Mergers and Acquisitions – Jonathan Baker

Jonathan Baker:
A lot of times, the owners, the founders, are responsible for sales. Right? That’s great. But a buyer’s looking at a firm and saying, okay, well, eventually I’m gonna lose that guy or gal. What then? And so if you can come to them and say, yeah, in three years, you’ll lose them. But look, we’ve got this process in place already, and so sales isn’t completely dependent on this one principle. There’s a funnel that they go through. We’ve got multiple people creating content. We’ve got a podcast, for example.

Jonathan Baker:
So having process, particularly around business development, is one thing that I would recommend most firms work towards.

Dana Robinson:
Exit Plan is a podcast for business owners and those who want to be business owners. I’m always in search of the lesser known stories of entrepreneurship. In the exit Plan podcast, you’ll hear stories from startup to sale and hear from the professionals who helped business owners achieve their exit. Hosted by me, author and private equity manager Dana Robinson, along with my co hosts and guests, you’ll hear real stories, tips, and tools that will help you plan for the exit you want, whether you are still working at a day job or running a business. Let’s get started with this episode of the Exit Plan podcast. Hey, everybody, it’s Dana Robinson coming to you with the Exit Plan podcast, formerly the Opt Out Life podcast. And I’ve got a great guest on today, Jonathan Baker. Jonathan, thanks for coming on the podcast.

Jonathan Baker:
Hey, thanks for having me.

Dana Robinson:
Jonathan, your resume includes some of the things that I think really bring value to my listeners, and that is, you’ve done some business and you help businesses. So I think that there’s a lot of people that I’ve met that have been kind of bred into the financial services industry. And I think of them as book smarteen, and I appreciate them. And we’ve used them, of course, for a lot of different roles. But when somebody’s actually done business, I think they bring some relatability and empathy to their clients when they turn into financial. And for you, an m and a advisor and some scrappiness as well. Yeah, yeah, scrappiness. Like you’ve been there.

Dana Robinson:
So I think that’s super cool. And what we’ll get today, for those that want to know, is this worth listening to? We’re going to get advice from an m and a advisor about optimizing businesses, what transactions are like, what are the types of things that can go right and wrong in a transaction? You know, a lot of the sort of showing you behind the scenes what you might not know, you might not know as an m and a practice that Jonathan runs. But I like to start out by getting your own journey. How did you end up in business? And then what was the transition like going from being a business person to being a business advisor?

Jonathan Baker:
So I’m from Nashville, Tennessee. Came down to Atlanta to go to school, went to Emory. After Emory, I worked as a consultant for five years doing marketing strategy consulting for large CPG brands, primarily. From there I quit to start my own business. Started a craft brewery with two business partners that is actually still going strong. Up to six locations, 180 employees in the southeast. It’s called Monday night brewing for those who are drinkers. But the bigger that got, the less excited I got about being there and also about, you know, my, I think my contributions were diminishing.

Jonathan Baker:
So I realized that I was better suited to smaller, startup type environments. We went through the m and a process, actually, as sellers got left at the altar. Oh, that experience really piqued my interest in m and a. And I saw an opportunity to come join punctuation, which is just me and my father, to help build out his m and a practice. So we advise small to mid sized marketing strategy firms, primarily north american, but we do international as well. And I mean, it’s a, you know, it’s a pretty narrow niche, right. Just marketing strategy firms. But that’s what we, what we’ve been doing and I’ve been doing that for the past four years.

Dana Robinson:
Cool. I like to talk about failed deals to the extent that you are free to talk about with, you know, I know they sometimes end in non disclosures and settlements or whatnot, but, you know, going through a transaction, this was with the brewing company. So you started brewing company, you got some partners. You are starting to realize like maybe this is not so fun as it, as it scales and gets to the bigger side of running the business and you take it to market and sell it. Did you use a broker, talk about the transaction a little bit, if you don’t mind.

Jonathan Baker:
Yeah, I can’t share too much, but we didn’t take it to market. We were approached by a strategic acquirer and weren’t really in the market. So this kind of took us all by surprise. And then we got really excited about it and then it went away.

Dana Robinson:
And do you think it went away for reasons that you weren’t prepared? Because it came out of the blue and you weren’t really kind of ramped up and prepared for transaction? Do you think there were some lessons in there that are, that are worth talking about?

Jonathan Baker:
You know, one thing that I had completely underestimated was the emotional toll I. That the M and a process takes on a founder. And also going in, I assumed, yeah, there’s going to be a spreadsheet. And it’s like, everyone agrees this is the price and whatever. It’s so much more subjective than that. Right. And you’re dealing with personalities and people in the same way that you are in business, which makes way more sense. But I.

Jonathan Baker:
Before. Before that experience, I had kind of thought of m and a as this black box where everything works like clockwork, and it turns out it’s way messier.

Dana Robinson:
Yeah. Yeah. Okay. So the transaction doesn’t go. It doesn’t go through. This is pretty common. I think I might still be worth pausing a little bit on it, just as a point, maybe, where you’re not talking about specifics, but a lot of strategics are, and private equity buyers are looking for what we’ll call proprietary deals. They’re just looking for an opportunity to talk directly to an owner and say, hey, we like your business.

Dana Robinson:
Can we buy it? And so there’s a lot of outreach. I would say that if anyone who’s listening to this has a business that’s doing any more than a couple million dollars a year in gross revenue, you probably have gotten an email from someone phishing and fishing, in the normal, non pejorative sense, for an opportunity to talk to you about buying your business or repping you or their buy side finders that have negotiated terms with the buyer, who says, go find me some businesses, find me some breweries, and they go find you, and then they put you in front of this buyer. That process can work really well, but it also tends to be messy, partly because you have often no professional advisors on the side of the seller. Right. The seller is like, well, yeah, if someone wants to buy me, I love that conversation. And then, you know, they’re. They’re entering a world where they don’t know what they don’t know, aren’t they?

Jonathan Baker:
Yeah. Although we did engage a broker after we’d been contacted. I think we knew enough to know that we didn’t know anything. And I think it probably would have gone south much quicker had we not kind of had some help. And, yes, it’s the experience, and it’s kind of knowing how to talk to someone, but it’s also this arm’s lengthen, uh, way of dealing with us and them that is helpful. So, you know, they can take emotion out of it a little bit more than we can. They can have more frank conversations. And then they act kind of as coach to us.

Jonathan Baker:
As much as they’re trying to fight for us, they’re still coaching us as well.

Dana Robinson:
Right? Yeah. So the, the emotional aspect, it brings up a couple things. And you, you’ve got this firsthand, and then I’m sure you deal with the emotions of your clients because selling your business is probably one of the more important things most people will do in their life. Right. And very often, depending on what stage of life you’re at, it might be the only time that you take this thing that you’ve built and that you care about and sell to somebody. Let’s talk about the emotional toll that you went through. And maybe even if you’ve got any anecdotes or stories from some of your own clients, you know, what are the things that people don’t see coming that are going to make this sleepless nights and angst.

Jonathan Baker:
The biggest thing that they don’t see coming is the ups and downs. So I think you kind of think of it as more of a steady up the closer you get, but it’s much more erratic than that. And I liken it to, you know, let’s say your house shopping. And so you’re visiting all these houses and you’re trying to picture your life in each house and how, you know, where would your furniture go? What, what would your evenings look like? What would a dinner party look like? And you’re trying to do that over and over again. And that in and of itself is emotionally exhausting. But that, as a financial transaction, is much smaller than this. And usually you’ve spent, this is your baby, you’ve spent years building this up, and this is the largest financial transaction you will ever do. And so you just have to multiply that sense of trying things on by ten or whatever.

Jonathan Baker:
And, you know, as you’re trying on different buyers, right, you’re going through all of this. And, and I think another, another parallel is this, you know, the ten stages of grief type of thing, right. Where you’re, you’re at different points, angry and accepting and ready to walk away and, like, without fail, all that stuff happens with every deal, maybe to different extents and maybe at different times, but you kind of have to go through all of that and you have to be ready to walk away or else you’re not going to come from a strong place of negotiation anyway.

Dana Robinson:
Yeah. Yeah, absolutely. I think that’s a good, the story people don’t see, and I can attest that I’ve seen a, the six month cycle of trying, of going through transaction that was half a billion dollars where I wasn’t even involved with the transaction as one of the management team. And the stories I heard were that this was on again, off again. We had a deal, then we didn’t have a deal, then we had a deal, then we didn’t have a deal. If both parties are really, truly trying to be objective, then it’s always going to be that way because you’re going to be like, hey, no, we’re not conceding on this term. And then the other side goes, neither are we. So we’re, you know, and then they walk away and then they actually probably think about it and go, why are we bickering over this one term that’s so remote and unlikely? Then one party goes, yeah, okay.

Dana Robinson:
You know, like I was being unreasonable on that or, or something like that. I’ve seen the same thing with a, you know, $100,000 business acquisition, million dollar bid, 15. We just went through a transaction on a landscape company and we didn’t know until probably we had assurance three days before closing. That was when we were sure. But that was almost three months of going through a very stressful time for the seller. We wanted the deal. There is some buyer emotions as well, but.

Jonathan Baker:
Well, and the seller’s trying to run a business at the same time too, right?

Dana Robinson:
Yes. Yeah. They, and they can’t let the business slide while they’re spending what now is half their time answering questions from the buyer. Right?

Jonathan Baker:
Yeah.

Dana Robinson:
Lawyers, the due diligence and all of that. I’ve got this theory that maybe it doesn’t apply to every circumstance that sellers, and maybe it’s, I’ll say this, I think this is true of all sales. Anything you sell, sales are based on trust and who you and you trust based on liking. In the m and a context, most transactions that get through have a buyer and a seller who trust each other. The lack of trust, you know, engenders fear. And fear is going to, you know, create the cycle of like, no, I can’t. You know, every time someone asks for something, there’s this sense that you’re having, someone’s taking something from you instead of you working in this collaborative trusting transaction. But I mean, maybe once you get to a certain size, maybe that’s bullshit.

Dana Robinson:
And you just have price and economics and contract terms.

Jonathan Baker:
I don’t think so. I mean, in the world that we kind of deal in, almost every transaction has some form of earn out, which is usually two to three years. And so you also have to, yes, there’s the financials, but, like, are you going to be comfortable spending three more years of your life working with these assholes? And if the answer is no, then walk away, right?

Dana Robinson:
Yeah, yeah, yeah. That’s. And sometimes it’s a little bit hard to do when you’re a seller because you’re enticed by this opportunity. And so you’re, I’ll call it the red flags, you know, the warning signs. You’re not maybe paying attention because you really want the deal to happen. I’ve also seen a lot of times the, the fear of the unknown supersede the trust that really should be there. So as a buyer, I’ve been in transactions wherever it takes a lot of coming back to try to be transparent about things and teach the seller some things that they just don’t know. They don’t know because they’re afraid.

Dana Robinson:
And I guess I’ve been in transactions where the intermediaries are either helpful or hurtful when it comes to that piece. I’ve been in transactions where the m and a advisor for the seller is leaning into the anxiety of the seller instead of trying to stabilize and regulate their nervous system with, you know, the knowledge that they bring to the table. Have you thoughts on that? Am I.

Jonathan Baker:
No, you’re completely, you’re completely right. I’m thinking about a scenario in which we had a potential buyer, you know, really early on in a deal, fly in to meet with the seller, basically just have dinner. And I was trying to prep the seller ahead of time. You know, they’re going to pepper you with questions. They’re going to, you know, don’t expect this to be relatively one sided. Just you make sure that they want you at the end of the night. And what ended up happening is the potential buyer came in and sat back and answered questions. And that actually instilled a lot of trust in those sellers.

Jonathan Baker:
I think a lot of times the buyers will be a little bit too aggressive upfront, trying to figure out if this deal is worth it or not for them not understanding that from the seller’s perspective, like this is a very one sided first date, just mansplaining all night.

Dana Robinson:
Yeah, I think that’s a great observation because if you think of a lot of financial based transactions, so a strategic at least is someone who owns a business in your space and probably can have some relevant reciprocal conversations. But financial buyers do tend to be very transactional. And you’re right, they’re going to sit down with a seller, pepper them with questions, try and take, you know, not take advantage, but they’re not, there’s not some empathy and there’s often not curiosity about what’s important to them that they’re, so you have the opportunity to completely destroy what you need to make the deal happen, which is build trust. And if you’ve got a buyer who’s willing to sit there and just say, like, yeah, I’ve done this before. You haven’t. Why don’t you just, you ask me questions and then tell me about what’s important to you. That’s a great way to begin a transaction that you’re laying a foundation for that trust.

Jonathan Baker:
You poked at M and A advisors, which is fair. We’re certainly not all created equal. But I also want to poke at lawyers.

Dana Robinson:
Please do.

Jonathan Baker:
I think there’s nothing that can kill a deal faster than an over eager lawyer. And you get a lawyer involved too early, get them pushing too hard, you know, the seller can end up taking that advice over what their own heads are saying or what is important to them personally and not kind of putting everything into context.

Dana Robinson:
Yes, yes. Lawyers kill deals is actually a good theme and probably one that I ought to bring some m and a lawyers on. This could be a panel, because the lawyers, almost, at least in the firms, do a lot of M and A, do not like being told by the seller, here’s what I’m going to take. They feel it’s their duty, and maybe it is, to deliver a full markup of every possible term that they feel can be negotiated. So the lawyers often step in and turn a sort of mid deal retrade on the buyer by over lawyering the deal. And then when the buyer goes, hey, but first half of this isn’t market, you know, these aren’t terms that are, you know, that I would accept from for any of my clients. And then the rest aren’t the deal we talked to the seller about. So, lawyer, you know, shut up.

Dana Robinson:
Take all this. You know, we’ve pushed back whole red lines before and just said, no, no, we’d like you to take the version of the deal that we told you we struck with your seller. And, and then you end up with a poor seller in a situation where they don’t know who to trust because they think, well, yeah, I did do this deal with my buyer. I think I understand it that way. But now my lawyers are telling me they’re scaring me. They’re telling me that, you know, these, these reps and warranties, you know, are dangerous for me. And I guess that is where a good m and a advisor would be able to come in and say, all right, look, the lawyers have to do this. Otherwise you’ll sue them for not giving you good advice.

Dana Robinson:
So they’re going to tell you everything that they think you ought to ask for, even if you tell them you don’t want to do that. And then you’re the middle child, I guess, is my example because I’m a middle child. So you’re the, the intermediary as the broker to come in and say whether there’s another broker, you’re just the only advisor. Hey, let’s work out the business terms. The lawyers don’t dictate business terms and get that seller out of that sort of fear. My advisors told me we have red ink all over this document. Have you experienced that? Pretty frequently, yes.

Jonathan Baker:
And I think we, you know, so we as advisors try to do as much negotiation up front, like put it. Let’s put everything we can into the Loi recognizing we’re not going to get it. All right. But it just gets infinitely more expensive, too, for both sides once you get lawyers involved. And so can we try to figure out as much as we can before we get our red pens out?

Dana Robinson:
Yeah, and again, like your advantage. And I’ve had a couple of m and a advisors on, and I think several of them have had business experience themselves. So I’m a huge fan of, if you’re going to use a broker, whether, I mean, I sold a business that was under a million dollars a couple few years ago, and I loved my broker. I’m a lawyer. I’ve been a licensed series 79 holder. Like, I can broker business, but I still, I found a broker that knew the market for property management companies and who had owned a business, you know, who had been through a transaction of his own. And that just, you know, it let me divest and sort of outsource to him a lot of the things that would have, that I could have screwed up on. So you’re in that position to say, all right, I’ve seen what the lawyers do, and this is what they have to do.

Dana Robinson:
And here’s where we can make concessions, and here’s where we are gonna push back. And then you’re able to go to the buyer and say, look, some of the stuff the lawyer called out fair, you know, they’re calling out some market terms. We’re gonna hold fast on those and hold that deal together.

Jonathan Baker:
Look, the lawyers always catch stuff. I don’t. So they’re necessary, but they often are coming in, with limited context into the dynamics of the deal and, you know, the why behind the transaction and the why behind the transaction. Understanding that can really help help you fight through some of these issues.

Dana Robinson:
Yeah. Yeah. And again, like, sometimes the seller isn’t in a position to help explain that. So if you’re, you’re hiring Jonathan, you really need to lean into Jonathan’s ability to help everybody understand that. So you know that the role of a good advisor is not just to like, find a buyer and then send you off to the lawyers. Right. It’s a, it’s a very intense process of being involved with that transaction and holding it together.

Jonathan Baker:
Yeah. You end up being a lot like a therapist.

Dana Robinson:
Yes. Yeah, I totally agree. So the, what are some of the things that you think I, from your experiences with your clients, what are the things that someone’s listening, they own a business. They want to transact at some point. They’ve got plenty of time to think about what, you know, let’s just say they have two years. What should they be thinking about that they, that most sellers don’t do that you wish they’d been doing a couple years ago?

Jonathan Baker:
There’s a few things I’m going to start with some really tangible examples. One would be cleaning up your books and making sure you are running everything in accrual accounting versus cash. Even if you’re using cash for tax purposes and cleaning up your books. Yes, it applies to your p and l, but what often gets ignored is the balance sheet because, you know, people aren’t looking at their balance sheet daily, but you just make sure you understand everything on your balance sheet and why it’s there because that’s oftentimes where the bodies are buried. Additionally, your client mix, make sure you’ve got, you know, for your industry, a client mix that kind of makes sense in our industry, you know, we’ll see really high growth companies, but those are often on the backs of one guerrilla client.

Dana Robinson:
Yeah.

Jonathan Baker:
Which makes that company harder to sell. Not impossible, but usually you’re going to get less money upfront or you’re going to get a lower multiple. If you’ve got one client, that’s 75% of your sales.

Dana Robinson:
Right? Absolutely. So if you’ve got time, then you need to backfill for concentration. So if you’ve got. And what’s a concentration trigger in the agency space?

Jonathan Baker:
About 25% is where I. People start getting a little nervous, a little squirrely.

Dana Robinson:
Right. So if you’re, you’re. Don’t have any client that’s more than 25% you’re probably. I mean, people will still call it into question, but it’s not going to be a showstopper, right?

Jonathan Baker:
Yeah, and people will always call it into question because it’s a stupid negotiating tactic that, you know, you kind of have to use. But, I mean, we just closed a deal with a client that was 75% of their, their book. And so, you know, you can still find buyers, but you might be. It’s a smaller pool of buyers, and that pool of buyers is not. It’s looking for something a little different than kind of the normal financials.

Dana Robinson:
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Dana Robinson:
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Dana Robinson:
The lessons in this parable are entrepreneurial lessons, but not what you might think from the current entrepreneurial zeitgeist. If you or someone you know are looking for a real pathway to entrepreneurship, here’s the secret. Your job is the way out of your job. It’s counterintuitive, but once you see how it works, you can’t unsee it. Learn the way of the fly swatter from the parable of Ubar and from the stories I share from my 30 year business journey. You can get a free copy of the King’s fly swatter water by going to danarobinson.com. and so, yeah, I’ll give you an example we looked at and would still probably buy a landscape company who has 50% concentration, because once in our hands, it would be a drastically less concentration. Right.

Dana Robinson:
But we’ll insure against that with some attrition calculation where their. Their holdback will get dinged if we lose that client. So, yeah, you know that you’re right. There’s a business, always a buyer, that will tolerate something that others won’t. You just have to find the right buyer if that’s the problem that can’t be solved. Right. Because you’re right. If you’re an agency and you’ve got a giant mega corporation that loves you and keeps feeding you work, it’s going to be very hard for you to dilute that with more clients to reduce your concentration and reliance on that client.

Dana Robinson:
And so if you want to transact, you just have to know that it is going to impact the deal structure, at least.

Jonathan Baker:
Yes, at a minimum. Two other things I’d love to mention. One is the firm’s positioning and how narrow a target or how deep an expertise they have in a certain area. I don’t know what the core area is. In landscaping, I only deal with english bushes. I don’t know. But in agencies, I’m an agency owner, and I only work with B two B SaaS companies. So I’ve got this deep expertise in B two B SaaS.

Jonathan Baker:
And in some sense, yes, that does narrow the pool of buyers. But that narrow pool of buyers will value you more because you have something that they cannot readily replicate. If you think about who the buyers are of some of these smaller shops, it’s larger shops, and they already can do everything. So what they’re trying to buy is something that you can do really, really well. So positioning matters. Two years is about the right amount of time that you need to kind of narrow your focus. The other thing is business development processes. A lot of times, the owners, the founders, are responsible for sales.

Jonathan Baker:
Right. And that’s great. That’s fine. But a buyer is looking at a firm and saying, okay, well, eventually I’m gonna lose that guy or gal. What then? And so if you can come to them and say, yeah, yeah, in three years, you’ll lose them. But look, we’ve got this process in place already, and so sales isn’t completely dependent on this one principle. You know, there’s a funnel that they go through. We’ve got multiple people creating content.

Jonathan Baker:
You know, we’ve got a podcast, for example. And so having process, particularly around business development, is one thing that I would recommend most firms work towards pretty soon.

Dana Robinson:
Right. All right, so we got get your books on accrual. And I would add to that gap. Right. Get, get somebody that understands that probably will be the person helping you with the financial aspect of your company two years down the road. So you have to, whatever you do for taxes, you need an accounting firm that’s familiar with the taking a kind of homemade cash based business and redoing your chart of accounts and redoing your books and getting you on the straight and narrow. You’ve got. What was the second one? That’s just because you had four things.

Jonathan Baker:
Positioning. Tighten your positioning.

Dana Robinson:
Tighten your, oh, not concentration over concentration on the customers. Your positioning. It’s interesting you say positioning because you’re actually helping sell agencies often who ought to be experts at that, but I’ll bet it’s like the mechanic who doesn’t fix their cardinal.

Jonathan Baker:
It’s exactly like that.

Dana Robinson:
The marketing agencies are helping other people position, but often aren’t thinking about what’s their position in their market and how do they, you know, convey that in a way that adds value? And the fourth one is replicable business processes. And the best way to do that is to actually be sure that you have hired all of the people that need to do their jobs without you. So work yourself out of a job. And you can only do that when you’ve got kind of business processes. Whether you’re following an Emyth Eos kind of journey or whatever the methodology is, you have to hand a buyer a business that doesn’t need you, don’t you?

Jonathan Baker:
If I could add a fifth recurring revenue. To the extent you can find or develop revenue that resembles recurring, do it.

Dana Robinson:
Yeah. And for those that hear that buzzword and let’s talk about it for a second, because it’s repeated from every business I’ve been involved with. So property management has a fee that recurs every month. So there’s recurring. Landscape maintenance is a recurring fee. Landscape construction is nothing. The reason that our buyers, when we go to transact and sell want that is they don’t want the cyclicality of sales, that they don’t want the long sales cycle. They don’t want to sort of be beholden to ensure that they’re properly pricing very big projects.

Dana Robinson:
So you have lots and lots of recurring revenue and an average ticket that fits the kind of business model they’re following. How do you do that in the agency world? What are the means of getting recurring revenue? If you’re running an agency of some kind?

Jonathan Baker:
There’s a few different methods. One is the retainer model, where you’ve got clients on a monthly retainer, but that’s becoming less common, and I think more common is it’s contracted for very specific service, search engine marketing, for example, there is a fee monthly plus your ad spend. So, you know, similar to what you’re talking about.

Dana Robinson:
Yeah. So I guess the agencies, obviously, ad buying agencies have something that they can bake in, because if you’re buying ads, you can also, you can charge service charge, you can charge the markup. You know, there’s a lot of ways to get that that are, and that you have a commitment to an ad spend, which makes it recurring as well. Right.

Jonathan Baker:
If you’re, but if you’re a brand identity house doing large rebrands, it is very difficult to find recurring revenue. You know, maybe there’s a brand dashboard kind of SaaS component that you could build out, but you gotta, you gotta either get creative or don’t worry about it. And, you know, we advise a lot of our clients, just don’t worry about it. Like, yes, recurring revenue is great, but you can’t, you can’t always get it. You know, if you’re a video production house or a brand identity house, there’s just, it’s just too hard to find. And so focus on the things you can control.

Dana Robinson:
Yes. Yeah. The, the, it’s like, whatever. You can’t do whatever’s trendy because it’s trendy. If you’re, if you’re a brick and mortar business, you don’t need to be a crypto AI business. Right. The, what are some other things that you think, well, let me ask you this. I was going to ask about punctuation, because it looks to me like you actually do more than just a normal m and a advisory practice.

Dana Robinson:
You want to talk a little bit about what the practice is and does, and, you know, what makes it different from some of the other m and a options.

Jonathan Baker:
Yeah. So we started out as an advisory practice, and then our clients started asking us if, you know, do we do m and a? Do we know anyone in the space? We’re like, well, we know enough people, so let’s just do it. That was 20 years ago. But we help marketing firms position themselves, develop lead generation plans, service offering design roles and responsibilities. We benchmark firms, and then we do all the valuation, buy side, sell side stuff. And so for us, oftentimes our clients start kind of on the advisory side of the business. They enjoyed working with us. We’re not everybody’s cup of tea.

Jonathan Baker:
We’ve, we can, you know, we can be a little bit different than some other m and a advisors, but if you like working with us, then they come back and, you know, we’ll help sell their business.

Dana Robinson:
Yeah. So you’re sort of a marketing agency for marketing agencies, like in. Does that bring conflict? Because you’re telling people you’re actually coming to, to the one who sells this service to other people and saying to them, you know, you can’t do this yourself because you’re blind to your own, you know, your blind spots are your blind spots.

Jonathan Baker:
I mean, it brings conflict in that. Not everyone agrees with that assessment, but those people are wrong. So.

Dana Robinson:
Yeah, that’s the. The. But that’s cool. Your clients then can come to you and say, like, we don’t have necessarily know what, when or how we’re going to transact. So the m and a side is not. Is not in action at all. But they just say, like, we. We want to create value.

Dana Robinson:
Yeah. And we want to pay for some services to. To do that.

Jonathan Baker:
And, and look, I’m sure you’ve talked about this at length, but a lot of the things you do to make your business a better business are the same things you would do to make your business a more sellable business. Right. There’s just so much overlap there.

Dana Robinson:
Yes. Yeah. And that is, I guess, ultimately something that I hope everybody hears when they’re, when they’re on this podcast, is that all of this stuff is stuff that you do for yourself. You own the business. Wouldn’t you want the benefit of the value that you would create to get yourself a better exit and not have to exit? Not, not, you know, don’t just think I’m building this. I’m planning everything for the eventual sale. But if you optimize your business and you’re running, I’ll give you a great example that a lot of businesses sort of miss. If you’re not on great financial reporting, you can’t get an investor or a lender to help you scale the business because all of them are going to diligence you the same way a buyer would.

Dana Robinson:
So you, as the owner of the business, actually benefit from preparing your business in a way that you could sell it, because now you can go to the financial markets and say, I need some debt or some equity, and here are my books that look as good as they need to look if I was going to sell the whole business, because if you’re selling a little bit of equity, it’s still the same expectation and if you’re going to traditional bank will take gap financials and the private credit markets will take gap financials. Right.

Jonathan Baker:
Yeah. And, you know, having a strong year end close or a month end close gives you the ability to make quicker decisions if, you know, things are going a little pear shaped or you need to ramp up, but you don’t know that unless you are closing the books on time.

Dana Robinson:
I love that. Yeah. And a lot of business owners, I think almost every small business that I’ve ever purchased doesn’t close anything. Right. It’s sort of just like the ongoing.

Jonathan Baker:
Yeah, but the credit card.

Dana Robinson:
Yeah. Yeah. So they’re entering three months ago in. Three months ago in Quickbooks. Right. Because you can. Which is the, which is convenient as a solo proprietor, but it’s. It’s not a clean way to run a business.

Dana Robinson:
And you’re gonna end up with, you know, the bad data in, gives you dirty data, so dirty reports.

Jonathan Baker:
We were, you know, back to that point about just running a good business. We were advising a seller. They were asking us, well, if we weren’t going to sell, we were going to hire this kind of expensive salesperson. Do you think we should hold off on that? Because that would, there’s not an immediate payoff and it would lower our EBITda. And my advice, and feel free to fight me on this was to go ahead and do it because run the business as if this sales never going to happen. Like, what would you do normally? And any good buyer is going to respect the same decisions that you are making and assume that you’re making them for very good reasons.

Dana Robinson:
Absolutely. I totally agree with that. And the same goes for not hiring somebody that you think is going to bring magic. So if, you know, I’ve had people be like, well, I know I need to work myself out of this job, and so I’m just going to hire this a player that’s very expensive so that when we go to transact, I’m giving them a great general manager, for example. That’s probably a bad move because you would only want to hire the general manager that you think you would want and can afford to run the business if you’re the owner. So, you know, that that fails so.

Jonathan Baker:
Much more often than it succeeds. And I think we see, you know, hiring from the outside for something like that is just playing with fire. Usually someone who has come up in the business has kind of learned it over time is going to be the best, you know, the best person to do that. But oftentimes there’s not a good person to do that. And that doesn’t mean go and hire someone and, you know, throw them to the wolves. It means you’ve just got some work to do.

Dana Robinson:
Yeah. Yeah. I had an interesting advice from sort of an entrepreneur who’d grown businesses and sold. She said, start hiring immediately. Like, I was like, well, but, you know, you start a thing, and especially in a service business, you start your service business. And she was, you know, I go, you don’t have the money to turn around and hire someone. She said, part time. Just hire someone.

Dana Robinson:
Hire someone and start giving them, delegating them tasks. Have them build the playbook for how they complete their tasks and grow with part time people until you can afford more than part time people. Otherwise, you’re kind of always stuck in this. You’re the bottleneck as the business owner. You’re the operator, you’re the salesperson, you’re the agencies that, they’re often the everything person. And the sooner you get good, competent, smart people. And in today’s world, you can get a lot of those who don’t want to work full time or who want to split their time between two businesses and are willing to give you half of their time for a lot less than, and probably produce more per hour of their time than if they, if you had hired someone full time.

Jonathan Baker:
I mean, that’s, yeah, that’s great advice. I think another reason to do that is the, the longer you are in the position of controlling every aspect of the business, the harder it is for you to give up any aspect of control. And when people come to us and are like, why can’t I grow my business? We’ll take a look at it. And it’s usually because of them. It’s usually because they are not, they’re constraining the growth of the business by not trusting good people to do work. They’re still wanting to be looped in on every decision. And that’s, you can’t scale a business that way. You can run a business that way, but you can’t scale a business that way.

Jonathan Baker:
And you certainly can’t get top dollar for a business that you sell like that.

Dana Robinson:
Yeah, totally. Well, a couple of asks from you that you may or may not be able to talk about. I would love it if you can think of an awesome deal that went through, and it’s a great example. And again, like, we can keep parties, names and all of that confidential. That maybe is a good example of a well orchestrated m and a transaction where everything came together and, or a horror story a deal that exploded everybody’s face. And we got some great lessons we can learn by not having that happen to us.

Jonathan Baker:
Let me.

Dana Robinson:
Or both? Both. I’ll take a good and a bad if you have both.

Jonathan Baker:
The horror story, I think, gets miscategorized as such, because oftentimes the horror story ends up being a best case scenario if it’s a horror story for the right reason. So we were working on a deal. We had multiple bidders close to full price. Both were strategic buyers on paper looked pretty good. So it was really came down to some of the financials and some of the cultural fit, and we ended up going with the folks with slightly stronger financials, a little bit more of a question mark on fit, but they had more of a need for us and got, you know, negotiated. Loi got through that. We’re in due diligence. Then they started asking us some kind of weird questions towards the end.

Jonathan Baker:
And so we asked if we could talk to their lenders, look at their balance sheet, and figure out what their long term plan was. Right. And effectively, it sounded like their long term plan was to continue doing acquisitions and use that EBITDA to pay out this earnout, which is, you know, Rob Peter to pay Paul scenario. And it just felt squirrely. So we walked away and it might have worked out, but it just started. Yellow flag started popping up. Yeah.

Dana Robinson:
Yeah. I mean, that’s an interesting thought and also a lesson in asking questions that most people don’t know that they’re entitled to ask. I mean, what, what is, what is the buyer gonna do? You’re, I mean, if someone says, hey, it’s all cash and, you know, we got a small hold back and, yeah, a normal transaction, but if you’ve got earnouts and holdbacks that are meaningful, you know, rolled equity of any kind, right.

Jonathan Baker:
To know where that money is coming from. Yeah.

Dana Robinson:
You’re becoming an investor and you need transparency about that. And that’s an interesting, you know, a good reason for a deal to kind of get blown away, probably after everyone thought the deal was going to go through.

Jonathan Baker:
Yeah.

Dana Robinson:
What’s a perfect deal look like? If. And maybe it’s an accumulation of a bunch of deals that you and your dad have done over the years. Is there, is there your, here’s, here’s the rosie. Everything, it comes together and maybe find some lessons in it.

Jonathan Baker:
Usually in a perfect deal, we are not needed. Really early on. In a perfect deal, we work out the business terms before Loi. We sign the loi, and then you get the lawyers involved financial due diligence teams, and there’s just kind of no surprises from either side. And so no one comes to me for advice. And so I don’t know if I, and, you know, we’ve done a few deals like that, and, like, I feel almost guilty right at the end, but you never know what’s going to happen to a deal and if you’re going to have to find a new buyer, you know, at the last minute. And so you’re kind of always on standby. But, you know, I think, yeah, some of the more perfect deals are the ones where I am least connected to.

Dana Robinson:
Okay, I like that. Let me pause and just say then what are the, what does that is the factors are financials look like what, you know, at the end, they look like what they were represented at the Loi stage would probably be a big deal. Right.

Jonathan Baker:
Yes. Although I think that’s, that’s often happens. But what doesn’t often happens is you’ve got a buyer who wants to lock up a deal, get it under Loi so that no one else can touch it, and then continue negotiating. And that’s what really gets annoying to me.

Dana Robinson:
Right. Yeah. I think whether you like it or not, there’s a point in every deal where there is an adjustment. And in the industry jargon, we’ll call it a retrade. That retrade needs to be really well justified if it’s going to not blow the deal up. Right. You have to say, all right, we got everything together on our assumptions. In the Loi, it was this.

Dana Robinson:
And now there’s a couple of reasons why we need a new term that we never discussed. I mean, for example, an attrition on concentration or something like that.

Jonathan Baker:
Working capital.

Dana Robinson:
Yeah. Yeah. So the financial piece is pretty common. That financial disruption between the beginning of deal and the final due diligence is not usually the thing that blows the deal up. And it’s aggressive retrades, or basically an ongoing retrade where you get the deal under contract and then every new piece of information precipitates another negotiation.

Jonathan Baker:
And I think in the deals that go smoothly, there is this level of trust that gets built and continues to be built throughout the deal. Right. And you’ve got, you need to have both sides trying to understand why the other side is fighting for what they are. And, you know, what, what am I, what’s my value to this party and what’s their value to me? And it’s not just financials. So it’s a mutual understanding and kind of a desire to work together and a desire to make this thing work because there’s a mutual understanding that one plus one can equal three in this situation.

Dana Robinson:
Yeah. I think that’s the integrity of the ongoing relationship. And I think one of the things I’ve seen that is quick to threaten that is not taking what you’ve promised seriously from either side. You know that if you’re in a conversation, business to business or with the intermediaries, and you say, okay, we’ll concede this business term, it has to be very good reason to go back on that or you begin to erode trust because you said that you were okay with this term, and then you let your lawyer tell you, now you’re not okay with this term. And it happens on both sides. I think. I think this is where lawyers can also square squirrel up deals. Is they, they second guess a business term that the, that’s already been given.

Jonathan Baker:
And we just had that happen where the, we had an over, you know, the lawyer just wasn’t looped into all the conversations, fought for something on a phone call that we had kind of already agreed that we would give up. And then I got a panicked email, you know, five minutes after the call ended.

Dana Robinson:
Yeah. Yeah. You don’t take back terms that you’ve offered unless someone decides they’re going to trade you for something. Right. This is where you end up in sort of like fair horse trading is fine. So, you know, you say, all right, well, we gave you this earlier, now you’re asking for a new thing. You know, you will give it to you, but we want. We want this thing.

Dana Robinson:
We kind of regret conceding.

Jonathan Baker:
Yeah. Yep.

Dana Robinson:
Love it. Anything else you can think of as an expert, Jonathan, that is worth doing as we sort of come to the wrap up in the podcast, some parting shots, words of wisdom for things that you wish your clients knew before they came to you.

Jonathan Baker:
I wish folks started the process earlier than they do because many folks don’t understand that when you sell your company, that doesn’t mean you’re not working for that company. You still might have two to three years doing that. And so you kind of got to think ahead, like, when am I going to be truly done and then back into it and consider you might want some advice two to three years before a sale in order to get the company to a place where it’s just easier to sell or to where you can hit the number you need to hit. I wish folks would engage us a little bit earlier. We’ve started doing valuations for firms annually now the same firm and we just have a check in on, this is what your firm is worth now. This is what the m and a environment looks like right now. How are you tracking on your goals? What are you thinking? Are you getting burnt out? And we try to just keep a conversation going so that we can hit the market at the right time, you know, kind of wheels to the ground.

Dana Robinson:
Yeah, I love that. I was talking to someone on the podcast yesterday who we’re talking about the lack of masterminds or kind of best practice that environments around optimizing your business for an eventual sale. Well, you know, like I. But not six months from now, like where you’re in around peers and service providers who are saying, here’s the things that you can do and here’s how you sort of begin to curate the business around peers well in advance of needing a transaction. And I think the stop gap is people can hire, especially when they’re in a niche like you are. They can hire you to become that sort of trusted advisor year in and year out before they even get to that transaction.

Jonathan Baker:
And it doesn’t cost that much. I mean, at that level. Right. It doesn’t cost that much. I mean, it’s, you know, a couple thousand bucks.

Dana Robinson:
Yeah, yeah. I mean, I’ll say it here, and you don’t owe me anything if you use it. You ought to create a mastermind for marketing agencies that ought to optimize and be advised by you and other people that, you know, bring resources to them, because it’d just be so much easier when they are ready, if they’ve, if they’ve socialized all of the things we just talked about into their business and implemented them well in advance.

Jonathan Baker:
Yeah. And there are some good folks in our space doing that. Good. Last thing I’ll mention, we set up a little website for the listeners of this show. So if you go to punctuation.com/optout, you’ll be able to contact me, even schedule time on my calendar, which I usually don’t let people do without emailing me first. And we’ve got a ton of free kind of m and a resources. You know, they’re obviously geared towards marketing services firms, but a lot of that stuff is relevant to all professional services firms.

Dana Robinson:
Awesome. I love it. We’ll put it in the show notes, punctuation.com optic out. You gotta. You’re not gonna get opted out by going there. So.

Jonathan Baker:
Thanks, man.

Dana Robinson:
Appreciate you coming on the podcast. Jonathan listeners, danarobinson.com and hello@danarobinson.com to get me an email that doesn’t get lost in the shuffle. Hello@danarobinson.com. Jonathan, thanks for coming on.

Jonathan Baker:
Thank you. Thanks for having me.

Dana Robinson:
Absolutely. Thanks for joining me on this episode of the Exit Plan podcast. I’d love to hear from you. Feel free to hit me up with questions or comments by emailing me at hello@danarobinson.com or leave comments and questions by calling 858-252-7785 call 858-252-7785 and leave a message.