Acquisitions Anonymous - #1 for business buying, selling and operating - From W-2 to Business Owner - Acquisitions Anonymous Episode 96

Episode Date: May 20, 2022

Want to receive this listing in your inbox? Signup for our weekly newsletter:https://landing-newsletter.acquanon.com/-----Michael Girdley (@Girdley) is joined by Patrick Dichter (@patrickdichter) to talk about how he went from working in sales to acquiring his own accounting firm. We talked about 2 deals, a cloud accounting firm and a marketing company. Patrick used e-mail cold reaches during his search and shares his process to maximize outreach, why he decided on an accounting firm, and more.-----Thanks to our sponsors!MicroAcquire is the #1 startup acquisition marketplace. It is simply the most efficient way to buy and sell startups when you’re ready to make your next move.-----* Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel.* Do you enjoy our content? Rate our show!* Follow us on Twitter @acquanon Learnings about small business acquisitions and operations.-----Show Notes:0:50 - Microacquire2:48 - Intro - Patrick Dichter4:34 - Why did you transition from a W-2 employee to a searcher?6:17 - How was your search process?7:31 - What was your strategy to find a deal 8:38 - Who is running the operation today?9:45 - How to cold reach potential sellers through e-mail? -  Applying sales experience to a search 11:16 - What would you do differently to improve your response rate? 12:34 - Deal 1: A cloud bookkeeping accounting firm15:07 - What’s interesting about this Deal?17:12 - What are profit margins typically for these companies?18:43 - How do you think about the cyclicality of start-ups as a customer?19:59 - Yellow flags on this deal23:41 - How do we think about different accounting firms and their services?26:20 - How would you grow this business? What barriers do you see? Would you recruit overseas talent?30:06 - Could we raise prices? Does this apply for an SBA Loan?32:06 - Any other considerations? What about revenue mix & seasonality on the cash flows?36:24 - Deal 2: Niche Digital Marketing Agency39:27 - What is their business model? What would make it interesting?41:44 - What happens with labor retention in these companies?43:50 - Financials, growth concerns & due diligence focus46:59 - How is the business-customer relationship on this Deal?48:53 - Why is this so pricey? How would we structure this financially?52:33 - Connect with Patrick-----Past guests on Acquanon include Nick Huber, Brent Beshore, Aaron Rubin, Mike Botkin, Ari Ozick, Mitchell Baldridge, Xavier Helgelsen, Mike Loftus, Steve Divitkos, Dzmitry Miranovich, Morgan Tate and more.-----Additional episodes you might enjoy:#Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hey, Michael here. Great episode today for Acquisitions Anonymous. I had a one-on-one episode recorded with me and Patrick Dichter, who is actually a cool story. He has been a listener since before he bought a business, and then he bought a business called Apple Tree Business Services about six months ago. We actually covered one of his deals that he submitted anonymously early in the history of the podcast. So he now owns a business and is looking at other businesses to potentially bolt onto that one in addition to growing his own business. So we We looked at two very cool ones. One is a cloud accounting firm, mostly targeting startups. We went through that one in depth, turned out really cool. And the second one is a digital marketing agency for sale out in Utah. So both of these were really cool.

Tons of insights from Patrick, I learned a lot, and hope you enjoyed the episode as much as I enjoyed making it. We'll get right into it now after a quick word from our sponsor. Today's sponsor is Microacquire, and Microacquire is the number one startup acquisition marketplace, and it is simply the most efficient way to buy and sell startups when you're ready to make your next move. So, you know, we've had Andrew, who's the CEO and founded the company on the pod before, and he's been great. You know, the cool thing about

micro acquire is that most of the conventional options for buying and selling your company, especially a tech one, are expensive for founders. So Microacquire puts all the cost and flips that the other side around. So they are free and anonymous listings. and they apply a rigorous vetting process. We're actually only 50% of the startups make it on average. They have over 2,000 online businesses listed today at any given time, and a buyer can expect to see a range of startup types that will fit any profile from SaaS to e-commerce to apps and agencies,

and of course more. So different sizes as well, anything from $5,000 all the way up to a million or more in asking price really for buyers of all sizes. So founders like Microacquire too, and they come with the expectation that serious vetted buyers will be showing up in great numbers when they decide to bring their business to market.

They've helped hundreds of startups successfully get acquired and facilitated hundreds of millions in closed deal volume. So if you're thinking about buying or selling an online business, then you definitely want to check out Microacquire. And thanks to them for sponsoring our episode today, good friends of the pod.

So looking forward to all that, and definitely check out microacquire.com. And if you're somebody looking for the right business, definitely go visit there and consider upgrading to one of their premium accounts where you pay a bit to start the conversation and see deals and more information than just the other options. So thanks again, and here's back to the episode.

Patrick, thanks for being here with me today to do this episode. I'm excited to be here. Thanks for having me. Yeah, so you win the guest of the week award here on Acquisitions Anonymous, bringing two deals. So I'm excited about that. But let's get started first. Give us a background. Introduce yourself, maybe take a minute and tell us who you are, what you do. And I know you've had a cool journey of going from Searcher to now post-searcher life.

So like, we want to hear how all that went. Yeah. Guest of the week is probably the highlight. but I am a recent self-funded searcher, and I bought a bookkeeping and tax firm. So I bought a company, Apple Tree, business services, and we just serve small business. We do bookkeeping, payroll, and tax. And I closed at the end of last year, so I'm about five and a half months into it. And prior to this, undergrad, international business and finance, did my MBA at University of Denver.

during school I sold door to door to pay for college and kind of cut my teeth in sales. And then I spent seven years helping grow a digital marketing company from zero to 35 million. I was leading and launching sales teams. And then I spent three years in small business advisory work. And 80% of the time with those clients, we would see bad bookkeeping being done. And that's what led me to go look for a bookkeeping firm to purchase. So I just saw how transformative that was for small business, and I thought it would be a good category for me to sink my teeth into.

So that's my story. And during my search journey, this podcast was a big part of my education and companionship. So happy to be here and hopefully add some value to your listeners. That's awesome. So we basically, you listened to us and did exactly the opposite, and things turned out really well. Was that the... That's it.

So, you know, as I think about your back, you know, you see kind of molds of where searchers come out of, you know, and I think there's the, I came out of investment banking or I was a PE associate and I realized, oh, I'd much rather be running my own thing. I think you're kind of unique that, well, then there's another bucket that appears to be like the financial people that have come in with like an accounting or underwriting kind of background. And they see the deals and are like, oh, I could do that too. But I think you're kind of unique, which I don't see as often, which is like this like sales mentality or sales background person who turns into a searcher.

What is appealing about making that transition from being like a bagholder having a quota as a salesperson to make you say, hey, I want to embark on this journey and kind of get off the W2 treadmill? Yeah, part of it was I was selling two small business owners for years and really enjoyed working with them. And I saw some that were doing really well. And when I started out looking for deals, it was definitely intimidating, you know, just understanding the financial side of it and trying to get up to speed on the lingo and, you know, modeling

things out. But I really felt like that would be my advantage once I closed a solid deal that I really knew how to grow it. And I knew what it takes to like be inside of a small business, you know, and be scrappy. So it was intimidating. on the initial deal flow sign, but it gave me confidence that if I acquired one that I'd be in a better spot.

Yeah, dig it. So I'm curious, the highlights of kind of how the Apple Tree deal went down because I think, you know, a cool thing, you sent us a deal early on. We discussed it on the podcast, as you said. And so, like, was that Apple Tree? Or was it like another deal that we hated? No, I first for about 11 months.

And that deal that I sent, to the show, it fell apart at about the 11th hour. It was about $800,000 in revenue, $200K SDE, pure bookkeeping company. And then three or four months later, it found and closed the Apple Tree deal. Not being a CPA myself, I did my own proprietary outreach, and that's ultimately how I found both of those deals was through my own outreach, because a lot of the brokers in the tax and accounting space just wouldn't really take me seriously if I am not a CPA.

Yeah. Well, and I guess we could talk a little bit because we did this in an episode we recorded a couple weeks ago talked about there's it's not like there's one type or one flavor of bookkeeping or accounting or a CPA firm. There's all kinds of things in the middle. And sometimes don't even require you to be a CPA to be in those businesses, which I think is super interesting.

You know, as you talked about this idea of doing, you know, direct outreach, what, you know, what was your strategy there and kind of finding stuff? So it sounds like you didn't see the brokers as a viable path. Like, what did you do in terms of running a process to go find the Apple Tree deal? And I guess also the one that you didn't end up doing. Yeah, I ended up using a virtual assistant to build a list. And then I created an email marketing campaign myself. And then I probably had five, people on the list that drummed up about 20 seller calls, and I sent LOIs to six of those. And I just tried to be diligent and quick whenever I had a bite on the line. There was one brokerage that was a little bit more open-minded to working with me, and that's actually one of the ones that we're looking at today. But the others, they just wouldn't hear me out unless I was partnered with a CPA. So it was interesting, but at the end of the day, I ended up finding some decent deals myself.

Yeah. And so in the Appletree deal, are you the owner-operator at this point? Or how does that go in terms of your time? Are you in there running the firm? Yeah. I'm there, you know, full-time. When I acquired it, there were about 12 employees. We're up to about 15 now.

and the owner had done a good job of getting himself out of direct client relationships. And there were three other managers who were, you know, the tax experts who are CPAs or enrolled agents. And so I spent my time on learning the business, sales, marketing, hiring, and then seeing if we can add additional services. is and I'm doing some billboard in consulting. And the owner is actually, we get along well, so he's staying on now as an employee. But I didn't have to backfill his time with another CPA or me trying to backfill a

bookkeeper's time or something like that. Yeah, dig it. So you mentioned finding the deal. You had a lead list of 500 potential candidates. and it sounds like from a lead to call ratio, you said you had 20, end up 20 intro calls. So that's about, I think, 4%, which is pretty good for a cold email outbound to call ratio.

What was your strategy to maximize kind of that 4% number? And are you happy with that 4%? Or are the things you would have done differently about the types of emails you sent or the way they went into people's inbox or how much you followed up with the people after that first cold email? If I did it again, I feel like I could probably double it. I learned a lot about, you know, the type of email that you use,

you need to warm it up, quote unquote, to increase your open rates, what you need to do with your URL tracking and how to get through spam filters, you know? But it was just very direct. You know, it customized the first name and it just said, Michael, are you retiring in the subject? And I think that just got some curiosity on the opens. And then it was just very direct to say, Michael, I've been looking for an accounting firm to purchase in XYZ town.

Your firm, Gurdley and Associates, looked like a good possible fit. If you've ever thought of selling in the next year or two, I'd love to chat. Just replying, we'll get a conversation started. So it got enough hits for me. But if I already do it again, I could probably double the responses. Yeah, what would you do differently? When I started out, I just created a new Gmail and I didn't warm it up to increase the open rates.

There's some technical things with the domain that it's tied to so that it looks like just a more credible email. You don't want to send too many out of the gate. And frankly, I was doing it during tax time. It was like, it was in the spring and I still got the first batch. I still got a good open rate. So I would think about the timing. And then you could also, I only did three touches, you know, so you could drip further long.

You could also, I probably made 10 phone calls to people that opened it a lot. You could tag on some phone calls with that as well. Yeah, totally dig it. Yeah, I wonder if there was a two, two, you know, double-edged sword with the tax time thing, because tax time seems like the worst time of the year to be a CPA. Every time I look at a CPA, they seem like they've aged two years in the year between tax years. So I wonder how many of them were like, yes, it was the right moment, right time. And I wonder how many were just like, oh, I'm way too busy for this.

Yeah. So it's an interesting conundrum. Super cool. Well, let's go to our first deal, which perfect from you is an accounting firm. So this one's from Po Group Advisors. Or is it POE or is it Poe group? I think they say Poe, yeah. Okay, that's super cool.

Is it run by somebody named Po? Yeah, I think Brandon Poe is the founder, and then they have multiple brokers. That's great. Okay. So this one, and you can find this at poogroopadvisors.com, if you're on YouTube, I pulled this up, and we're going through the teaser here.

So the title for this one is fully remote cloud accounting firm, with zero owner hours. And let's see, it is a, going through kind of the quantifiable stuff here. The designation is, as an accounting firm located in the United States, and it is currently pending acquisition. So I guess it's under contract.

And the asking price is $2.6 million and the annual gross sales, so the total gross is $2.6 million. So they're asking one-time's revenue for this firm. And the reason for selling is listed as career, change. About this practice, so let's see what else they say here. This is a controller as a service consulting firm for startups. They perform bookkeeping, tax, and human resources to fully support clients' back office needs. They are committed to helping organizations grow quickly and

stay lean, and they have fully remote capabilities with clients and employees in multiple states. Okay, so controller as a service targeting startups. This is a great place to work with a strong commitment to their core values, yada, yada, yada, we love our staff. And they, they They do good stuff for HR. And then most of the clients are charged a recurring fee for services, and most are on auto draw, and there is very little bad debt. This is a team of tech savvy professionals who do quality work and provide exceptional service.

The owner hours, and this is bolded, owner hours are nearly zero, and there's an exceptional executive team. They use a marketing firm that does digital ads and all that kind of stuff. The website designed, redesigned in 2021, and the executive team attends. startup events and often speaks at these events. The ideal buyer must be a forward thinking, open-minded, and enthusiastic about running a very different type of accounting practice.

But clients and employees expect a different experience than a traditional firm, a buyer with venture capital and startup experience could be very helpful. Continuing the amazing company culture will be important. And then they have a link here where you can go find out more about the deal. So yeah, so Patrick, what was interesting about this

deal to you and you suggested it? So I'm excited to talk about it. Yeah. So what's interesting about this is it is a cloud first accounting firm. So when those come up for sale, they get snatched up very fast. Typically what you'll see for sale nowadays is they call them more traditional practices where clients are used to coming into the office. There's a lot of paperwork. And these cloud firms are just much more scalable. They can service clients anywhere. and it's just easier for people to bolt them on. When I was searching, I was looking for deals that were at least, you know, $250 in SDE or a million in revenue, and they don't come up very often.

So this one being 2.6 is pretty nice revenue. The fact that it's asking for a 1X means that there might be something a little wrong with it. So accounting deals, they usually trade on a basis of top line revenue. So they trade for between 0.9 to 1.5 times. And the virtual ones almost always go for 1.5. So with this asking price being a 1x, I'm guessing that the profitability wasn't quite as good as some other cloud-based firms or there's some sort of hair on the deal that they brought the asking price down.

but I liked that there's management team in place. I like the niche with tech-based companies. A little bit of a question mark on the career change, right? It's like, what is that career change? Are you going to work for one of the tech companies or one of your clients? You know? I know that this deal sat on the market for six or seven months, and it just changed to acquisition pending.

and if typically these these will be gone in 90 days so I'm not sure what the reason for that is but on the surface I mean this looks like a you know solid seven or eight as a 10 in terms of an accounting deal yeah so what just is a typical kind of EBITA percentage or a free cash flow percentage that you would see from a 2.6 revenue 2.6 million revenue accounting firm like what is what do these typically run at profit margins? You'd expect 20 to 30 percent. 20 to 30 percent. And that includes total including sellers, seller working in the business or, you know, sellers discretionary earnings, or is that like legit EBDA?

I guess I'm considering like seller earnings in that as well. Yeah. Yeah. Yeah. So, okay, so really, really this looks more like a typical main street business that it's 15 to 20 percent EBITA margins. if it's a good one, and then you're expecting to pay yourself a salary of 10%.

Yeah, some of these old school accounting firms that are like a million in revenue, they're running like 40%, you know, cash flow to the owner because the owner kind of is a rainmaker and does a lot. So it's a dilemma, right? It's like how much cash flow do you want to acquire or do you want to go a little bit less profitable and have, you know, some non-billing management in place. Yeah.

We looked at one the other day that I think was 800 top line, and it was a CPA firm, and the owner claimed to be taken home $450 or $500. So when you don't have employees and you don't try to scale stuff beyond what you can do as a superhero human, I think these things can go pretty nuts. So how do you think about the cyclicality of startups as a customer,

right? And it looks like this is maybe Bay Area, West Coast centric. That would be my guess based on kind of the way they talk about it. They're at events and they're out kind of, you know, schmoozing with startups and venture capitalists. Like, how do you think about the cyclicality of startups as a customer?

And I say that because right now we're kind of going into a VC winter, at least if you read the VCs on Twitter. It's much more of a boom or bust client than a Main Street business, you know? Now, if I acquire a customer, you know, we expect to hang on to them for seven or eight years on average. I would imagine this firm is probably like a two or three year average because some of them just run out of cash or they might grow so fast that they bring it in-house. You probably get a higher average engagement, however. So you play with fire a little bit working with VC-backed clients.

But a lot of times, you know, you can bolt on fractional control or fractional CFO out of the gate. because they have, they have, you know, cash to burn. Yeah, dig it. It's when startups have to do things fast, they sling money around, which is great. So one thing that doesn't make sense to me about this listing, so it says reason for selling career change. And then down here it says, in all bold, for some reason,

the only thing bolded in the listing is this other sentence. So first sentence was reason for selling career change. Second thing is owner hours are nearly zero. So it seems like those don't really work. How do you think about the incongruity in this list? I'm like, wait a second, which story are we going with here, guys? If I'm reading between the lines, there might be some senior people there that are doing the work. And, you know, the owner, I'm guessing the owner is involved in some of these other tech companies

or maybe they're a CFO and one of their clients now. I think what the broker is trying to do there is make it look, transferable, that's odd. I truly like, you'd never really see that. They usually say, because a lot of accounts track their time, they'll say the owner works 2,000 hours per year, right? Or the owner has X number of tax returns that they handle themselves. So if the profitability was there, I'd be excited about it. But I'm guessing that the profitability is being, you know, reduced because of that. Yeah. Well, is it typical also, you know, they don't list any sort of profitability in this listing.

Is that atypical for these types of things? I don't think that brokerage does. Some of the other accounting brokerages do. They'll explicitly put it on the listing. They'll say how much cash flow is coming to the owner. They'll say what software tools they use. Yeah, but they don't for some reason. That's also something to kind of probe on as I look at this.

The other thing that's really one of the fascinating tricks I like to do in looking at these listings is most of these advisors have some sort of ID, system where they put an ID next to the thing. So, like, you could, for example, you know, if they don't tell you what state it's in, then you go look at the listing ID and it's like, TX003. Well, guess what that means? That's the third listing they did this year in the state of Texas, right?

So I was looking at this, the listing ID for this one is FC 2001. And I'm like, I don't know, maybe it's just like a bad Spanish football club? Well, I think it's fully cloud for them. So their traditional practices follow the model you're talking about. Otherwise, I don't say the state on the front of the listing. Ah, there you go.

Okay. Well, that's super cool. Yeah. That's a good catch by you. Yes, I have good times. All right. So another thing to think about this, so there are different types of kind of these accounting style practices, right? You have, you know, you have, for example, firms that have CPA-based practices.

practices where they can prepare taxes. They can go do things like at a station, which is like reviewed financials, audited financials, that kind of stuff. And then you have another group, which is bookkeeping and accounting. And those are two different things.

And those kind of mix in terms of practice areas as well. And then there's this third kind of dynamic now that's relatively new, which is fully cloud or more main street oriented, right? Where you're targeting either a global basis for your customer base or you're doing it more locally,

which I assume your company is more locally focused. Is that more Main Streety? For now, yeah. COVID definitely forced a lot of virtual, but I couldn't call us cloud-based right now. Yeah, totally dig it. Okay. And so these guys, when you see something like this is a fully remote cloud accounting firm,

these guys are just doing bookkeeping with accountants and maybe or maybe not there's CPAs in there based on what I'm seeing. Correct. Yeah, dig it. It's a good distinction. When I first started, I was looking for pure bookkeeping because I wanted to stay away from some of the tax risk. And bookkeeping and CFO services are probably more scalable. And then as I went through my search, I became okay with the tax work as well. And frankly, because the one that I bought was very productized in the way that we bundle bookkeeping and tax. But otherwise, yeah, it's a very very different practice if it's majority bookkeeping and controller services versus majority tax. Yeah. So as you think about this market, especially the cloud-based guys, and this is, you know,

this is a controller as a service. So it's higher level than some of the kind of the way the market's going. But you're seeing, I guess, Bench is one of them. There's another one, Zeno or something like that. Anyway, Zendu, I think we tried to use them. It wasn't very good. It was like this cloud bookkeeping service, and they basically, you know, they had, I think they tried to put us on Zeno. Is that a platform? There's zero. Zero, yeah. So they put us on that or it's QuickBooks Online.

And in those really struggle, like at least the time, two times I've tried to use them, they were just like thumbs down, not good. You know, is that a worry for somebody getting into this kind of market, especially on the cloud side? or how do you think about this business in the context of where the industry's going? Not for the next. Actually, no, it's not something I worry about. You do see, even with QuickBooks Online when you get in the platform,

if you're doing your own books, they're trying to sell you a human component as well. They say use one of our bookkeepers. You see, you know, zero growing in the space. You see Jeff Bezos with his own bookkeeping platform from his, you know, angel investing. I think at the end of the day, tax code isn't getting any simpler, and there's a lot of business owners that want somebody to talk to.

So I think there will always be plenty to eat off of. But if your firm doesn't keep up with efficiency and trying to use some low-code automation or trying to speed up your client delivery, you'll fall behind. But I think there's always going to be some human element involved in all this. Yeah, I dig it. Okay. So let's say let's say you're trying to, you buy this business

and you mentioned because you have a sales mindset, you know, and that's your background. Like you're trying to grow this. You know, what do you think are the kind of one or two kind of barriers to growth for this business? And I'm guessing it's probably not potential new clients because everybody I know calls me. The question I get asked more than anybody else from my peers and friends is like,

do you know a good bookkeeper? Do you know a good CPA? And my answer to them is not anyone that's taking new clients. So I'm curious what you think about is kind of the barriers to grow something like this. Is it on the staff side? Is it on the infrastructure side?

Or maybe it's on the sales side? Yes, you nailed it. It's definitely going up to a million in revenue, It's kind of a slog to get your sales and marketing going. And after that, it's all about recruiting, retaining talent, having your processes dialed in so that you don't have, you know, one rock star that does things differently and then they walk out the door. So that's what's made me excited about the space.

And, you know, I'm only five months in, but it's proving out that if you can recruit talent and keep those systems tight, you can continue to grow 20, 30, 40, 50% year over year and not break the business. Yeah. And that's with keeping the core services, right? You can also bolt on additional services really easily once you have that relationship. Yeah, dig it. And then you talked about recruiting talent.

Like, are people still mostly recruiting only U.S.-based talent for this? or, and I've seen like firms, and I've been pitched by them, like firms in the Philippines and stuff like that with, you know, Ernst and Young folks that have left there, right? And there's an office of 50 folks that are doing accounting in the Philippines. Like, are you, or if you look at a business like this, are you stuck just trying to recruit U.S. base people? Or are you going to start, are you able to start to look at doing a global search

to staff a business like this and help it grow? Yeah, that is happening on the bookkeeping side. you'll see offshore talent being leveraged. Our firm hasn't yet, and our labor cost is, our cost of goods is 45%, which is still pretty manageable with U.S. talent. On the tax side, I think that's harder,

and frankly, the client trust isn't there. But if you're going for pure bookkeeper and fractional CFO, you can do a lot of the more junior roles and tasks with offshore talent and have a cost advantage. I don't know if you remember, but when you looked at my deal about a year ago, you called it an inevitable mullet business, which is just a beautiful business term.

And you said eventually this business will be, you know, US in the front, offshore in the back. And you're right. If it's pure bokeeping, that's the way it's going. Yeah, yeah. Man, that's, pat on the back for me. That's a jam. Well, that whole comment you just made went from abject terror because I look at so many deals.

I had no idea what you're talking about at first. And then you compliment me and I was like, this is the best. Number one, amazing. Best guest of the week. It's a perfect analogy because, yes, that's the way it's going. And, you know, I've talked to people in the industry that have, you know, their cost of goods is only 20% because they've got it dialed in and they've got offshore teams and they've got some really big margin.

Yeah, that is pretty cool. So let's talk about the other side. Is there oftentimes growing options with a business like this to just go in and do in-place price increases? Are you going to typically find a business like this that's in the business, business services area that is already maximizing kind of gain per customer? If it's for sale, you can likely increase prices. With both of these deals, I think it's,

I just think of like accounting firm and a marketing agency, they both have an array of services and you just think like stickiest to least stickiest, payroll is probably most sticky. Then tax, then bookkeeping, then controller slash advisory, right? So if you have payroll slash tax, you can definitely go in and increase prices and it's just a big pain for a client to leave. And I know there's some roll-ups going on where that's part of the intent is they'll raise prices 50, 60% year over year, knowing that only 20% of clients might churn out. And the rest is just not worth a hassle to try to go find a new payroll or tax provider. Yeah, totally dig it.

And then as deals for, say, a business like this gets structured, are people using SBA loans to do? a business this size. It seems kind of perfect for SBA or there are other pals that, you know, people are going to buy a business like this. Yeah, I did, I did an SBA deal myself. And the firm is about half that size. And yes, Live Oak has an entire accounting specialist dedicated just to this space. And a lot of SBA lenders are willing to, you know, lend on these professional service firms that have no assets to go after because they're fairly solid sticky deals. So kind of last thing on this, like, let's say you wanted to go pursue this deal.

Based on what we've read so far, we talked about a few things that were kind of not red flags, but kind of yellow flags of like, oh, I should probe on this stuff. So, you know, I think we talked about the owner hours, you know, being nearly zero, but they want a career change. I want to figure out what the heck's going on there. You want to dig into maybe the startups as a cyclical customer. Are you buying this at the wrong side of the cycle? Is there anything else you would go into this and be like,

man, I should go make sure I look at these few things in terms of making a deal like this work? Yeah, my top questions were always revenue mix. How much is bookkeeping versus tax versus others? I'd always try to get the P&L with monthly columns just to see how lumpy the cash flows are coming in. try to get how many billable hours the owner is doing. And if you can get their rates, some people are doing fixed fee pricing and it's hard, but others you can find out,

they'll say, oh yeah, we bill out bookkeeping at $80 an hour, and we bill out tax at $200 an hour. So that gives you a really good gauge for where pricing is set. And then I'd also just try to find out, you know, what's the new customer acquisition look like,

you know, growth year over year, how many new clients are you taking on for month? Yeah, I dig it. So one thing, you know, one thing that would worry me also is what is the situation with the team and the morale? It sounds like they think they have a great culture. Like, what does that really mean? Does it mean the seller was overpaying everybody?

That happens sometimes. So reading through this, I'm like, hmm, like if my biggest period of growth is having the right talent in place to keep building this business, you know, I really want to understand what the current state and trajectory of the talent would be when I would look at a business. like this. It's nothing a pizza party can't fix. Look, culture is easy. You just buy some pizza and then if things are not going super great,

you put some pineapple on it. There you go. Problem solved. I, you know, there is a large cloud of accounting firm acuity that does an amazing job. And they openly talk about, they try to acquire a Main Street accounting business and it did not go well. And that was a big part of it. It was like very different culture, very different tools.

So yes, you have to tread lightly and, you know, figure out how many people are coming up against retirement or, you know, is there a big profit share going on that's being added back? And, you know, if you can have some retention clauses with clients as well as team, you know, helps mitigate that risk as a buyer. Yeah, totally dig it. Yeah, this line here where you're just talking. talking about both clients and employees expect a different experience that are traditional

firm. It's like, uh-oh, what is that? That could be good. I'm guessing they're trying to sell against the big four grind, you know? Right. That could be good. That would be said for that. All right. Yeah, I think this is also an interesting one, you know, as an investor, if you're not somebody that wants to go run a firm like this to to partner with somebody who is an operator and would want to get in and maybe as an Ernst & Young or whatever the other big accounting firms are, like refugee. And you're like, okay, well, you want to run your own show

and potentially do better on a long term, this could be a good partnership with somebody with a bit more business experience and the kind of accounting and client relationship side, that somebody that would be a refugee from one of those places could be a good partnership. There's definitely a lot of investments going after these and a lot of strategic buyers as well.

I went after one deal with Po and I was up against 16 other offers. And many of which were all cash up front. And a big part of that was because of the niche that this bookkeeping firm served was within a certain medical space. And I know that there are a lot of strategic buyers that were after it. Yeah. And I lost out. Join the club, man.

Number of offers are they like, yeah, we had four offers higher than yours. I was like, wait, but you only got five offers. Yeah, okay, well, fine. Anyway, all right, well, let's move on to, let's move on, yeah, the second deal. So this one, also provided by you, guests of the week, way to go. Nitch, Utah Digital Marketing Agency

located in Salt Lake County, Utah. So I guess that's different than Salt, that means you're not in Salt Lake City, like you're way out maybe on the south? I don't know. Anyway. So this one's from Biz Buy Sell. So terrible, we're pulling it up on YouTube.

It's got terrible clip art as their logo up at the top. The asking price for this business, which is Nitch Utah Digital Marketing Agency, is $3.4 million. Cash flow is listed as not applicable, and gross revenue is $2.6 million. EBIDA is $650,000. So they are asking, let's see, $650,000 in EBDA. So earnings there, and then they are asking $3.4 million for it. So shy of six times earnings for an agency. Cool.

All right, I'm going to suspend my disbelief on this one. They pay no rent, have no inventory, and it was established 15 years ago in 2007. So this one is a full-service digital marketing agency offering website creation, SEO, CRO, UXUI, graphics design, organic social media, content creation, blogging, all the magical on-site and off-site SEO stuff like backlinks.

So he directs, Google My Business, etc., located in Salt Lake County, Utah, and then they have a link here to the teaser. So I'll click on that and see what we get. How about that copy right there, all the magical stuff. That is beautiful. Yes, yes. All the digital marketing and see people love that kind of language. So they do have a better-looking teaser.

Yeah. And a picture of the team, which is kind of what you'd imagine a team in Utah looks like. not exactly the most diverse group of folks I've ever seen it by whole life. They have 1,200 past customers. I wonder how many current customers they have, 24 full-time employees and three owners, a bunch of areas they list here for growth, and good customer retention, enterprise customers,

and all that kind of stuff. So the revenue, they actually give us the last four years of revenue and then this year estimated. So they did in 2018, 2.9 million, 2019, 2019 they did 3.3 million, then 2.5 million, then 2.5 million again. And this year they think they're going to grow a little bit to 2.7 million. They did a net income in those years of 300,000, 600,000, 500,000, and now estimate 600,000. So this is a pretty steady-eddy business with the owners taking home most of that, you know, EBITDA between the three of them. It looks

like somewhere between 200 and 700,000 depending upon the year. And they have a little footnote here that they say 2021 was a bad year for them. So this is an agency business. So maybe let's start there, Patrick. Like when you see an agency business like this, what is their business model? Like, how are they making money in terms of, you know, value comes from the customer and ends up in their bank account? Yep. So that would be my number one question is the revenue mix because an agency that's just doing a lot of websites, that's very feaster famine, right? But if they are also getting, you know,

revenue from hosting, managing, pay-per-click, doing SEO, doing content marketing, some of that, you know, CRO, those ongoing retainers, that makes it a more stable business and, you know, something that's worth buying.

Again, like, In accounting, you can stack which is the most sticky to least sticky. Here, you know, website hosting, most sticky. Not a lot of revenue there, but next is probably SEO. And then after that, it might be content. And then you're down the list after that. So that's really what I would want to identify first. Where's most of the work being done?

And is that going to be seeking or occurring if these owners walk out the door? or if they, you know, just hold a bunch of relationships in the Chamber of Commerce and everyone comes to them for web design. So that's how I'd size it up. The agency that I worked at, you know, we had really good retention in the agency space. We bragged about 96% retention per month. But annually, that's half your revenue walking out the door, right? It's brutal. Brutal.

Yeah. So I'd really want to dig in and say, okay, where's new business? coming in, do you have good inbound coming in? Do you have a salesperson? And I'd also want to identify, what are those three owners doing? You know, are they, are they your best technical talent? Or is, you know, one of them, project manager? That's a, you know, a key thing that probably needs to be priced in that's not being priced in right now. Right. So that's where my head goes on this one. Yeah. I do. know some people in this business or in parallel businesses like this, especially in digital

marketing agencies. And the stories I hear from them scare the crap out of me. Like the great, you know, the great resignation or whatever people are calling up for people switching jobs now. Like this, I see that as a spectrum of how much it's hitting specific industries. And this is hitting, this industry is getting hit by this the most. Because you're seeing people that you're high, you know, what happens with this type of business where you're doing. in an agency like this. It's typically low margin. You're doing a lot of client work where it's one-time payment and not recurring unless you're doing SEO and that sort of stuff. And you end up with this situation where you're hiring 24-year-olds or 23-year-olds out of school. You train them up

and then somebody else calls them and doubles their salary. And you didn't really have the ability to raise their rates as much as somebody else could just because somebody bringing them in house is going to be able to see much more value from than you are when you're having to bid against 15 other people for jobs. So the people that I know that run business like this have had huge turnover, just massive turnover trying to be able to keep people around, you know, for the past couple years, which that scares the crud out of me. Yep. You're totally right. We saw that all the time at our agency. It was based in Columbus, Ohio, and the operations people, you know, we'd train them up, and then they'd get picked off by all the big agencies downtown or some of the Fortune 100s in

Columbus that wanted marketers in-house. I think if you can product ties and get it dialed in really tight, you can protect yourself from that, and then you can leverage the offshore talent as well. So if you say, we're the go-to experts for the roofing industry or we're an agency that specializes in dentists, and you've got your retainers dialed in, your product delivery, that becomes a little less risky on losing talent,

but you're still going to have a hard time, you know, keeping staff once you get them trained up. Yeah. So I think that was something you said there was just super interesting. Like, you know, being in an agency model like this where you go after a very specific size of client or industry, like you become the auto dealer website builder and social media company,

that gives you a ton of power because you can productize and reuse so much stuff versus somebody who it looks like these guys are which is just like a general main street marketing agency where it's like oh you you do auto come on in you do insurance come on in like that's that seems to me like a bloodbath when you're going in there and trying to compete around that

which which scares me about this deal. Yeah. Agreed. It is impressive that they've gotten over the two to three million dollar revenue mark. Typically, those generalized agencies, they never get above one or 1.5 million because it's just so hard to scale. One thing I don't like looking at these financials is a COVID impact. Most agencies did fine or they grew through COVID because there's an initial scare and then everyone said,

okay, we got a, we got to double down on digital. And it's a nice COVID bump. It's really interesting when you, like, when you see people like in businesses now, claiming, like, oh, COVID killed us. Like, COVID did all this hurt. It's like, wait a second, everybody else trained did better, but why did you do worse?

You know, and it's like, well, like, we're all too scared to labor out. You know, whatever it is, it just doesn't make any sense. So you have to wonder if, you know, I understand why they're saying it, but also, it's like, it's like disingenuous. So, I mean,

the other thing that's really kind of worrisome here is the three owners are working in the business. So to some extent, I would be willing to bet when you look underneath the hood on this, deal, there are three owners. And I think they're right here in the picture. You can see there are three old white guys. One, two, three right in the picture.

I think when you see something like that, my guess is it's probably three agencies in one. And one's doing the SEO stuff, the other one's out selling. And then the third one is doing all the contra and creation and website design. Anyway, that'd be my thing here. So that's the other problem with a model like this

is if you don't have, You have to worry about your people poaching your clients and disappearing or taking their book of business to somebody else. So here you have a situation where I have to wonder how much of this business being successful so far is because three owners who found some other people they want to work with have all been working in the business and have a ton of skin in the game and probably can't leave. So that's hard to replace one person, sometimes impossible, I think. Yeah. Now, that's really where the diligence would have to focus because if one of them is project manager and they're taking home 150K, okay, I can work around that, right? Or if one of them is just cranking out WordPress websites, I'd be excited about that because I can find somebody to do that for less, right? But that's what it all hinges on.

Maybe a dumb question. So not all of this work is created equal when you run an agency like this. Like if you ask me which businesses I want to be in here, it's like I want to be in the SEO business because SEO is awesome. It's recurring revenue every month and it's impossible to measure the success. Right. Like great. Like it's easy to not be accountable, but people know they have to pay for it.

So you have that. And then the second is kind of the ongoing content creation, content marketing stuff through social media. And that seems like a great business to be in, because they just pay you every month and you deliver six tweets and you go from there. These other businesses, like they're in where you're doing project work, like, why don't more agencies just focus on the appealing stuff? Or do you have to do that project work as a loss leader or a full services in order to get those clients who you then sell posting, you know, SEO and all that kind of stuff? Yeah, sometimes you do have to do the project work to get them in the door. what's interesting and I don't know for sure that CRO term

this is something that you'll see you know you talk about growing within an ecosystem so the HubSpot ecosystem you'll see this term come up a lot chief you know revenue officer and they're really looking at the blended roles of sales and marketing and looking at the way people run inbound the way they handle customer success

and there I think there's a ton of opportunity and a ton of margin. I don't know if these guys are doing that or not. But, yeah, all those other services they have listed, a lot of them are just one time. So I'd really, if I could in diligence, I'd try to identify where the revenue is and then also the gross profit of each department, if you will.

So in terms of Superheaval, in terms of making this deal work, I am stuck at there's no way in hell I'm paying six times revenue for this business like I'd rather go buy like a franchise of raising canes or something like a much better deal than this like

you know if you you as a potential buyer of B2B services like how do you think about a listing like this or are you even going to double click on it when somebody has an insane asking price like that or maybe it's not insane and I'm the insane one which is totally totally reasonable answer I wouldn't yeah I wouldn't touch it at a 6x

I'd be game at a 4x if I thought the revenue was sticky and I could backfill some of the owner roles that are being done. I mean, you've talked about this. At the end of the day, service businesses that scale, it's like getting 1% better every week. An agency that grew that big, they've been dialing some things in and working on some processes. And if I can buy that and save myself the time, it could definitely be worth that. I truly think that's what I got at apple tree.

The firm had been around 20 years. A lot of trial and error had been done. And I bought it and saved myself all those headaches of getting the systems and processed dialed. And now I can really focus on growth. So I think at a 4x, you are getting some value there. If you have answered those other questions on, you know, where's the revenue coming from? What do the owners do? Yeah.

Super cool. All right. And then structuring a deal like this, is it, I mean, SBA is an option for something like this, at least looking at those financials, or is there other ways that something like this would be put together? Yeah, you might be able to do some seller financing. I'm guessing you'd probably have to do an SBA deal to get this one done. And what's wild, there's another agency-specific brokerage, and they're asking prices are all seven to ten X. for deals that size. It's just bananas. But yeah, I think at a 3-4-X, you could probably get 70-80% SBA financing on this. Yeah. Well, I did hear, you know,

the 7-10x, I did hear, you know, from people in this space that there were folks trying to accumulate businesses like this and buying them up. So, you know, when your cost of capital is low and you have to deploy it,

like, yeah, sometimes those are more tools, you know, start getting paid. You know, I guess there's questions of, are you actually Constellation Software or are you Thrasio? Like, those are those kind of two things? Are there, is there really actually pricing power on economies of scale? And you got to wonder about these agency businesses, you know, which end of the spectrum they end up on. My guess is Thrasio. Darcyo.

What do I know? Super cool. Okay. Well, this is a super interesting one. You know, one thing we didn't really talk about on it is says here, niche digital marketing agency, but then they don't talk about what their niche is. So, very, very interesting. And maybe the niche is terrible.

I don't know. Yeah, we'd have to find out from the broker. Yeah, they're just like, we're in Nistria's marketing agency, but then we do everything. It's like, well, does it sound very niche to me? No. Maybe, I don't know. I'd imagine if they said, you know, with the Nishas, they'd feel like they're giving it away. You mean, unlike, well, here, they cover up the logo in their team photo here.

I just noticed there's like a weird Pentagon over the team logo. Huh. Super interesting. And then they have a team photo, but they don't want to give it away. I don't know. Super, super. Business brokers are weird.

Super weird. Okay, well, cool, man. This was amazing. This turned out to be an awesome episode. Your prep work was awesome and all that kind of stuff. So, you know, our listeners who are numerous now, I don't know if you've heard,

we're the number one podcast for Small Business, M&A. Yeah, there's only one. But our listeners like to follow along with the journey of the guests for sure. and how can we help you, how can we support you and what you're doing? I know you're growing your business, you're tweeting on occasion,

what are the best ways for people to follow along and be helpful to you? Yeah, I always love connecting with folks in the space. Twitter is probably the best, or you can find me on LinkedIn, Patrick, Dichter, on both of those. And if you have a small business with one of 30 employees,

we do a great job with bookkeeping payroll and tax, and we can service companies nationwide. So feel free to find me. in those places or you can look up Apple Tree Business Services. So thank you for having me, Michael. This has been a lot of fun. Yeah. Well, it's so cool that we were quietly a part of your journey from pre-ownership to ownership

and now you've come back to tell us how you're killing it. So it's super cool to be part of that and that's a lot of why we do what we're doing. So I'm glad we were able to be at least of some help at exposing what you shouldn't do. There you go. Big help. Super cool. All right. Thanks, Patrick.

All right. We'll see you.