Buying a Marketing Agency in the Age of AI

0:00Hello, ladies and gentlemen, boys and girls, and welcome back to another episode of Acquisitions Anonymous. This is the internet's number one podcast on buying, selling, and operating small businesses. I am one of your hosts, Bill D 'Alessandro. And today I am with Michael Gurley and Travis Jamison from CapitalPad. And we have a digital marketing agency doing a million bucks a year of EBITDA. And the cool thing about this business, it is specifically focused on the legal profession. So this isn't your kind of run-of-the-mill digital marketing agency. It's It's got 50 % EBITDA margins, 65 clients on retainer, and is entirely targeted at the legal profession.

0:36So it's a pretty cool deal today. Travis knows something about this space, owning a digital marketing agency himself. So he has really good insights about what it's like to own one. So without further ado, I hope you all enjoy this episode of Acquisitions Anonymous. We'll set Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100 % ears anymore. Thumbs down on just the plus inventory line. Hey, Michael here. This episode is brought to you by Toninson Accounting Services, the leading provider of quality of earnings reports for small and midsize business deals.

1:08Every year, their team reviews over$500 million in transactions, and the reports are trusted by buyers, bankers, sellers, and brokers nationwide. What sets Toninson Accounting Services apart is premium quality work at an unmatched price, a full quality of earnings report for just$6 ,000. You'll get more depth and insight than firms who charge twice as much, which is why so many dealmakers turn to Tonnenson Accounting Services when accuracy and speed matter the most. There's a link to tonnensonaccountingservices.com in the show notes, or reach out to Josh Tonnenson on LinkedIn for a free consultation, where he'll walk you through the process step-by-step and answer any questions that you have.

1:43Tell them that Acquisitions Anonymous sent you. Hello, and welcome back to Acquisitions Anonymous. We have my good friend, Travis Jameson from Capital Pad with us. Hey, Travis. Hello, people. Glad to be here. Thank you. All right. And my also other good friend, Michael Girdley, of course, here with us. Let's go. Let's go. So it is almost Christmas. It is December 16th. It is freezing here in Charlotte, North Carolina. Travis is wearing a very sophisticated sweater. I'm doing with him on YouTube. He looks like a professor. He's got the glasses and kind of the... Very nice. You look very smart today.

2:17Well, I'm in the awkward phase of like, I think I'm growing out a beard, but I just look kind of like dirty right now. And so you have to add like a sweater and glasses so you just don't look like a hobo. That's a good move. I also am doing that, as you can see, and I just have my Pearl Snap shirt on. So I'm looking very Texas today. Trying to. All right. We have a cool deal, though. This, I'm hoping, is right up Travis's alley. It is a digital marketing agency. If only we had Heather here to shake her fist at the first part of this title, which is SBA pre-qualified. Michael can shake fist in Heather's stead.

2:55This is an SBA pre-qualified eight-year-old agency with 47 % year-over-year SDE growth, strong recurring revenue. It has 1.98, so call it$2 million a year of sales of revenue and$1 million of income. So a very solid 50 % net margins. They're asking a 4.1x multiple. So they're asking$4.3 million. Let me tell you a little bit about this. It says, launched in 2017, this digital marketing agency focuses on providing legal firms in a narrow niche with online lead generation, advertising campaigns, and strategic consulting. This agency has been very successful with continual year-over-year growth. the most recent period showed a 47 % SDE growth over the trailing 12 months.

3:44Rather than doing as much of the critical work himself, such as sales, the owner has built a team to handle these care areas while working an average of 20 hours per week. The team totals 10 people, including the owner and his spouse, and they manage 65 active clients. Each client is on an active retainer, paying an average of$3 ,200 a month. There is no troubling client concentration, such that if a single client were to cancel, it would substantially impact the profitability of operations. The owner wants to sell so that new leadership can come in and build upon what he has accomplished over the last eight years.

4:14Given his efforts in building a strong team, the agency is in excellent position to transition smoothly to a new buyer. SBA note, the business is SBA eligible, but to get the maximum lending amount available, the buyer will not be able to draw a salary from the business. If the buyer needs to draw a salary, they will not be able to get as much financing. Please see the SBA pre-qualification letter in the package for all the details. To secure the deal with an SBA offer, we were looking for someone who is very well qualified. Interesting. We're going to come back to this. Ah, relisting update. This business was previously under an LOI with an SBA buyer, but they pulled out of the acquisition due to a major unforeseen issue in one of their other businesses.

4:54With the business now back on the market, we have kept the price the same and the multiple has dropped due to the continued growth while we were under LOI. The business recently eclipsed the$1 million in TTM SD for the first time. This is for sale by our friends over at Quiet Light Brokerage and our friend Chris Guthrie, who's a broker over there, not wearing a hat or touching his face, wearing glasses and looking very smart like Travis. So what do you guys think? This is an interesting one. I think it has a great start. I like that it's very niche focused. It's not like broad digital marketing.

5:28It's for legal firms, which I happen to know are getting rolled up right now. There is a platform being built of specifically like digital marketing companies for legal. Oh, interesting. Very specific. Yeah. So I wonder if people will hear this episode and buy it. They might. I don't know. Like, you know, I tend to hop on here and like, I like to hate on stuff immediately. Like I don't hate on this. This has some legs to it. So I can tell you a little bit about this space. I had a friend who was in this space a number of years ago. So I can almost guarantee that the clients here are personal injury or those types of law firms.

6:14They pay huge numbers for clicks. They pay huge numbers for leads because a lead can be worth 50 grand to these guys because they're taking a portion of settlement and they're usually contingency. But anytime the phone rings, there could be$50 ,000 on the end. So legal firms like this, they're big customers of like answering services, intake services, because if someone's not on the other end of the phone, you could lose a lead. They also can pay big numbers on a CPA basis for leads. If somebody has a medical claim, if somebody was hurt in a car accident, if somebody was hit by a truck, you know, these types of things, they're very, I mean, you see all the billboards on the highway, right?

6:57Like hit by truck, you know, asbestos in the walls, like, you know, all these like general, these huge class actions. I would bet that these guys are optimizing around those types of keywords. Yeah. And you might even be understating it. Like with attorneys, it's not like there's generally a huge preexisting relationship or like a recommendation. It's like, I need an attorney for X. I'm going to go to Google and find that person. Right. And so that's why they pay out the wazoo for it because there's no other way to really get in front of them. So yeah, they, they legal pays a lot. You should look at like their calls per click rates on ads.

7:32It's bananas. Yeah. I mean, imagine you click a link on Google and someone paid Google a hundred bucks. I mean, wild. And then you just hit back and move on with your life. $200 down the drain for the legal firm. So we here in San Antonio, there's the number one guy who basically has dominated all of personal injury advertising here. And he basically outspends everybody in San Antonio, Houston, Austin, Corpus Christi. And he lives here in San Antonio. And about six years ago, he threw a quinceañera for his daughter. It's like a 15-year-old coming out party. like it's very it's very south texas thing anyway he spent 12 million dollars on it was the rumor and he flew in pitbull so yeah uh it's just a total the whole business is just a racket to shake down insurance companies to some extent so it's crazy i mean yeah the judgments can just be huge i wonder so you said he kind of is the the biggest spender i know when like if you think of e-commerce like how do you win you if you can pay the most for you know a lead or a cost per click because you're making it back on the back end.

8:41Like that's how you win. I wonder how a lawyer or law firm would be doing that. How can you pay the most here and be like proud of that? I mean, you probably need the lowest cost structure, right? So you probably be leveraging AI or a whole bunch of associates and you need the highest billings. You need to be winning bigger judgments than the other guys because it's not like you've got to outbid, not like the lawyers have to outbid the dog supplements brands, right? The lawyers have to, the personal injury lawyers have to outbid the other personal injury lawyers. So you have to be better than your direct competitors.

9:13So, well, it's, it's, I think digital is like not high on the ranking for these folks because your typical customer who they're trying to get is a person who was driving a truck and like got, you know, got killed and his, they're trying to get a settlement for that, um, or go to, go to court. So here in San Antonio, at least, and in Texas, it's number one is billboards. Number two is like broadcast TV. And then number three is like digital ads. And it kind of works its way down there. But to your point, Bill, also, these guys here are not just competing with other personal injury guys for billboards.

9:53They're also competing with everybody else who might want to do a billboard as well. And yeah, the way they win, Travis, is these guys just out pay. They outbid everybody else. And then that allows them to have the flywheel of getting to pick which clients they take on. And there kind of tends to be two types of clients. There is the ones that the lawyers actually take care of. And like, did somebody die? Okay, we'll take it. And then there's the rest, which is if you go look at the offices for these personal injury guys, there'll be like a 15 ,000 square foot office and it's just cubicle after cubicle of paralegal arguing and shaking down and doing insurance company claims for$50 ,000,$100 ,000 at a time.

10:38And yeah, I've gone to like look at their offices and you're like, oh, like I understand what happened to manufacturing. We sent it all to China and now we have this manufacturer that just shakes down insurance companies. That sounds fun. So back to this business though, right? But there's, let's, Travis, let's talk about a couple of ways it might actually work. So this is an agency, right? These guys aren't lawyers. They are selling leads. I assume they're selling leads or they're selling, maybe they're selling digital marketing services to lawyers, right? That's what I'm unclear about. They do say online lead generation.

11:14And I'm like, are they providing the leads? Which is a really interesting business model, kind of like the rank and rent, where you make these dummy sites. You rank them using the spammy tactics. you get the leads and you sell them to attorneys. That can work really well. It's more of a kind of a churn and burn business type thing. Or are they providing the actual marketing services for the lawyers? If so, that's a much better business model overall. What's interesting to me is they mention the retainer. It says each client is on an active retainer paying an average of$3 ,200 monthly. So that makes me wonder if it's more kind of SEO style and or manage your Google ads for you.

11:56Yeah, it's definitely not just design, right? Yeah, no, I don't think it's web design. I mean, if you're on retainer, it's got to be some kind. And they say marketing, not web design. So it's got to be some sort of we run your Google for you or maybe we're SEO optimizing your website or maybe they're link building. You know, I don't know. You know, with these, assuming it's in a, well, there's 60 clients, so they're in markets everywhere. It's not like you can just do the SEO and then stop because your competitors are always building as well. So you have to like continue with it forever. So the retainer model really, really makes sense here.

12:30You have to always compete against others. So the big thing come to my hand. So I should disclose that I own a marketing agency. It's like 14 years old, maybe 15 years old. So it's been around for a really long time. Know the industry quite well. There's a huge shift right now with what is the digital landscape going to look like a year from now. Because every month that goes by, we all use the LLMs, ChatGPT and whatnot. we use those way more and we use Google way less. What is it going to look like a year from now? What's it going to look like three years from now? And, you know, if you're starting a company, it's one thing.

13:11If you're used a bunch of SBA debt, piling it on there and have to have a business model look the same five years from now as it does now, that's a big question. It's a big if. The early sign so far is that whatever, whatever the acronym we're using for LLM optimization is just SEO with like a different flavor? Or are you seeing something different? Because that's what I'm seeing people do. They're just like, oh, well, we just need to have different optimization so the LLMs like promote us to their user base. Well, it rhymes. It rhymes a lot. And I've even had calls with my management team at the marketing agency today about should we shift 100 % to AI?

13:46We're talking about it and we can already optimize it really well. But it takes a skillset. And so it makes me question, is the founder, are they the like the lead seo mind share behind it and somebody coming in do they need to already kind of know how this these things work this like you know hacker mindset works um because it does rhyme with seo but there are a lot of differences um you need to be able to figure that out and that's that's a little worrisome heading in there the the market is quite different and what will it look like for all of the clients moving forward is it going to be the same type of service, the same type of retainer.

14:26There's just so many unknowns right now with it. Well, so that's the thing. It's like, is this thing transactable? Like it's, this seems to be a great business. It's making a million bucks a year. It's got 50 % net margins. It's probably basically a labor arbitrage business, right? Where you're probably paying people overseas to build links or do the work or click the buttons or whatever, and then you build them out on retainer. So it seems like an awesome business to own. This person is making a million bucks a year. But to your point, Travis, I don't know what the heck digital lead generation looks like in five years.

15:00I mean, I don't know that anybody knows. If you pretend to know, I think you're full of it. There's just so much changing right now. It would make me nervous to lever up and buy this thing for four times, which is four years of earnings, which means that you've got to fundamentally believe one of two things, either a, the market will be mostly the same four years from now. Right. And so I can get my money back or I can morph this business as the market shifts underneath my feet. Uh, you kind of fundamentally got to believe one of those two, when you buy any business for whatever multiple, that multiple is the number of years you need things to not go pear shaped in your market.

15:42Or you've got to feel confident that you can dance between the raindrops as it happens to you. So if you're buying this business and you don't know the difference between SEO and GEO, you might be in for some hurt, I would think. 100%. Hey everyone, it's Bill. And I want to tell you about maybe the most exciting sponsor we've had in a long time on the pod. It's called CapitalPad. And it is the thing that I wish existed when I started my journey of operating and investing in small businesses. So Capital Pad is a marketplace for acquisition entrepreneurs, that is people who want to buy a business and need capital to list their deals and solicit capital from other people who want to invest in acquisition deals.

16:27So if you want to back somebody buying a small business, Capital Pad is the place to do it. And if you want to buy a business and need capital, you can go on CapitalPad to be introduced to investors. So the really great thing too from the investor side is that CapitalPad takes care of all of the details that can get hairy with small business acquisitions. They handle standardized terms, standardized governance, standardized distributions all up front in black and white. Basically, CapitalPad professionalizes investing in small businesses and the returns can be really, really good. I'm so stoked they exist.

17:05It's founded by my friend, Travis, who is a phenomenal entrepreneur in his own right. So if this sounds like something that's appealing to you, if you want to buy a small business and need capital, or if you want to invest in small businesses, go check out capitalpad.com and tell them that Acquisitions Anonymous sent you. And I've consulted with people looking at buying marketing agencies before. And that's the first thing I always start with. Do you, at your core, understand digital marketing? If you don't, you shouldn't own, you shouldn't buy this. But just because it requires, it's hard to outsource and hire people to have that higher understanding of it.

17:46You can hire people to fulfill certain tasks, like build links in this way. But the big strategies, the strategies are always changing. um this is like digital marketing business it's not like one of the boring businesses where it's always going to be the same it changes every couple years like our marketing agency has reinvented themselves four times throughout its life like pretty massively because what worked before stops working or what works before everyone starts doing it and and ruins it and so you have to like transition to something else um so you really have to like understand it at a fundamental level of what levers to pull and how to hack these algorithms just algorithm hacking um but somebody has that skill set, it becomes a lot more viable.

18:27And if you don't, then eek. Yeah. Or you better build it pretty quick. And the problem is the, in the year it takes you to build it, you know, the world's moving under you during that time. That being said, if you own an agency, is this a great add on to get into a different vertical, you know, and build some credibility? I think so. I mean, it would be difficult to figure out all of the funnels and levers and relationships to like suddenly hop into a 60 person legal business, right? Like that's, uh, it's really hard to get 60 businesses like this under retainer. Like that's fantastic. They've done a great job with that.

19:06Um, I don't know how to do that immediately or within a year. So if I don't know how to do it, then then this is, this is a legit asset right there. Okay. So this is really interesting. So Travis, maybe someone like you or you should buy this business, immediately your digital marketing agency is in the legal vertical, which is a lucrative vertical. They've got, to all their credit, they have 65 clients. How many lawyers are there who are potential clients here? The TAM is really big. If you knew how to deliver the service and you probably also knew how to acquire clients, you could easily double the size of this business and not make a dent in the TAM, right?

19:45Yeah, 100%. I would really want to drill down during diligence on their customer acquisition strategies. And the longevity of those methods is, you know, how important is the founder here? Is the founder doing sales? Does the founder have relationships with 60 clients like that? I think that probably goes down a little bit. Are they doing, say, like LinkedIn outreach spam or email outreach? You know, those things have diminishing returns. And, you know, every month that goes by, I bet the effectiveness of that goes down. Or is it some other method that looks a little more evergreen? Again, you just always have to be reinventing yourself with marketing agencies because they're marketers, right?

20:29These are the people coming up the strategies themselves. And so they tend to burn out the good stuff pretty quickly. So yeah, I want to dig down on that. And it would probably be worth getting a consult from someone like Travis or someone who owns a digital marketing agency if you were going to buy this, to kind of look under the hood and go, are these tactics sustainable? Is this a churn and burn model? You know, are these tactics not going to work in a year or two? You know, would you feel comfortable buying this agency? I mean, I can't, in general, it would make me really nervous to buy a business in an area that I was not fluent in without getting some expert opinions in the area about whether it's a good or a bad business.

21:06Yeah. I agree. Uh, Girdley, you always say, you know, if you're trying to buy a business, you better talk to at least 10, even if you already to know which one you want to buy, right? Yep, so you learn about it. Yeah, so I'd go talk to everybody I could on this. So I'm with you. Hey, can you switch gears a little bit? Here's something that's wonky about this. The business is SBA eligible, but to get to the maximum lending amount available, you will not be able to pay yourself for working in the business. Like, how do you guys read that? Like, to me, that's like, ooh, this means that the model for getting an SBA loan here is going to be like flying pretty close to the sun.

21:43Yeah, two things. One, they're asking you to just leverage yourself as much as possible. The second, I don't think the SBA allows that. I think you have to model in a livable salary in order to get the approval for that. Am I wrong? If only we had Heather on this week. Do we know anybody who's an SBA expert? So in the absence of Heather, let's just try to pencil this, right? So they want 4.3 million for the business on a little over a million of SDE. There's plenty of interest coverage here, I would think. I mean, it's a 10-year loan, so you got 430K. Let's say you're going to have to put down, what, 10, 20%.

22:25Let's say you put down 10%, that's 400K. I mean, you've got a$4 million SBA loan, which means you got 400K of principal. And I mean, even if you've got another 300K of interest on it, 400K of interest, you got 800K of debt service a year-ish. So what they're probably getting at is if you pay yourself 200K here, you got 800K of debt service, the debt service covers ratio is not there. And that's what they're basically saying is, I would have said it differently. I would have said, you're going to need to put down at least 20 % equity to buy this with an SBA loan, right? Because basically like this, no, what they're trying to say is the, the multiple that we want you to pay is too high for the standard 90, 10, 90 % debt, 10 % equity SBA deal.

23:16And so you don't, and so they, they went with, and so you can't pay yourself. But what actually they should have said is, and so you need to put more down and get it, get an SBA loan. So that's probably what it is, that there's just not quite enough coverage. SBA deals, as a rule of thumb, if you're paying more than three and a half times, roughly, you're not going to be able to go max leverage on an SBA loan at today's rates because the debt service coverage is not there. Yeah. And you definitely want a big buffer, right? I mean, to be honest, everyone who puts down, gets a 90 % SBA loan, that scares the bejesus out of me.

23:55I'm going to be very honest, but you don't want a lot of buffer, you know, uh, marketing agencies, they, they ebb and flow. Um, if the, if the economy hits a bump, that's the first thing that people cut is their marketing spend. A marketing agency goes out the window. They try to coast as long as they can. Um, yeah, you need a big buffer here. Yeah. It's funny you say that I makes me extremely uncomfortable also, but I did it twice in my early 90%. Yeah. I bought, I bought my first couple of businesses with SBA loans. and it worked out, but yeah, it's scary. I was naive and reckless back then, but maybe you have to be a little bit to buy a business.

24:33Yeah, right, right. It worked out. There we go. It worked out, but yes, it was scary. That's a lot of leverage. 90-10 is a lot of leverage. So, I mean, Travis, broadly, are agencies good businesses to buy? I mean, depending on the specifics, of course, but can people use an SBA loan and buy an agency and do well? I'm a little bit mixed. I think they're fantastic assets to own. I really do. The cash conversion cycle is great. You know, they pay up front. You do the services. So it's, you know, you don't really need any working capital for the most part. Assuming you got a sufficient client load.

25:11They're fairly lean businesses. You can use a lot of like offshore talent. So there's really a lot to love about it. The bigger thing is knowing the specifics of the actual tactics they're using. So if someone like me or like a growth hacker type person would buy this, I'd feel way more comfortable. Even with like the coming shift of AI, right? If you have that mindset of there's like hacking systems, like this is a great thing to buy because you can shift with it. Like there will always be marketing spend, right? So I think it's really dependent. very much like a business founder fit here business entrepreneur fit as always okay anything else on this one i mean this is good are we thumbs up tentatively uh i love the right person i'm totally interested in it uh the biggest thing is just the debt scares me with the the changing marketing landscape right like will google look like it does now two years from now No.

26:13100 % no. 100 % no. Yeah. It scares me to lever up. To own this business, I think this is a great business. I love that it's in a niche space. It's totally focused. They're not just doing broad CPG brands. They've got legal firms on retainer. I would want to know about churn. I'd be really focused on the average lifetime value. I want to focus on how they acquired the 65 clients. Can we turn that into 125 clients? I'd have some diligence questions here about how their business specifically works and whether they're providing a good service. I think churn will be the one example of whether they're providing a good service.