risk. Like, that's why sellers don't want to finance deals, because they might as well just continue owning the business if they're going to have to finance the lion's share of the deal. But a bank will do that because all they want is interest in the return of their principal.

Yeah, and I wish we could have come back to that.

I know we're coming up on time of just like, you know, I know that the, the last deal we looked at, we had a nice creative way of financing with the owner that was beneficial to him and us. And honestly, I don't even remember the exact structure now, but, uh, It's definitely more favorable to us, to your point, but certainly worked for both parties. All right.

Well, Matt, you know, this has been something. What would you like to leave folks with here?

I mean, if you're thinking about it, if you're thinking about an acquisition or you have an opportunity, as soon— I'll give you an example. I was talking to somebody yesterday who said, you know, they had gotten an NDA from a potential buyer. So a non-disclosure agreement from a potential acquirer. And they said, hey, do I— is there anything I need to be concerned about with this? And I just said, hey, I'm not an attorney. But like, and for that reason, but I can tell you there's important stuff in there. And for that reason, you should probably get with an attorney now to have them review that, whether you end up going through it, through with it or not. Um, I think that is the message, is the sooner you can get other people involved, the better and smoother it will potentially go. You can get it to the answer quicker, so get to a yes or no quicker, and then be organized in the way that you're going through actually implementing and executing the transaction.

Yeah, and I'll just give a quick plug for Pendleton Street Business Advisors here because we use you guys when we were looking at that deal particularly, and it was one that didn't pan out, but it was in the first call that we had, I felt great about paying your fee because, you know, one of the things I was looking for was somebody who could see around corners, somebody who knew what I don't know and what to say, when to say it, what not to say, and who to bring in when.

And it was so obvious just in the first conversation with the, the potential, uh, acquisition that you guys had me covered there.

And so that, that was huge.

And I think to your point is, if people that are out navigating these types of situations on their own are only going to lose a lot of money in the long run, whether that be from, you know, getting devalued, overpaying, you know, underpaying for, you know, buying a bad— making a bad deal. It's just there's too many things that if this is not your specialty.

It's the same thing we go through, right? Our pitch of why somebody would hire your payroll or HR company, it's the same dang thing. So like, don't, don't be a hypocrite when it comes to a much larger deal.

So thank you, Mr. Morley, we appreciate you dropping some knowledge on us today.

Well, thanks for those kind words and thanks for having me again.

Of course, love you.