Sun, 6 June 2021
Todd Taskey has over twenty years of experience as a founding investor, board member, and management team of several business ventures. Now, as M&A at Potomac Business Capital, he helps CEO's and entrepreneurs develop a successful exit strategy by understanding the mid-market investment banking process. Today he joins us to talk about roll-up strategy, the mergers and acquisitions red flags you should avoid, and what you should be offering as an agency if you're thinking of selling.
3 Golden Nuggets
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Secrets to Implementing a Successful Roll-Up Strategy for Your Agency
Jason: [00:00:00] Hey, what's up everybody. Jason Swenk here and I have an amazing guest today. A repeat guest, Todd, where we're going to talk about a roll-up strategy because there's a lot of things out there right now that are going on and this market is growing very quickly with, uh, mergers and acquisitions and, Todd is going to provide a lot of value to you.
So let's get into the episode.
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Hey Todd, welcome to the show.
Todd: [00:01:50] Happy to be here, Jason. Thanks for having me.
Jason: [00:01:52] Yeah. So for the ones that have not checked out our other interview, which we'll actually link in the show notes, make sure you guys all check that out, but, uh, tell us who you are and what do you do?
Todd: [00:02:04] Yes. My name is Todd Taskey, T-A-S-K-E-Y. You can find me on LinkedIn. I'm happy to connect Potomac Business Capital is our group and we do, uh, investment banking primarily in the digital marketing and digital transformation space.
Jason: [00:02:18] Awesome. Well, let's kind of jump right into it. You know, there's a lot of crazy things going on at this moment with, you know, different deal structures.
What are you guys seeing since you're in the mix of it with a lot of digital agencies?
Todd: [00:02:32] Yeah. You know, it's interesting. We've got one client. I'll give you just a couple of anecdotal pieces. I've got a client right now that is small, you know, they're actually under a million dollars of EBITDA, which is usually an important cutoff, but these guys are very focused in terms of the work that they do.
They provide email marketing in a very specific vertical. And that becomes a, a really good bite-size piece for an acquirer. And in fact, both of, we expect two LOIs this week for them, and both of those are very sizable companies, but I think they viewed this opportunity as, like I said, a bite-sized piece that they can build out a practice from and then cross sell across to their other brands.
We've also got, you know, we closed the deal right at the end of the year where our client is about 2 million of EBITDA. They're a partner in the HubSpot space, has long time been there. And we were able to put them together with the business, very similar to theirs, probably about twice the size. And that now becomes one of the larger premier players in the HubSpot space.
We've got another client now that’s in the video intelligence space, again, they're a little bit under a million dollars of EBITDA. But because they're so specific in their, in their offering, it becomes easier for us to find, uh, a very specific or curated fit for them really, you know, from the, almost from the network that we already have.
Jason: [00:04:15] And so what should people know about the possible roll-up? Because there's a lot of people listening in that their intent is to have option to sell. And let's say they're to a point where they do want to sell, but they might not be over the certain threshold in order to see the real money that they really want.
Like you and me. We always discuss kind of the million in EBITDA is kind of the, the starter, right? Like you got to get to that level in order to really start to entertain some healthy offers. And so talk a little bit about how can the people listen and get a little bit creative.
Todd: [00:04:53] So, two things I would say. Don't think of it as a roll-up, think of it as an arc of services. And so when people put together, when larger buyers put things together, they don't want an SEO shop and another SEO and another SEO so that they can become a bigger shop. What they want to do is become a destination, a one-stop-shop if you will, for their clients. So what a lot of, for example, there was a lot of news.
People want to check in Tinuiti, which was a, a Mountaingate Capital company that was acquired in January by new mountain capital. And it's very, very, uh, nice data point for the space, but they had spent the last four years building an arc of services. So for an example, they acquired a company four years ago called Elite SEM they added paid media, they added social, they added content, they added analytics, a delivery system and a platform and everything else, and had a wonderful exit from that.
So, one question for your listeners is, am I providing a, a really specific piece? Right, to that arc of services. And am I really, really good at providing that to folks? So that would be one. And then I think, you know that the second thing, when you look to be acquired, private equity is driving a lot of the activity in our space today.
And so for private equity to get the returns that their investors want, they always will have some debt in their structure. To be able to borrow from an institution they need $2 million of EBITDA. For most lenders, that is the minimum that they'll do. So from that standpoint, I'll give you an example, we've got a bunch of private equity relationships.
The transaction that we did with HubSpot, I reached out to three of the groups that we work with and that we know pretty well. And I said, hey, you know, if you don't know about HubSpot, you should, it's a fragmented industry. There's a lot of smaller providers in that space. And it's a great software for inbound lead creation.
So two of the groups said to me, Jesus, you know, if you can find me, uh, you know, an a million and a million or a million and a half. You know, any pieces that you can put two together so that we can become a diamond or an elite partner, and we can, we can lend against it. Then we would be excited to do that. So that's a project that we're working on now where I've got actually two kind of in the early stage companies that are both, uh, around a million that will get us to that amount that private equity can, you know, can sponsor.
So there's lots of opportunity that's out there for, and it's a little bit easier if you're smaller to solve a very specific issue, if you will.
Jason: [00:07:58] So if you're putting two kinds of agencies together, right? Like you're taking one plus one equals two. How long do they have to be together before you can kind of go to someone and be like, yeah, it's a proven model, right?
Like, like what you were talking about is looking at like, all right, it's not just adding services to add services. It's adding services to come up with a full solution for getting the max results. So I just want everyone to be clear on, on that, but how long do you feel like if you do take, like, let's use an example in our mastermind, we have tons of agencies and some specialize in one particular service and that's it. And same thing with another one.
Now, if they come together and they're like, Hey, we're both going after this industry, we put these two together. Wow. We'll make it over the threshold, but how long do they have to be together? Because I know with Republics we're putting, you know, last year we bought eight agencies and I still look at it going, look, we still need to make sure everything fits together before we talk about exit and all that. So what are your thoughts there?
Todd: [00:09:08] So couple of great questions. The first is when you were putting agencies together. Here's what I find, that without cash, the deal oftentimes will break. So for example, Jason, you and I are roughly equals. We're going to put our business together. Let's say we have about a million bucks of EBITDA.
A million bucks is, you know what it means. I have a very good life. You have a very good life. Now I'm going to give that up and I'm not going to be in control of my agency anymore. And, and who's going to be in charge. Who's going to make the decision to, you know, a whole bunch of questions that make it difficult.
So, real-world example, when we did that transaction at the end of the year with two HubSpot agencies, we, one company had the larger company of three owners and my guy was a single owner. We put them together. Now they all have roughly 25% of the business. To make that work, my guy got roughly $3 million.
The acquiring company wrote a check. They had it on their balance sheet and they wrote a check for that amount of cash. So now, that happened December 31st, our expectation is that we'll spend most of the year doing integration, picking up efficiencies. And then we will get credit for that. So the combined businesses, about 6 million, we would expect at the year-end, it would be about seven and a half million of EBITDA.
And then beginning of next year, we'll take that to the marketplace, right? With the other project I mentioned where we're bringing those $2 million businesses together. That's going to work because we're going to bring a private equity group together at that time.
So each of those owners will get cash at close. Probably somewhere in the two to $4 million each in cash. And then they'll also have somewhere between 20 and 35% equity in the new company, the larger company, and all of these things need to be worked out. The private equity group is going to get a little bit better value on that business because it's not as valuable because it's smaller and because they haven't harvested the efficiency yet.
So in, in that deal, it, when we start, it will be agency one agency, two and private equity all coming together at the same time. Whereas the other deal that I mentioned, those guys are going to just do it themselves because they were strong enough and they had enough cash to be able to do that. So that we'll have a little bit of an impact on the answer from that standpoint.
But I would think. You would want to be able to show a full financial year cycle to prove to somebody this is real. And it takes that long, right? For things to be humming along that everybody's familiar with the system and move on from there.
Jason: [00:11:55] What are the things to look out for that you see as big mistakes when. Because there's a lot of people, you know, I see a lot of people go into my mastermind members and clients are like, hey, let's roll-up. Let's roll-up. Like, what are some of the gotchas to be like, or the red flags for people to avoid?
Todd: [00:12:13] Yeah. You know, uh, giving an example, Mountaingate Capital has had tremendous exits so far with Olsen and Sierra and just recently with Tinuiti and, and the, the guys that drive that private equity group say that the number one most important criteria for them is culture fit. Secondly, is culture fit, and I think third is also culture fit. So they also established leadership because there was somebody who writes a check, right?
Whoever writes a check is in charge and what I see oftentimes. Uh, in, in kind of failed combinations is that nobody writes a check nobody's really in charge. Everybody's kind of given up their autonomy and aren't completely comfortable and they do it almost without a lot of forethought. So that would be one.
I think the second thing is the notion of two companies coming together. If they're smaller, they should add certain capabilities. So for example, in, in a transaction that we just closed at the beginning of the month, that hasn't announced yet. These guys both do digital marketing focused on the SMB space.
My guys had really good technology, but not a lot of sales infrastructure. The buyer had great sales capability. They didn't have technology and to add the technology to their sales process should have a tremendous impact. And that will, that will cover both sides. So from that perspective, it shouldn't be just, you know, two companies that are identical and feel like they belong together. There should be something that you add to each other.
Jason: [00:14:05] Love it. Well, this has all been amazing. Todd, is there anything I didn't ask you that you think would benefit the audience.
Todd: [00:14:10] Um, no, not from a question standpoint. I just think it's interesting when I have conversations, which I do pretty regularly. People are surprised at the type of opportunity that's out there because oftentimes they think, well, I got to sell my business, I guess some cash, I get an earn-out and then I become an employee.
And there are so many more exciting opportunities than something like that. That extent, that A gets liquidity, B hopefully a better upside and gives entrepreneurs an opportunity to focus on just the things that they are best at that they enjoy the most.
So, so maybe it's just opening up their aperture a little bit to consider what they would like to do. Because I, I believe that we'll see a really strong next two or three or four years in this space where good companies will get strong valuations and have the opportunity to do, you know, what gets them excited.
Jason: [00:15:12] For the ones that are interested in chatting with you. They're, they're over the million in EBITDA or close to it. They're wanting to really kind of exit or have a bigger opportunity to take some chips off the table. Where can they reach out to you?
Todd: [00:15:26] Yeah. So find me on LinkedIn is the easiest way to do that and just reach out there. But one last thing that I would say, which I think is interesting. You see, I have lots of conversations with clients or prospects, that they do not want to go through this process of putting a deck together, getting their financials right, going out to the market and let's see if somebody will buy us.
But I have a lot of them that say, listen, this is how I'm thinking about the future. Here's where I see our strengths and weaknesses. This would be a really great fit for me. And, and so for example, I've got two deals under LOI now. The video intelligence company was exactly like that. When I sold to my client, Arie, he said here's, this is what would help accelerate us and the people that would benefit most from our capability set.
And he's been on my board here for a while. One day I had a conversation about a completely different opportunity. And turned out that potential buyer is a great fit for him. So I'm always interested to talk with people that are doing interesting work that want to explore what might be out there for them.
Whether that's something that they want to do in the Spring of 2021, or just to be exposed to ideas that are interesting as they come along. So I'm always happy to do that. Uh, our website is potomacbusinesscapital.com and you can find me on LinkedIn. I'm pretty easy to get to.
Jason: [00:16:55] Man this new software, I'm waiting for the little keyboard, but, uh, make sure you, uh, tell him, uh, you heard of, uh, him from the smart agency master class and they'll hook you up.
And, uh, if you guys enjoyed this episode and you guys want to be around amazing agency yeah. Owners to really help you scale faster, create that predictability, that, that growth, and really achieve the money that you really want in your business. I want to invite all of you to go to digitalagencyelite.com and check out our exclusive masters.
Todd: [00:17:26] I will tell you some of the, a few of the guys that I've spoken with have been thrilled, maybe a little bit surprised at how much they have ramped up their agency as being part of the mastermind group. Not just the stuff that they've learned from you, but being around other people is forcing you to think bigger and to do bigger and you know, all those exciting things. So keep up the good work.
Jason: [00:17:46] Oh, yeah, we, we love it. You know, if we can, uh, speed up people's, uh, sales process and get them to where they want to go faster, that's our whole goal. So thanks Todd for coming on, everybody go reach out and, uh, until next time have a Swenk day.
Direct download: How_to_Implement_a_Successful_Roll-Up_Strategy_for_Your_Agency.mp3
Category:general -- posted at: 7:00am EDT