How to Sell Your Agency for Big Money (ft. David Tobin w/ TobinLeff M&A Advisors) | Episode 076 - The Agency Growth Podcast

Speaker 2 All right. Cody, you shared an article with me this morning. Yeah, the NVIDIA guy. Speaker 3 Yeah, I thought it was cool. I thought this was extremely timely because. But I also thought this article is kind of funny because they they call and I'm going to say the NVIDIA guy because I know he's much wealthier and and has every right to have everybody know his name. But the the article title just says Bay Area Tech CEO, which is funny and and pretty representative of the entire theme. But. Yeah, we can link this one in the show notes just so people can read it. But the title of the article was Bit Area Tech CEO Worth 35 Billion says Quote suffering wasn't Worth It And at the the bottom here there's a a note from the writer that I thought was interesting and it said Nvidia's valuation past the 1 trillion threshold May it's a fee only matched by a handful of other companies and others. And one that would seemingly make most of the business struggles feel worth it. The article itself kind of talks about the personal struggles of entrepreneurship. And he he says that if he knew everything that was coming and what he was getting himself into that he wouldn't have done it. And that if most people would, they wouldn't either. So I thought the there's another. There's a couple other mentions about the quantity of money and. As I was reading I just got a strange taste in my mouth thinking that, look, I don't know many people. Well, one I don't. I don't know billionaires personally, I can't. I can't speak to that one. But the the worth it element of the difference between being like a A10 millionaire and then up to 100 millionaire and then even up to billionaire and above David, I'm guessing more than us. You've talked to some of these people, right? And. In in that range you know people who are selling their businesses for I I believe as your company defines it like not generational wealth. What is it here? It's familial wealth once. Once you're in that place and and you're experiencing that amount of money, is there a difference in in how people perceive it is? Is there a extra incentive to be above? 10 million / 100 million, that sort of thing. Do do people feel something? Because in my brain I thought I've I'm very open about it. 10 million, I'm good. I'm done. I'm, I'm, I'm going to find I don't need a yacht. But you know I've got the yacht money mindset of I'm checked out. I don't need to do this anymore. What do you think? Speaker 1 What you mentioned, I too I don't have experiences with billionaires. Some many of our clients, they've been fortunate where when they sold they monetize their business. It was generational wealth. Now that's that's all perspective and and in context because that can mean different things to different families. You the basis of that article you reference, so it's an interesting one. That quote wasn't worth it, my experience being an M and a advisor for owners of closely held companies, whether they're on the smaller side. You know, companies that might sell for a million or. On the larger side, 35 to 40 + 1,000,000, I think it goes back to the journey and did they have a purpose while building it? Was it rewarding and satisfying? I think we all know people who are very content regardless of their income, while others they can never have enough. So what's been rewarding for me? It's. And I'm thankful the privilege to work with owners at a very crucial part of their business career when they're monetizing and there's a lot of reflection points, all that they've put in or are they getting it out? And it's typically not just the economics. Most owners want to do right by their employees and their clients. So I would say my experience, yes, the journey has been worth it for most of the owners that I've had the privilege to work with. Speaker 2 I think what I found interesting in the article. So all of this kind of came out in a podcast called Acquired and what I found interesting was what they asked him, he's 60 years old. They asked him if he could, if he could be 30s and 30 years old magically and go back to that Denny's that they started NVIDIA in with his friends and do it all over again Would he And and it was leading into kind of the giving hope to the new like newer generation or something like inspirational to like start a company and then be as successful and wealthy as you know NVIDIA founders. And he said no, but they they're like, oh, well, like, you know, then they started to go that direction of like, oh, interesting, why not? I wanted to know what he would have done instead. And we've had a couple episodes where we've talked about if if we could do it all over again in knowing what we know now, would we go back into marketing. And I think all of us said no, because we just kind of ended up here. And it wasn't like a a thought that was like no, there's a huge gap in the marketing industry. No there isn't. It's insanely saturated and and you know you have to carve out niches in order to not be saturated, which is you know really is a strong stands that we've taken. Speaker 3 So Jake, even on a on a smaller scale, I wanted, I wanted your opinion on this too say you know somebody comes in and wants to buy us out, they want to give us 20 million cut in half to split it between us, cut it in half again for taxes. We both get $5,000,000. Let's say that's one life path now. Now make it 10 times bigger. Now you get 50 million to you is is there a difference in the worthy here? I just feel like the yes. OK. OK. Yeah, no, it's fine. Speaker 2 Do you know how do you know how like one $1 million house does not get you the house that used to get you And so like if I'm only taking 5 million, like, I mean and I want a nice house and I want like the luxuries of that. Well, I've only got and I've only got 4 million left and I didn't even get myself that great of a house like I I got one like a nice suburban area in Minnetonka. I didn't get one like on Lake Minnetonka. Speaker 1 Cody, I think there's a fallacy or flaw to to that question from my experience because rarely when we're doing, planning and having discussions with clients on what's next. No owner that just built a company wants to have a retirement party buy themselves the gold watch and retire. Entrepreneurs don't do that. They they monetize, they take some time off and then they're back at other ventures, maybe not as the operating partner, but then they have the the resources, the cloud, the gravitas to say I'll invest in a company or I'll take a minority position. So it's usually leveraging and people just get. Tired. They want to be on to what's next. Speaker 3 Yeah, that's cool to hear. Speaker 2 Well, no, interesting, interesting article. Interesting cold open David, I like your take on that and there'll be more on that. But I think it's time to actually introduce our guest for the episode. And and usually we David, we just have you give yourself like an introduction and when we'll ask some follow up questions. But what's what's special about this episode is that typically we have a lot of guests on about different ways that they have grown their agency or taken a different route in their agency path. Now we're we're bringing on David who owns or is it I guess a partner and co-owner and your company Tobin left which is a merger and acquisition company where and you specialize in actually merging or acquiring or selling businesses. And specifically in this one we'll talk about agencies cuz what I've seen in a lot of the forums are people talking about selling their agencies for, I don't want to say laughable amounts, but a lot smaller than than what is typically acquired. So in this episode, I really want to talk to David, get his perspective on how and when different agencies sells, sell and then the things you can do in your agency now to have it sell for big money later, as David was talking about, and move on to the next big thing. So David, I think it'd be really helpful if you just give us a little history of your career and then what kind of led you to Tobin laugh and and you know the experiences you have with that and what your mission in life is. Speaker 1 I appreciate that, Cody. I'll keep it brief. I come from in the advertising and marketing world. I grew up in an advertising family. I started a coupon publishing business in college I. Found and owned and sold two agencies. My last one and this is what was my entree to what I'm doing now around exit planning and and M&A were direct marketing agency. Our client base for the most part were financial services companies and agencies. They had a desire to put their agents, brokers, advisors in front of business owners on a favorable basis. So my, my team and I, we came up with the idea that the best hook. Her door opener would be to position these financial advisors as specialist in exit planning, family transition planning, succession planning. And it worked, as your listeners can appreciate the topic of exit planning or selling a company. That's typically of interest to an owner. So I actually built that company around concepts like that. I sold it in 2004. I was away from the industry for a while. I couldn't help myself. I'd meet a business owner and I'd say to them, Cody, what is your exit plan? And they wanted to talk about that. So in 2010 I started to do consulting primarily for agency owners around exit planning succession planning. And it evolved because many of our clients the the most likely exit pathway was going to be to sell to a strategic buyer. We started to do the M&A work and it grew from there. Today there are 12 people in my group. We have six partners. We have 4 research analysts. I appreciate you asking what's our mission? We are mission driven. Our mission is to help. Owners maximize and monetize their life's work to convert business value into personal wealth and to be able to be in the position to move on to what's ever next. So with that, you know I'd love to share and hear your thoughts and questions guys as it relates to how can owners, if that's what you guys want to talk about maximize and monetize what they've built. Speaker 2 Yeah. When do you, when do you normally start working like you know someone approaches you and says hey I want to build something to to start selling or or you know they've already got something and and in their business and they want to now look beyond the horizons and the start wanting to sell their agency. When do you come in as kind of that advisor at at what point in that process? Speaker 1 We engage at different times. We we have some clients, they have the foresight they they're planning in advance. They may come to us a few years before they're thinking about a liquidity event they want to focus on. Working towards the end of mind, what can they do to package and position their companies. So some of our clients, it could be two, 3-4 years in advance, others they're they're ready to sell, their companies are at the value range. They've done their homework and now they're just trying to find the right M&A advisory group, but then there's there's a third. Grouping we if we have an opportunity with prospective client, we try to spend a fair amount of time on the front end to educate both the prospective client and us on what is the likely price in terms that they're able to command based on our market experience and the realization hits in that they may not be able to get enough. To move on to what's next and and and and that owners of marketing and service firms have to be really knowledgeable because they'll talk to a friend and a friend will say. I just told my company for 10X or 12X, well, it's a technology company or a SAS company and they traded different multiples than a marketing services firm. So it a lot of people just they need, you know, they're faced with what are the true economics and then they realize they're not ready. Speaker 2 So in some of those situations and they try to say should I look to a strategic acquisition and buy someone to scale and possibly be in the desired range, that's a good good point. What? What is? What's the the typical multiple for a like a like a service slash marketing agency? Speaker 1 In isolation it's it's a it's a tough question to answer. So just in context, and you know we're going to talk about in this episode, what are the variables that would impact a multiple? What are the value drivers? So if I look over our past 20 transactions, we'll see multiples on the low end as low as 3X and we can celebrate with some of our clients 12X. Now, that doesn't help your listeners, because they're. Too much when you have such a wide range, but it'll make the point, why would certain companies be on the lower end, whatever that range is at a given point in time? And that's where I'm excited when we get to it, where we talk about issues such as a unique value proposition, client concentration, risk, margins and so forth. But, but just in context, Jake, I mean. Smaller service firms you know that might have an eboda of $1,000,000 or less. The range is typically 3 to 6X. Hard to get 6X and only $1,000,000 unless it's a real strategic value when you start getting into EBIT does. 2 million and above. Again, based on strategic region and who the target buyers are, that's where you have an opportunity to go from maybe 5X to 7X. And if you guys are interested, I'll talk about why some of those companies sold north of 8X. Speaker 2 Yeah, I can tell Cody is itching to ask questions. But just just for clarity for our listener, for the listener might not know, can you briefly explain what EBITDA is? Speaker 1 Yeah. And I'll go even a step deeper. So, so, so EBITDA, it's earnings before taxes, depreciation, amortization at the end of the day it's the measure of pre tax cash flow after fair market compensation packages for the principals. When it's time to sell a fair amount of presentation energy negotiations will go into what is the Adjusted EBITDA calculation. EBITDA on the surface is a gap number. You know you can look at the P&L and see the interest and depreciation, but then there is the add backs. Just as a quick example, small closely held companies, in most situations the owners either pay themselves below market or above. They'll pay below to keep payroll taxes down, Medicare taxes. But if a buyer is going to assess their company, they'll say what would the profits have been if the owner paid herself a fair market comp package? And then there's an adjustment to EBITDA. So when I said 4X or 7X, it's a good, I'm glad you raised this point, 4X or 7X of what it's typically Adjusted EBITDA. And then the question is over what time period pre Pandemic, most buyers would assess a company based on for example a three-year weighted average. They'll say how did the company do over the last 12 months, Not as much weight months. You know, 13 through 24 and so forth after the pandemic because many times you had to discount or remove completely 2020 and 2021. Now more and more deals are done on the trailing 12 months and then there's more energy and focus on the 12 month forecast. And that's where we're seeing buyers. And then if we get to it in this episode, it's not just on your historic EBITDA. If somebody owns a service firm and they're bought by a strategic buyer as opposed to a financial buyer like a private equity group, most likely the deal term will include an earn out formula. Where part of the dollars, the consideration is contingent on future performance. So when somebody would say, you know, I just got 8X on my company. It it truly is 8X of what are you basing it on what you did historically and or how you're going to perform moving forward. Speaker 2 Yeah, because it's never as simple as like 8X of my revenue like it's the, I mean revenue. Revenue is a we. We always say this revenue is a fake vanity metric. Speaker 1 No, exactly. I'm, I'm, I'm, I'm really glad you mention that because some people believe they can just, you know, if they build their top line, they might get one times that number. Or some multiple that is the case. A good multiple of your top line if you own a SAS company, not if you own a digital marketing agency, an integrated marketing agency. It's all going to come back to your bottom line. Speaker 2 This is so good. I, I I was waiting, just waiting for Cody to say something and I was like just, I was like, I know you got tons of questions. Speaker 3 I do. I have one. This is kind of pointed and and it might be shots fired at some of the listeners, but I want it to be a reality checked for them too, David. So four agencies making less than a million a year, you can take that either way. It can be EBITDA, it can be revenue. What are they worth? Speaker 1 They Well, here's Cody, it's. It's an interesting you're it's a good question for on a number of levels that what are they worth here here's one of the big challenges an agency that has earnings let's say a 500,000 or 700 in most situations that company is heavily dependent. On the founder or founders, so buyers know that. So their biggest concern is if I pay you four or five times your earnings and you get that at closing, what will happen to the business If you're off to something else and they protect that through an earn out formula. They'll say we'll give you 30% or 50% at closing and then over a three-year period, you get the balance. What happens many times on deals like that, the owner, he or she's a business person, they're going to look at a deal like that and say if the buyer's going to buy my company with my own future cash flow, I might as well just keep it. And at the end of the three years, I'm pretty close to where I would have been and I still own the company. And and that's where many times owners will just pause and say what, what am I doing? I mean why even put the time and energy to try to sell it. However, there's a if somebody wants out and they would say I really want to move on to something else in 12 months or 30 months, then you have to get off that treadmill. And then it might be worth saying I'll take my half in closing, I'll stand behind an earn out. Just because you're getting paid on an earn out does not mean that owner has to work full time for two or three years. They just have to deliver a company that can perform. So what is it worth? It's when you have to buy a company with after tax cash flow. Unless a company's really growing a small company, it's hard to get more than 5X of EBITDA. Speaker 3 Interesting. Oh, follow up question. And I'm, I'm going to say it as dumb as I can because I don't want anybody to feel excluded guys when you say these multiples 5X. Are we talking monthly? Are we talking yearly? Explain to me here what, what is this? Speaker 1 It would be 5X most likely on your trailing 12 months of earnings. Now even though it's a little higher than earnings, you know net income because you have interest in depreciation, but it's really that pre tax cash flow that the company's throwing off and if it's a really if it's a small company that's not growing that seller owner would have a hard time on the smaller side getting three times their earnings. If you're showing growth in good profit margins now I'm still talking about smaller companies then it could be four times or five times and if you guys are interested I could share with you why earlier I mentioned we've had some successes at 10X and above. You know why were some companies able to command them? Speaker 2 Yeah, we do. We do want to get to that because a lot of our listeners aren't, they're not even at the $500,000 mark yet and Cody and I are just hitting that this year. After about three or four years, I've lost track. But well, I think a lot of this is as we've put a lot of emphasis on processes and documentation early on. So it isn't just. Like floating with your your head above the water when you hit that $1,000,000 mark and you know suddenly you're struggling to scale further than that because there's nothing documented. And I think a lot of the things that you can do to get the 10X mark on on your your company kind of starts when you're smaller. It's. It's how you structure and. Create different revenue lines that are really impactful for a company's margins. Speaker 3 Yeah. I think I part of me thinks like, well one, I don't know. I have no idea because I'm not even close never done anything like this. So it does make me we just want to ask you mentioned it before in a very simple way and Jake, you know tell me if I if I'm getting too excited here and jumping too far ahead. But can we just say what are those? Things that people need to do early on and then what are those things that through doing that allow them to get those higher multiples when they do want to sell out. Speaker 1 I'd love to to share that and and Cody if I may, just just a quick follow up to what Jake was saying and this, this leads into the discussion on how to have a company that that is more valuable when when somebody has a small firm, you know you got to start somewhere and then your Billings are at 300 and 500. I'm not talking about earnings and and the donors start to believe that hey I've got something that's valuable. You may have something that's valuable if it keeps on that track. You have to make sure you truly are realistic with yourself. It's this company throwing off money after a fair market compensation package to the owner and owners. Because what happened? Somebody would say like the 500,000 of Billings you have a couple employees, most likely the owner or owners. He or she's taking a below market salary, 80,100, and his or her skill set would most likely command a higher. So you can pay yourself however you are, but you really want to start recasting and say what would my profits have been? And then a goal, a foundational goal to start building for is after that fair market comp, can the company start throwing off 15 percent, 20% of net income as a percentage of your fee income? Because that's the measurement. So if you could get the company for example the 500,000, let's say it's 1 owner, he or she's paying themselves 150 and then the company's throwing off $100,000 after paying everything else. Now you have something now it's truly making 100,000 on 500 buyers. This is now this leads into your your your question, Cody. One of the key value drivers will be the profit margin, the EBITDA margin. The ones that always are assessed include growth has historic and potential moving forward margin, net income as a percentage of your top line and then your vision, your unique value proposition, how sustainable and transferable is your company. If you guys are going to buy something, you want to be sure that the cash flow will sustain, it's going to be transferred and it's scalable. And then how do you assess that? If you look at the the confidence that this business will continue, you want to make sure there's not high client concentration risk. One client is X percent. You want to make sure that employees stay, that the culture is good and there's incentives for the key People don't want to stay involved. The market that you serve, have you demonstrated that you've got a systematic way to identify new prospects and and and what happens so often, it's usually so dependent on that founder as mentioned a moment ago for new business, your ability to start saying others in my company can land accounts or we've got a real good engine for generating inbound leads or outbound opportunities, that's what buyers will will look towards. Speaker 2 Can you explain what makes something scalable? From a buyer's perspective, because I think there's a, there's a there's a misconception that I don't want to say it's a misconception. There's a lot of people who are saying I scaled my agency to $10,000 per month. And like, this is like we're talking about just like the fake gurus out there where we, I always say you can't scale anything to $10,000 a month, $10,000 a month is like a baseline. You scale from there and not even that. I wouldn't even, I wouldn't even argue that you don't even start scaling at 10,000 a month like you're still founder operator running everything. So can you give us some ideas on like what is scalable actually mean in terms of a buyer? Speaker 1 Well, sites of examples I'm dealing with almost as we speak over the last couple of weeks, I've had these discussions. So as an example, a scalable opportunity, we're having discussions with a pretty profitable client. Their niche is programmatic media and you know 25 employees and they can quantify that those 25 employees in this company throwing off good earnings, they could almost increase their Billings by 50% by and maybe only have to add one or two people just as an example. In turn, we have a client that completely different company now that does public relations around certain influence or events. The principle so much of their contacts is based around her personal relationships. That's where the business comes from. We're having a hard time presenting how will this company grow, can anyone else demonstrate that they've been able to bring in these larger accounts. So it's those are just examples that well, one, you've got to be able to show where will the business come from And then you guys, I mean you own businesses, the two of you, your listeners do, you've got to be able to deliver on it. Now it's a little better now because two years ago great resignation, a lot of diligence was around can you even get the people to grow your top line by 20%. That's not as much of an issue today. But if you're going to put forth a plan, you know, Jake, to your question, if you're with a prospective buyer and you're going to say our top line has grown by 20% per year for the last three years, buyers know the bigger you are, the tougher it is to grow in proportion. They're going to really challenge you on your growth plans. And it's more than just an Excel spreadsheet. You you're going to have to show closing ratios and and target the size of your target audiences. And in the irony, many of your listeners own marketing communications agencies. They do that kind of planning for their clients and they're the ones wearing, you know, the shoemaker's children. They don't treat their own agencies as as their most important clients. Speaker 2 It's almost like in in if you really want to be serious about selling something, or if you want to be serious about making the claim that you've created something scalable. It's almost kind of like, can you step away from the House of Cards without it falling? And if you take your hand off of the top and just back away from it, and it can still continue to grow and someone else can step in and start building on it, then that is scalable. Speaker 1 Yes, your analogy is such a good one because if it is a House of Cards, it's going to be known. Big deals are small deals. When you get into the due diligence process, it everything comes out. I mean, I'm generalizing especially on larger deals. When you start bringing in a group that will do what's called a quality of earnings report and forensic accounting, you've got to, you've got to address those before you go to market because they will come out. And if they come out and you don't disclose or present, then you're on the defensive and a deal won't get done because buyers will say, what else could there be that, I don't know. So even if you have weaknesses, that's okay. You just present it up front during the whole presentation before you would get to a letter of intent. So in your example, it's not a House of Cards, and if it is overly dependent upon the seller on the founder, that's OK. We've still helped many companies sell. That seller just has to appreciate he or she's going to have to stay involved. Speaker 3 For a few. Speaker 2 Years in a couple episodes ago, we were talking about how a lot of agency owners will when they start, the first thing they do is start. They outsource the actual work the the execution of their campaigns. To people who are quote UN quote skilled and then on top of that they'll like layer in a level of like outsourcing the actual acquisition. So at a certain point they're just kind of the middleman between this arbitrage of of sales and and delivering the service. And we mentioned this is actually an episode called like the seven biggest mistakes agency owners make and it kind of to the point of of selling and creating something scalable is you still have to facilitate in that in that situation you still have to facilitate the relationship between. Both ends of the contractors, the acquisition contractors and the execution contractors. At the same point you also don't control the process on either end. So it it's totally dependent on you know whether the pool of contractors you got is good at sales or has a good lead list versus the other pool of contractors whether they're actually going to continue to service you and. And be your your, your continued partners because there's going to be change management and there's going to be turnover and churn with the contractors you use which is why we're such a proponent of of building things in house. So you control everything and you also know, you know close rates and churn and your your execution effectiveness. And and being able to step away with those processes in house and and letting things just run while you watch. And then I think at that point that's when you say, OK, I've got something that can grow without me, How big can we get it before we talk about selling it? Speaker 1 You're you're on, you're on target with those recommendations. Speaker 3 This is spooky, man. I I'm just thinking back to conversations that I've had. I can say this now. It's been long enough and. Speaker 2 It's it's spooky because it's almost Halloween. Speaker 3 That's what I was going for no I I can think back so and again I I don't think I'm breaking any rules here. We can check with Mark before I actually sent into this out but so spin you tech when I when I joined that team. There was like 6 people on the marketing team and then they went through one acquisition and then later on they went through another merger and by the time I left they were over 100 and I had a conversation with him once when we were at about the 40 people. Mark and this is, this is a conversation that he was having and he was just telling me pretty openly, which I thought was cool. And he said, you know as we try to get to the next level, kind of one of the issues I'm realizing is how much growth and acquisition is dependent upon me as the President and that in order to get to the next level that we do have to move away from that. And he said it was also hard because it's just. That's what drives him and that's that's he likes to win. He likes to to go out and get you know, like just like sports guys, it's it's a it's a fun thing for them. So that part was, you know, just as I was listening, I couldn't help but think about that. And like I I've had this exact conversation on on the receiving end of of somebody who is going through it and it's just very cool to to know and then hear that because Jake and I kind of talked about this too. And he'll express concern about this. And I always throw back at him like, Jake, it's fine. It's not a problem. We haven't had a problem yet, right. You you can get U.S. business. So I don't see it as an issue. And he's like, yeah, but it's going to be an issue eventually. Like, yeah, but you know, it's not yet. We have other issues. And then he just shakes his head. Speaker 2 Cody just sees, he's like, oh, another client, another client, another client. And I'm just like, well, I've got a. I've got to find them and I've got to actually get them and. And it's not always going to be like that. Speaker 1 Yep. Yeah, it's interesting code. You said about the company you were affiliated with. Even at that size with 40 employees, that founder controlling shareholder, it was still dependent on him. And it it just highlights one of the biggest challenges that marketing and communications agencies have, it's how to solve the new business challenge and to meaning to grow beyond one person. So when people can accomplish that, now that's the strong driver that would help that become a sellable company with a higher multiple. And and if you look at what are those four or five ways to do that, it's either driven by relationships of the partners, partner partners, organic growth, a salesperson or a sales team or strategic acquisitions or Aqua hires some combination thereof. And that's where I, you know, I jokingly made a comment about the shoemaker's children. If if your listeners have a company that they're continuously building their prospect database, they do account based management, they they're thought leaders, those are all important steps that address driving the top line and showing you have a transferable company. Speaker 2 What do you consider? What do you consider organic growth? Speaker 1 The. The ability? The coding lands? The account in your shock, Jake, and he's not as involved, Cross selling that client, taking them from a $5000 per month retainer to 7000, getting referrals from that happy client. It's it's really developing that relationship as opposed to who just initiated it. Speaker 2 How do you how do you measure that from like selling is it I My first instinct would be just to be like, Oh well, what's whatever your marketing is less your less your growth. Yeah. How do you measure that? Speaker 1 Well, the way buyers will look because we've done a fair amount of buy side for clients will look as an example shows your client list for the past five years and we look right away for repeat business. How many of those clients in 2020 are you still servicing today? So one measurement is just repeat work who sticks with you. The second is your average client either retainer or average Billings per client in a given year. Maybe three years ago you had 50 clients that averaged $7500 a month. Has that grown is your average client so, so there are ways that you can assess but it's so client retention is so key that cause. I mean, we all know it's so hard to get a new client. And in the irony is a lot of small agencies that they'll do a lot of inbound and they're getting leads, they churn clients. We're trying to sell a firm right now. They can't keep clients. And yeah, they're growing a little because they're great at new business. Now what our story is, and this is not an easy one to sell, is yeah, they're not great on delivery, but look at their new business, energy with you, Mr. Miss Buyer. Improve the service offerings and you'll really have something. Well, that's that story's not being bought so easily. Comparing that to here's a company, they land a client, they keep them. Buyers love that. Speaker 3 This is often really Jake, We we, we know what that's like a little bit. This is our company but. Speaker 2 Yeah, this is, yeah. Yeah, not our company, but. This is often referred to as churn rate, correct? Speaker 1 Yes, yes. Speaker 2 And can you tell us how an agency would calculate their client churn rate? Speaker 1 There is a formula for it. We don't normally quantify it so much as we know what buyers look at and we do the same before we are representing a buyer. It's well, one you want to see as mentioned, you know which clients from a few years ago are still there and then they'll really focus in on the larger clients. What happens and this is one of the challenges with small firms. If somebody buys your company, Jake, there's going to be a percentage of your clients they don't want because they're too small and they can't make money with them. So the churn rate's going to be really focused on the larger clients, unless your business model is one that we we've proven we can make money with a whole bunch of small ones. Gotcha. Speaker 2 OK, I can see Cody thinking. Speaker 3 Yeah, I'm like, I'm trying to be respectful all the time because we had a lot of these written down and I'm trying to think of the most important ones to to go for. Speaker 2 All all I know is that we've got some things to start tracking. Speaker 3 Yeah, David, do these. Do people, I mean, I have to imagine you've got a full spectrum of people who know when they go to sell, they've got none of this in mind at all. And they're just, you know, they need your help, even with the education and then some people who are more equipped and better prepared and better planned. In order to get to, you know that position, do you do you accept and work with any and all of them? I mean because say for example, somebody just through sheer willpower manages to build a very large business and you ask them these questions and they're like, I have no idea, right. This person does in charge of that and they they do that. I think you know and I I say this because I know. Some business owners who are like this who just through sheer enthusiasm and caffeine managed to grow things very big and do very well. But when you go to ask them these questions, they're like, I don't know, I I I don't know that sort of information do. Do you help them? Do you? Do you say, hey, if you do want to sell, you need to get this information for us? What does that look like? Speaker 1 Yeah, Yeah, we certainly try to help if we can. Cody, what you mentioned and you and Jake will appreciate this. So, so you guys started this company a few years ago. Your focus I assume is on building it. If somebody gets their company and it's growing, they're a business person. They've either done it on their skills, their gifts, their intellect, that they've got skills or talents. At some point they're going to start focusing their attention on how to sell the company, and the same way they figured out how to grow it. Now they're going to become educated on. They're going to listen to a podcast like the one the three of us are on. They're going to read, they're going to start talk, they're going to start associating with advisors, attorneys. And so rarely, if somebody's thinking about selling, do they come to us, They usually appreciate what the value drivers are. Many times you do have to do some housekeeping. You've got to get financials that are gap compliance. You recast your numbers, the packaging on the website, putting incentive plans in for key employees. There's like you're not fixing at the core because you can't fix that. M&A advisors, they don't know your business well enough to say you're worth 4 million today. We're so wonderful, we'll make you worth 8 million. What I think if you'd ask our clients, we've done a nice job to help maximize what they have to package position if they're not ready, we would be the first to tell them so. So owners really are in tune that if I may just give a quick plug for a piece of content that's on our site. They wrote a white paper. It was on you know the Forbes council. It was 8 best practices on how to manage your Business Today for a lucrative exit payday tomorrow. Our belief through experiences, if you manage these things you can we also have a more profitable Business Today. It's not like you're mutually they're mutually exclusive that I'm just working towards the back end at the expense of today and those listeners of yours that are taking time to listen to the three of us think we know what we're talking about. Sometimes we do that. I I give them credit because they're thinking about tomorrow and only good can come out of that if, you know, if you're building with an end game in mind. Everyone has heard that saying there's books with that title, but that's so true today. And if you don't sell for 10 years, all the better. You still have a more valuable company. Speaker 2 I mean it's one of the seven heavy effective. Have I botched that seven highly effective. I can't remember Stephen Covey. You all know the book begin with the end in mind, yes? And I think there's a good portion of our listeners I don't think quite have the end in mind anything past the the daiquiri on the beach or anything in between and and there's there's quite a lot of in between there. But Cody had his mouth open, which usually means he's gonna ask a question, and I just kind of snuck right in there. Speaker 3 I wanna yeah, I wanna do one more kind of open-ended because we've kind of talked about the things that people can do planning wise say they're actually in the. The selling stage, either they've talked to you or they're preparing to talk to you, they want to be in that position of actually doing it. What once they get there, what things do they need to do or prepare to do in order to show well so that they look good and that they don't look like amateurs when they come to the negotiating room? Speaker 1 Yeah. It's certainly an important question that we, we also have a published piece. What are the questions that buyers typically ask? You need to be well prepared to answer those questions. At the top of it is, Jake, what do you want to sell? You need to really be clear, How involved do you want to be? What's your growth plan? Are there incentives for your key employees to stay? What's your process for new business? So there you really need to appreciate how buyers are going to be assessing it. You've got to get your financials in order. The discussion with prospective buyers cannot be about your numbers, what you hand them or e-mail them, the the materials that should be so clear that they understand the outbacks it's presented. It's it's been reviewed by an outside source so that you're spending your time with the buyers about the vision, not trying to justify your numbers. The change of control plans for key employees. If you don't have a phantom stock plan now for key employees, put one in place because buyers want to know their incentives for your key employees to stay. Meaning they get a portion of the selling price, but only if they stay for a few years. That will help increase the price you can most likely command. Your website has to be cleaned up. I mean that they're going to be going right to your site. If there's negative social media out there, you've got to be prepared to discuss it up front so that they're hearing it from you. So then there's a fair amount. There's a on our sitetobinleft.com, others there there's an awful lot of content on staging preparing a company for for a liquidity. Speaker 3 Event I think it's funny. It sounds like the best thing that you can do to look better later on is to do everything right right now. Speaker 1 Well, if you start now and I know you know you meant that seriously, but it's so true that guys, you got to make money And you know, yes, you've got to build and scale and vision. You can't have margins right out of the gate. But as soon as a company can get to a goal of an EBITDA margin of at least 20%, now you're building and it goes up and down because you make investments and the economy gets tighter. We all appreciate that. But you really got to say, what's the scorecard that that you're going to measure? Speaker 2 Yeah, my mind is like blown right now. I'm just like now I want to go back and be like, all right, Cody, we got to go back and we got to look at our client retention rate for the last four years. We got to average these. Yeah, not not that we want to sell anytime soon, but like just get in the habit of doing things like that. Speaker 1 So you know, it's not chaotic if they win and if that time comes, I think. That we've gone through, you know, yeah, one thing that fixing the business model is also pretty important with a percentage of companies, business model, meaning a lot of agencies, especially inbound agencies, they don't price their services enough and and the business model just doesn't work because and then everybody's just looking for scale. They take on accounts that a buyer won't want, you know, So if you guys are going to, you know, if an agency owner is going to work so hard to try to make money, I just really encourage them work harder on business development. So you can be selective on the accounts you bring on for accounts that appreciate what you're doing and then set up your contracts so that you're not always going to go over budget when the client when the scope creep and I'll give you a quick example, we're taking the market now. I'm so excited. This is a company, I've done this company for six or seven years almost every year their margins have been at or above 40 percent, 40% after a fair market comp. And this company is pretty significant in size and and our story is our investment thesis when the the document first slide is a proven business model that generates A40 plus percent EBITDA year in and year out and not every company can do that. My point just is, if you're growing, you want to start with the end in mind. Consider taking a hard look at your business model today. Speaker 2 So I like it. I think. I think this. I think this is like a perfect place to end it. I I almost wish like. Like after that, like some like violent music just started and we just it just faded out. Speaker 1 I don't know if I said something good or bad, but. Speaker 2 No, no, that's perfect. Yeah. We're just or this is a this this is I think this is a great place to end it. Cody, did you have an extra? Anything else to ask? Speaker 3 No, no, no. I'm just thinking about. I'm thinking back in my life and everything that I've gone through at the companies I've been at in thinking like. Oh yeah, that makes sense. Or that could have been done better. Or you know that that they did smart, you know? And I don't know, it's very reflective. Speaker 2 I think David, I think the best thing to do at this point right now is just give yourself, I know you you've done it a little bit earlier, but just give yourself a little bit of a plug like where can, where can people follow you, what's the name of your company, how you know how can they learn more information about what they can do right now to help them sell for big money. Speaker 1 I appreciate the opportunity to share that. So our firm is Tobin left TOBINL, EF2F, Tobin left.com. We we've received compliments about our content from agency owners. We really work hard. If we put up information hopefully it's, it's meaningful. So certainly our website if an agency owner wants to talk to us about his or her business or the M and a marketplace, we welcome that. We don't charge for that time because we're trying to see if we can establish a relationship. So we're more than happy just to talk about specifics for the company and what we're seeing and and the M and A landscape. Jake, Cody, I appreciate the opportunity to share this with your listeners. Speaker 2 Yeah. Well, thanks for coming on. This is obviously like we're not even at the point like we like to give advice on based on our own experience. But there's certain situations where things that we like to talk about, things that we like to learn are outside of our realm at this current stage. So having people like you on this podcast is super beneficial not only for us but also our listeners, so. Stay on it for just a second. We're going to, I'll, I'll end this here. But then yeah, I don't know what I was going to say there so I'm awful at ending these but this will probably stay in anyways and it'll be a fun little one, so. Speaker 3 They like the thanks guys. Speaker 2 All right, everybody. Thanks for listening. We'll catch you next time. See you.