Jeremy Weisz 4:45
I want to go into an example Second Bite, right, we talked about the Second Bite podcast, an example when it comes to that. And I think there’s a caveat with the second bite when we’re talking about what type of acquires, actually will result in a second bite, because I think maybe in some circles, it’s like, well, just consider what you got. All you’re gonna get in, don’t worry about the next stage. That’s maybe for a smaller company acquiring another small company. But when it comes to private equity, it’s a different story. I mean, they are going to be buying and they’re looking to sell at some point, right? So I love to talk about maybe some misconceptions of the second bite.
Todd Taskey 8:02
Yeah, so a couple things second bite, my mind falls into two categories. Number one, your second bite could be a cash distribution over the next few years, also known as an earnout. That’s a less exciting second bite. But one that exists particularly or oftentimes, if you’re going if you’re being acquired by a what’s known as a strategic buyer. In today’s world, many strategic buyers are backed by private equity, just like the example I just gave you. Private Equity will typically be into a company for what they will describe as three to seven years. And they’re looking for a return on that money that they have invested. That’s somewhere between, let’s say, four times and seven or eight times on your money. So if the hope is that the investment that we’ll make by rolling forward is the lingo, some of the equity, then, you know, hopefully that’s a much bigger upside. And there’s there’s many, many examples where that turns out to be exactly the case. So to give you one piece, I’ve got a client currently, they’re out in the mountain states, we did a real good transaction for them. They got high single digit millions. They’ve been running their business for 10 years, there were about $2 million of EBITDA. We sold into a private equity group. They got high single digit millions, and they got roughly 40% of the company. That was just two years ago, that was November of 2019. During the cutters during the summer of COVID. They did two additional transactions that added about five and a half million of EBITDA and as we sit here in the summer, 2021 they anticipate that this year, they’ll do $11 million of EBITDA. I know they’re considering two other acquisitions that would add four or 5 million more EBITDA to that. But if it just keep it as it is that at 11 million of EBITDA this year, a business like that, in this market will probably trade for, you know, 12 or 13 times EBITDA, maybe even a little bit more markets pretty strong right now. So that’s 140 ish million dollars of value, the company has about 25 million of debt on it, from the acquisitions in my clients been diluted down from about 40% to about 27, or 28%. But let’s say roughly, they have a quarter ownership in a net 100 million dollar enterprise. And the first byte that they got, was called eight, nine ish million dollars, theirs, and that was for 60%, the 40%, in two years, is worth around 25 or 7 million dollars, tremendous outcome, these guys have no intention of selling that business. Now they have full intention and growing it so that their second bite, hopefully, will be six or seven or eight times with their first bite was. And that’s how you draw it up on paper all the time. Right? And, and, you know, if you find the right fit, and the right people and the right culture, and you match all those things up, you know, those things happen. Now, last quick point on that is, I’ll give you we’re talking to them now, with a client that is a Facebook agency. So let’s say they’re two years later to the game, the company’s already bigger, the there multiple, if they decide to do the transaction and join them, their second bite will not be as big as the so won’t be for
Jeremy Weisz 12:15
that company was earlier on in the acquisition,
Todd Taskey 12:18
but it will happen in two years instead of happening in five years. Right. So, so all of those are part of that sliding scale of when does a transaction happen? Who are the people we’re partnered with, you know, on and on from that standpoint, but it puts it puts a seller in a position that if if they sell to a group that’s going to exit in another year, they would probably be almost entirely out of their, you know, earn out or their second bite within a year or two years. That could be pretty attractive.
Jeremy Weisz 12:55
There’s a buyer, Todd typically share those things like we’re looking to buy you and then in two years here, our timeline is two years or four years, or is that more after the fact that they’re sharing those things?
Todd Taskey 13:06
Yeah, I mean, it’s a question we always ask. And good buyers, I’ve got a group right now that we’re negotiating an L ally with a want their goal is to sell by 2024. That’s, you know, three years from now, a lot of stuff can happen in three years. You know, as everybody listening to this knows, there’s a lot of stuff I planned for three years ago for now. And some of them came true, some didn’t. So you never know, from that perspective. We’ve had clients that, you know, somebody has knocked on the door sooner than that with a really good offer. And they said, that makes a lot of sense. And so you just recalibrate everything.
Jeremy Weisz 13:46
I talk about multiples for a second. So you mentioned at what, again, that they range and I know there’s an expectation so people come up, come to you probably maybe with big expectations, unrealistic expectations on people not what are you seeing the ranges that people if you’re at this level, here’s what we’re seeing this level, like, as you mentioned, they rolled a bunch of companies, the multiples, probably much bigger than if they’re they’re lower, what are you seeing with multiples and what people can sell for?
Todd Taskey 14:22
Yeah, you know, so expectations are usually a little bit outsized. And people always point to the high watermark, if you will. Of course, it’s Tinuiti is a transaction that New Mountain Capital announced back in January, that currently sits as kind of the high watermark. Tinuiti is a great company. Super profitable, growing 30% a year great management team, great contracts, great retention, great technology, great data, blah, blah, blah, right? Literally on On and on and on all of it great. And so now I am a $2 million business, don’t have technology, don’t have retention, don’t have a whole, you know, don’t have all these things. But I want that big multiple tip, you know, and, and so. So I’ve got a couple groups now that expectations are, are way beyond what we feel like we can deliver. And I just don’t think it’s appropriate for the market will deliver. But the question is, what will the market deliver? And that’s what a process will uncover, right? So if, and I could be wrong, maybe the market will say 10 times EBITDA up for $2 million EBITDA up business, right, maybe it is worth 20 million bucks, but I can tell you is, the best way to find out for sure is we need to go ask, we need to make sure we have your financials done properly, we need to have a deck that really tells the story simply but accurately about what the company really does. And touch on all those points that a buyer is going to want to know right away. And if we get three or four offers for the business that value it on a $2 million business around 15 or $16 million. And then it’s pretty clear to me and to the client, that that’s what the company is worth,
Jeremy Weisz 16:24
like a seven times in that situation
Todd Taskey 16:26
in that situation, it would be right in that range. And then, you know, give you one other example, we had a letter of intent for a client that we did not close for a bunch of different reasons back in February, that business traded, and that’s called six times EBITDA. And they got 70% in cash and 30% in stock. The stock in the larger company, that larger company is at $20 million of EBITDA already $20 million. They valued that company at nine times EBITDA really low, I think by I would say that companies probably were 12 or 13 or 14 times even. So when I do the math on that the math on that my client got offered six or six and a half times EBITDA. But 30% of it was 50% discount into word should be in the market. So what does all that math come up? Do? Who knows. So there’s always these variances. And the challenge is, when you talk to that guy, one of the guys I described at the country club, we’re at dinner in a family event, whatever it is, you sold your business? Yeah, would you sell it for? They’re going to tell you the top line number on sold for 15 million bucks. In the history of golf or dinner meetings or family events, nobody’s ever said, How much was in an urn out how much is in escrow? Your employment agreement, right? They’re just like, oh, wow, 15 million bucks? Well, what if that guy sold it for $10 million in a million a year for 10 years earn out? assuming you’re gonna grow at 20%? a year? Right. So that’s a little bit exaggerated. But in transactions that we work on smaller and transactions, it is the terms are equally as important as the value is.
Jeremy Weisz 18:29
Talk about that for a second terms wise, because you meant in this kind of goes into? How should a agency think about selling? What should they look for when they’re they’re ready to sell? And you mentioned a couple things in there like employment contract, what are some of those finer details that the agency should start to pay attention to when they’re ready to sell?
Todd Taskey 18:53
So this is that stuff, there’s 100 details, right? You know, one that comes up all the time, if you have a second bite. So let’s just use an example. You sold it for 10 million bucks, you got 7 million in cash, you have 3 million in stock, you think that 3 million is going to be worth 10 million in three or four more years. You’d like to people you’re like everything else. There’s a there is a clause in there. Most likely that says if you leave the company, here’s what happens to your stock. And then that kind of falls into almost like a grid of four things. Number one, if you quit without call for no reason. You just say I don’t want to do this anymore. Right? By the way, the reason we’re buying the company is because you we want you here we need a partner. You got to drive this part of the business, blah, blah, blah. And you just say yeah, I don’t want to do this anymore. There’ll be terms around that. The company can buy back your shares company has to buy back your shares. company buys them back at fair market value company buys them back at whatever they paid with a 20% discount or a 50% discount or all of us negotiate. Okay, that’s if you leave. If you leave for good reason, that’s different. good reason would be something like, you know, you’re in Boston, they require you to move to the Albuquerque office. I’m not doing that. Well, everybody’s moving the Albuquerque office, well, I quit that. That would be you terminating with good cause. There’s different terminology, but that that’s now more favorable to us, because it’s their fault. If they terminate us without cause, they just say to us, you know what, it turns out, Fred over here can do what you do. So we’re letting you go. That’s typically our because when, when we say to them, hey, we don’t want you guys to do that, though. Like, Oh, my gosh, we would never do something like that. Great. And if we do, I either get to put all my shares on you, or I get to keep them all. So totally up to me, right. And then the last one is termination for cause. Right? So you keep showing up for the podcast drunk, and you slur your words. Typically, there are good and evil in our agreements, you have the right to cure. So they can’t say, Jeremy, listen, you’ve shown up for the last two weeks drunk and slurring your words on the podcast, you’re fired. They have to say, Jeremy, listen, you’ve shown up for the last two weeks drunk and slurring your words on the podcast, you can’t do that anymore. And then you’ve got a period of time to cure that, typically 30 days or so. Right? And then you can get into potential bad acts like if you’re convicted for committing a crime, if you you know, if you kill somebody, if you’re you know, and then you get into, well, wait a second, you can’t just be convicted, right? He got, he can’t just be
Jeremy Weisz 21:51
chill so many different
Todd Taskey 21:53
iterations of the sometimes you can get into way down a rabbit hole. Right, which obviously, we try to avoid, because it’s expensive with legal and nobody wants to go down that. But there’s a little bit of a construct in there, that and then there’s a bunch of things you get into working capital, let’s talk about your non compete agreement. Right? How long is that going to last? For what areas that is? it? Is your non compete agreement? For example, you just do email marketing, the firm that bought you does social does search does paid does content? Does your non compete, prohibit you from doing any and all of those things? Right, lots of different issues. And you, you The earlier you get out ahead of those things, the better off it is, the longer it goes into the end, when we’re just about ready to close, the pressure just always builds on the seller. Because they get a big pot of money if they if they close the deal.
Jeremy Weisz 22:56
Yeah, there’s a lot of moving pieces in this and a lot of iterations of those moving pieces. But I appreciate you sharing some of them because I could see those are some common ones. And but, you know, the, you know, the buyer and seller have a lot to work out and both want to protect themselves. You know, ultimately, I’m talking about why do deals fall through? And I don’t know at what stage if you want to talk about me, you’ve probably seen every last thing over the years, over the past couple of decades. And I don’t know if it’s necessary in the beginning, but maybe in the middle to end. Why do what have you seen why deals fall through?
Todd Taskey 23:41
You know why? What I see most often is because nobody’s committed to getting a deal done at the beginning. And what I mean by that is when you sign a letter of intent with the buyer, the buyer should be holding a party that night that we finally got these guys to sign an LOI. It was competitive. There was three other groups in there we went back and forth a few times we negotiated hard but we came out with this asset that’s going to tuck into our group really well. Or if your private equity This is going to be a great portfolio company we’d love the management team we love everything else right? So because I know I know we’re gonna hit bumps in the process negotiating legal due diligence financial I didn’t realize your guys were doing it this way your contract say this. I thought they would say that whatever it might be. Right, right. I want that buyer to say you know what, I’m not freaking going back. I mean, we’ve battled so hard to get here. I’m not giving it up because their contracts because we thought their contracts were three years and they’re only two and a half years or whatever it might be. number one. Number two, I want them to know hey, If if you’re going to require a non compete like this, which is so not market member, those three other groups that we went to, that we that we were competing with, I’m sure those guys are going to be reasonable. So you decide how you want to handle, right. And, and so that’s probably the biggest reason why. Because there’s just not a, there’s a, I would say at least a perception of a very competitive process upfront. to, to, to win a letter of intent. Oftentimes a seller will be like, Oh, my God, let’s get the sign, let’s get this signed, in, the more you can get into your letter of intent, the less there is to negotiate after that. And by the way, after that, you’re committed to that buyer, you cannot continue to shop, you cannot continue to negotiate with others, you have to act in good faith. So your time to get a lot of your stuff done is before you sign a letter of intent?
Jeremy Weisz 26:04
Yeah. I find that there’s a lot of parallels to marriage in this situation. Because you know, a marriage, there’s bumps, you know, and you have kids, it causes stress, a bunch of stresses that this process caused so people aren’t committed. There’s just there’s reasons along the way to abandon I guess so. But let’s let’s assume both people have the best of intentions. In the beginning. What are you see big bumps? Maybe it doesn’t kill the deal, but baits a big point of contention. During the deal. Like you mentioned one thing about contracts, sizes, like if you’re if someone’s an agency now listening, are we better button these up? Based on your advice, right now, if we’re gonna sell?
Todd Taskey 26:48
Yeah, you know, having recurring revenue. So, you know, I will say oftentimes, so recurring revenue is a big one, that’s helpful. By the way, if you have month to month contracts, versus one year contracts, makes no difference. Because it’s retention that matters. So you’re, you’re a smaller agency, and you’ve got a big global company with a one year contract. And they’re in month four. And they change their mind where you can sue them. They’ve got 18 lawyers on the 35th floor. Go ahead, right? It’ll never happen. So rather than having, quote unquote, great contracts, I’d like to see great persistency or retention with your customers, right. But let me let me just touch on a couple practical things. Because when you’re selling, in your, let’s say, your one or two guys, right, you and me. So we have an agency, people to make this up, start on day one, and they work to the 15th. Right. And we pay on the 15th and the 30th. Let’s just take in this example, we pay them one cycle back. So they started day one, on day 15. They don’t get a paycheck. On day 30, they get a paycheck, that paycheck is for first through the 15th. Which is great for our cash flow, right? Because we had this person working for us for two weeks didn’t even have to pay. So that’s great. But now we get to deal close. So do close it on the 30. And the buyer says you’re accruing for your payroll properly, right. But there’s a payroll that is going to be so we close on the first of the month, there’s a payroll due on the 15th. You know what that payroll is for? payroll is for the period before that I didn’t get any of the benefit from you kept all the profits to that. So you have to make that payroll, that your payroll now my payroll. And then the buyers like well wait a second, that payroll is like $180,000. I know, I don’t want to pay it. I didn’t get anything for it. And then and then the the seller oftentimes like what the hell, there’s that. That’s ridiculous. Right? That’s number one. Number two, we charge people upfront. They pay us the beginning of the month for the services we’re going to give them through that month. Again, great for our cash flow. We closed on the first of the month, right? We’re getting checks on the first of the month for work being done that month. All those checks that came in on the first of the month are not yours. So you know, heaven forbid, you know that first you know, why would we want to close on the second or the third or what have you. Now, all of that, you know the acth inflows or anything Got all of those that I got up front. Don’t get, that’s not even my money either. Here’s the worst thing. So then we got, by the way, monitor the week, before we closed, we got a $50,000 check to do this guy’s website, gonna take us to make it up two months to do it, we got 50 grand, the work for the 50 grand is going to happen over the next two months when I don’t own the company. But I say to myself, wait a second, it’s in my account, that’s my money. It’s that if you operate your life, as a lot of guys do on a cash basis, correct. On an accrual basis that gets assigned to the work when the work is done. And so guys say well, wait. So first of all, I lost that 50 grand, so lost it. Second of all, I don’t get I have to make that payroll for 180 grand, you’re taken out of my working capital, the cash in my account, right? Third of all the checks that we got in on the first you’re saying I don’t get to keep those either. Screw it. I’m not doing this forgive these guys, you’re screwing me is what? Am I good? Geez, hold on a second, right? That’s it? Is it mean?
Jeremy Weisz 31:10
Isn’t it a place where? You know? Isn’t it just a fraction when you talk about what the sale the company is going to be? Is it more of a principle thing for people at this point? Like they’re just not seeing the big picture? or Why? You know, cuz let’s see, let’s just take those
Todd Taskey 31:27
numbers. Yeah. 180 plus 50 pluses. That’s for both of my kids all four years of college. Right? It’s just it. And so. So there’s part of that it is short sighted. And I think the point you’re getting at is that in and of itself is never the reason. But that’s a an acute injuries are added to trigger someone.
Jeremy Weisz 31:51
Yeah, maybe having some kind of doubts. And that just kind of right? The thing that pushes him over the head,
Todd Taskey 31:57
yes. And it adds to other things and other things. So, so it’s stuff like that the the buyer typically knows what they’re getting. The buyer has done this a bunch of times, the buyer has a team that does this. The seller, my guy has to run his company. At the same time. He’s got to do this full time. This is this is double duty for it wears you down?
Jeremy Weisz 32:29
Yeah. First of all, Todd I want to think you have one last question before we before I ask it, I want to point people towards the SecondBiitePodcast.com check out more episodes of your podcast, and people can check out PotomacBusinessCapital.com. And learn more about everything. And if you are an agency owner, and over I guess what would you say is a good number to start to engage with you in a conversation?
Todd Taskey 32:59
You know, typically, I would say it’s around a million dollars of it’s interesting because there’s there’s time is why we oftentimes will talk to anyone you know, that finds us through the podcast or through you or other friends. I’ve got a group right now we did a transaction with earlier, they do digital marketing, they’re an agency focused on the SMB small business market. And they’re looking to add another acquisition later, in 2021. Somewhere around 750 800,000 of EBITDA, somewhere in that range to up to a million or so which is lower than we typically do. But it would be in but this a great organization would be a great additional contribution. So a if you are a digital marketing firm focused on that part of the market, the SMB market, they would be happy to talk to you, even if you’re below a million dollars. Otherwise, if typically somewhere between 1,000,005 million, seems like a lot of the transactions we do are somewhere in that two ish or so million dollars, but we’re always happy to to begin relationships, whether that means we jump into something immediately, or we can just be a resource and, you know, hopefully have a future opportunity.
Jeremy Weisz 34:22
Yeah. So last question Todd quickly is I’d love to hear some of your favorite resources. In general, like we mentioned, obviously, SecondBitePodcast.com. You know, both of us, I think are a fan of John Warrillow’s built to sell. Also, you know, I know a lot of the the people you talk to and help run and do EOS, some wanting some resources that you recommend or you like,
Todd Taskey 34:52
yeah, EOS is a great one, the Entrepreneurial Operating System, they have a bunch of material, a bunch of books, you can Do it yourself, you can get help for your firm. I’ve got dozens of clients that have used them. I’ve got clients that have told me EOS save their life, save their marriage, save their company. So certainly worth checking out. You mentioned Chris Voss, I’ve read Never Split the Difference three times. It, it will help you negotiate with your wife and children. It’ll also it just helps you. And the great thing about Chris’s job, or Chris’s book is that it talks about how I can get what I want. And you get what you want. Recognizing that there’s some realities to that, right. You know, I know there’s one story in his book where he talks about these guys are hot or standing off the police, they’ve got a hostage, they’re inside some apartment with guns. We don’t want to go to jail, I can’t help. That’s not possible. I want to sell my agency for 15 times EBITDA, I can’t do that. That’s not possible. Right. So if you if you don’t want to get shot by the police, when you can come out of the, that soundbite we can work on together, right? If you want to be treated with dignity, if you, you know, if you don’t want to be paraded in front of the cameras, these are things I can do. And he talks about making people feel comfortable enough that they can be honest enough to trust you enough to let you deliver on that. And so I learned I mean that that I would say this if you want to learn if you read EOS, their book is called Traction. You read Traction you read Never Split the Difference. Man that would you know we’re in the middle of summer, but that would be a very successful summer, and you will be a much better what more well educated, more centered CEO. Those are two great resources.
Jeremy Weisz 36:52
What um, what episodes should they check out on your podcast?
Todd Taskey 36:56
Oh, geez, all them I would think here’s the here’s the thing people love about my podcast, Jeremy to be to be self serving for a minute.
Jeremy Weisz 37:03
Yeah, I love your podcast,
Todd Taskey 37:05
we interview guys that are unknown, that people have never heard of that have done something really remarkable which is to build and to sell an agency or a business for seven or eight figures is a tremendous accomplishment and you can hear directly from them what that was like so you don’t have to hear me blabbering on about we can do this or we can do that guys will tell you here’s what I was afraid of here’s what worked out this surprised me this I like this I didn’t write and and that is that’s a hard resource to come across. And I think that’s why people really like it because they’re hearing from you know, their their fellow entrepreneurs about what’s real and what’s not without a lot of hype or BS in there.
Jeremy Weisz 37:50
Todd, I want to be the first one to thank you everyone check out Second Bite Podcast, PotomacBusinessCapital.com check out more episodes of Inspired Insider and Rise25 Thanks, everyone. Thanks Todd.
Todd Taskey 38:02
Thank you, Jeremy. Great to be on the show.