Intro 00:00:00 Welcome to the Creative Agency Success Show, the go to resource for agency owners looking to scale their business. Join us every week to stay ahead of the curve and position your agency for future success.
Jamie 00:00:15 All right. We just got done talking with Jonathan Baker from punctuation, and I thought it was a really good conversation and a topic that comes up almost on every other sales call is, okay, what how can you help us prep for M&A? And so, I know this is a conversation that is really people in the industry are really thinking about. So, I'm glad you joined me. On this one hand, I know you had some really thoughtful questions. I know after the show we had some good conversations as well.
Hannah 00:00:39 Yeah, Jonathan said a lot that I'm really sitting here still chewing on, from that conversation of just how it how it applies to my clients and just the general M&A landscape and just how that's changed from a trend perspective. there's multiple things that came up in the conversation that, as a listener, I highly encourage you to do a little thinking on if you're thinking about an M&A, like, really take these things that he said into consideration because it sounds like there are some ways that deal structure is changing.
Hannah 00:01:13 I don't know about you, Jimmy. One thing I also took away from that conversation were his comments about Esops. And in terms of what they recommend from that perspective, because I feel like I have a lot of clients who come to me and say that that's part of what their vision for the future might look like, that that's part of what they're considering. So, I think there's a lot of tidbits that might be at least help our clients and anybody in this space go into their decisions as wide open.
Jamie 00:01:39 Yeah, that's the biggest thing about acquisitions to me is, is I think the more you know, going into it and the more you understand going into it, the easier the process is going to be. And I think, Jonathan said that in several different ways throughout this, throughout this podcast. And I think that's that definitely is from my experience, what I see as well as the more prepared you are, this is the one situation where you almost can't be overprepared, right? The more prepared you are, the easier it's going to be, the more money you're going to get, and the easier the transition is going to be after the fact.
Jamie 00:02:06 So again, took a lot out of this. There's a lot of pins that I put in and like you said, just kind of chewing on some of the stuff you said. And this might be some information we need to get back to our CFOs. And I'm glad our listeners are getting it by listening to this podcast. So again, fun episode, really good information and a lot to think about here. Hello everybody. Welcome to today's episode. I'm really excited about today's guest and today's topic. And I'm also really excited that I have Hannah Hood joining me instead of Jodi once again. So anytime Hannah's on the show, it's going to be a it's going to be a good show. So, I'm happy to have Hannah here. But we're also, we're also joined by Jonathan Baker from punctuation. So, very excited to talk with Jonathan. He's definitely a well-known name in the industry and excited to have him here. So, Jonathan, why don't you just start off by telling us a little bit about yourself, a little bit about your background and a little bit about your company.
Jonathan 00:02:52 Sure. Jonathan Baker yeah, I am one half of punctuation, which is a kind of boutique consultancy. We work exclusively with small to mid-sized independent marketing services firms. I head up the M&A side of the business, helping those firms, get ready for sale and then doing kind of searches to help them sail or, helping with internal transactions, bringing on partners, that type of thing. My background is actually in, brewing. So, I also own a craft brewery. My two business partners are running that day to day. And, you know, a few years back, pre-COVID, we went through the M&A process as sellers and kind of got left at the altar. And so my, fascination with M&A stemmed from that. And I've always been around the marketing industry. My focus has always been marketing so, saw an opportunity to jump on board with my father to help kind of build out this side of the business, which we've been doing for four plus years now.
Jamie 00:04:07 Yeah, it's I was waiting, and I was going to ask if you didn't tell me there's anybody that's in M&A has some kind of story that goes along with it because no one's just like, oh, I want to get involved in M&A.
Jamie 00:04:16 Usually it's a transaction gone bad or just oh wow, that's a different process than I thought it was going to be. I want to help other people get, get ready for that. So do you want to just give us a little bit more of that story and kind of what, what led you to. Okay, this is something I want to help others navigate the waters of.
Jonathan 00:04:31 I mean, you kind of summed it up right. It was both of those things. It was a process combat. And. Oh, I want to help other, owners figure out how to do this better than I did. going into the process, I, I assumed that, you know, the valuation was like a spreadsheet, right? That everyone just agrees on. And then once everyone agrees on the spreadsheet, we just move forward and, turns out it's a lot more nuanced than that. And it's a lot more emotional than that, particularly for the sellers who have built this thing that is their baby and trying to figure out how to transition it, you know, outside of themselves to someone else.
Jonathan 00:05:14 and every process is a little different. But knowing kind of what to look out for and what are the, you know, what are the highs in the process, where the lows and the process. Being able to coach founders through that really stemmed my, my interest. I think by and large, the marketing industry is headed by really good people trying to do good things, and they're really good at marketing. But no one's really good at M&A because it's something you only do once, hopefully, if you do it right. so, you know, I, I just kind of saw an opportunity to come on board and help Steward people through that process.
Hannah 00:05:57 Well, the valuation is a piece that obviously we as CFOs here have a large part in just especially coaching our clients through that, making sure that there's some hygiene around that valuation piece. But you talked about some of the nuances, like what are some of the non-financial nuances of the valuation from your experience and especially what you're seeing in the process right now?
Jonathan 00:06:19 Yeah, a lot of it is buyer dependent.
Jonathan 00:06:21 So, unfortunately like kind of hard to tease out for a particular buyer how they're going to value things until you're in that in the middle of it. But things like your positioning is really important. your client concentration, how you know, how big your, how big of a percentage of revenue your largest client is, percentage of recurring revenue, the seniority of your leadership team, the kind of just financial trends, right? Are your profit margins going up or down? Is your is your AGI going up or down? and I'm sure I'm forgetting some others, but those are some of the big ones.
Hannah 00:07:04 Yeah. No that's helpful. I feel like clients all the time, like we talk about that and obviously it's something that we want to keep in mind, especially with ones that have like a long term focus of like what an M&A is in their future. And they want to be sure that we're keeping a close tab on that. But then also whenever it comes time, it's like, oh, wait a second.
Hannah 00:07:20 Like, got to figure out what that actually means for me and how it's actually going to affect me in this process. but speaking of that, I have a lot of clients who, especially when they first come to us, they tell us that that's in their future, that's their goal. how soon do you see people starting to really keep a close tab on that process? Go ahead and start the conversation with that. Like, I'm just trying to figure out, like if I have a client that comes to me, when should I be making sure that we're having that conversation and bring in somebody like you and to help us with that process?
Jonathan 00:07:51 I think the biggest factor there is making sure that they understand the process and the post process transaction process. So, in all likelihood a percentage and maybe a large percentage of the purchase price is going to be contingent on hitting certain, you know, targets post-sale. And so, there's going to be in many cases, you're going to be required to be there 2 to 3 years after you sell.
Jonathan 00:08:19 And so what you're trying to do is really back into like, when is the right time based on when I think I'm going to run out of steam. How much gas do I have left in the tank? are there other things I want to do with my time? And, you know, you're likely going to want to prepare for, you know, give yourself a year or so for the sale. So now you're talking about 3 to 4 years. So, 3 to 4 years before you want to be completely out of the business is when I'd start thinking about it.
Jamie 00:08:50 Yeah, that's really interesting because I don't I think that's a really point that hopefully everybody listening to this podcast understands. I'm not sure that's what everybody knows is a lot of people think M&A. I'm ready to get out of this business once it's sold, I'm done. But I think, you know, a lot of the part of the valuation is those future numbers. Okay. So, we're a $6 million company. Guess what.
Jamie 00:09:07 Next year we're telling the people we're going to be a $15 million company. And then I can just like shake my hands of it and get an awesome valuation. That's not really how it works anymore. So do you want to talk a little bit about things like what those agreements look like, what your role is post-acquisition and kind of how that works.
Jonathan 00:09:22 Yeah, I would say philosophically, the buyer is doing what they can to reduce their risk in a transaction. So, you understand that that's where they're coming from, right? And in professional services there are not assets like yours there's nothing to kind of back the business if things fall apart. It's really just client relationships and the people. And so, you have to hedge your bets against losing clients and losing people. And you do that by putting money at risk in the future. So, I would say, you know, every deal is different, right? But let's say, like the average for small to midsize deals would be you get 50% of the money upfront, the rest you'll get, annually.
Jonathan 00:10:16 And, you know, for over two years, kind of one chunk of 25%, the other chunk, 25%, both of those contingent on hitting, let's say, top line revenue targets or something like that. there's obviously a much, much more nuance. If someone's using an SBA loan to buy, then there's things you can and can't do. There's some instances where, you know, if folks are doing a roll up, they might actually put more into it up front, but the rest is actually rolled into the new entity as equity. And so, you may or may not see that ever. And you have very little control over whether you see that. So, there's different flavors to all of this. But on average that's kind of how it works.
Jamie 00:11:04 Yeah, I think that's what you mentioned is like I said, I think it's a really key point for people to understand is that there is going to be some involvement afterwards. And so can you. I want to talk a little bit more about that.
Jamie 00:11:14 And a lot of people have a lot of pride in what they're doing, and then they sell it. And oftentimes the new company is going to change things about the existing company. So how do you help owners deal with those upcoming months or years where they're going to be working in the business instead of on the business and just doing different things? And it's going to be just different than what they're used to.
Jonathan 00:11:33 Well, the biggest thing we try to do is, I mean, you know, preventative maintenance effectively. So, we don't want them to get into a relationship with someone where that's going to happen, where they're going to change things too drastically. So, we try to help them understand and we try to understand what is the seller's kind of long or the buyer's long term vision? Why are they buying this and how does it fit into the puzzle? What changes do they expect to make to the business and over what period of time? Right is this are they going to run it as a standalone, keeping the name, keeping the same payroll, or are they going to roll it into their name immediately? And all of these things have implications, obviously on the business, but also kind of emotionally, and then a big part of what we do is trying to understand where the seller's the principles of the sellers kind of see themselves thriving most in a new organization.
Jonathan 00:12:36 and sometimes it's in a similar role, sometimes it's in a new role. And if they have kind of good, you know, leaders in the wings, that can often be an option. we've dealt with buyers who have acquired multiple firms. And over time, the principals at those firms have actually completed their earn outs but are still employed at the firm because they're just having fun. Right. Like sometimes selling is more about getting out of the risk part of the business and having that. Wait, and then now you can, you know, maybe you fall in love with the M&A process, and you want to be a part of the M&A team. Like there's options when you are selling to a larger company. That is one thing that I think folks don't take into account is oftentimes selling to a larger company is a good thing for your employees because it gives them upward mobility where they might have had none or little beforehand.
Hannah 00:13:35 Yeah, that's some really good points. when you're talking about that preventative maintenance and deal structure, are there things that whenever clients come to you that you advise them highly against from a deal structure perspective to help with that preventative maintenance perspective, just to be sure that, like, you're like, this is like my hard know, like in terms of non-negotiables, like, do you have any of those things that you would just highly advise clients against?
Jonathan 00:14:01 I think our only hard, hard no would be an Esop.
Jonathan 00:14:04 So, we strongly advise against Esops. We often advise against selling to kind of traditional private equity. that very often is not a good cultural fit. Given the way that they try to run their business now, I will say there are smaller private equity firms that are, on the less evil scale. And sometimes they're trying to do pretty cool things. So, that's not kind of an across the board thing, but other than that, it's really dependent on the person and trying to understand what they want personally out of life. I think that's one thing that, you know, as a business owner, I always appreciate talking to other business owners, that, you know, you created this business for yourself, right? And so, you're selling it and you want to do something like, what do you want to do with your time? What do you want to do with your money? And like, let's try to figure out how to make that happen even through a sale.
Jamie 00:15:04 So go into the, the Esop.
Jamie 00:15:07 I think most people understand the private equity thing, right? Most people understand that, like a lot of private equities, they have, they have one goal and that's to that's to make profits. And they're going to squeeze the they're going to squeeze the juice out of that orange as much as they can. But explain the Esop thing and some of the traps that can happen with an Esop.
Jonathan 00:15:23 first you've got in an Esop, all the employees own a piece of the business. Right. But employees are started as employees. They aren't necessarily entrepreneurial. And so, what you end up having oftentimes is safe, unremarkable decision making. You don't have a single voice able to make hard decisions about the business. Another reason is just the financial risk. Concentration that you are signing your employees up for. Right. So, if you have a kid, you're not gonna tell that kid to invest in one stock. But if you have an employee with an Esop, you're effectively telling them to employ that all or nothing on this, right? Which is just not a safe investment strategy.
Jonathan 00:16:15 It's also harder to undo. So, it kind of eliminates other options, right? You can't create an Esop and then easily flip it and sell it to a private equity firm. That's not to say you can't, but you have to undo all of it first. and I think there are also just fixed costs annually to, you know, establish. Yes, but also maintain, the Esop. It requires a really expensive valuation. Big adviser fees, legal filings and, you know, particularly for small to mid-size companies, these can kind of add up. I could go on, but I feel like I gave you enough there.
Jamie 00:17:00 No. That's great. Like I said, we've definitely worked with companies that are esops and thinking about Esops. And, like I said, I think it's one of those things. Oh, it sounds great, but there's a lot of logistics that go into it that if you're going to do it, you have to be 100% bought in on it. and really to kind of go down that path.
Jonathan 00:17:16 And you have to have the right employees for it, right? Because you don't want to sign employees up for something that's not going to be good for them.
Hannah 00:17:24 Yeah. I feel like they definitely need to go into eyes wide open. And I feel like everything you just outlined would help somebody in that situation go into an Esop decision with eyes wide open because like you said like you've got really got to make sure that your employees are looking at the business through an owner's eyes and really have that owner mindset and that can oftentimes be hard, to accomplish and, and hard to do in that situation. Have you had a situation where somebody was an Esop and then wanted to do an M&A situation? Yes. Oh, how'd that go?
Jonathan 00:18:01 We got it done. But it took a while. Right? Because you've got to get all the employees on board, basically.
Jamie 00:18:09 It's a negotiator like The Godfather.
Hannah 00:18:11 Yeah, yeah.
Hannah 00:18:15 Well, I'm happy to hear at least it can be done that. That way if somebody listen to it, they're like, oh, shoot.
Hannah 00:18:20 Like a party committed to going down this path that maybe I shouldn't, that there is still a way, there is still a path forward if something changes in that scenario.
Jonathan 00:18:29 Yeah.
Jonathan 00:18:29 I mean you're still going to, you know, hopefully the firm is still well run and making money. Right? Because it's got to be worth something in order for it to be worth flipping and spending all that time to do so.
Jamie 00:18:42 So, I'm gonna rewind the conversation a little bit and rewind the process a little bit. So can you kind of go into what I, what I think the biggest mistake I get from when it comes to M&A is, is companies just think they can flip the switch. It's like tomorrow yesterday they weren't even thinking about getting acquired. And now they're like, okay, we're ready to get bought. We want it to happen immediately. What are some of those steps that should happen in between those two things? And what should companies be thinking about in order to make themselves more marketable, even when they're not necessarily thinking about selling quite yet?
Jonathan 00:19:11 One thing I try to coach owners to do is to get a valuation sooner rather than later.
Jonathan 00:19:16 And even if you're not ready to sell, you at least need a starting point number to know how far away you are from getting there. and so, we'll do valuations annually for some of our, some of our clients just to help coach them through the process. Right. But once you have a valuation, it's going to be, you know, and let's say you, agree on the number and the general terms that you think you can get. You're going to have a few weeks to create marketing materials, maybe a month there. Then you're going to go to market, and that's going to take three months to dig up enough interest. And then you finally find the right fit. At the three month mark, you sign an Loi, and then you've got three months of due diligence, which stretches six months of due diligence. And so, you're pretty quickly at a year. You know, this whole process can be done in three months. I would say that is very unlikely, but it can happen.
Jonathan 00:20:18 but 6 to 9 months is usually the average that we see, and you just have to. And that's if you are 100% ready to sell. You know, books are in good order, right? but oftentimes the books are not in good order. And so, we need to go back to the beginning. I'm sure you've seen books Folks in terrible shape.
Hannah 00:20:42 Oh, no. Never. Never.
Hannah 00:20:47 I will say that's one.
Jonathan 00:20:48 Of the first things you should do is make sure that your books are in good shape, because that's going to be key to everything else. And frankly, it sends the right signal to a buyer that they're buying something that's buttoned up, run like a business, right? So, stop running personal expenses through the business. Make sure that you understand everything on your balance sheet and there's no bullshit. Am I allowed to cuss on this podcast? Definitely.
Hannah 00:21:15 Please do. Every now and then. That's fine.
Jonathan 00:21:20 Okay. No bullshit balance sheet then. and make sure your chart of accounts makes sense.
Jonathan 00:21:26 And that's just for you as well as an owner, you know, that's going to help you run the business better, but it also will help a buyer understand the business quicker and will help you get through that process quicker.
Jamie 00:21:36 Yeah, I know that's always the first thing I'm talking to companies about when they're doing even thinking about doing a sale, this is the value you get can go down pretty quickly. If due diligence is happening and they give you a request list, and it takes you four months to pull that request list and half the stuff you're giving them is wrong and you can't answer questions. And so, like, you really have to know your numbers inside and out and be willing to provide that data pretty quickly in the due diligence process to not scare companies away.
Jonathan 00:22:01 Absolutely. Yeah. You want to be able to react quickly once you're ready. and you also need to be running your books on an accrual basis. if you're not already.
Hannah 00:22:10 You're speaking my love language over here, like all the chart of accounts things clean books, accrual basis.
Hannah 00:22:18 Like I love that you're telling people this. So, I feel like that's right in line with exactly how we tried to advise our clients. So, this perspective is really great. I mean, shameless plug for anybody who doesn't have somebody doing that. Like we do that if we can help with that part of it around here. And clearly you can help with the M&A part of it there. I guess I also kind of want to hear, like, what have you seen like, since you've come into this space, like, what are some of the trends that you've seen? Like what's the difference between when you started in this space versus where we're at now? And have you seen any trends that have happened over the course of time that maybe we should be paying attention to?
Jonathan 00:22:57 I think there was a lot of money floating around post-Covid in 2021, and that inflated valuations kind of artificially. So, you are seeing, pretty big multiples. And when I say multiple, that's a multiple on your adjusted EBITDA.
Jonathan 00:23:16 So you know, is that a four on, you know, four times you're just at EBITDA or is six times you're just EBITDA? valuations have since come down. And because interest rates have been high, and I think 2023 was pretty soft for a lot of our clients at least. You just didn't have as many folks entering the market to sell. until recently. Now, this year, that has started to pick back up, but there's still a large number of buyers out there, because remember, we're talking about small to mid-sized agencies. They're not going to be super, they're not going to need external financing to the extent that, you know, a large purchase might require. So, the interest rate stuff doesn't matter as much to these folks. and so, you've got a ton of buyers out there and you don't have as many sellers. now, now, multiples are not what they were in 2021, but I don't think we're ever going to get back to that. Or if we do, it's going to be a fluke and you're not going to be able to time it.
Jonathan 00:24:24 So, now is a good time to start thinking about selling, if that's something that's in your future. kind of based on the trends that we've seen, and we have started to see an M&A activity pick up a little bit. You haven't seen as many transactions because there haven't been as many opportunities for firms to buy.
Jamie 00:24:49 Yeah, I think that's really interesting perspective. We've talked about the Covid boom a lot of different times and kind of what that brought in the cash it brought and the, you know, the opportunities it brought. And I think that was one thing we always recommend is like, you know, you want to be in a good place. And so that way when times are not as good that you can kind of jump in and take advantage of it. But I think everybody was kind of thinking that during Covid, which is interesting. So, we've kind of hit the time of the podcast. We get a fun question. And this is going to be the first time we've done it this way, where I don't have an answer to this question, and I'm not sure if Hannah will either.
Jamie 00:25:17 But, so you mentioned the brewery aspect of your life and your career. And so, Hannah and I both travel a lot. And one of the things that I find funny is every town you go to; someone tells you this is a great brewery town, or this is a great microbrew town. And so, like, I feel like whether you're going to Boise, Idaho or Saint Louis or Nashville. Everybody wants to tell you that. So, I'm curious what your opinion is for even just a top 2 or 3 true microbrew or brewery towns in the US. And Hannah, if you have an answer to this as well, you can but I, I, I don't know I want, I want the answer from Jonathan here. So, I mean this is.
Jonathan 00:25:53 Going to get me in trouble.
Jamie 00:25:55 I guess that's the goal.
Jonathan 00:25:58 Off the top of my head, I would say Asheville, North Carolina.
Hannah 00:26:02 Okay.
Hannah 00:26:02 Our producer Roxanne's in that area. She would appreciate that answer? Yeah.
Jonathan 00:26:07 Portland, Oregon.
Hannah 00:26:09 Okay.
Jonathan 00:26:11 there, in a.
Hannah 00:26:11 Couple weeks, you're gonna have to tell me where to go.
Jonathan 00:26:14 Maybe Denver.
Jamie 00:26:19 That's where I'm at. So.
Hannah 00:26:20 Yeah, that's. I look at.
Hannah 00:26:21 There in your neck of the woods.
Jamie 00:26:24 Awesome. Well, I appreciate the answer.
Hannah 00:26:25 Good ones.
Jonathan 00:26:26 And there's so many good ones. And that's, you know, when you hear people say that what they're really saying is, Brees say something about geography. So yeah, when you say, you know, this is my local brewery, that's almost like a flag telling people where you're from. And so, what they're telling you is, I am from here in this place is cool.
Jamie 00:26:49 Yeah. No, I and I don't have a I never I'm not a beer lover. But it's like when I do drink a beer, I'm like, oh, this is good, but I'm not. I don't have a distinguish taste bud where I can go. That's the best beer I've ever had. So, I enjoy it and I do like to go local when I go to places because of that reason, because it is a pride thing and it's something you're not able to get somewhere else necessarily.
Jamie 00:27:06 So, I use so much.
Jonathan 00:27:08 More than the beer. Jamie. It's about the experience, the culture of meeting a stranger and talking, you know, what music are they playing? What's the lighting like? How is this experience making you feel?
Jamie 00:27:23 So, when are we going to travel together. So, you have to send me your agenda of your next couple trips so I can, maybe I can attend a conference together and you can help me get that experience.
Hannah 00:27:32 I think your dad was at the conference. We were at a few months ago. So just, you know, come on with him. We're going back to that one in a few weeks. So, we could just hit up some breweries together. Yeah, exactly. So, for brewery recommendations and M&A activity, how would our listeners get in touch with you outside of this podcast?
Jonathan 00:27:54 You can go to our website, punctuation.com. and you can contact me there, Jonathan, at punctuation.com is my email as well.
Jamie 00:28:03 Awesome, awesome. This is a fun episode.
Jamie 00:28:05 I know M&A is a very hot topic. Not just now but all the time. And so, I think this episode is one that's going to have a long life and a long tail. So, I appreciate you coming on and having these conversations. And I hope our listeners grabbed a couple of things from this and we'll take it moving forward. So definitely appreciate the time today.
Hannah 00:28:21 Absolutely.
Outro 00:28:22 Enjoy this podcast. Visit our website Summit Connect to get more tips and strategy for achieving business success. We're here to be a resource in this ever-changing industry.
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