How Jon Morris grew his marketing agency to Multiple 8-Figures & Sold

This is the 7 Figure Agency Podcast. Discover the strategies and techniques to grow a highly successful and profitable digital marketing agency with your host, Joshua Nelson. All right, welcome everybody. For those of you joining us live, welcome. Be sure to comment here, give me a like, give me a yes, give me a hey hey hey or something like that. Um, I'm super excited. Today we're going to be doing something special. Um, you know, this is part of the 7 Figure Agency Podcast where we're interviewing high highly successful digital marketing agencies from across the country. And a lot of times it's agencies that are kind of growing, gone from 6 figures to 7 figures. Today we've got a very special guest, John Morris, who grew to 8 figures, scaled the agency, sold it, and really just has an amazing story to sell, to tell. So if you're excited to hear about kind of growth, exit, maximizing profitability, just put a yes in the comments. And without further ado, John, Thanks so much for joining us.

Thanks for having me here, Josh. Very excited to be here.

Outstanding. So I guess the best place to start is just kind of give us a high-level overview of you, your background, and kind of, you know, how you got to build your agency.

Absolutely. So I actually started my first agency in 1996, 2 days after I graduated college, and grew it to about, I'd say, 10 people. Never really was able to scale it, ended up closing it down. Went to a large agency called Ketchum and I ran their digital marketing group. Decided to go to University of Chicago for business school, actually to study finance and to get out of digital marketing and do a complete career change. I did an internship at a hedge fund, was bored out of my mind, realized it was not the right decision for me, uh, and I entered an annual business plan competition called the New Venture Challenge. I had no interest in starting a business. All I wanted to do was win the competition. Uh, I didn't. I took second place. I'm still very, very bitter 18 years later. Uh, but that actually is how Rise Interactive got started. And the reason why I decided to pursue it was you had all these entrepreneurs and venture capitalists and private equity people who believed in me enough to give me second place and give me a little bit of money, uh, that I felt like it was worth giving a shot. So I, uh, ended up starting this working out of my home. My first year of sales was $12,000. Uh, I grew that company from me working out of my home to about 250 employees. Uh, we were just south of $40 million in net revenue by the time I left.

Unbelievable.

About $250 to $400 million in managed media. And so, it was a phenomenal run and I had a lot of fun doing it.

Amazing. And not a lot of people build to that level in their agency. So, if you're excited to hear this, just put excited in the comments. I think you said $40 million in revenue, 250 or so employees. I know you've got all kinds of accolades. You don't like to brag about yourself, but I think you made the Inc. 500 or 5,000 list 9 years in a row, got some great recognition as a CEO and a leader in a business. So, So kudos and thank you so much for coming on and sharing with us today.

Absolutely.

So I guess, but I think the best place to start is just talk to us a little bit about what you did at Rise Interactive. Like, what was the service mix that you guys provided as an agency?

Sure. So the original, the original services was primarily focused on paid search. Uh, we eventually expanded to 3 major service offerings. So we had a digital media offering which included search, search engine optimization, programmatic, uh, social media, you know, etc. We then had a fairly large web development group, so we were developing, you know, generally enterprise-level websites. And then we had an analytics, uh, group that really was the glue that brought everything together. So whether it was web development or media, we were using lots of data to make really good decisions. Uh, so we would set up your analytics infrastructure as well as provide the insights that come out of that analytics.

Very, very interesting. So, um, talk to me a little bit of how the business was structured. This 240 employees, how much of that was sales team? How much of that was operations? How much of that was client services?

Uh, absolutely. So the first thing is I'll just explain how my org structure works. Uh, we had a sales department, a marketing department, a client service group, an operations and finance group, and a product development group where we build our own proprietary technology. Uh, in the sales and marketing, I'm guessing it's between 10 to 15 people in in that group. In the product development, I think we were around 30 people when I left. Wow. And then in the operations and finance, I'm guessing another 10 to 15 people. And then the rest of them and the vast majority were in the client service department.

Got it. So, so like a healthy mix across all segments of the, of the business. Yeah, I'd love to hear like kind of how long it took for you to go, you know, to about a million or so, kind of what that initial phase in the business looked like, and then how you made the leap. Because, you know, I think a lot of agencies nowadays can get to 7 figures, kind of to a million to 5 million, but going beyond to that 8-figure level is, is a big, a big gap. So talk to us a little bit about the early days and then some of the lessons learned to get over the hump. You know, over that $5 million mark, let's just say.

Yeah, and let me just give you an idea of what my revenue was in the earlier. So I did $12,000 my first year, I did $80,000 my second year, I did $350,000 my third year, $750,000 my fourth year, and then my fifth year is when I broke the $1 million marker. We did $1.1 million.

So about 5— it took him about 5 years, guys, to get to his first 7 figures in, in business.

Um, and then 2009 is what I call my asterisk year. It is the only year I did not have double or triple digit growth. Uh, it was obviously the financial crisis, and, uh, one of my largest clients ended up going bankrupt. They were actually in the financial industry, so I started January down 40%, uh, and ended up doing $1.1 million again in that year. So by year 6, it took me to go from zero to over a million in revenue. Uh, we then went on a tear. So our revenue went from $1 million to $2 million to $4 million to $8 million to $12 million to $13 to $19 to $24 to $30. Um, you know, and so it just kept on growing, generally in around $6 million increments, you know, on a regular basis.

And Chris, sounds like almost once you got to the million-dollar mark, you got into this doubling effect basically where you were doubling year over year.

And generally in the earlier years, I would put a plan every June. I would start putting my plan together for the next year, and my plan was to double generally in the earlier years. So if I was at a million, I would say, well, what do I need to do to do 2 million the next year? And then if I was at $2 million, what do I need to do to do $4 million? So the, the first thing is just a mindset, is if you think about a typical agency, a typical agency should have 50% gross margin. They should have 30% to cover all their sales, marketing, and operational expenses, and they should have 20% that goes to the bottom line. Now, if you want to think of yourself as a private equity investor and you say, you know, the target is 20% on average for an agency, I'm going to target a lower number. That gives you more capital to invest in the business. And so I was willing to delay a lot of profits to fuel the growth of the business. And so that was part of my strategy, is I targeted much closer to 5% as opposed to 20%. For many, many years to give me more in sales and marketing. Uh, one of the things I found— find fascinating is that most agencies grow through word of mouth. And if you think about what we do for a living, we help generate leads for our clients, but yet we don't invest in our own lead generation infrastructure.

True.

And so a huge number that I like to look at is what percent of your revenue do you spend in sales and marketing. And so, um, if you're looking at, uh, you know, you're between 0 to 3% in sales and marketing, you will hit a point where the revenue you lose will be equal to what the founder is able to generate on a, on an annual basis, and you'll basically just get stuck uh, at that level. Uh, the next stage is really 3 to 6%. Uh, this is when you want what I'll consider fairly manageable growth. Uh, 6 to 9%, you're starting to get serious about your growth. And then 9 plus, uh, is when you are really looking to scale and grow your business. Now, there are two major levers, in my opinion, that allow you to have a sales and marketing budget that is 9% of your revenue or greater. The first is your gross margin, which is after you take all the people and all the labor and all the costs aside and figure out how to do that more efficiently and more effectively, that gives you more money to invest in sales and marketing. And And then the other lever is, uh, delayed gratification. Are you willing to sacrifice some of your profits today, uh, for tomorrow? Now what I will say is, just because you put the money into sales and marketing does not mean you spend it intelligently. There were several years where I would dial up or dial down my sales and marketing, and I would get the same outcome. And so, there was tons and tons of testing of different strategies to deploy, to make sure that we were spending our money in areas that would intelligently generate leads and allow us to grow.

Love it. So, not something you hear every day, right guys? But kind of this idea that you wanna target at least a 20% net, but what John did in his case was he said, "Hey, listen, I wanna grow this thing more aggressively. I'm willing to draw down that net, put more of it towards my marketing, towards my business development initiatives. And it sounds like in your mind, that's one of the things that kind of propelled you to that next level.

You know, think, think about it this way. If you have two $1 million businesses and one of them spends, let's just say 3% of their revenue or $30,000, and one spends $100,000 on their sales and marketing, spends 10%. Uh, I'm not going to suggest that it's a guarantee that if you spend $70,000 more on sales and marketing that you're going to grow faster. Like, the other person might have a better network, you know, other things that go along with it. Uh, but I would say that you have a much higher likelihood if you're committed to that, that over time you're going to figure out how to spend that $100K more intelligently And you have a $70,000 advantage over the person that only spent $30,000 to grow. Now, the other thing that I would say, and if you were to have one major takeaway, this is something I preached over and over and over again. Your number one sales goal is never to lose a client due to performance. Hmm. So if you have a leaky bucket, and you are losing clients, it doesn't matter how much you're investing in sales and marketing, uh, you got a bigger problem on your hands. And so most of the people I'm assuming that you work with, and everything I've studied about the 7-figure agency, are retained relationship type businesses. And so what you have to be thinking about is, you know, sort your revenue by the customer that gives you the most, see what percent of revenue they give you, then the next customer, then the next customer. Generally what you're going to find is 20 to 25% of your customers represent 80% of your revenue, and you need to hold on to those customers for dear life. And if you're holding on to them, it makes your sales— if you, you know, we were very fortunate We happen to be really good at sales, and if we got into the room, we were able to win deals. But what I always wanted to focus on was the experience when you actually became a customer was better than what we sold you.

Powerful. So you kind of made this— you made this promise, but you made sure your team could deliver on it and you could exceed the expectation.

Think about it this way. When you are selling to someone, you want to put your best foot forward, right? You're not going to sit there and have a crappy sales experience. You want to have a great sales experience. Well, how often do you actually buy a product and when you get it, you're like, wow, this was so much better than what I was sold? It doesn't happen often.

Yeah, not very often.

And so if you are adamant and dedicated to figuring out how to make it so that the experience is better than what they were sold, you get to keep this revenue. You know, just to give you an example, I think it was in 2019, 20% of our revenue were from customers we sold in 2013. And, you know, so— and that's one of the things that we study on a regular basis is, uh, your revenue— think about each year as a class is what percent of, you know, this year's— this year's revenue comes from each different class. If you're doing your job well, you know, over multiple years you're going to have sales that go into perpetuity.

Yeah, love it, love it. So, so really consciously recognizing we have to reinvest in marketing to grow and to grow the business, but we can't outrun churn, right? If we're just selling and losing clients as quickly as we're landing them, that's not going to work either. It really has to be a combination of aggressive sales growth, delivering amazing results, and retaining the clients that we do get so that a year from now, 2 years from now, 5 years from now, they're still doing business with us and they're actually increasing their spend.

Exactly.

Love it, love it, love it. So, um, you talked about this, this kind of 5-year journey to, to a million. And then kind of doubling, doubling shortly thereafter. Um, what, like, what were you doing to get clients in the early days? And then, like, what were the sales strategies that worked best to go from, you know, that, that, you know, $5 million to $10 million plus?

Okay, so, uh, my early days, uh, I did not niche down as I know you suggest. Uh, I would say I was, I was really focused on Chicago.

Okay, so you were like the local, the local area specialist.

Exactly. And I probably went to 5 networking events a week. So if there was anything that was related to marketing, uh, I was there. Uh, but what I found was the most successful in my early days was calling on competitors and calling on complementary businesses, uh, to get referrals. And so the competitors, uh, were generally much larger than me, you know. So, uh, there was an agency called Resolution Media, which is owned by Omnicom now, that I think has, you know, 3,000 to 5,000 employees. Uh, at the time I think they had 50 to 100. Uh, they referred all of their small business leads to me, and so I then started calling, uh, web development companies. And so my initial strategy was really a partnership marketing strategy, and what I found was a couple things. Cold calling works, cold outreach works. Uh, but I found that the energy it took to get someone to answer the phone from a web development company versus a prospect, uh, was much greater. And when I got them to answer the phone, there actually turned out to be an immediate opportunity. So the ones that answer the phones were like, you know what, we were looking for an SEO provider, I'm really glad you called me. And so I probably built a network of 50 web development companies, advertising agencies, larger competitors that would outsource business to us. And that was the primary tactic that we got to get our phone to ring in the early days.

Love it. So kind of early on, local networking, finding strategic partnerships. I think for you, you know, those of you listening, you know, something to be said for look for people already selling to the prospects you want to work with. And, you know, don't be afraid of the competition. That's a great idea. You know, even like, you know, a lot of people look at us, plumbing and HVAC SEO, and think, oh, can't touch the plumbing niche. Well, the reality is we have to turn away a lot of business because they're not a right fit or they're in a market that we've already got closed. And so even buddying up with agencies in the niche that you're in and trying to find strategic opportunities where they can refer business out to you is a great play. John, I really appreciate you, you sharing that.

I would say as we got bigger, there was a couple things that we did. Um, one, you mentioned some of the awards that we won. We won awards in 4 different areas, so it was culture, uh, innovation, digital marketing, and, uh, growth. We did this, uh, with purpose. And what I mean by that is we probably had a database of 500 different awards in those 4 different categories.

Wow.

And my theory was that no one remembers you if you win 1 award, but if you win 30 a year, they'll remember you really well. And so if you just take growth, there's the Inner City 100, there's Deloitte, there's Crain's Fast 50, which is a Chicago one, there's the Inc. 500, 5,000. The digital marketing, we won multiple times, you know, Search Agency of the Year or Digital Agency of the Year. Or best campaign for a specific thing or web development provider of the year. So we really focused on all of those different awards and then culture in terms of best place to work. One of the ones I'm most proud of was Ad Age recognized us as one of the 50 best agencies to work, I think it was 2015.

Wow.

Now, the thing about winning an award is it's very easy to say you want to win it. It's how do you reverse engineer and actually do the hard work to make it so that you're worthy of winning it, right? Uh, but, you know, uh, we were recognized by Forrester as one of the top 10 performance marketing agencies in the world, and multiple years in a row. Uh, and so those were all active things that we did to help really build our brand.

Love it. And, you know, it's like you said, you set the intention. We want to win fastest growing, we want to win this, we want to win that. And you kind of put it out there and then you've got to work with the team and reverse engineer, how do we make sure our company is such a great place that we would get enough of those submissions that we would actually win those awards? And that's great work. So, well, I guess what would you say, like, how much time went into identifying those awards? Applying for those awards and who was responsible for the charge on that front, just outta curiosity?

So our marketing team was responsible for it. There was a team dedicated to, you know, categorizing and grouping and databasing all of these. And, but it was a team effort. Now I'll give an example. The Inc. 5000 list is an evergreen award. We knew that every year we were going to wanna be on that award. And it's a very easy submission. It's just math. You either, you know, do it or you don't do it. Forrester is a full company-wide effort. You know, the, the interviewing processes, the number of client references that you have to, uh, submit to them, uh, there's also— you have to be of a certain size, a certain scale. But I mean, it's a rigorous, really deep interview process that you have to go through, and you get everyone involved in that. A lot of the ones where, you know, like if you're Search Agency of the Year or those different ones, you have to have really complex campaigns and you have to think about what those campaigns are and how you submit them. So you have to generally identify, you know, probably a year ahead of time, you know, what is the campaign that you think is going to be worthy of winning You know, and generally your clients are pretty pumped because, you know, if, uh, if they win Best Search Campaign of the Year, it makes them feel really good that, you know, they picked the right provider.

For sure. Yeah. So, so strategically, you know, looking for these awards, applying for these awards, doing the work to actually earn them, um, how much do you feel that played a role in your positioning, your ability to land clients, and I think probably your ability to retain and attract great talent in your company?

I, I think it was a huge part. You know, I'll give you a really good example. Um, the current CEO, I think he was either SVP of client service or president at the time, uh, was in Boston to, uh, to accept an award for us, and I think it was a growth-related award. And there were a few other companies that were there from Chicago and he went over to walk over and introduce himself, and he just overheard them as he was walking up. He's like, and I don't know how it does it, but Rise Interactive wins every single award. And he just had like this moment of pride, you know, as he was hearing them say this. Uh, but if you think about it, what I would say is I don't know if it— I don't know how much the awards help in terms of, uh, getting invited to RFPs. We vast majority of the way we win business is getting invited to RFPs. Um, but what we— what I do believe is that when we got into the room and you're talking about why you should use us, you know, if you're looking to use us for a specific area and we've got all this third-party independent, you know, providers recommending us as the best of the best, Uh, it just gives a lot of credibility and a lot of trust, uh, in that area.

Yeah, yeah, for sure. So, so it sounds like first, first million to a couple of million was local networking, joint ventures. Um, then you started to focus on branding, positioning. Um, as you started to build the team, like, what were some of the key strategies to land clients and grow from, you know, a million to $10 million, let's just say?

Okay, so a couple things. I had a mentor named Jack Kraft who was the former vice chairman and chief operating officer of Leo Burnett, uh, and to, to this day I still talk to him almost every day.

Amazing.

Uh, and you know what I would say for everyone listening is finding a mentor and finding someone like Josh who can really guide you and have been down this path is absolutely Uh, the Leo Burnett model was that you have 50 clients at one time and that you don't expand beyond 50 clients, and that when you win a client, you basically sunset a client. And we followed that model, um, and so what we were looking for is basically we would win larger and larger and larger accounts. And so our portfolio over time, you find, is— it's basically just as easy as managing a million-dollar account as it is a $100,000 account. And sometimes it's actually easier. Um, you know, when you— when you win a small account, uh, oftentimes even though the budget might be small, it is 100% of that person's budget. Right? And so the level of scrutiny is incredibly high. When you win a million-dollar account, oftentimes it might be the smallest line item of their entire budget, even though it sounds like a really big number. And so they tend to know how to work with agencies better. They're more sophisticated. Uh, what I would tell you is we never skipped a step though. And what I mean by that is my very first client was $50 a month. So I literally went from a two-figure monthly client to my second client was a three-figure monthly client. Uh, and then I got into the thousands, then I get into the high thousands, then I got into the low 5 figures, and it kept on growing from there. Um, so I apologize, I need to grab a Kleenex real quickly.

I know, take your time. So good, good insight here, guys, and I found this to be true. I think everybody that's going down this journey finds it to be true. It takes as much energy to sell the $5,000 a month client and retain as it does to sell the $500 a month client, right? And it sounds like that number continues to be true. The higher, higher up you go the ladder. And it sounds like, John, in your model, it was, let's just continue to get larger and larger monthly retainers. What would you say was your average client value, you know, towards the $10 to $20 million a year range?

You know, we were really good at the probably, $250,000 to $750,000 annual size agreements. Okay. Um, towards the end, we absolutely had several 7-figure agreements. Uh, we had some clients that were below that, but that was kind of our sweet spot of where we would play. And what I could tell you was, uh, where we ran into challenges— and this is, you know, if I stayed on, this was probably one of the big things I had to figure out strategically is we were getting to, you know, a lot of low 7-figure engagements, uh, to move to the next level, uh, where, you know, I'll give an example. A credit card company, which is one of the most major credit card companies you could ever imagine, uh, invited us to their global digital media pitch, and it was an RFP, and we made it to the finals. We actually— it was, by the way, an incredible experience there. They rented out an auditorium and they had 50 people in the audience evaluating us, just to give you an idea of just how many people were involved in the making. We actually got a standing ovation.

Wow.

And, uh, this is when I knew we did not win the deal. Um, where the head guy basically says like, this, this presentation was phenomenal, but oftentimes on a Friday we're going to decide to do a campaign on a Monday, and we're going to need you to staff 50 people, uh, to work on this project. How are you going to be able to, you know, staff up? Uh, now today Rise is part of Quad Quad is a 1,600-person agency network, and I think they'd probably be able to support that. But at that time, we just didn't have that scale. And what I found is that to go from, um, to eventually where we hit a ceiling was without having a global infrastructure, uh, the next size deal was really, can you handle our global business? And so we had to make a strategic decision. Do we want to invest in global Or do we want to go from, let's just say, 50 clients to 100 clients and change the model in terms of the number of clients we were pursuing? So those were like strategic decisions that I didn't get to make because I, you know, I'm no longer there, but that's kind of where I was at a crossroads when I was at that point.

Fantastic. So, so good, guys. Give me a 1 in the comments if you're getting value. If you've got questions while John's still on, put them in the chat and we'll do our best to answer them. Amazing. So, so kind of like focus on bigger clients was the play, really maximize the value on a per-client basis. I'd love to talk a little bit before we start talking about how you position the company for sale and kind of how that whole transition works, because I know people are fascinated with that topic. But before we go there, I'd love to talk a little bit about retention because this is something I'm passionate about, something we spend a lot of time really drilling in with the listeners and the members. Um, like What were some of the things you guys did to create a world-class experience and retain the clients that you had at the highest level possible?

Yeah, so first of all, our mission was to deliver a remarkable experience and superior results. I believe that if you deliver a remarkable experience, and when I say remarkable experience, you know, deadlines are made, you're really enjoyable to work with, you go above and beyond, you're on the call of duty, all those types of things. Uh, think of it as like the mint on the pillow, you know, of like the hotel experience.

Yeah.

Uh, but your results are awful, you most likely are going to struggle with retention. Yep. And then on the flip side, if you have, uh, phenomenal results but you're just a pain in the butt to deal with and they don't like you, uh, or you're missing deadlines or you know, it's just a clunky way of getting there, uh, you're most likely going to have a hard time with retention as well. So you need both. And, you know, one of the things that I recommend in terms of annual planning is that everyone should have 4 goals every year, and it should be a revenue goal, a cash goal, and a profit goal, which are the financial metrics. But then there is something I call an infrastructure goal, and the infrastructure goal is basically saying, 12 months from now, how is my business going to be better than it was today? And what I generally want people to think about is 4 major things to invest in. And you want to be investing— like, in our case, our mission was remarkable experience and superior results. So we invested in both of those things on a regular basis to determine, you know, what are the line items that we need to do to make improvements in those areas. You know, I, I saw you, uh, had a little bit of surprise at the size of our product development team. Uh, so, uh, one of the things that we did from a superior results standpoint is, uh, one, we recruited very heavily from the financial industry. Uh, in order to get a job, I put a huge emphasis on analytical ability, and you actually had to take an exam before you're even allowed to interview, with a 22% pass rate. And, uh, so you have these highly analytical people, uh, but then if you think about, you know, everyone says that they're data-driven, uh, we really focused on being the best at media data. And we built connections to all the major platforms across all the major, uh, programs. And we were able to answer questions across multiple channels in a way that no one else was able to answer them, uh, at a speed that no one was able to answer them. And so, uh, it really was investing in both of those things is how I would focus on working on retention. And I, I, you know, because I'm part of your Facebook groups and I see a lot of people, uh, make comments about EOS. So if you do EOS, you have these annual planning sessions, and I can tell you, I think EOS is great, but the biggest flaw that I see in EOS is it doesn't connect the goals with your budget. And so what you need to be thinking about is, you know, if your problem Uh, let's just say is, you know, your reporting is not sufficient and you're losing clients because you're not giving enough insights into your reports. And you say, I'm gonna go invest in reporting. Well, now you actually have to get it in the budget. So are you going to invest in a tool like Datorama? Are you going to go hire someone who's going to be an expert in it? Are you going to hire— are you going to invest in training? And so those are the kind of the elements that you need to think about.

I like that. So, so like really you invested heavily on the experience, right? And there's so much you can do from an experience perspective. But the reality is if the results aren't there, they can think you're your best friend and they could love all of the tchotchkes and things you're sending. But if the results aren't there, they're going to churn anyways. They're going to cancel. So you said we're going to invest in the experience. We're also going to really invest in the deliverable. We're going to invest in the data analytics. And I think that's a really strategic play to find people in the financial sector that can look at data, that can look at metrics, that can make strategic decisions, and that gave you a sharp competitive advantage against, you know, the others that were selling these same types of digital marketing services.

Yep. And I'll just add one thing to it. I'm a huge believer in being able to differentiate yourself. And what I want all of you to think about is I'm going to give you a test in terms of differentiation. And what I'm gonna explain to you is it is the second question that matters. So the first question is going to be, uh, so what differentiates you from the other thousands of agencies? And, you know, you might hear that we're data-driven, we have great customer service. It might be that we only focus on a specific niche. So here's the follow-up question. That's phenomenal. I just— look, let's just go with data-driven. You know, I just met with 50 other agencies that says that they're data-driven as well. How are you more data-driven than those other 49 agencies that I just talked to? And if you can't answer that question, uh, then you don't have a real differentiator. Uh, so, you know, there's two ways that I look at— you could create differentiation. One is to focus on a specific vertical or niche, or the other one is to focus on a specific element and be the best at that element that could work across multiple industries. Uh, so what we would explain is that our vision was to be the leaders at leveraging data to help brands make smarter marketing decisions, which is a very fancy, long-winded way of saying we're data-driven. Uh, but my backup to the follow-up question to the other 49 agencies that says that they're data-driven is first, we recruit heavily for analytically driven people. We have an exam, it's got a 22% pass rate, um, and so we have these minds that are data-driven people. And then the next one is we built our own analytics platform. And what I explained is when you think about data-driven, uh, there is lots of different types of data. There is customer data, pricing data, inventory data, media data, you know, etc. We focus on the media data, and what we're really trying to do is just identify two things: wasted media, so money that was being spent that was poorly allocated, and then scalable opportunities that you have not spent enough on that you could actually scale. And so I think that we did a really good job of being able to answer the follow-up question of how are we more data-driven than our competitive set?

Powerful question, guys. So it's those two questions. It's right, what makes you different? And then what actually about that is different than the competition? And if you can go to that level and have that answer, then you've got the right to win, right? You've got the right to say this is why you should go with Plumbing and HVAC SEO versus these other 17 agencies that are vying for your business right now.

Powerful share. And, and just since I, I know your, your playbook, and I'm a big believer in your playbook, I want you to think about it. All of you are thinking about what your niche should be, or you've already decided on what your niche is, uh, but there's nothing from stopping me from having the same niche. Yeah. So what I want you to think about is, if I go into your niche and 49 other people go into your niche, what are you going to say Or what are you going to do in terms of how you spend your time and money to make it so that you're not just better than the generalist, but you're better than the specialist as well?

100%. And you know, the whole thing of being niche-focused right now, 5 years ago it was a major competitive advantage 'cause you might've been the only one in that niche. Today, there's dozens in every single niche and there's gonna be more and more coming on. So you have to be thinking that next level deep so that you are differentiated and so that you stand out in the pack. Great stuff. Again, guys, give me some yeses and some likes if you're getting value here. We've got John who's built an 8-figure agency, scaled it, sold it, sharing some great, great insights. I wanna transition now a little bit. We talked about how you grew to $1 million and then you grew to $10 million and then you grew to, you know, $40 million plus. Let's talk a little bit about how you started to position the company for acquisition. Because not a lot of agencies, you know, are at that level or have ever been able to kind of think at that level. Love to hear kind of how you thought that through and how you were able to bring it across the finish line, so to speak.

So a couple things. First of all, when you go to business school, uh, they really train you to think about you go raise private equity money, you build a company, you sell it in 5 to 7 years. I personally am not programmed that way. Uh, I think very long term in terms of I just want to build a great business. So when I built Rise, I was not thinking about my exit strategy. Actually, when people asked me what my exit strategy was, I said I'm gonna die one day. That was my exit strategy. Um, so, uh, what ended up happening is, uh, I believe in investing for growth and for the future and trying to build something big. And in 2016, I wanted to start building the technology that I was discussing with you, and I did not have enough capital to do the sales, the marketing, and build the technology. And so I, um, I ended up going to the capital markets, looked at private equity, but I ended up choosing Quad or Quad Graphics, uh, which is the largest investor— largest printer in the United States. Uh, because strategically they were looking to get into this space. They have a few hundred salespeople, they have every major retail client you could possibly think of, and the people are just awesome people. Uh, so the, uh, initial investment was a minority investment that allowed me to invest in the future of the business. Uh, 2 years later, I sold majority ownership to Quad. Uh, and so the intent was, uh, the intent was— I wouldn't say I hired an investment banker. I went through an entire process. Uh, I built a really good relationship with people I trust, people who I know would take care of the business. And I ended up doing a deal with them. So it was a little bit less than the usual path that I would say people go down, but I can absolutely answer any questions in terms of how you structure deals, how you— how companies are valued, things to think about, um, you know. So any questions in that area, I'm happy to go into detail on.

Absolutely, guys, drop your questions in the comments. I know we unpacked this with our mastermind group a couple weeks ago But I guess, so kind of the concept was you kind of, you were like, I need this extra capital, let's continue to invest in the technology. They bought a portion of the business, which means you got an infusion in cash and you were able to reinvest in that growth. And then over time you recognized, hey, you know what, now might be a good time to exit. Just on that topic, like what was the trigger point for you that said, okay, hey, look, I'm gonna take the cash off the table and move on with my life. Versus continuing to build and scale?

Okay, so I actually left my earnout early, and I decided in October of 2019 I was going to step down. I would say that there were 3 to 4 major factors that went into it. One of them was just something that was going on personally that was pulling me away, and I had to focus on that, and it just was more important to me. And, you know, you always hear the line that, you know, it's not personal, it's just business. I don't believe in that line. I believe that your family life and your work life blend with each other and you have to prioritize what is important. And I needed to focus on my family at that moment in time. So that was one major reason. A second major reason was Every— I mentioned every June or July I start planning the next year, and it was the first time that I just wasn't excited about the plan. And it was— it, you know, the plan's been implemented even without me being stepped down. Uh, you know, I think Rise is up probably 50% since I left. Like, they're, they're on a tear and they're doing amazing. Um, and, you know, the way, you know, you always— if you have LinkedIn Insights and you go look at the headcount growth of businesses, you could generally get a good idea of how they're doing or not. Um, and, uh, but it was the same playbook I did the year before, which was the same playbook I did the year before. And I just personally thrive on new challenges, new complexity. And, um, and so that was, you know, I would say kind of the impetus of I wanted to make sure that I was still feeling like I was growing as a CEO. I had some personal things going on. I'd say those were probably the two primary factors.

Awesome. Well, hey man, amazing journey there, right? Building the agency, growing it, getting the partial buyout, selling it. Um, and now you've pivoted to, you know, some of the lessons you learned in growing and selling to financial management and fractional CFO services for agencies, which I definitely want to dive into. Um, but for, for like, for the agency that's trying to figure out, I'm at $3 million per year right now, let's just say, what's my business worth and how would I sell it, how would I value it? Can you give a couple nuggets on, on that side of the equation? Because I know you work with a lot of agencies.

Yeah, absolutely. So first of all, agencies are valued generally based on profit, or specifically EBITDA, which is earnings before interest, tax, depreciation and amortization. And based on lots of different factors, the multiples tend to range from 5 times EBITDA to 15 times EBITDA. So if you're a $3 million agency and 20% of your revenue is EBITDA, uh, means you have $600,000 in profit, you can basically think about the value of your company is going to range between $3 million and $9 million is the range that it would be of value. Now let me give you criteria of how do you get to the 15 times multiple as opposed to the 5 times multiple. First of all is just scale and size. So when you think about who your buyers are, your typical buyers are the major holding companies. So it's Publicis, Omnicom, WPP, IPG, etc. And these are multi-billion dollar companies. And so buying a $3 million business really just has a tiny, tiny impact to them overall. And so as you can get from $3 million to $10 million, your multiple is going to go up. If you can get over $25 million, your multiple is going to go up. If you can get over $50 million, your multiple is going to go up. So as you get scale, your multiple increases because that just moves the needle for people who are looking to put a lot of capital to work. The second thing is there are specific niches or verticals that have premiums. Uh, healthcare and finance tend to get a premium over other verticals. And so, uh, you know, trying to— you know, so a buyer might want to get into a space or to add more revenue to a specific space And so picking the vertical you focus on, uh, will matter in that regard. Uh, I can— I have a few more unless you need me to move on.

I know, let's keep going, this is great.

Okay. Uh, third thing to think about is just the services that you offer. Uh, uh, right now Amazon Advertising or marketplaces are really hot. There's more demand than their supply, and people will pay a premium because they're trying to gain that expertise and they might not have that expertise. Expertise. Um, trying to think about what else. So it would be— oh, then they're going to look at, do you have customer retention issues? So that if you have one client that represents 80% of your revenue, you might make less than if you have 300 clients and it's well-diversed. Uh, so those are kind of all the factors. Is the founder, uh, tied to the revenue, or can that founder leave and they can still preserve the revenue. So those are kind of different elements they'll think about. The other thing that I want you to think about is that generally you only get half the money up front and the rest is on earnouts. And so, uh, when you hear these multiples of 5 to 15 and $3 million and $9 million that you could potentially make, really it's— you're given $1.5 million to $4.5 million. And then you have to earn the second half over 2 to 4 years.

Got it. Great, great insights, guys. Give me some ones if that's helpful. Kind of a Cliff Notes here from what I took away. You know, your buyout's gonna be based on your profit, right? Your earnings before interest and taxes. Like, so whatever your profit is, you might get a multiple somewhere between 5 and 15 times. That's kind of what your company's worth. And then there's specific things that he just shared that you can really use to increase the potential multiple. One being be large enough that you're relevant to these bigger companies, right? Your $1 million business is a drop in the bucket where you're $10+ million, I think is kind of where that becomes much more interesting to the bigger companies is kind of one of the main things I took away, John. Yep. Awesome. Guys, I'd love to hear your, your questions and your takeaways in here while we've still got John with us. So, let's shift gears again now. I think as you grew and as you sold, you took away some really powerful lessons as it relates to finance. Talk to me a little bit about that and kind of the genesis of Ramsey Innovations.

Yep. So, a couple of things. One, I'm a data-driven guy. And I love just numbers in general and visualizing those numbers in ways that allow me to make really intelligent decisions. And, uh, all of us, every single person listening here, all we have is time and money. And the more intelligent you spend your time and money relative to the competition, the faster you're going to grow. And your key data source to understanding how you're spending your time and money intelligently is structuring your finances in a way that allow you to make intelligent decisions. Uh, give you a couple examples. I have two clients, both are $5 million in revenue. One made $1.5 million in profit last year, one lost $400,000. They're in the same market. They do the same services, and the only difference is their gross margin. And so understanding why they're not doing well— this year we're hoping for them to make $400,000 to $500,000 in profit, uh, and it's because we're working on fixing their gross margin problem. The company that actually made all this money, we're looking at their gross margin and what we're noticing is although the gross margin in its totality is great, there's actually a couple service lines where they're losing money. And then there's another one where you have two teams that manage the same amount of revenue in the same department, in the same group. One has a 27% gross margin, one has a 54% gross margin. And so by being able to structure your data properly, by being able to go granular By knowing the right questions to ask, we feel that we're just in a business that we can really help people grow and put them in a much better position, you know, to ensure that they have the right cash in the bank, that they have a plan to build their cash, that they understand, you know, what they should be spending on sales and marketing. But we also challenge you. It's like, you know, okay, you're going to go spend money on sales and marketing, but is that really the best use You know, why are you investing in a conference in the UK when you're going after customers in the United States? And that's an extreme example, but I'm just trying to give, you know, the idea of, you know, we help people spend their time and money more intelligently.

Awesome. So some of the key benchmarks that you just shared, I'd love to kind of recap those. So if you look at your agency, it sounds like gross margin is mission critical. Kind of having a gross margin, which just define that for the, for the group. Like, what is— if you look at, you know, all of your revenue and you take out the actual hard cost of delivery, that's your gross margin?

That is correct. So first of all, you're gonna have two different types of, uh, agencies: agencies that are managing media and agencies that are not managing media. When I talk about revenue, I talk about what I consider net revenue. So all pass-through money. So if like you're buying ads on Google and you're collecting from your client, that doesn't count. Okay, so you got your net revenue, then you're hiring people to do the work to deliver for your clients, and you're licensing technology, and you might have some travel and entertainment in there as well. When you take all that money and you subtract it from your revenue, you want it to be about 50% or greater. Uh, as a general rule of thumb, and that then gives you the remaining amount of money to invest in your infrastructure, to invest in your recruiting, to invest in your sales and marketing. And ideally you have about 20% left over, uh, unless you're looking to be your own private equity boss or owner and invest back into the business to fuel growth. And so the first one is by far the most important number is your gross margin number. Uh, really having a good approach for that and understanding that is critical.

So, and I think I really— knowing what you would consider in that gross margin, right? Do I put my account managers in there? Do I put my SEO team in there? Do I put my white label providers in there? Does Nelson go in there, right?

And kind of knowing Sales team does not go. Everyone you just mentioned, account managers, white label providers, SEO providers, licensing SEMrush or whatever tool that you might be licensing, all that goes in there. Your sales team will go into what I call SG&A, which stands for selling and general administrative expenses. And that is a separate department.

Office rent, would that be gross margin or sales administrative? I—

so this is, this is where you can get into different philosophies. I put that in your SG&A. I don't break out your rent and proportion it out to the individuals that are using it. I just have it in the SG&A section under operations.

Got it. So, I mean, there's lots of strategic decisions to make that can really impact your profitability, that can impact your growth. That can impact really taking things to the next level. And I think what you guys are doing at Ramsey is specifically designed for agencies that want to grow and scale and really get that dialed in. Talk a little bit about how someone can learn more about your fractional CFO services. Yeah, kind of learn more about how they could tap into your sources for that.

So a couple things, you can go to ramseyinnovations.com, you can connect on LinkedIn with me. You can email me at jon@ramseyinnovations.com. Uh, you know, and I would say there's two major service offerings. We will do all of your accounting, which is like your invoicing, your payroll, your bookkeeping, your month-end close— what I consider the table stakes, lights-on department of your finances. Uh, and then there is the more strategic, forward-looking things, which is developing your annual plans, your budgeting, your forecasting, your cash flow analysis, your resource planning, and your monthly insights. And we can help you with all of that.

So good. And, you know, speaking to that, like, when you look at finances, right, there's, there's such a spectrum of options, right? You could hire just a bookkeeper off, you know, QuickBooks Online.

Yeah.

You could hire your local guy, a CPA. Um, you could go with the company— like, what would be the, the real reason to use a company like yours versus just a standard generalist financial planning firm.

So what I would say is whether you're looking at us or you're looking at a fractional CFO that's a generalist that hasn't niched down on agencies, or you're looking at a bookkeeper, what I want you to be thinking about is understanding what are the important questions that you need to answer from your finances on an ongoing basis. So the benefit of using someone like us is twofold. First, uh, we only focus on agencies. If someone calls us that is not an agency, we will turn them down. Uh, and the reason why we're doing that is because we are trying to answer very critical questions that we know agencies need to answer. How do they reconcile their media? How do you determine what your gross margin is? Uh, how do you put your resource planning together? All of those different elements. The second thing is we are actually building technology. So just like I did at Rise, we have a 4-person product development team. We're going up to 8 people by the end of this year. Uh, we'll plan on being at least 20 people by 2024. Uh, and the idea behind that is once again we want to be able to answer questions that are critical to agencies but we want to be able to do it for less money than if you went to someone else. And we want to be able to do it in a way that's much faster and more effective.

Powerful, powerful resource, guys. John, thank you so much for coming on. Thank you for sharing. Congratulations on your growth, your success, what you're up to with, with Ramsey. If you had one last piece of wisdom to leave with the listeners before we wrap up today's session, what would that be?

Can I do two?

Yes, please.

So the first one is what you have to think about is there's two versions of you. You're— there is the digital marketer version of you and there is the entrepreneur version of you. You have to decide who you want to be. Do you want to be a digital marketer, which means that you're really never going to scale that large because you want to be involved in all the clients? Or do you want to be an entrepreneur and a CEO? And there's, by the way, no wrong answer. It's just something that's self-reflective. And the second thing is, I don't care if you use Ramsey or if you use another provider, but I promise you, by investing in your financial infrastructure, uh, you'll end up saving money, spending your time more intelligently, and ultimately allowing you to grow and scale your business. And nothing would make me happier than to see everyone listening today become amazing case studies for the 7 Figure Agency. And take their businesses to the next level.

So good, so good, John. Thanks so much for sharing. Guys, if you wanna learn more about John, be sure to look him up, be sure to reach out to him on LinkedIn, ramseyinnovations.com, is that the right domain, John?

That is correct, yep.

John also does workshops on finance. What is, would the best place to find that would be on your website?

You know, actually, I don't even think it's on our website yet. Email me, by the way, 3:30 today, uh, Chicago time. We are doing a workshop on, uh, budgeting and forecasting. So if you email me, I'll make sure you get an invite right away.

Perfect. John@ramseyinnovations.com. Be sure to reach out. Um, John, this has been great. You know, you've had such success. Thank you so much for taking the time to share and, um, drop these nuggets of wisdom. Guys, as you're listening If you're watching this on the replay, what were some of your takeaways? What were some of your insights? Put those in the comments. John and I will be looking at this. If you have follow-up questions, post them there as well. And we will, we will wrap there. John, thanks again. Really appreciate you. And guys, thanks for listening and thanks for, thanks for participating. Press the like button, press the subscribe button, and we'll see you again real soon.

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