How to think about agency M&A, and The downfall and rebirth of the Patels

0:28All right, everyone. The good news is that there's no long-term commitment. So you can just learn more by going to marketingschool.io slash agency. Once again, that's marketingschool.io slash agency to learn more. And we hope to see you inside. You sent your team something in regards to M &A, like an outline or what'd you send your team? Yeah, because I read a lot of memos. So I wrote like a eight page memo and then some people from my leadership team added to it. So they added like another two pages. So yeah, that's what I do. This helps me get my thoughts out on paper. so it's very clear. And then we can hash out any holes in my thoughts too.

1:03All right, so what's your plan on M &A? Share what you're comfortable with. So you're at how many employees now? You have a good amount. Well, we have like 40-ish, but we had like 80-ish before, right? Because we had to cut from some of the M &A transactions that unfortunately didn't work out, right? But the fact of the matter is still, looking into the future, and I told you the book that I'm reading, right? Did you finish the book? Almost, I'm almost done. So I read it in Asana. Dude, this song is great. So the book that I had Neil read is called How to Make a Few Billion Dollars, right? And this guy, Brad Jacobs, he founded not one, not two, not three, not four, not five, not six, but seven multi-billion dollar companies, right?

1:42And his whole thing is just consolidation. He's consolidating industries. He's buying a lot of companies, right? Great book. Everyone should read it. But anyway, going back to what I'm thinking is, you know, the economy is not good right now. And that's when, you know, and you and I have talked about this. That's when people are fearful. And when people are fearful, that's a good time to be greedy. Assuming your balance sheet can take it, right? Otherwise you might have to have some creative terms. And so for us, I'm like, okay, even though the economy is bad, it doesn't preclude us from starting to talk to people, which I'm starting to do right now, right?

2:15And I'm starting to figure out, okay, what team do I want to assemble to do these deals to, right? The problem with this and the conundrum, I talked to my coach about it this morning, right? And the conundrum I have is if my thesis around like, top 5 % of people are always going to be needed, but a lot of people are probably going to lose their jobs. That makes it difficult because if you have to balance acquisitions with this AI thing, my whole thing is it would suck if you do a couple of these acquisitions and you have to cut half the people. So one memo is about the AI conundrum. The other one is about the M &A thesis about what the plan is and how we plan to attack this for the next five years.

2:54in theory if you can also find companies that are making good money but have tons of headcount and you know you can end up releasing a lot of the headcount with ai in theory you can buy them cut i know this sounds cutthroat uh replace it with ai and your profit margins go up but you're buying it based on a multiple of its existing business yes and so this is what this is where we settled this morning with my coach right so i was like look you know we're building product right now that's automating portions of marketing, like a lot of stuff that can be automated, right? If that proves to work well on our own stuff, we'll roll it out to other people.

3:28And if it proves to work there, then we can start to play that thesis out. So the in-between right now is let's see how the product works out and then let's move forward. Because if that works out, then we can for sure start to do that. And yes, it's cutthroat, but it's also what private equity does. It's business and it sucks. No one wants to ever see people get fired or lose their jobs. it's a hard thing to actually fire people as well. At least for you and I, it's hard. But nonetheless, there's a business opportunity. The question is, do you want to strike at that? Or you can go after businesses that may not get as disrupted from AI and gobble up those.

4:04We'll talk about how you guys are thinking about it right now. Because you have over 1 ,000 people. 1 ,200 people? Over 1 ,000. Okay, over 1 ,000 people. What are you looking at doing? Whatever you're comfortable sharing. Sure, so we have a deal closing this month. They're in Southeast Asia. I don't know how many employees they have, 100 and something. We have another one that's closing in July, I think, June or July. They're in Spain and Mexico. I just got back meeting with a company in Brazil that we're probably going to make an offer to. We're looking at one in the UK right now. We're getting close to making an offer to one in Italy, which I think will happen.

4:49we already talked to them about pricing and we're on the same page for dollar amounts. We just have to make sure cash flow's there, they're actually doing the profit that they're saying, double check quite a few things, look at churn rate, all those types of things. But the Italy one we've been talking to for months, even the one in Brazil, we started conversations with them, I think, end of January. So it takes us a while because we want to get to know the founders. We don't like acquiring companies unless the founders are going to come along. And why? Explain why. It doesn't matter how smart you think you are.

5:24If you look at someone else's business and you're like, oh, I can do this better. I can cut this, replace founders, do this better. And you can have your own list. I can make double, triple the money. You haven't been in the business actually for years like the founder has or the founders. They know stuff you don't. You need time for there to be a knowledge transfer. and ideally what you do is you want to keep the founders on because they built something amazing, assuming you want to buy it and you're buying something because it's an amazing company. Now there's some private equity and some buyers who buy distressed assets and they just cut and it's a hack job and that's different, right?

6:01What you and I are talking about is buying good companies that are growing still, they're going up and to the right and typically the founders have done something right. There's something in them that the market likes, their team likes, whatever it may be. So what you ideally want to do is you may have all the ideas of what they're doing wrong, but you got to give the founders credit for building what they built and they're doing something right because you want to buy that company. If they weren't doing something right, probably shouldn't be buying that company. So ideally you want to keep them and let them keep doing what they're doing right.

6:31And then you go and fix all the stuff that they're doing wrong. But before you go and fix it, let it be and work with them for six months to a year before you start making major changes so you can understand the culture yourself, understand why they're doing things a certain way before you go in and just disrupt too many things. And when you do the changes, do it slowly. Yes, you're not going to make as much profit. You're not going to make as much profit as quickly, but you'll usually will keep the business growing. You'll keep great culture. And what you'll find out is you'll drastically reduce the risk of the deal going sideways.

7:09Because if you do 10 deals, it's very unlikely that all 10 deals work. No matter how smart Apple is or Google is or Elon Musk is, all these guys have had bad deals. That's what happens when you buy companies, not all of them work out. So your job is not to just make sure it grows. Your job is to also mitigate risks and make sure they don't fail and go to a zero because taking those losses really hurt. And by the way, most people think like a lot of deals don't work, right? I think it's greater than 50 % that don't work. In fact, I have no idea. I saw from some study before, I forgot what it was, but I'll talk about what I would have done differently.

7:44So to Neil's point, I would have kept the founders on because there's also something to be said about, go back. How about first describe when you did the deals, because you did more than one. What'd you learn? What were the timeframes of the deals and all that kind of stuff? Go into detail. This is 2021. Okay. 2021 in May, May of 2021, we did one, right? I can't give too much detail around the company, but we did one. And then we basically, this was like a, they focused on paid media, e-commerce, right? And they did some CRO work too. They had some good logos, right? So that was part of the reason we wanted to do it.

8:19And they were pretty hardcore workers too. It was a small but mighty team, but they were really hardcore, right? Two, three months later, we did an acquisition. This was an SEO shop. They had like 30-ish, 35-ish people or something like that. So you did two acquisitions. Two, three months later, you did another acquisition. Yeah. So that's the first little thing, right? We did these pretty close together. So we did these. And you want me to go into what I would have done differently now? Go into what happened to the deals. I know you can't go into too many details. I think you just said they didn't really work out the way you wanted.

8:56Yeah. But can you explain a little bit why they didn't work out the way you wanted? What happened? Yes. And then how you fix things. and then what you would have done differently. That's a lot. So just remember those. The reason why these deals didn't work out, one, is we didn't do enough due diligence, right? So we had, that's the first thing. And by the way, I'm not blaming anybody. I'm going to take responsibility. I always take responsibility first on these things, right? It's always the leader's fault at the end of the day. So we didn't do enough due diligence. The deals sped through pretty quickly.

9:30We had a broker that you and I know that was really incentivized to push the deals through quickly. Then the third thing is I didn't trust my gut. So when I met these people in person, one, I actually thought was a great leader, right? The other one that I met, I just felt like there's a lot of things that were off. There's like that little gut feeling that you have, right? I didn't trust the gut feeling because I thought that the way that these deals would work out, I would still be okay no matter what, right? So it's those three things. The other thing I would say is we should have kept the leaders on, right?

10:02The reason for that, this goes into my point, is when you're an agency, especially when you don't have like hundreds or thousands of employees, when smaller agencies, everyone looks up to the leader. That leader is so critical. Once that leader leaves, the winds are taken out of their sails, right? And they get really demotivated. And so once we close on the first acquisition, one of the key lieutenants from the first company left because he was so burnt out from working so hard that he left, right? We should have structured it where there was some type of earn out and where maybe there's some equity hold back to where the founder could get a second bite of the apple.

10:39And in fact, he probably would have been down to do it. So just those couple of things. That answers your first part. And the second part was, and to go to it, do you want to talk about how much revenue you acquired between both the companies? Okay. Okay. So the second thing is, what happened and how'd you, well, you broke down the lessons you learned, but what happened and how'd you fix it? Because it didn't work out, right? So what'd you do to try to repair and salvage? I talked to my coach about this this morning. The way I used to run it was these deals, because you want to do a deal that's low risk, high reward, right?

11:14And like VC, for example, is high risk, high reward at the end of the day, right? But I would say these were higher risk. And so the risk profile was, was too high there. Right. Um, I would say the things that happened was, um, we did these deals and then what happened was immediately there was a GM that came from one of the deals and she had worked at big agencies before. Right. Um, so we, we appointed that person to kind of run the day to day while I had five other projects to focus on. So I did the deals. I thought that was done deal. Right. And I became, I disinvolved myself and said, okay, trust, trust these people get out of their way.

11:49So I trusted but didn't verify and I wasn't involved. And that was a big piece of why they didn't work out. I do believe they could have worked out had I stayed more locked in. So the businesses struggled. Did the revenue pretty much get wiped out fully from whatever you bought? Yeah. So it's pretty much a loss. There's nothing to fix. The clients pretty much were gone. I would say it made things a lot worse because when you combine, like you have your culture, right? That's one family. Okay, let's do it this way. You have your family, you have your two kids, right? Yeah. Your wife, right? Let's say I have a family, right?

12:24I have like two kids and a wife too. But your family has its own set. It's like organized chaos. Would you agree with that? Yes. Okay, that's like a company too. A company is organized chaos. When you combine not only one other entity, but another entity together, it totally deflated the original single grain team because some people were good, but some people were really bad and they didn't really enjoy working with the people that were really bad, right? And I'm not blaming anybody. That's just how it is. And then there's one company that had been burnt out. They overworked themselves. The other one, these people would, instead of going to a client call, they would take yoga classes.

13:02So they would go to yoga class instead of client calls. So that ruined the culture, I would say. And you had to basically cut people and rebuild the culture from scratch. Because I'd taken my eye off the ball. Right. And so my, my key takeaway for everyone here is if you want to do this stuff, you're going to do it for a very long time, 10, 20, 30 years, you got to stay involved. Right. Um, and the third thing is you have to be, you have to trust, but verify. And let me give you one more story. There's a guy I know he's, he's a YPO. Okay. He has a company and they do, you know, let's say$30 million a year, something like that.

13:38Okay. Um, and they, they do stuff for like, let's just say they help events. Right. I visited his warehouse this past week, 40, 50 ,000 square feet. I was walking through it. And originally I was talking about, I was like, man, you know, sometimes it's such a pain in the ass having to, you know, wipe everyone's, like solve everyone's problems, right? That's kind of what you're going to say. Solve everyone's problems, right? And he's like, yeah, yeah, I feel you. I feel you. Like, you know, I really want to hire someone, blah, blah, blah. But as I was walking through his warehouse, there's, you know, when you finish like a big concert or whatever, there's a lot of cables, right?

14:08So you'd expect those cables after a concert to be very dirty and very all over the place. He has full-time people dedicated just to cleaning those wires and then folding them up really nicely. And then everything's tagged. That level of attention, I looked at him. I was like, even if you give someone 10, 20 points of your company, they're not going to care nearly as much as you will about this stuff. He's like, yeah. I was like, how often do you walk the warehouse? He's like, every single day, I still point out things. 20 years into this business, I point out the little things. and that's what it takes to run a great business and his business really grew in the last five years or so.

14:43So it was like 15 years of slogging it out and then the last five years has been growing and now it can become something pretty significant. Dude, it's so funny. But you've got to stay involved. You've got to stay involved and you've got to pitch into details. I also agree with you, doing deals too close, integrating two companies that you just bought at the same time is really tough. We try to focus them on different regions with different leaders So then that way we don't have one person trying to work on two deals. It's different people in an organization. Like our Southeast Asia deal will get led up by Dan.

15:17And our deal in July will get led up by Javi, who leads up LATAM, and Luis, who leads up Spain, because that company is in both regions. So then that way Dan doesn't have to deal with two acquisitions at the same time. Plus he has a team underneath him to help. the other thing that I've learned about buying is that companies you really want to buy are these big fast-growing sexy companies but they're too expensive and they're really competitive and then you got the big companies but they have some hair on it and those companies if you can get them for the right price it's worth it but they're still somewhat competitive by private equity is what we're seeing.

15:59The deals that we've focused on are small deals that don't really have too much competition because they're too small for private equity or the holding companies for us, all right, the big ad agencies, the competitors. And buying one of them doesn't really move the needle, but buying 10, 20 of them really moves the needle. But that's the only way we can make the math work to go against our competition is we go after really good companies that are small but they're scaling up and they're still growing nicely, but they're too small for a company doing 18 billion a year in revenue to buy. That's actually a really important perspective.

16:37Um, because again, you want to do a deal that's big and hairy, right? Um, but you don't want to do like a, like a, a deal that's high risk and like low return at the end of the day. So what you're doing is like, sure, they might be smaller deals, but you're doing, you're combining a bunch together. So it actually ends up working out. This message is brought to you by single grain and single grain is a marketing agency ran by yours truly. Single Grain does paid media, SEO, creative, conversion rate optimization as worked with a handful of companies such as Uber, Amazon, Airbnb, Salesforce to startups, venture-backed startups, a lot of different companies.

17:10And ultimately our mission is to do innovative marketing that drives customers. If you wanna learn more, just go to singlegrain.com. Again, it's single grain, grain like wheat. And we'll see you on the other side. But it's just a lot of operational work and it's just grinding it out. But that's why the big boys don't want to end up doing that. It's just too much work to buy all these small companies. And it's roughly the same amount of work that you'd do if you just bought one bigger company. Just the multiple that you're paying for the bigger companies is like double. But I think there's levels to it too, right?

17:42Like right now you might be doing these smaller ones, but in a couple of years, you'll probably be doing the much bigger ones. So it takes time. I think we'll continually do the small ones. 10 years out, I think maybe mid-size to small ones. 20 years out. It's probably similar model. Have you seen Accenture? So during COVID, Accenture was doing literally an acquisition a week. Sometimes even more than one a week. Tell more. Okay. Accenture has a very unique model with M &A. Do you want to explain what Accenture is first? Accenture is a big consulting company, right? Like a McKinsey or a Deloitte.

18:16It came out of Arthur Anderson when they had all that accounting scandal with Enron, Accenture part, you know, pretty much got spun off. And when you look at Accenture, they're a 200 plus billion dollar company. The last time I checked out their stock, I think they have around 600 ,000 employees globally. So the deals we're looking at, some of them are actually have Accenture has looked at in the past. And some of them, you know, we're in competition with Accenture as well. And we don't win. Accenture, even though at their size. They're buying really tiny companies that don't really move the needle, but they're buying so many of them.

18:56It's filling in any market voids for geography concentration that they may lack or skill set that they may lack in those geographies. And then they're just taking their network and saying, oh, you now do this UX UI service. Here's all our customers that need it In that region, boom, your business now has exploded. And they have a very interesting approach. They don't do tons of big earnouts. They pay you a large chunk up front. They do a little bit on earnout because you need to incentivize and keep people there. And they do a lot of knowledge transfer between the people that are running these businesses and their team.

19:32And that's been their M &A playbook. But it works well. When you have 600 ,000 people and if only 5 % or 10 % of your employees are A players, at that level with 600 ,000, you have enough A players where you can give. That's a lot of A players. Yeah, you can give new tickets to a lot of people. 30 ,000 to 60 ,000 A players is a lot. It's a lot. Even if it was 10 ,000 at scale, that's still a lot.

19:58Here's a question. How much time are you spending right now percentage-wise on M &A? per week 50 60 percent 56 what was it like a year ago five percent yeah exactly it's it takes a lot of time but and then maybe it'd be helpful if you tell people what how in what way are you you're definitely not sourcing deals but you're probably coming up with deals on the terms and the pricing no i don't even do that so we have a guy named carlos sesta who heads up m &a for us he headed up M &A for Americas for Dentsu Aegis, which is one of our competitors. I think they're like, I don't know what size they are, maybe$9 to$11 billion a year in revenue dollars.

20:44So they're bigger than us, of course. He headed up M &A for North America and South America. So he's been doing this for a long time. Miss Carlos? Uh-huh. And after that, he went to a company called Presidio, where he tucked in a lot of services and SaaS companies for some cloud company, I think. I think they were cloud-related. I don't know how much he did in M &A there. If I had to guess, somewhere between a half a billion and 1.5 billion of companies that he bought. And then he came over to us. Now, Carlos has a team that helps him with sourcing and outreaching. and we also pay for some software that helps us with that as well.

21:24We reach out to a lot of people. I think we reach out to close to 50-ish companies a day, so somewhere around there. We may miss the weekends. I don't know if they actually email people on the weekends, but at least for five days a week, they're reaching out to 250 people a week minimum or companies a week. Pretty good response rate. Call it 30-ish percent response rate. Yeah, some people respond that we're not interested in selling, but I think our team, the last number I got from a few days ago was around 18 % say that they're interested in having a conversation. Is your message just like, hey, I want to buy your stuff?

21:57I don't know what the message is. I should actually ask on that because I can probably find you. So 50%, what are you doing? So the team does the initial calls. Once they do it, I start meeting up with the founders, the ones I like, get to know them. Sometimes I'll fly down to them or they'll fly to me, get to know their business, get to know their process, what are they doing for their customers. We, of course, sign whatever documentation, NDAs, et cetera, that they need. And really get to understand the people that I could be potentially working with and their team and what makes them unique and special.

22:26How they're winning business, how they're marketing, how they're getting RFPs in. What separates them from their competition? What happened with the deals that they won? How they make the clients happy? What's feedback from the client, like actually getting it firsthand? The deals they lost, why they lose it? Like one of the companies I met in Brazil, they were breaking down their customers. And they're like, I was like, all right, what are some deals you lost? So then they break down a company. And I was like, okay, why'd you lose that company? And funny enough, we were talking to them. We haven't closed them yet, but we were talking to them for a different service than what they were pitching.

22:58And they were like, they felt we were too small, but they loved us. And I was like, cool. Because if you combine them with us, we're already larger in scale. They won't have a size issue with us. You know, my CM, my, my, uh, managing director or head of LATAM knows them quite well and they won't have a size issue with us, especially cause we're global and they're a global company. So we would win those kinds of deals. So then you start looking for all the things that they're struggling with that you could potentially repair. It helps you start calculating how much more money you can make from the deal.

23:33And then you also start looking at all the things that they're doing really good that in your company, even it may be a hard pill to swallow, what are you doing that you're not world-class at? Or even if you think you're world-class at, who's doing it better than you? And what can they bring to the table and how can they, in your words, level up your team, right? So there's a transfer. Yeah, yeah, yeah. Yeah, there's transfer. So looking at things like that, also their existing customers. Okay, what services are you selling them? Do we think we can sell them our services? Do we think we can cross sell them on multiple countries, right?