Episode Transcript
[00:00:00] Speaker A: I just play Simcity 2000, and on that 30,000 view, I deploy capital, I deploy concepts and things, and then I look to see if people come. What happens with business acquisition? It's like I've sat back in my chair in the Internet cafe, and the guy next to me taps me on the shoulder and was like, hey, Mike, your city looks pretty healthy, and I can see all of the people moving around. Mine's on fire. Do you mind if I just give you my mouse and keyboard? Because I've had enough.
[00:00:28] Speaker B: Welcome to the agency how podcast, where we help web designer digital agency owners create abundance for themselves, their teens, and their communities. This week we're joined by Mike Spratt, all the way from across the ditch in New Zealand. Mike is the managing director and owner of Gherkin Media, and in this episode, we are discussing all things agency growth, specifically through acquiring other agencies. This is not Mike's first rodeo. He's been here a couple of times on the podcast, and some of you will already be very familiar with his business model. We explore the risks involved in vendor financing, the ins and outs of growth through acquiring other agencies, why you need to be building to sell, and much more. If you're looking to grow your business through acquisition without your existing team burning out from dealing with deferred obligations, as Mike puts it, then you're in the right place. I'm Troy Dean. Stay with us.
All right, without further ado, ladies and gentlemen, please welcome to the agency hour podcast, the one and only Mike Spratt. Hey, Mike. How are you, my friend?
[00:01:30] Speaker A: I'm better, thanks, mate. Thanks for having me back.
[00:01:32] Speaker B: Excellent. Thanks for joining us. Now, this is your second appearance here, the first time that you joined us. Is it your third? Is it your third time on the. Wow, you're a threefer. You've joined an elite club. My many people that get on three times, one of the times that you were on, it kind of blew up, and you got a whole bunch of people that messaged you as a result of that podcast. For those that don't know, just tell people who you are, where you're from, what you do, and then maybe just give us, like, a 32nd overview of what we did on the previous episode that blew up and. Cause I think that'll be a nice segue into what we're doing now.
[00:02:11] Speaker A: Yeah, yeah, for sure. So, Mike Spratt own a company called Gerken Media. We started in Auckland, but we're now predominantly an australasian company.
The reason why we've expanded was because of what we're going to talk about today, which is growth through acquisition.
And so we moved to Christchurch with an acquisition and we were scared about that. We thought proximity was going to be a problem and that was successful. We then acquired a company, Gold coast kind of Brisbane, and we were scared of that because it's now international. And again, proximity and that went really well. And then we've acquired two other businesses since then.
And whilst it's a unique way to grow, it's actually become our favorite way to kind of grow the business. So we're an Australasian company now and we specialize in the biggest, I think the biggest niche for web design development SEO companies, which is small to medium sized businesses who are in trouble and sit somewhere in between the fledgling and viable kind of space.
And we help them out. We help them out with really good extraction tools so that we can kind of figure out quickly how to get them out of a pickle. Then we have really kind of good design, development and deployment, website design and development products.
We can then help them finish their online ecosystem through high level and then we also have a performance product that we wrap into our growth plans.
So we are a productized, we're a value upfront productized service delivery agency that helps small to medium sized business owners where we have a direct relationship with the business owner.
[00:04:14] Speaker B: Yeah.
[00:04:14] Speaker A: Fleshing to viability.
[00:04:16] Speaker B: Love it, love it. And now I do need to call out what's going on in your background because for those who are watching the video, this is not a zoom virtual background that Mike's chosen here. Let's go. There's a tradie walking around in shorts, but what the hell? No, that's. No, I love it. What's going on?
[00:04:33] Speaker A: So I don't have a seat in my own office at the moment because we're too cram packed.
Yeah. So we've outgrowndeze our offices downstairs and we're moving upstairs now. We're gonna be in here I think, August 1. But it was either that I come up here and just kind of chill out with Colin or do I at home. And right now New Zealand at school holidays.
[00:04:53] Speaker B: So school holidays, which would be a nightmare.
[00:04:56] Speaker A: Cheers to happy.
[00:04:56] Speaker B: Right. So we're literally seeing the growth of your agency behind you. You've taken over the upstairs of the building. You're fitting it out and painting it. It's fantastic to see. I love the authenticity of it. Now let's. I want to talk about growth by acquisition. A lot of people won't understand what that means you're actually acquiring other agencies and that's the way that you're growing your agency, right?
[00:05:21] Speaker A: Yeah. So we have referral, we have organic, and then we have acquisition. So those are the only three ways that we grow. We have never spent a single dollar, and I literally mean a single dollar, on marketing.
So initial growth was stimulated through referral.
After probably the first little while in mavericks, we decided to do a website for Gherkin media because we just never had time or whatever to do our own. And that started to bring in organic leads.
And then we went into the.
From when we got to the stage where we had capital to deploy, whether it was in terms of surplus funds, surplus cash or debt, we started to grow through acquisition, which is basically where we buy other agencies and then we roll out the red carpet to their clients. And so far, in the terms of acquisition, dissolve the originating IP.
Some of the times we keep it. The most recent one, we're keeping it. But largely in the deals that we've done so far, the outgoing business owner wants nothing else to. They just want to go. And so what we do is we roll out the red carpet. Hey, business X has been acquired by Gerken Media. My name's Mike. We're here to help.
Blah, blah, blah, blah, blah. And away we go. So we've had a look at twelve businesses now and what I mean is we've got past the stage of NDA and into an opportunity to start to write a letter of offer. On twelve deals, we've bought four. We've missed out on one. One where I made an offer, my offer was the best offer, but they didn't choose us because of proximity, which is fine, it's fun.
An outgoing business owner will make a decision based on not just money.
The other thing with that fifth one was, it was very small. It was only about $15,000. I think the business was doing about a grand a month in recurring revenue. And it was all very farm based in Tasmania or horses and farms and all of that type of stuff, you know, not a massive loss. And then the, I guess the seven that we've looked at and haven't acquired, you know, there's all been. There's always been like a reason from fraud right through to that. Too far gone to be able to help through to, you know, the owner who's selling. You know, just absolutely kind of, you know, dreaming on what the, what it all looked like and all the rest of it. And so it gets me excited. I really like to grow that way. It's addictive way of growing, but I guess you've got to really kind of be in a position where you can, where you can actually help. I don't think it's a beginner tactic. I think it's probably for businesses with a little bit of a track record and a team and processes in place.
But if you're good at it, it can be really fun and a great way to grow.
[00:08:54] Speaker B: I imagine it's also a very expensive way to grow, maybe not in the long term, but in the short term. And obviously, you can only talk about what you can only talk about. I'm not asking you to divulge any sensitive information or anything that's under an NDA. But are these deals usually all cash upfront or is it some of a vendor finance? How are you funding these deals? Because I imagine it's, you know, I don't imagine you've got a war chest of millions of dollars just sitting around waiting to buy agencies. How does that all work?
[00:09:22] Speaker A: Yeah. So coupled through debt, couple through cash flow, some of the ones that we've looked at, we've offered vendor financing.
[00:09:31] Speaker B: A.
[00:09:32] Speaker A: Lot of the times. If I offer vendor financing, it's because I think I'll use it, because I don't. Because I believe that the outbound owner doesn't believe that it's actually going to cash flow the way that it's going to cash flow. And so if you say to them, hey, let's do vendor financing, and they believe it's going to cash flow, well, then they wouldn't have any objection to vendor financing, especially if you can get them.
[00:09:52] Speaker B: Right.
[00:09:53] Speaker A: So how I'll give you, can you.
[00:09:54] Speaker B: Just, can you just explain vendor finance for those listening who don't know what.
[00:09:57] Speaker A: We'Re talking about, the four deals that we've done within three days of being tapped on the shoulder, I've put exactly the amount of money that they want in their bank account. Right. That's my money. It's either through Mike Spratt's personal kind of like cash flow introduced as capital, or it's through debt because I haven't had enough money to cover it. So there's another way that you can finance the deal, and that's when you say to the outbound owner, I will give you basically, like, your profit over a certain amount of time. So say, for example, if you do a deal for a million dollars for easy maths, and you say, hey, I'll give you, like, vendor financing over 25 months, you know, and I will give that to you out of the surplus of me running your business.
And so it's a great way to kind of ascertain whether the business owner who's selling believes that the business will continue to do so or normally you've kind of deferred any fears that they would have of you taking the reins anyway.
But vendor financing is where you use the surplus cash left out of the business that you've just bought to pay back the vendor over time. Therefore, you don't have to have any of your own money. You just got to make sure that that business that you buy remains profitable.
[00:11:20] Speaker B: And the risk for the, for the vendor, for the outgoing business owner is. Cause I've actually heard a story of a buddy of mine who sold his business. Vendor financed.
He got, I think he might have got, I think he might have got 600 up front. Vendor financed the rest. Within a year. He had to take the business back over from the new business owner because the new business owner had completely ridden it into the ground. He basically got his business back for free. Plus he got the 600 deposit and he ended up with the business, which he didn't want, but he had to take it back because there was no chance he was ever going to get the rest of the money because the new business owner completely screwed it up. So there's a risk on both parties with vendor financing.
[00:11:59] Speaker A: Yeah, yeah. What I do is there's a, again, I said to you at the top of the meeting, I obviously want it to be more kind of like educational and give people who are watching today the ability to maybe start to conceptualize how they would do their first deal or kind of how it all looks. On my kind of like list of things to check off, I've got some notes around talking about my letter of offer and how I actually do a deal which covers what you were just kind of mentioning, like the clauses around financing and stuff like that. But the other night when I was thinking, like, what's the best way that I can kind of conceptualize what it looks like to have a growth through acquisition model, one of the things that really kind of like, came up for me was the idea around the deferred obligation that comes with what people assume that they do versus what they're actually doing.
The idea of growth through acquisition at its simplest form, say, for example, someone whos just getting into the industry says that they want to build a website. Thats the place where a lot of people start. So I want to build a website and im going to do that for my customer. What I mean by deferred obligation is instantly theres actually a difference between the idea of building a website and what youre actually doing, which is probably more along the lines of like adding to or building a part of the Internet. And so you go to a customer and you say I'm going to build your website.
And what you mean by that is I'm going to install WordPress or get a theme of Shopify and I'm going to make it look pretty and I'm going to do some content and all the rest of it. What the client kind of expects back is sometimes a little bit wider. It's that you will register my domain, right.
That's a different thing. Youll set up my email. Well, thats kind of like different thing.
You will build the website and anything that you use to build it you will look after from a maintenance point of view afterwards.
And so the analogy that I would use is if youre going to build the Internet. So its on the concept level of building the Internet, there are, you know, you got to ask what is the Internet? The Internet's a place where you can go and it's made up of lots of other little places, some of those websites, some of those social media, some of those kind of other bits and pieces. And the, you know, the simplest thing is you build a house. Well, who builds a house? Well, a builder. But if you think about it, a builder isn't the only person that builds a house. You got an electrician, you got a plumber, you've got a architect, you've got an interior decorator, you've got a landscape, you've got actually quite a lot of people that come together to build that house. And so what people who build websites do is they will kind of like defer all of those other things. So instead of figuring out how to host a website, they'll go and they'll talk to siteground or kinsta or kind of whatever. Instead of figuring out how to set up an email, they'll put it into 365 or Google. Instead of creating their own HTML ML form, they'll use fluent or gravity or all of those things. And as soon as you do that, you defer the obligation of what you could have conceptually done or perceivably done at the beginning. And when you do that one times for one client, it's fine. So when you, but when you kind of like start to go, when you build ten houses now you've built like a little online neighborhood. While there's different types of deferment across different types of clients across different kinds of websites. And what happens is all of these little things start to gradually grow. Your obligation to your clients and to the websites that you've built and to the part of the Internet that you've started to put together grows and grows and grows, and all of a sudden your lowly little builder is now responsible for something that is getting a little bit complicated, a little bit big. An annual subscription rolls around that was annual. Is the client going to pay for that? Am I going to pay for that? Well, I didn't talk to my client about that. Something breaks, is that my fault?
You need Shopify support? Well, they don't give you human beings when all of these things start to build up. And then what happens is there's a point at which the lowly builder or web designer developer at this stage goes, oh my God, this has gotten too big for me. I'm starting to freak out. It's costing me money. I don't want to hire staff. There's all of these things that on this residual obligation start to build up and build up and build up. All of a sudden they're in charge of a city and they just wanted to swing a hammer. And so from a conceptual point of view, again, just to keep it simple, you might think, well, Mike, well then, in this analogy of building places from a house to a neighborhood to a city to a state to a country to the world, well, who are you then? Are you like, are you the mayor of the city? Are you the prime minister of the city?
And I think that's where I can best frame how and why and who should really kind of look at growth through acquisition, because im actually none of those things. If you were to kind of finish off this analogy that Im using, I would be more, it would be easier to articulate what I do by pretending that I just play Simcity 2000 and im at 30,000 view and I dont do any of that stuff, right. I deploy capital, I deploy people, I deploy concepts and themes and then I look to see if people come right. And when what happens with business acquisition? It's like I've sat back in my chair in the Internet cafe and the guy next to me who's also playing some city 2000, taps me on the shoulder and was like, hey, Mike, your city looks pretty healthy. And I can see all the people moving around. Mine's on fire. Do you mind if I just give you my mouse and keyboard? Because I've had enough. My city's on fire. Let's just share screensh and can I have a little bit of money or can I have a lot of money? And you just take over my city because you're prepared to remain hands off and you're a little bit kind of further ahead in this ability to weather the deferred obligation that's been created in my environment.
Does that make sense?
[00:18:59] Speaker B: Yeah, it does. It does. It is a really good way of looking at it. When you take on another agency, how do you deal with all that deferred obligation, or the technical debt, or the shit show? For want of a better term, you ingest that. How do you then clean that up and streamline it and optimize it without your existing team going, oh, for God's sake, Mike's bought another bloody agency, and this is going to take us three months to clean this up. What's the process there? And also the dovetail question there, I think, is at what point is it too much of a shit show for you to go like, what's the criteria?
[00:19:34] Speaker A: So, simultaneously, if you are thinking about growth through acquisition, you should already be building to sell. I think that's probably important if your initial business. So your day to day business. So Gherkin media, for me, I'm building to sell. So read cadence, read build to sell. Talk to people who have done it before. And if you're already doing that on your business, then you should have systems, tech stack stuff, operational kind of pathways through your business that will allow you to wear the burden of an acquisition.
And so I always think about it in terms of horses in the stable, right? Gherkin media has to be a donkey. It has to have the additional kind of like, carry bags needed to.
[00:20:33] Speaker B: Wear.
[00:20:34] Speaker A: The additional weight of anything else that I buy. And the reason why I need Gherkin media to be a donkey in a stable full of stallions is normally because of the debt servicing. So say, for example, I use my own money. Well, I still pretend that Gherkin media has a debt to me, so I borrow the money. Well, now I have a very real obligation to repay that debt. And so what I want to do is I want to take any saddlebags off that next horse that I buy, I want to put them on my donkey, which is Gherkin media, which can carry the weight, it can carry the additional cost, it can carry the burden, and that frees up that stallion to run as fast as it can and keep all top line revenue to drop down to debt servicing until I've paid back the money.
And so you need to build a donkey first is the way that I would kind of say that and the way that you do that is to be already building to sell. I think anyone that owns a business should build to sell. I think it's really kind of like a important, you know, a framework to have in your business. Yeah. To be it.
[00:21:42] Speaker B: I'm going to say something quite controversial. Well, I don't actually think it's that controversial, but a lot of people are not going to like what I'm about to say. But I think the difference between, and I hang out in a lot of groups where there's lots of entrepreneurs, lots of business owners. I'm putting that in their quotes. The difference between owning a business and being an entrepreneur and just having. Being self employed and having a job for yourself is whether or not your business could ever operate without you for a period of three or four weeks, without running out of money and completely hitting the wall. Now, if you're. Now, by the way, there's no judgment here, and there's nothing wrong with either of these scenarios. I just want to make sure that we're all talking the same language. If you're building websites for clients and you've got a VA in the Philippines and you go on holidays for four weeks and nothing gets done, no invoices are raised, no money's paid, no value is delivered, no profit is declared, you don't have a business. You're a self employed freelancer with an assistant, which is totally fine. There's nothing wrong with that. But that is not a saleable asset. You never be able to sell that because you're it. You are the business. And I think that. I think the difference between that and a business owner is someone who is interested in utilizing people, processes and capital to build something that can operate without them. Not because I want to go and sit on the beach and be a lazy prick, but because I want to build something that is an asset. Whether I keep the asset or sell the asset, I'm interested in building assets, not just giving myself a job. I just want to draw that distinction. And I hope I haven't offended anyone in that.
[00:23:22] Speaker A: Yeah. And so the, the people that have sold to me have been probably categorized by what you just described. Someone who has not had the opportunity to move past that one, plus a couple kind of thing, and sometimes didn't want to. The most recent business that I bought, the person just wanted to be free from obligation of a division of his business. But then he wanted to continue on, on the parts that he loved because he's a builder. He's not playing Simcity 2000 like me, and it's all conceptual and 30,000 views. In trying to build a big business and building to sell. He likes what he does, he makes good money doing what he does. But the deferred obligation of a division of his business just got too much. And so for him to be able to go, hey, Mike, tap you on the shoulder. Look, give me some money.
One times annual is this amount.
If it's in my account in the next three days, I'd be happy to walk away from it. And so obviously there's a period of there of doing my due diligence and stuff like that. But largely the deals that I've been doing up until this point are characterized by people who have got to that point where there's just a problem and they don't want to or don't know how to get rid of that problem. So it's easier just to kind of sell it so it's worth something. They don't quite know what it is.
As I said before, we've looked at twelve. I would probably categorize two of those now, I didn't figure this out until afterwards. I would probably categorize two of those of people who just used me to price the book, but they didn't know how to establish a figure of which they should be selling the business for and all the rest of it. But I agree with you, there's nothing wrong if you want to own your own job and design and develop kind of like websites and help people with a single category or limited category agency.
But just be aware of any kind of deferred obligation that you're building because it can come back and it can kind of, you know, buy.
[00:25:31] Speaker B: Absolutely. And then when you're on holidays in Bali with your partner, you're opening the laptop every day because you've got a stick of shit that's broken.
[00:25:36] Speaker A: Exactly.
[00:25:37] Speaker B: John Warlow talks about this on built to sell. It's a great podcast, it's a great book. He talks about this a lot, that the best time to sell a business, and it feels to me like you're buying businesses at the best time to buy a business. He says the best time to sell a business is when is not. Is not. There's push and pull factors.
[00:25:56] Speaker A: Right.
[00:25:56] Speaker B: A push factor is when you are just cooked, you're exhausted, you're done, you don't want the bloody thing anymore. It's a pain in the ass. You just want to get rid of it. That's the worst time to sell a business, the best time to buy a business, probably the best time to sell a business is when it's doing really well. But you are just being pulled so much so that you want to do something else with your time. And you are. Maybe you found your calling, whatever it is, but there's no real major problem with the business. You could just hang onto it if you wanted to, but selling it is appealing because then you're really freed up to go and do this other thing. It sounds to me like some of the deals that you're doing that people are just like, I just need this problem to go away, and I don't want to fix it myself, and I'm happy to offload it.
[00:26:37] Speaker A: So we've got a better opportunity, we've got a death, we've got a divorce, and we've got a divisional restructure. You know, so those are all under some form of duress. And that's not because I've purposefully positioned myself to acquire through duress. I would be more the last one of the last ones that I looked at was a really healthy business.
And it actually probably is a good kind of segue into how I do a deal in the letter of offer and how we do it. But sometimes accountants and lawyers and brokers can sometimes destroy a deal, because a lot of the times there is this idea of how to value a business and what a business should be worth and all of these types of things.
One of the business that we looked at was a very healthy business, although it had massive kind of problems that were not easily kind of, like, overcome. But one of the biggest problems was the accountant was in the room, and the guy was an absolute, he's probably a good accountant. An accountant doesn't know how to buy or sell a business. They know how to push the numbers around a spreadsheet and get you out of your tax obligation. But normally, what's been really beneficial for me, and one of the things that I do really well and to start the kind of process of talking about how I do a deal is, normally youll get a tap on. My experience is I get a tap on the shoulder and someones showing interest that theyre wanting to sell their business, they will get me to sign a non disclosure agreement and say, hey, basically, you cant talk to anyone, you know, about what I'm going to show you. Please don't discuss it with anyone. All of those types of things. What I think is really cool about the way that I go about it is I put into the middle of the table a letter of offer. It's my letter of offer. It hasn't been kind of looked over by a lawyer, an accountant, or anything like that. And I explained to the business owner that this is our document, not my document, this is our document, and on this document you can write whatever you want. You can write, Mike, you're not allowed to fire my staff for the first six months, Mike, I want to carry on doing web design and development, so I'm not going to assign a restrain of trade.
When you take over the business, you've got to take over these servers, these softwares, all of those types of things.
At the beginning, what I'll say, and my love swear on this podcast, by the way. Of course, what I'll say at the beginning is, hey, outbound bound business owner, this is my letter of offer. And in here there are a whole lot of clauses, but you can write whatever clauses you want into it. And then what I do is I show them all the ways that I can fuck them, right? And I go, this is how I can fuck you, right?
[00:29:34] Speaker B: I love it.
[00:29:35] Speaker A: And this is how you need to write against me to make sure I don't do that, right. And they're like, okay, thanks. Yeah, okay, well, let's write against you so you can't fuck me. And then what I do is I say, and this is all of the risks that I'm taking when I buy your business, and this is how I'm going to write against you to make sure that those risks are mitigated. And normally that's a really, really good kind of like start off point. The biggest one, largely that I found, is that I dont nickel and dime them. And on the last one I didnt even look at the p and ls, right. I looked at the book value again one times, put that money in his account three days later, so hes happy. Anyway, we dont probably need to go too deep into why im prepared to overpay for a business, but it just comes from confidence.
If you can buy on a one times annual, and your lifetime, your lifetime relationship with your average client is ten years, well then you're fine. If you're buying at a one times annual and your clients get annoyed with you within two years, well, you probably shouldn't be growing through acquisition.
[00:30:56] Speaker B: And when you say one times annual, you're talking one times annual. What?
[00:31:00] Speaker A: Recurring revenue. So we don't buy any recurring revenue, we don't buy any project work. All we do is we up until this point, we buy on a one time.
[00:31:08] Speaker B: So one times annual recurring revenue.
[00:31:10] Speaker A: Recurring revenue, yeah. Yeah.
[00:31:11] Speaker B: Which is different to like, a lot of. Most businesses are valued at a. And in fact, the, the kind of global benchmark for agencies. Most businesses are valued at a, at a multiple of what's called EBITDA, or net profit. And agencies are typically valued at somewhere between three and six times net profit. Right.
Which is, and again, that's a whole other conversation, but you're valuing your businesses, the agencies that you buy at one times recurring revenue. So if they're doing $100,000 a year in recurring revenue and they're a $400,000 a year business, they're making $100,000 in recurring revenue. You're saying it's worth 100 grand.
[00:31:45] Speaker A: Most of the businesses that I deal with don't have a lot of project work. They don't have strong intangibles, they don't have brands that are kind of like received as industry kind of like leaders.
And often the brands going in the bin because were going to roll out the red carpet from Gherkin media, and theres a tax advantage to doing it that way.
And obviously, all deals are different.
There could be some that come in its like, well, that brands actually really strong in that niche or for some other reason, we have to buy it as a going concern, any of those types of things.
But largely what the people that I deal with want is they want to be free from it tomorrow. They want some money in their account, and they want to know that you're going to create that triple win where they get a good result, I get a good result and the clients get a good result.
And we can pretty much guarantee that. The other reason why we prepare to potentially perceivably overpay, there's two things to one times annual deal.
Number one, they are happy. Right. Most small to medium sized business owners, you give them one times their revenue, theyre happy. And the reason why theyre happy is because they know that even if they got ten times EBITDA, ten times zero is zero.
And what does a small to medium sized business actively try to do to avoid tax is they zero out their net profit through other.
All you got to do to decrease your net profit is increase your salary. So there's all of these things that a good accountant can do to make sure that a small to medium sized business has zero net profit anyway. And so if you've been doing that and then someone comes in and goes, hey, 2.5 to ten times a bit dead. Well, you zeroed out your net profit. And even if you use a, what's it called? There is a term for, if you use the one where you put back into, put back into all of the salaries and stuff like that, it really doesnt matter. The other thing as well is by the time ive done my due diligence, I know that theres going to be a huge portion of costs that arent actually going to ever apply to me because theres going to be maybe subcontractors that I dont need, there's going to be servers that I don't need, there's going to be softwares that I don't need and all of those types of things.
And if I keep the book for 24 months and I make no changes, I've got my money back.
If I make the changes that I know I can make sometimes. On one of the more recent ones, I had my money back within four months because of the changes that we were prepared to do and a few other bits and pieces.
So yeah, so my letter of offer goes into the middle and it basically says, hey, there's going to be a pro rata clawback. Hey, if it's a big business, there might be some vendor financing or some other kind of way to do.
[00:34:51] Speaker B: What's a pro rata clawback? How does that work?
[00:34:54] Speaker A: So say, for example, for easy maths, I buy your business for $100,000, which means that it should have had $8,000 worth of recurring revenue per month.
If one of those clients is $2,000 a month and they leave, well, I've got a six month pro rata clawback. So you got to give me back twelve grand of the 100 that I gave you. So it's a clawback, pro rata clawback. We do six months. And basically what that says to the outbound business owner is don't sell me any client that's volatile right now. Right. If I bump them, there's no claw back. Right. So the most recent.
So people, people might be interested to know. So the, the first book, the first book that we bought now operates at a twelve x. From what I bought it to what it is now is a twelve x. The second one is a six x, the third one is a three x. And the reason why I'm talking about this is because the fourth one is a 0.75 x. Now what does that mean? It means that its currently operating at only about 75% of the book value that I bought. Right. And so there was a portion of that, that uncle, fortunately for the outbound business owner, he sold me good clients and they didnt even give me a chance. We wouldnt even have a chance to bump them. They were just like, were not being acquired. Fuck off. Like, no way. Get, nah, send all my stuff to this other agency now. Right? And I was like, you know, well, I mean, imagine if you bought a business and then the clients were like, I don't want to meet you.
I'm not even going to meet you. Right. So I felt a little bit sorry for him on, on a couple of those ones. And then there was another client who's like probably one of the first real true, kind of like narcissists that I've ever come across in my career.
And I've figured her out pretty quick and got rid of her. Now I can't claw that back, you know, because it was kind of like my decision. It was no, yeah, yeah. No fault.
[00:37:01] Speaker B: That's an investment in your mental health.
[00:37:03] Speaker A: Yeah.
Like so bad. Yeah, yeah. And so that's your, that's, that's actually your clawback course. And the three big ones are normally vendor financing. So, hey, you know, I'm not prepared to put my money into this thing. I'll buy your company back off you over time using a different finance technique. The second one is restraint of trade and how that works. And sometimes people need you to avoid your restraint of trade because they want to keep on operating in some format. And so that comes down to trust. And then the third one that protects me is the pro rata clawback, which is again, like a financial clause. That means that if you sold me something that you shouldn't have, it's likely that I'm going to be asking for my money back.
But what we do, I actually kind of create a ledger within the letter of offer even after it's been signed off and finished with the deal. And normally what I'll do is I will put in up to like a level of clawbacks, but it'll be balanced out on the performance of the rest of the book. So say, for example, the most recent one that I bought is operating at about a. .75 in fact, it's not. Now it would be back up to about a one because we've sold some of the existing clients on more project work and some SEO growth plans and some discovery and all the rest of it.
But sometimes what I'll do is I'll say, hey, I'm going to put the clawback amount back into the letter of authorization and let's just see how we go over the next six months. If you send me any new work or if someone elevates to a higher plan and you had mentioned that to me, maybe it'll all kind of like, balance out. And I prefer to do that rather than like, hammering the claw back the minute that it comes.
And so if you're reasonable in the letter of offer, if you are reasonable in the financial clauses that you put into the letter of offer, if you pay them what they want, that's a big one. If you give them the ability to walk away and you don't burn them on clawbacks or be difficult to deal with afterwards. The reason why I like to do that and the reason why, apart from the guy who died, I have a really good relationship with the people who have sold me businesses is because that's what I want. I want them. If someone rings, oh, hey, hey. I'll finally get ready to go on that website that we've been talking about for the last five years. Well, then they'll send that to you.
They'll kind of, just because they sold the business doesn't mean that all inquiry to them as a person will kind of stop.
And in fact, the second person whose business I bought, he's actively building another book and will likely come to me again in two, three years and say, hey, do you want to do that deal again? And I might go again.
[00:40:15] Speaker B: Who died? You just mentioned.
[00:40:18] Speaker A: Yeah, so that's, it's funny. There's two little stories that come out of this. We had someone tap us on the shoulder, hey, this guy's died of COVID And, you know, we are acting on behalf of the wife and we'd like to sell the book. Yeah, so that one was tricky because I couldn't write against anything. There was no protection clauses. And so we got it. We got it basically cents on the dollar on the deal. But it was, again, a number that represented, there was a number that represented enough money for the wife to go and do whatever she needed to do next. And it also meant that she was no longer obligated to look after any of the clients. And for us, it was, we cant put any. Think again. Well, im not going to put a clawback clause on a widow, you know what I mean? And so what we said was rather than one times annual, this is a number that I would be comfortable to take a risk on running your book into the future, knowing that I can never ask any questions. Theres no one to go to. And go, hey, this client did this or that said this or that. Your rest of it.
Yeah. So yeah, it was a COVID death, decent sized book, but yeah, but if a kind of an outlier, most people will have some form of succession planning, even if they aren't expecting to die.
[00:41:48] Speaker B: You would hope. I don't think most people have some form of succession planning, Mike. I think most people are living in denial. Haven't thought about it. What's one of the weirdest things you've seen? I had this conversation. People approach me all the time about wanting to sell their agency and I have to give them a reality check. I had a guy recently, actually, who put a, who was looking at acquiring another agency. And I was brought into the conversation and this p and l, you know, I signed NDAs and all that kind of stuff. This p and l comes across my desk and the guy's making about 580 grand a year in revenue. Um, but, uh, there was, you know, again, he deliberately kind of reduced his, um, his profit, was paying himself and his wife, who didn't work in the business at all, was paying her, you know, 70 grand a year salary or whatever. And, um, and I said, you know, based on this p and l, I reckon this business is worth about 100 grand, right? And the guy wanted 1.4 million for it. So he wanted three times revenue, right? And I said, well, thats three times revenue or about twelve times profit. Like, is he stoned? Which podcast has he been listening to? Because no ones going to pay twelve times profit or three times revenue. I said, first of all, tell him to go and clean up his fucking profit loss statement and come back with something thats legit.
[00:43:11] Speaker A: Oh, yeah.
[00:43:11] Speaker B: Because theres all the car payments go through the business and said, okay, well take all that shit out of the p and l and then come back with a real p and l so we can actually have a look at what it's worth. Because at the moment, it's worth about 100 grand.
[00:43:23] Speaker A: That's why sometimes avoiding the p and l is a good idea. Right?
[00:43:27] Speaker B: Yeah. So what's the advice you give someone who's got an agency that's doing 500 grand a year in revenue, and they think it's worth a couple of million to buy Raoul.
[00:43:37] Speaker A: Well, what you've got to do is you've got to think about who just put yourself in the other person's shoes. So we had one recently, guy wanted a million bucks that was making 250 and had a very small count of clients.
And his accountant had told him that it was worth a million bucks.
And so based on what?
[00:44:02] Speaker B: Based on what? The hallucinogenic mushrooms I had for breakfast. Based on what formula?
[00:44:06] Speaker A: So I said to him, hey, you won't let me do vendor financing, you won't allow callbacks, and you won't allow a restraint of trade.
And I would need to run your business exactly as it's running now for five years to get my money back.
And for every client that leaves, I lose 120 grand. And then I say, would you do that deal? And he said, well, this is just what my accountants told me to do. And I was like, yeah, but I'm talking to you. Would you do that deal? And I said, I'll do it with vendor financing and I'll make the first quarter of a million dollar payment. Now, my accountant told me all upfront, no restraining trade, no vendor finance. And I was just like, you're not actually selling your business.
[00:44:54] Speaker B: That's right, that's right.
[00:44:55] Speaker A: You're wasting everyone's time.
[00:44:57] Speaker B: That's right.
[00:44:57] Speaker A: The weirdest one was the fraudulent one, and I consider it fraud. A couple of guys hit me up.
Hey, Mike, we've got 400 clients. So this is my, by the way, this is my dream acquisition. Hey, Mike, we've got 500 clients. They're all paying about twelve to $13 on average per month for WordPress hosting, and they haven't been talked to in a while. Then I was just like, jackpot, let's go. I want this. I want this. Service structure was in a mess. I knew I could make money there straight away.
Signs of life. So we order for what we call signs of life and we can do this whether the client, whether the outbound vendor gives it to us or not, because most people will put a citation on the bottom of their websites. And so basically they wouldn't give me the client list. Oh, you were a little bit uncomfortable about giving me the client list because you could talk to them. Actually, there's two weird ones. I'll do this one first and so on. The tenant was like my perfect acquisition. Because if we buy 500 clients who are on WordPress, who have just got basic hosting for twelve, thirteen dollars a month, and they haven't been talked to in two years, and we roll them up to care plans, that's another 1012 15 x company for me to acquire. And enough work, we do about 150 websites a year. So that's the next three. I can go on holiday for three years if I buy a business like that. And long story short, it was a hosting business, but then a lot of the clients were owned but the relationship was owned and the hosting was put in by one of the partners who had an agency.
And I was just like, so I can't talk to 350 out of the 450 clients.
[00:46:40] Speaker B: Right, right.
So, so let's value it on 150 that I can talk to.
[00:46:46] Speaker A: And then there was a whole lot of other weird stuff that was quite funny because they wouldn't give me the client list. I was like, by the way guys, here's your client list, I can find out whether you're not.
And I was like, which, let's have a look. Let's go through and take a sample size. Which are the ones that I'm buying and which ones are the ones that I'm not? And by the way, the ones that I would be buying are the ones that have poor signs of life. Poor signs of life that you can basically tell that that business isn't functioning anymore by looking at their website and social media profiles and stuff like that.
The second one, I don't know whether it was on your community or whether it was on the Edmund Barr community, but this guy posted, hey guys, my friend's husband has died, he has an agency and we're looking for potential buyers.
I've rang them all to let them know what's happened.
I'm keen on taking some of the clients on my own and I've had a conversation with them.
We have sent them all their logins, details and all the rest of it for if they want to leave and something else. And I was just like, you just threw this widow's last payday in the bin with this post, right, because no one's going to buy it. Now hold on. All the clients have been made aware something bad has happened. They've been given everything that they need to leave. You've picked through the clients and had conversations with some of them, right? And there was another really big thing that he did wrong. And I said like congratulations on throwing the value of that book in the bin, right? And everyone was like hey, don't be mean, he's just trying to help. And I was like well what he did whilst trying was completely alienate someone like me to buy in that book because theres no value on the best.
And so its one of those things from any form of capital deployment that you use to grow your business. So were looking at talking about my kind of donkeys and stallions in the stables. Were looking at a new type of capital deployment into the states in March.
I think there's opportunity for a business like Gherkin Media to operate out of there. We'll obviously continue to grow through acquisition and later on in the year we'll also try and get good at actually marketing gerkin media through traditional realms.
But once you get to the point where you have surplus capital and you want to use that capital to grow, or you actually should be using that capital to grow because theres a massive tax advantage to do so. And I think it all helps if youve got your company ready to go. So the biggest advice that I can give to someone whos looking to do this isnt necessarily go and look at businesses to buy and have these conversations all the rest of it, or obviously that would help its build to sell in your own business first, because once youve done that, you will understand what to look for in businesses that you look to buy.
The person who buys me, it's going to be the quickest decision of their life because I've removed all of the risk, large number of clients, small average order values, really good team, really good brand, not dependent on you as a designer, globally positioned, not that great australasian business.
And hence why I'm excited about some american deployment in March next year. I already know what city I'm going into.
I know the stats of that city. I know that it will kind of like work perfectly. But to be in a position where you're going to start to kind of grow through these means is basically pretend. If I have to go on Dragons Den tomorrow and they're going to ask me some questions, am I going to get caught out? If you're not going to get caught out of, and you understand the metrics in which people look for when they're buying and selling businesses, then growth through acquisition is a really fun, really kind of exciting, somewhat kind of addictive way to grow your agency. And if you can do so in a way that creates the kind of triple win for yourself, for the outbound business owner and the clients that you take over, the first thing, I think one of the first things I ever said to you on the original podcast that was on you is that opportunity lies where responsibility has been abdicated. And this also applies to growth through acquisition as well as care plans for your clients.
[00:51:30] Speaker B: Yep, totally love it. Love it. So some homework, watch Shark Tank or what is it?
[00:51:37] Speaker A: Dragon shark Tank.
[00:51:39] Speaker B: Although, yeah, I love it too because I always put myself on that show and go, well, if they asked that, I wouldn't know. So guess what I'm doing tomorrow at work. I'm figuring out what that number is and what the answer to that question is makes you a better business owner. And read built to sell by John Warlock. It's a great book. And check out the built to sell podcast. It's a fantastic podcast. I love because it's all about stories about people who have sold and bought businesses. The one from Rob Walling when he sold drip to leadpages is a fascinating episode. I mean, I know Rob and his wife, Cherie. I think that's her name. I think I just got her name wrong. I'm sorry. If you're ever listening to this doctor Walling, she's been at our shows and spoken and been at our events. Anyway, the story of him selling drip, the lead pages, which was amazing, and then lead pages, that company ended up selling lead pages to an investment arm and just kept a drip. It's a really interesting story. Anyway, built to sell. Check it out.
[00:52:36] Speaker A: Yeah, you got me to read early on Cadence as well.
[00:52:40] Speaker B: Cadence by Pete Williams.
[00:52:42] Speaker A: Fabulous book is really good. And yeah, again, hopefully the stuff that I've talked about today is kind of helpful to people who are watching podcast. And just like last time, if you want to know how to price a book, if you're thinking about building for sale, if you want a conversation with me, there's a little book, an appointment tab at the top of my website that any agency owner or anyone's welcome to book a call on and have chat. Last time I said that, I think I had about 50 agency owners take me up on it and talk to me about care plans. And I loved every single one of it. So thank you to those that did.
And then lastly from me, guys, just remember, and Troy probably doesn't like me talking about this, but just remember four years ago, I lied to Troy about my monthly recurring revenue to get into mavericks.
And so it doesn't take long once you've been incubated into the Mavericks community to get to where I am. So four or five years ago, I didn't even meet the by base pre requisition or pre requirement to even to me. And now I've been on multiple times talking about how we've done some cool stuff and all the rest of it. So make most of that mavericks community. And if you can come, Maverick, because.
[00:54:06] Speaker B: That'S where Adam Silverman also lied to get into Mavericks Club, too, and he ended up becoming a coach. So there's something in that. Thank you. That's what Mavericks do, right? That's what mavericks do. Thanks. I appreciate the kind words. And I will say you've done all the work, mate. So credit to you. Thanks for coming on and sharing again. Mike Spratt from Gherkin Media. We'll put a link to Mike's website in the show notes here. Hit him up and have a chat. And yeah, thanks to looking forward to doing it again sometime.
[00:54:31] Speaker A: My pleasure. Talk soon.
[00:54:35] Speaker B: Hey, thanks for listening to the agency hour podcast and a massive thanks to Mike for joining us. Our next live event is happening in San Diego in October and it will sell out. So if you'd like to get a taste of Mavericks Club and want to tap into our amazing community of agency owners and coaches and mentors, then check out the link in the description and book your ticket to Mavcon today. It is in San Diego October 14 to 16 and early bird tickets are on sale for a couple of weeks, so check this out and get your tickets before they sell out. Folks. Remember to subscribe and please share this with anyone you think may need to hear it. I'm Troy Dean, and remember it's possible to turn peanut butter into diamonds. Is that right.
