John Warrillow is a well-known author and expert on service businesses as well as mergers & acquisitions within the space. I did an interview on his podcast, Built to Sell Radio, that outlines my experience selling my digital agency.
The interview – originally published on the Built to Sell site – touches on a variety of subjects, including:
- Building a simplified business from A through Z
- Stabilizing revenue through skilled forecasting, a solid sales system, and fixed payments
- Walking away from a multi-million dollar acquisition offer
- Negotiating an acquisition offer from 3X EBITDA to 5X EBTIDA
- and more.
Watch the Youtube video below, and a transcript follows that for those of you who prefer to read.
Transcript
Introduction, Positioning & A Bit About My Digital Agency
Host: Welcome to Built to Sell Radio.
Jeff Archibald: Thanks for having me.
Host: You had a digital agency called Paper Leaf. We’ve done a few stories about agencies, and so I’d be just curious to know how your agency was unique. Like, what made you guys special?
Jeff: I think we were special in a couple of ways. We were horizontally positioned…
Host: What does that mean?
Jeff: That means basically we offered services to a variety of verticals. We weren’t like, “We do digital services for lawyers or for finance” necessarily. So we weren’t vertically positioned, we were horizontally positioned. But part of the reason that worked is we were very tight. We basically did three things: we did website development, software development, and mobile app development. And so, you know, we weren’t trying to be a digital marketing firm as well, we weren’t trying to be a search optimization firm – all the things that can fall under the banner. We weren’t trying to be everything to everyone, and so that ended up being helpful because we were kind of the experts in those three areas that people came to when their generalist agencies couldn’t tackle the big, challenging problems.
Host: Makes sense. So sort of wide in terms of customer prospect base, but very narrow in terms of scope of services offered. How did that impact the employees that you were able to hire, being very specific in what you offered?
Jeff: I think it was good because, you know, they were able to become experts at a very small piece of technology. You know, there’s basically two or three frameworks or languages that folks would learn. Our stacks were kept very specific and small, and so they didn’t have to learn a million different languages, and they didn’t have to learn a million different industries necessarily. And then it also opened up the door to having actual collaboration with our clients, right? Because we didn’t have vertical expertise, we weren’t able to come into, like, you know, like a real estate market and say, “Oh, we know this inside out and backwards.” So we really had the client – they had to buy in to be the subject matter expert, and we would come in as the technology and execution experts and the UX experts. And so, you know, when we found the right clients and they bought into us and we bought into them, it was really kind of a super team.
Host: I guess the knock against that, or what I’ve heard the pushback when I proposed that – because I’m a big believer in sort of narrowing your services – is some people say, “Yeah, yeah, but look, I don’t want to walk away from revenue,” or “I’ve got this great relationship with the client, and if I start saying no to jobs, they’re gonna find someone else.” It’s scary, right?
Jeff: Totally is. And like, I think the best thing that we were able to do to mitigate that sort of risk was to find complementing smaller specialist agencies who could offer those services. Develop kind of referral and work-together agreements where we weren’t worried that they were going to quote-unquote “steal our clients.” And so, you know, if there was a client who really needed some search engine optimization or something like that, we had an SEO company that we would work with specifically. We wouldn’t refer them to the big, huge generalist agency who had all these other services under their banner, because that’s how you lose a client.
And like the turning down the revenue side of things, it’s like, I get that too. You know, payroll can get big and that can get scary, but I tried my best to mitigate that by having really good forecasting systems in place. So I knew what revenue was looking like for months out. I never felt desperate to take revenue. That’s kind of the first bit. And the second bit was understanding that, you know, if you position yourself as a real expert in something and have your business model operations really dialed in, then you don’t need to worry about this whole scarcity mindset of there not being enough work.
Revenue Forecasting & Simplicity
Host: Service businesses are notoriously a roller coaster when it comes to planning and budgeting. Feast or famine – one day you got too much work and not enough people, the next day you’ve got way too many people and everybody’s updating their LinkedIn profile. How did you project out? I mean, it’s a rarity to hear that you were good at forecasting sort of the future work.
Jeff: Yeah, that was something I solved for myself first and foremost to help myself sleep better at night, you know? Because it was tough when we were in the stages of “I have no idea what’s coming in or what’s not.” And so it was a variety of variables that we changed and added up to a sales system that we were able to forecast appropriately. So like, we had forecasting in our CRM, so we knew if we put X dollars into work pitch, we would get Y dollars out in about Z days. Because we were tightly positioned, we knew what the length of time most of those contracts would take, you know, between six and 12 months. And then we did another operational piece where I moved to, instead of billing as we go, models where it was basically like fixed payments over the length of the contract. So we knew exactly what was coming in. All of that kind of added up to being able to look months ahead and seeing what was coming in and what was reported to come in, and not over-hiring, not under-hiring, none of that kind of stuff.
Host: I’m glad you mentioned contracts. I’d be curious to know how you structured your billing. Like, what was your model?
Jeff: It was super simple. I’m a big proponent of keeping it simple, you know? We had a shop rate. We didn’t have a rate card.
Host: What is a shop rate? I’ve never heard that term before.
Jeff: Yeah, it’s basically if you hire Paper Leaf, you pay $175 an hour. That’s it. It doesn’t matter if you’ll get some senior staff for that, you’ll get some junior staff for that. It’s a blended model, you know? It’s not the most expensive in the world, it’s not the cheapest in the world. Makes my life simple, you know? All that kind of stuff.
And when it comes to billing, yes, so let’s say you hired me to build – hired Paper Leaf to build, you know, some sort of mobile application. I said it’s going to cost $100,000 and I think it’s going to take five months to build it. So in our contract, that would be like you’re going to pay me $20,000 for 5 months, and here’s the payment structure. And for us, I would always come in with that. I would never tie it to any deliverables or any approvals. I would just say here’s the schedule, and 90% of clients would say, “Sure, that sounds good.” And some clients would be like, “Well, no, I want this tied to a deliverable,” and stuff like that. So we would do it that way.
But when they sign that contract, then we would go into our invoicing software and we would set up all of those invoices as drafts. And so every month at the end of the month, we would just go find all the drafts and just send, send, send, send, send. Be done invoicing in like a matter of hours versus days for some shops.
Host: I’m so fascinated by how simple you made your business. Like, focus on simplicity in terms of your billable hours, simplicity in terms of forecasting. Was that something very intentional on your behalf? Like, is that part of your DNA, or did you stumble into that? Like, what’s the focus on simplicity all about?
Jeff: I’m probably just a simple guy, simple mind, need to keep things simple. But yeah, it was probably a response, honestly, to having too many hats. And so it’s just kind of like, okay, asking yourself this question: What would it look like if this were simple? You know, how could I make this as efficient as possible? And I’ve always been a very efficient sort of person. My brain just goes to the part of how do we make this more straightforward when I found myself doing something that seemed to take too long or I was repeating the same step – why couldn’t it be automated? And it’s a lot of trial and error too, right?
Host: I love that sentence, “What would this look like if it were simple?” In and of itself, that sentence is simple to say but so difficult to actually process.
Jeff: Yeah, it totally is. I think I stole that from Tim Ferriss actually, listening to one of his podcasts. And it’s a question that’s worth asking inside and out of our businesses and personal lives too, I think.
Why I Wanted to Sell My Digital Agency
Host: Yeah, Tim’s got some great hacks for, you know, solving problems and learning systems, and simplifying is, I think, one of the common themes and threads that runs through all the work that he does. How big did you get this business before you decided to sell? Like, what was your revenue number, employees, that kind of stuff?
Jeff: I think the revenue was about $2 million, and the number of employees was, I think, around 16 or 17 if I recall correctly. And so that was in 2020, I think, was right before we sold.
Host: And what made you think about selling? Because I mean, I can see you’re a youngish guy and it’s a youngish business. Like, why not build it for another 30 years?
Jeff: Yeah, it’s a good question. And what it ultimately boiled down to, I think, was I filled my boots, you know? I had a lot more success than I ever thought I could. Like, my original goal was, let’s replace my salary of $36,000, you know, when I started it. So that all happened, and that was great. But the other super honest answer is I just wasn’t loving it anymore, you know? I had great staff, a great team, but I just didn’t love the work that much anymore. And the seat I was in, you know, only the worst problems would bubble up to me. And you know, I just kind of didn’t want to do that anymore.
And you know, I ran the shop for 15 years, and over that time, I prioritized the shop over everything else. And so I didn’t – I put a lot of things on the back burner in terms of traveling and whatever else that a lot of people would have experienced. And so I just kind of felt like I had the opportunity to sell, and I wanted to do some other things. And so, you know, might as well give it a go.
Host: Did you become resentful of your business?
Jeff: It’s a really good question. I don’t know if I became resentful of the business, but I became resentful of parts of it. And like, to be totally honest, there’s one of the questions that was in my mind, especially when – because I had a failed acquisition prior to the successful one, which we could talk about if you want – but I came to this question of, I’m not sure I like the person that my business is turning me into when I was very, very, very stressed out, you know what I mean?
Like, I was waking up at all hours of the night. I would have some interactions with staff once in a while that I wish I could take back and be a little bit more empathetic about. And you know, that stuff is all – your listeners know too – like it doesn’t stop at 5 o’clock necessarily, right? Like, it bleeds into your home life, bleeds into your relationships and friendships and all that kind of stuff. And I was like, is it worth it, you know, to be changed in this way? And you know, selling is one way to manage that and solve that problem, and there’s other less full-on ways to do it as well. But you know, that’s part of the reason I entertained that idea.
A Failed Acquisition & Leaving $4M on the Table
Host: I’d love to hear the story about the one that got away, the failed acquisition. What happened?
Jeff: Yeah, that was interesting. So that – I don’t know, just kind of came – it came on my plate. I wasn’t putting word out that I wanted to sell or anything like that, and it was a private equity firm. And they basically had this model where they buy up like three or four similar companies and put them in a fund, and then you know, do what private equity firms do – ramp up the value and then sell those, sell that fund basically.
And so they’re coming to us to be like, “Hey, it would be great if we had an internal digital agency to help ramp up marketing and operations and that kind of stuff.” So I said, “Okay, cool.” So long story short, I went through this whole super involved due diligence process. I had to hire accountants and lawyers to not only evaluate the buyer but also the four businesses that were in their fund, because the way they wanted the deal structured was I would basically be like an LP, limited partner, in the fund. So my earnout would be solely tied to the sale of the fund four years later, is what they’re predicting.
So at that point, I went down this whole path. I was super burned out and just didn’t want to be working on the shop anymore. And then right – I think it was the day before the deal was supposed to close – they changed one of the terms to the offer, which I can’t recall off the top of my head anymore, but was basically put all the risk back on me – like if you don’t hit these profit numbers, then we basically get 100% of the shares. That’s just kind of like, that’s crazy. I would never sign that.
And so at closing, I was like, “Nope,” and walked away and dropped $50,000 that I was never going to get back on service fees and left, you know, a multi-million dollar offer on the table because it was ludicrous. And so that was a good example of how acquisition attempts can be kind of predatory. It was either them hoping that the due diligence process has worn me out enough and there’s enough sunk cost fallacy that I would sign anything, or they were getting cold feet about it and were just like, “Well, the only way we’re going to do this is if we have it totally loaded in our favor.” So glad I walked away from it, but it was a ringer for like six months.
Host: Oh man, I’m sorry to hear that, but there’s so much good stuff in this. I want to unpack a little bit because our listeners, I think, are getting courted all the time these days by everybody from super legitimate buyers that could be offering life-changing money to really shady people who are offering these 100% earnouts and weird equity roles and everything in between. So it’s really helpful for our listeners to hear this.
So, you’re – is this around the time you’re a couple million in revenue when you got approached by this PE firm?
Jeff: Yeah, I was about a year before that, so we were probably at like, you know, one and a half, point six or something like that.
Host: Got it. Okay. And did they provide you with a letter of intent before due diligence?
Jeff: Yeah, exactly.
Host: And the valuation – what were they thinking in terms of multiple of earnings? And then, did – I’d be curious to know if in the letter of intent they talked about the structure of you rolling some of your proceeds. Presumably, they did because that’s what triggered your due diligence.
Jeff: Yeah, they did. And it was basically – and to be fair to them, they offered a bigger multiple. Like shops like mine, which are like design and dev shop kind of thing, usually fall in a 3 to 5x multiple on EBITDA. That’s how they’re valued just off the hop. They offered a larger multiple on that that probably would have been – I don’t – it would it would have been about four on earnings – sorry, four on revenue. So 4x revenue.
Host: Oh wow, okay.
Jeff: They’re like, “This is what we think this is – they got to sell for. This is what you’ll get.” But it’s all tied to this big question of: can we increase the value of these four companies and can we find a buyer at what we think we could sell it for, you know? So high risk, high reward.
Host: Yeah. Were they offering you any upfront cash?
Jeff: It was all – all basically shares in the fund.
Host: Okay, that’s helpful. So they said, “Look, we think that over time your shares could equate to four times your revenue – four times 1.6 million.” Do the math – can’t do it off the top of my head, but they were not offering you any cash upfront. They were saying you’re going to roll the equivalent of that into this fund, and then if you’re successful, you will earn a significant payday. So what was your reaction to that? You’re a little burnt out, you’re not liking who you are when you’re in the throes of the stress of this business. When they presented this offer, what was your reaction to the letter of intent?
Jeff: It was interesting. I was pretty green, so it was kind of eye-opening to see the projections of what they were hoping to sell the fund for and what that would mean for me. Those were big numbers, you know, like it was in the $4 million or $5 million range or something like that. So I was like, “Oh!” And the other side of it was like, “Okay, so this is actually an asset that someone wants to buy.”
You know, all of us as service owners, we hear a lot about how it’s hard to sell service businesses, and we think they’re worth something, but am I too important, and all those sorts of things. So to actually get like a real offer on the table was eye-opening and invigorating, exciting.
The other side of it too was, you know, when you have a whole bunch of staff and they have like—I had a bunch of young staff with mortgages and young kids and stuff like that. The other side of it is like, “Okay, I can’t just quit, you know, and leave like you can at any other job when you’re burnt out and tired.” So I need to take care of all these other people. And so having that offer on the table and knowing that the intent here is to use their skills to increase the value of the companies in the fund meant that they would be sticking around, they would have jobs. You know, Paper Lea would continue to exist, and that was another big part of it, right? Because I didn’t want to just sign something over for it to be stripped and I walk away and everyone else is left for dead. You know, I didn’t want to do that. So it was good on that front.
I didn’t necessarily understand that I was taking on effectively all the risk, you know, until much later in the game.
Host: Yeah, well, it sounds like the game changed a little bit because in essence, you agreed to roll—seeing the letter, the plan was to roll your equity and you would have been given a portion, a minority portion of this larger entity, exactly, that included four businesses. Got it.
Jeff: Okay, yeah. The challenging part there is like the risk was always there though, because there was no cash, right? Cash is king. You can’t do anything with those shares if they don’t sell the fund. If they sell for peanuts, then I get peanuts. And ultimately, I can only control like a very, very small part of that. And that’s the big thing that I kind of came back to at the end, is just like, you know, our shop could come in and knock it out of the park and the economy could tank, or nobody would want to buy these sorts of businesses, or whatever—all these variables out of my control. And then I would have effectively nothing.
And so I kind of became wise to that over the course of due diligence. And then when the terms were changed late in the game, that was just kind of the last nail in the coffin where I was like, “I would have to be a moron to sign this.”
Host: At the letter of intent stage, what was your impression of the firm making the acquisition offer? Of the people you were interacting with? Like, what words come to mind in terms of your impression of them?
Jeff: I don’t know, they were good guys, you know? I got on with them. They were the kind of guys that I would go have a beer with, have good conversations with. You know, I do believe that they were—they are—generally good dudes. They were young guys, they’re professionals, they’re forward-thinking, all that sort of stuff. They had their act together, they weren’t stuffy or anything like that. And they were clearly way more experienced in this area than I was.
Host: So not creatives from the digital agency world that were trying to pull together a business deal—they were business guys first who happened to know a little bit about the digital marketing space.
Jeff: Yeah, they were lawyers and accountants, basically. They were the guys that I chatted with. And the president, you know, I can’t remember what his background was, but it might have been finance as well. And that was one of the things too that, like, you know, noised a little bit. Like, we put together the efficiency numbers for my shop, like you know, how billable we were at what hourly rate versus what actual revenue was. And on the spreadsheets, you know, the accountants can always find like, “Oh, you know, if we just tweak this, then all of a sudden there’s all these extra hundreds of thousands of dollars.” It’s like, “Yeah, but that’s not really how the business works all the time.” You know, so those sorts of conversations happened a bit. But yeah, they are definitely like finance and law backgrounds, which is the strength they brought to the table.
Host: Yeah, I love the spreadsheet guys. I’d be like, you know, “If you just made their billable rate $300 an hour instead of a blended rate of $175, you would make 40% more money!” Right, and we don’t know clients. It’s… Yeah, that kind of stuff.
Jeff: Yeah, or if your shop was 100% billable all the time, right? How much money you’d make. It’s like, “Yeah, cool.”
Host: Yeah, yeah. Love it.
Okay, so you’re working with the accountants and lawyers from the private equity company. You’re going through diligence, and I’d just be curious to know like, how did they raise the specter of changing the deal term? In M&A parlance, that’s referred to as re-trading. But it sounds like it was sort of last minute. You were worn down from all this. You dropped 50k on this reverse diligence process. Like, did they send you an email? Did they pick up the phone and call you? Or like, what was the format?
Jeff: Just trying to recall… It was, yeah, they sent over a revised purchase agreement that had like one big change, basically highlighted for me to preview right before it was either like before we were supposed to meet or sign, or before like a lunch where we were supposed to discuss it one last time. I can’t remember. But they did send it over, and I looked at it. I was like, “Wait a sec,” and then went and sat down with these guys. And you know, they explained their side: “Well, we’re taking this big risk, and you know, if you don’t do anything, then we have a shop that’s worth nothing.” And I was like, “Yeah, but you’re telling me if I’m not perfect, I don’t get anything, and that seems ludicrous.”
And so yeah, there was just kind of that discussion. And then, you know, if I recall correctly, I kind of left it as like, “Okay, well, I’m not really super excited about this, and I’ll take it back home and consult with my side.” And yeah, gave my lawyer a call, and I’m like, “This is how I’m reading this, and this is the risk I see.” And he was like, “Yep, that is the risk I see too.” And then we were just kind of like, “No, not gonna do this.”
Yeah, and it was like one of those changes that was so misaligned that you can’t even counter it with something reasonable. I mean, in the middle, you’re just kind of like, “No, that’s a full stop.” You know?
So that kind of just killed the deal in its tracks then. We all walked away. Yeah, it was… it was so outside of market.
Host: You know, it’s interesting. At least they had the decency to highlight it and say, “Hey, we’ve made a change, page three, column, you know, paragraph two.” There’s, you know… In some cases, I’ve heard, you know, you’ll be in like the ninth turn of the share purchase agreement, and there’s this, you know, fundamental change which gets kind of squeezed in, and like, you know, nobody notices it, which, you know, that’s sketchy for sure.
Yeah, it’s super sketchy. But in your case, they had the decency to say, “Hey, like, we’re making a change.” And as I understand it, it was, you know, if you didn’t meet these future targets for revenue, EBITDA, the equity you had in the fund would go to zero, effectively transferred to them?
Jeff: Yeah, something like that. If I recall this four years ago, you know, so I might be off on that, but that’s what’s coming to mind.
Host: And what was their reaction when you said, “I’m out”?
Jeff: You know, they were okay. They didn’t fight it, which makes me think they just put this in there where—because they were conflicted. They probably, if I’m being totally honest, they probably needed more of a generalist marketing shop, you know, to really do what they wanted to do, rather than a highly specialized technology company, which is more what we were. And so I think they might have realized that as they went through due diligence, and then this was their way of being like, “Well, if we can get this for zero risk, then cool. And if we can’t, then I’m fine walking away.”
Host: Interesting. Yeah, so they may have come to that conclusion in the process of diligence.
Well, listen, I’m really grateful for you sharing it with such candor, because I think that is something a lot of our listeners will have to deal with, and they’ll have to parse the wheat from the chaff, or whatever that expression is.
Host: So where did it go from there? I mean, I’ve heard when a deal goes south, it can be really emotionally difficult for the owner because you become so emotionally connected to, you know, a sale. You’re going through, spending money, and it’s very, very emotionally draining, the process. And then to have that all pulled out from under you at the last minute, I’ve heard people can really spiral. What was that like for you?
Jeff: Yeah, it was like, you know, I was not stoked on having to spend 50 grand, but you know, what can you do? And honestly, it was okay because I never had a question that walking away was the right decision. And you know, part of the steps I was taking—because I’d been thinking about selling the shop for a couple years beforehand, right? And so like, my idea there prior to all of this was like, “Okay, I’m super overloaded. I’m like the one person managing like, you know, 10 or 11 people at that point. We were a small shop, but I was doing everything poorly.” And so I was like, “I need to start thinking about what selling would look like.”
Then objectively, like if I were trying to buy my shop, what would I need to do? And so I started to put in actual layers of like management and reporting for scalability and all that sort of stuff, with a theory that I’m like, “Okay, I have two outcomes here, and both of them are positive: Either I build a sellable shop that someone comes in and wants to buy. If they don’t show up, then I have a shop that is much less reliant on me and is way more sustainable for me on a day-to-day basis.”
And so when I walked away from the deal with the private equity firm, I was like, “You know what? It’s the right decision, and I’ve put all this work into a place that is now like—there’s, you know, way fewer people reporting to me, and it’s more profitable.” So I was able to look at the positives of it rather than the negatives of it. You know, I think that was a big thing for me, like getting through that kind of period. And then what ended up happening is the other deal came along shortly thereafter.
Creating a Sellable, Independent Business
Host: Yeah, I want to get to that. Before I go there, I’d be remiss not to ask, as it relates to making your business less dependent on you—you know, we’ve heard things like hire a management team and put together standard operating procedures, and I don’t discount the importance of those things. Obviously, they’re incredibly important. But our listeners, I think, have heard those. Is there anything kind of niche-y or unusual that you did that made your business less dependent on you that other folks might learn from?
Jeff: Mostly what I ended up doing was just looking at the group that I had there and saying like, “Who—” because it was a young group, it’s like, “Who wants to move up, and who can do it, and who is already going to be better at this stuff than I am?” So I’m just like—I was never a very good developer, right? I was a designer by trade. So like, I need to hand this off. I can’t provide any mentorship to developers. And so, you know, that was relatively easy to hand off. And same thing with the operations side. I started to hand that off as well.
But the big thing for me—maybe this is like being a little bit Type A or control freak or whatever—but like, everyone always talks about delegation, delegation, delegation, right? That’s what we need to do to grow and all that kind of fun stuff, and to sell. But no one ever talks about how to know your team is doing it well. And so I’m a very data-oriented guy. That’s how I kind of built the shop over time. And I applied that same thing.
So basically, all of the managers that we put in place to scale over time just had some very clear key performance indicators that I could just look at, that we talked about monthly, report on. I’d just be like, it’s very easy to see whether or not things are going well. Like, what’s employee morale? What’s client satisfaction? What’s your billable rate? And then on the company level, you know, obvious things like profitability, whatever else.
And so like, that would hold the managers accountable to the kind of that really, really difficult trifecta of: Are we profitable? Are our clients happy? Are our employees happy? Are your reports happy? And I could look at those figures, and if one was off, I would ask why. And then there would either be a good answer or a bad answer, and then we’d solve it. You know what I mean? So that was the critical part for me that kind of made me feel like I wasn’t like flying in the dark with regards to delegating a bunch of important stuff.
Host: That’s really helpful. Coming up with a couple of KPIs that made people’s lives objective, their contribution objective, easy to measure.
Jeff: And that sort of stuff too, I think it’s—and maybe your listeners know this, maybe they don’t—but I think it’s critical with those key performance indicators that they’re well-rounded, they’re not all pointed in one direction. Because if your KPIs are all about profitability, then the managers are just incentivized to maximize profitability, probably at the expense of the quality of the product or the client satisfaction or and/or the employee experience, right?
Or if you’re only incentivizing them to keep the employees happy, then what happens to profitability or client satisfaction or whatever, right? So you kind of need to have all three if you’re running a service business for it to work. And that’s a really hard balance to strike, and you need to be like an empathetic leader and understand that they’re not always going to be perfect every month or quarter. But as long as you know they’re generally—the large data sample looks good, then you’re going in the right direction. But I think that’s a common mistake.
Host: I really like your analogy of the kind of triangle and having one corner edge of the triangle sort of being out of whack. You know, it’s about trying to find the balance. You can’t overemphasize any one. Really makes a ton of sense.
Actually Selling My Digital Agency
Host: So walk me through the actual successful sale. So you’re back to business. What happens next?
Jeff: Well, it was very kind of—it came around very organically. Yeah, back to business, you know. We’re continuing to build the shop and scale it and trying to sign larger deals and all that kind of stuff. And I had a friend of mine who runs a savory pie company. He’s a New Zealand expat. It’s called South Island Pie. And so we go off for pints and chat and commiserate as business owners and all that kind of stuff.
And so, you know, he’s one of my best friends. So I was like, “Yeah, like if the right offer came around, I would sell,” you know, that kind of thing. Having that conversation. And he was friends with an Aussie expat who is one of the partners at ZGM, who was the marketing firm based out of Calgary that eventually bought us. And so he was having a pint with Rick, the Aussie guy, and mentioned this because Rick was talking about—at ZGM, they had had a really hard time. They were trying to build their digital team in-house and just were spinning their tires a little bit.
And so they were doing a lot of branding and marketing and ad work and PR work for their clients, and these are big clients like the Government of Alberta and stuff like that. But their digital side was sort of lagging. And so they’re like, “Maybe we can get there through acquisition rather than building it in-house.” And so I had sort of known a couple of these guys. Like, I was on a board with one of the other partners and stuff like that. So I’d known ZGM.
So Rick and I, anyways, Aussie expat, we started going out for lunch once in a while, just kind of shooting the breeze, talking about running service agencies and all that kind of stuff. And then that led to the kind of like, “Hey, this idea of like, are you open to acquisition?” Which he already knew I was because of my friend at South Island Pie.
So that ended up basically with an initial conversation with Mario, who is the COO at ZGM, and it was very casual. Like, “Hey, let’s meet at your office, let’s hear what you’re like.” Let’s basically just feel each other out, kind of thing. And that led to a letter of intent from them.
Those initial conversations, they felt at home. They’re good guys, right? I’m like, “These are people I could work with, these are people I would hire if I was hiring.” And I think they felt that they would hire me as well. Those sort of soft variables don’t get talked about a lot, I don’t think, in deals and mergers and acquisitions, but they’re super important. You know, you have to really, really trust the people you’re going into a deal of this size with.
Host: ZGM is a marketing agency based in Calgary. How big, like number of employees, were they at the time?
Jeff: I think they were around 75 or something like that. They had an office in Edmonton as well.
Host: Got it. So there’s 75 employees, so kind of midsize agency. That’s helpful. And you’re getting a good vibe from them, and they prepared a letter of intent?
Jeff: Yeah, they did. So we basically had a pint at the office, and we were like, “Okay, what are they looking for? Why are they looking to acquire? Why am I looking to sell?” We kind of talked about that. And realistically, all that stuff lined up where it was like, what we’re good at is the gap that they have, but also what some of our clients need is what they’re good at. We have a lot of startup clients who, you know, we build them a thing, a piece of software or whatever, and then it just sort of sits there, and there’s no marketing or promotion plan. So that made sense from a complementary services angle.
They had a couple of initial terms right off the bat, which I thought was interesting. They’re just like, “Hey, we need you to be here for three years. If you’re not here for three years, then we’re not interested in doing the deal. That’s like a total deal-breaker.” I was like, “Okay, you know, it’s fine by me. If this deal doesn’t go through, I’m going to be here for many years anyway.” So, you know, that kind of stuff. And yeah, then they put together a letter of intent that basically spelled out some of the terms of the deal.
Host: You mentioned there were a couple of deal-breakers for them. Three-year earnout was one. Was there a second deal term that was important to them?
Jeff: That was the big one. And then obviously, yeah, like alignment on valuation and me sticking around. Not just me sticking around in some sort of ancillary consultant role, it was like, “No, you need to lead the shop for three years,” which makes total sense, right? Because they’re like, from their angle, “We don’t know how to run a company that builds software.” So they come in, you know, who knows what’s going to happen? And also, if we’re going to pay for the asset that you’ve run, this is our best odds of earning our money back.
I was like, from a logical standpoint and trying to negotiate in good faith, trying to find this win-win situation for everybody, for me, I was like, “Yeah, that makes total sense.”
Host: How did you answer when you’re having the initial sort of get-to-know-you conversations over a pint in the office when they said, you know, “Why do you want to sell?” How did you answer that question?
Jeff: Yeah, I think I was pretty honest. You know, I’m a pretty straightforward guy. I was like, same thing I kind of said here, that I’ve accomplished more than I thought. I want to find a home for, at that time, I think there were 17 or 18 employees. I want to make sure that they all have jobs. And you know, I want to do something different. Like, this is the main thing that I’ve done with my life. I want to relax a little bit afterwards, and I want to do whatever comes next.
They appreciated the candor there, and I wasn’t feeding them a line around sticking around forever and they’d never have to worry about finding a new managing director or any of that. So I was pretty straightforward with it. And also let them know that at that stage, the company’s running pretty well. I basically do biz dev and big strategy, and that’s about it. So I don’t hate my life either, so I’m not here to take any offer that’s on the table. It has to be fair to everybody.
Agency Valuation, Initial Offer & Negotiations
Host: You mentioned smaller agencies trade in that kind of band of three to five times EBITDA. Where did their offer come in at?
Jeff: Yeah, their initial one came in at three, so on the low end of that. Part of that, various reasons there. You know, we didn’t have a ton of recurring revenue. We were a very project-based shop, so that’s risky, right? You always have to go find the next deal. But we had that super dialed in. Yeah, there were probably some salary adjustments there as well. Like, I paid myself, you know, way lower than market standard, so that sort of stuff affects the valuation.
But then, you know, I came back with a counter to that that was, I think, three and a half times. And that’s sort of where we landed. But actually, no, I came back with a bit higher multiple, more in the four to five range. Can’t remember exactly. And that’s where the kind of financial structure and the deal mechanics got interesting. And kudos to Mario for coming up with a very simple and elegant solution for this, which, you know, as we discussed earlier, was kind of in my wheelhouse.
Basically, what he said was, “Okay, we’ll move to three and a half times multiple on EBITDA. That is guaranteed. We know you want more, and so what we’re willing to do is basically have a variable or performance-based component of this.” You know, it’s an earnout, more or less. But the interesting part was, basically, the way it was structured was for the three years that I was sticking around to run the shop, the first $300K of EBITDA went back to ZGM, and then anything over that, we split 50/50, up to a ceiling for me.
So that was pretty straightforward. It allowed them basically to recapture their money that they put out, but it also incentivized me to do my job right and not just phone it in for three years. And it also was a fair way to share the risk. You know, it’s like, okay, all of us service owners, we value our shops way more than everybody else. It’s just kind of how life goes. But Mario wasn’t necessarily just going to gift me that. He was saying we can get there, but we have to work together on it. And so that’s kind of how that was structured, which I thought made a lot of sense and was a fair deal, which ultimately is what I think we should all be looking for.
Host: Yeah, so three and a half times downstroke, meaning cash, like guaranteed, and then first $300 grand of profit they kept, and then sharing equally in everything north of that. And how did you perform during the earnout?
Jeff: I hit the ceiling every year. So that was fun.
Host: That’s great, that’s great.
Jeff: And part of that, you know, and this comes back actually to something I mentioned earlier about really trusting in the people that you work with and only going into business with people you trust. All that kind of stuff, because the guys at ZGM recognized that, you know, if Paper Leaf outperformed and did really well, then they’re going to get more of their cash back, I’m going to get my cash back, and then I’m incentivized to keep performing every year, right?
So they were doing stuff where, you know, they would have one of their clients come in with a big software ask, and they would ship it to us. We kept the brands, we kept everything separate. Like, there was no merger, it was an acquisition. So, you know, they were shipping us reasonably big contracts that might not have come across our plate otherwise, that ended up being a win-win for everybody.
Host: So when you factor in the profit sharing on the back end and hitting the ceiling, where did it end up netting out in terms of multiple of profit being, like, when all was said and done?
Jeff: Yeah, it was around 5x.
Host: Oh, great. Yeah, so right at the ceiling there. Good for you. That’s awesome. That’s awesome. And how did you… You know, a lot of people signing up for an earnout are nervous because they know that they’re going to give up reporting of their EBITDA because, you know, that usually gets centralized. How did you think through who would own the reporting on the EBITDA and ensure that was done cleanly?
Jeff: Yeah, we chatted about it a little bit beforehand. And so the kind of agreement we came to was to run the two companies as two separate entities. So we weren’t necessarily merging all the EBITDA together. It was Paper Leaf’s balance sheet, Paper Leaf’s financial statements, all that kind of stuff was how that was being tracked.
But as we all know, EBITDA is a very malleable sort of figure, right? So we had some discussions around what that would actually look like. You know, I was like, “Well, what we don’t want to happen is a bunch of disbursements to be paid out that totally kill the EBITDA.” And there are mechanisms like that, right, that can lower the EBITDA.
But it came back to, okay, we’re keeping the financial statements separate. Mario was very upfront where he would send me draft financials before they were finalized every month so I could review them. If anything seemed off, you know, I would be like, “Hey, like, why is this like this?” Because I’m not an accountant guy, you know, I’m a designer. So my financial acumen is pretty rudimentary. So I would ask some questions, and there would be good answers, and we’d go from there. So it felt like a collaborative effort.
Host: It wasn’t top-down like, “Here is your financial performance for this month. You have to take it.”
Jeff: Yeah, yeah, exactly. So that’s the part of the deal that, like, you can’t write all of that stuff into a purchase agreement necessarily. You can put some of those things in, but at the end of the day, there needs to be some personal due diligence on the people you’re doing business with. And the incentives need to be aligned because Mario was like, “If I want Jeff to perform, I can’t screw him over in year one, or else he’s just going to bounce for the next two years, and then I’m screwed.” So the whole incentivization model and personal motivation side of it, I think, was critical.
Host: Yeah, and a very delicate alchemy, but at the end of the day, it sounds like you guys nailed it. And again, simplicity being a common theme. Well, I’m really grateful for you sharing the story. Are you up for a quick lightning round of questions before I let you go?
Jeff: Yeah, for sure. Let’s do it.
Lightning Round Q&A
Host: Okay. I think I know the answer. We, I think, touched on it with the private equity group. Were there any other slimy tricks that acquirers or potential investors tried to play on you to prey on your naivety on the whole M&A process?
Jeff: No, I don’t think so. I think, yeah, the big ones were changing it at the 11th hour and just trying to wear me out with kind of a mountain of due diligence.
Host: Yeah, yeah. Biggest mistake you made in the process of selling?
Jeff: Biggest mistake I made in the process of selling… Uh, probably how I announced it to the staff.
Host: Okay, tell me more.
Jeff: So we were like, it closed on January 1st of 2021, and we had our annual meeting, you know, January 7th or something like that. So we went through this whole annual strategy call, you know, all these people on Zoom and whatever. And then right at the end, I was like, “Oh, and here’s something exciting! Here’s an extra thing: we got acquired.” And here’s what it means, and there’s some explanations, you know, like everyone’s jobs are safe, we’re staying our own brand, all this kind of stuff.
But what that did was basically erase all the previous hour and a half of conversation from everyone’s mind because all they cared about, rightfully so, was the acquisition. So yeah, I probably would have done that differently.
Host: Interesting. Okay, well, that’s a good pro tip. Get it done at the beginning of the meeting, not the end.
Jeff: Yeah, or a separate meeting.
Host: Yeah, separate. What were the emotional highs and lows of the sale process? Can you point to moments in time?
Jeff: Yeah, the emotional high was probably getting the ink all dry on the contract and being like, “Okay, this is done.” Like, at the very least, I have this amount coming in over the next three years. And then, you know, if I want to walk later, I can, and everyone’s good. So basically, those core needs were met.
And then the lows were, you know, probably sharing it with staff. We had, and I think it was generally pretty well received, but there’s a lot of fear, right? Change comes with fear. And we had a tight-knit group there, and they were worried about me leaving and worried about what it meant for them and worried that our culture was going to change. Just lots of worries, worries, worries. And so I don’t blame them, and it’s like you can say as much as you want about how it’s not going to change, but they have to see it. And over time, they saw it, and nothing really did change. Their jobs were exactly the same, and then they bought it. But it was kind of tough to be excited about this thing but then have all of these fears kind of thrust upon you.
Host: Yeah. Was anybody resentful that you were kind of getting a fat check and they were not?
Jeff: I don’t think so, no. Everyone seemed, you know, everyone was pretty cool about it. And I had a really good relationship with all the staff there. So I think it was more congratulatory rather than resentful.
Host: Yeah, yeah. Was there any resource you could point our listeners to that would help them get educated about the M&A process? Like, anything you used or a book or podcast or speech or YouTube channel that you found helpful?
Jeff: The main one that comes to mind for me is a guy named David C. Baker. He’s very well-known in the agency space. So I was basically reading everything that he put out and listening to everything that he put out about M&As in the agency space. So that’s where I got to understand the 3 to 5x multiple on firms like mine and all that kind of stuff. So that was a big one.
And then another agency-specific resource was an organization called The Bureau of Digital. It’s basically a community of hundreds of digital agency owners. It’s run by a guy named Carl Smith, who’s a stand-up guy. And so that is a very open community where people would just outright discuss, “Hey, I got this offer. What do you guys think?” And a whole bunch of agency owners would weigh in. So that was really helpful too, having a community of folks to bounce ideas off of.
Host: That’s great. Was that like on a Slack channel or Facebook group or what?
Jeff: Slack channel, yeah. It’s a Slack channel. You paid to be part of it, and many still do. And they would put on events, and they shifted to digital events during COVID and all that kind of stuff. But yeah, it’s like a daily Slack channel with bigger workshops and events, too.
Host: That’s cool. I mean, neat resource. Never heard of it, but neat, especially for digital agency owners. What was the trophy you bought yourself to commemorate the win?
Jeff: So there were sort of two. My brother likes to say, his running joke is, “Jeff sold his agency and then bought a used Subaru Forester.” So, which is not wrong, that’s what I did. But yeah, the other trophy was probably… Yeah, I built a house in Kimberley. So I was in Edmonton at the time, and I knew I wanted to move to a mountain town. So I zeroed in on Kimberley and then put a down payment on a place here.
Host: No disparagement to Edmonton, but I think you upgraded. It’s just a different kind of spot, but you know, I love Kimberley. It’s a beautiful part of the world in the mountains. If you’ve never been, it’s certainly one to put on your list. Well, congratulations on the mountain house and all the success, and I can’t wait to see what is next for you. What is next for you? What are you up to? Where can people find out about you if they wanted to connect? Is social media a good place for them to do that?
Jeff: Yeah, I don’t know. Most of my social media is like me riding my mountain bike with my dog, so if you want to see stuff like that, you can search Jeff Archibald on Instagram. But if you want business stuff, probably LinkedIn – just search my name on LinkedIn. And then yeah, I have a personal site, jeffarchibald.ca. I’m doing a little bit of consulting work with agency owners, and that’s where I think you read my post about selling my company and stuff like that. So I’m writing there.
Host: Yeah, it was a great post. I’m gonna put it in the show notes for your episode at BuiltToSell.com because it’s kind of a personal reflection on the sale process. So that was great to post, and all of that, including Jeff’s LinkedIn profile – Jeff Archibald – all that will be in his show notes page at BuiltToSell.com. So Jeff, thanks for doing this.
Jeff: Hey, appreciate it, John. Thanks for having me.