New to the DTC Podcast Network: Agency Confidential. Tom Shipley on Buying Growth: Scaling Your Agency Through Acquisitions

0:00Jeff Shannon:Welcome to the first ever episode of Agency Confidential. I'm really excited to be here. This is a podcast dedicated to chatting with some of the best agency leaders in the world, going under the hood, really understanding how they built their businesses, how they overcame challenges, their biggest wins, and the takeaways that you can then go and put into your agency. I'm your host, Jeff Shannon. I co-founded an agency about six years ago called Pilothouse Digital. We're a performance digital marketing agency focused on the e-commerce and D2C space. Over the years, we've worked with everyone from small mom and pops all the way up to the biggest of the big brands, Unilever, Kellogg's, and we've made every mistake in the book.

0:37Jeff Shannon:The thing that we keep coming back to is every time we go and talk to other agency leaders and owners, we get better and they get better. The more we can share our failures and share our wins, the better we become as agency leaders. So that's what this podcast is really dedicated to, having those conversations in the open so people can learn and share and grow together. About six months ago, we actually started another business called Agency as a way to connect established agency owners together in a myriad of different ways. If you're interested in that, this podcast is brought to you by agency.

1:13Jeff Shannon:If you're a seven, eight, or nine-figure agency owner, we'd love to have a chat with you. See if you're a fit for the agency network. We'd love to see you there. So on with the show. you have this saying and this way of thinking that really changed my perspective on our business which is any business problem can be solved with an acquisition tell me about that we're losing

1:34Tom Shipley:money we argue between my cfo whether we have 30 days or 90 days of cash what do you do when you run out of money jeff you buy a company if you have a motivated seller you can come to terms that you can work with

1:52Jeff Shannon:Hello, everybody. Welcome to Agency Confidential, where we uncover the stories behind the business of running an agency. Today, I'm really excited to have a conversation with Tom Shipley. He's an investor, advisor, builder who's done a bunch of amazing things in his career. He's acquired a ton of agencies. He's helped people acquire a ton of agencies. He co-founded Atlantic Coast Brands, where he took that business, if I'm not mistaken, I think from almost the brink of failure to selling over$2 billion in product, He created Foundry, an e-commerce aggregator that raised$100 million right out of the gate.

2:23Jeff Shannon:He's an investor in many brands and agencies. He's an advisor to many brands and agencies. He runs some great events, which I'm sure he'll talk about. And at the end, at the top of it all, Tom is a master of M &A. He's a huge proponent of growth through acquisition, spends a lot of his time teaching and advising brands and agencies on how to grow their business by acquiring other businesses. And he's an all-around great guy. So, Tom, welcome to the podcast. Great to have you. Hey, Jeff. Great to be able to be with you again on the podcast. So I think, you know, I think we should just dive into it.

2:52Jeff Shannon:We've got a pretty short one today. I'd really love to hone the podcast on the idea of growth through acquisition. I met you a couple of years ago at one of your events about scaling your business through acquisitions. I think it was called Scale at Speed. It's funny. I actually, I found the notebook this morning, so I've been taking notes in there. And you have this saying and this way of thinking that really changed my perspective on our business, which is any business problem can be solved with an acquisition. Tell me about that. How did this come to be one of your core beliefs?

3:20Tom Shipley:I want to take you back and just tell you a story about my first two acquisitions. And I'll be very quick about this. The first acquisition was my business was a online store, but I mailed out millions of catalogs. We had up to about a dozen pages in the SkyMall Magazine. Life was great. Dot-com bust happened, which means we couldn't access capital. Slight recession. Conversion rates goes down. Average order goes down. We're losing money. we argued between my CFO, whether we had 30 days or 90 days of cash. I ended up speaking with an investment banker who said, Tom from New York, he said, Tom, I have the perfect acquisition for you.

3:56Tom Shipley:Remember, I'm out of money and I have no access to it. He said, perfect acquisition. He said, I represent Boise Cascade. We're selling off a$750 million division. That division has a$15 million company that the buyer does not want. So they have a buyer for that business. He doesn't want this$50 million. And he said, they don't want to write it off. And you are the perfect buyer for that business. With that, I learned that if you have a motivated seller, you can come to terms that you can work with. And we end up buying that business. And over double the size of our business, we exit a year later.

4:29Now, fast forward two years later, myself and my partner, again,

4:34Tom Shipley:remember, we're two former Special Forces guys in Richmond, Virginia. And we have this vision. We're going to take my playbook on how to develop an iconic brand using direct response marketing. Now, everyone laughed at us when they heard our idea. We were going to build for the first time, this is 2005, a$100 million beauty brand using direct response marketing. And everyone laughed at us that this will never happen. At the end, we had such strong conviction. At the end of the 12 months, we had proven the model work. Great customer acquisition costs, great lifetime value. We did$331 ,000 in revenue, but we ran out of money.

5:11Tom Shipley:Now, here's where it comes in. What was our problem? The problem was is we proved it worked in print and radio. However, internet, it was working, but we weren't great experts at that time on internet marketing. So that was the first problem. The second is we didn't have a team. It was myself and my partner and a part-time bookkeeper. We didn't have this tech staff. There was no such thing as you can, there wasn't Shopify or any other type of microsites, platforms that you can just, a funnel platform that you can go and plug and play. So we basically had someone build us. It was a little bit kludgy.

5:44Tom Shipley:So we didn't have all the fundamental tools to succeed. And the worst part is we ran out of money and I couldn't even feed my family and neither could my partner. And so what do you do when you run out of money, Jeff? And we had so many problems and stuff. You buy a company. So that's what we did is we bought a$15 million business in Hoboken, New Jersey. It was a vitamin supplement company with nine brands. That was important about that. They were throwing off a million and a half of cash. they had a great tech platform basically you plug into designer developer they were great internet marketers and basically we put our little 331 000 brand on top of this platform and within three years we did a hundred million dollars we did a billion dollars in that first skincare brand so when i say it could we had so many problems where do you start if we were to grind it, it would have taken us years and a lot of risk to get there.

6:38Tom Shipley:And suddenly within three years, we did a hundred million dollars. So whatever challenge you have in your agency, for example, you have an Amazon, you have a problem with lead flow and you have an Amazon agency. Well, one of the hottest things is, is TikTok shops. What would I say is you can either build it on your own or you can buy a TikTok shop agency. Give an example, a buddy of mine, Brian, Brian was probably one of the best. He had an Amazon agency from the area of, he was brilliant from marketer and a salesperson in business development. There's no one better than Brian. The challenge that Brian had is, he had so much confidence that he was able to charge twice the growing rates.

7:17Tom Shipley:His problem was his team was mediocre. Now, what happens when you charge twice the growing rates and mediocre results? Churn. So he's bringing on clients, but they're churning out just as fast. so he went and found the best operator in the business who could not generate new clients they were having trouble making payroll and he was going without the the the ceo and they had 1600 pages of sops so brian bought that agency so an aqua hire small piece of equity basically gave everyone jobs hired this guy as a ceo with a very strong salary gave everyone raises and suddenly he had the best core platform in the business as far as amazon and that's why he two years ago he He got an offer for$187 million for his agency.

8:00Tom Shipley:Again, his core problem was he didn't have the capacity and the core capability to match the amount of level sales. He acquired it, and that allowed him to become this rocket ship. So you tell me what your challenge is, is whether you need to do incremental channels, new products, expertise, capacity, cash flow. A lot of times people have such a strong in the agency. They say, well, we're at the capacity to grow because of our C team is great, but we just don't have enough business. But if you acquire a business and then book a business, you can get there.

8:36Jeff Shannon:So I want to come back to the how you buy a business when you run out of money, but I'll come back to that. I think a foundational piece to that, we've always, you know, at Pilothouse, our agency, we've always thought about acquiring, we've always talked about it. We've just never done it. And part of it is, you know, I feel like we're never in the right headspace or it seems daunting. What kind of, what are the foundational pieces? What's the headspace? What are the things you kind of, the non-negotiables you need to figure out to be able to start acquiring?

9:05Tom Shipley:First of all, remember, it is never the knowing all the how, it's knowing the who. What I do with everything I do in business, I'm a business architect. I don't need to know every detail. What I need to do is understanding what I'm going to do and why I'm doing it and the overall framework of the steps. And then I need to focus on the next step and really find the experts that can help me get through the next step. And that's really it. And so it is, and it's the conviction. And let me just share this with you. and part of it is an attitude. Let's say I've been in business for three, four years in my agency or five years.

9:40Tom Shipley:Now, suddenly my goal is I'm going to have aggressive growth goals and I'm going to go, what would be a really good growth goal for an average agency, Jeff, after five years, annual growth rate? 25, 30%. Okay. And then the reality is because there's stuff that happens, they have a bad year on average when agencies shoot for 20 or 25 % growth after they have a certain size, I'm seeing the average results about 10%. If an agency, and this is five years, if an agency grows by 10 % every single year over five years, they'll increase and it compounds. Great, great job. At the end of five years, you just increase your enterprise value by 50%.

10:16Tom Shipley:Now, what have you done? You've dedicated a lot of times for lead gen, sales team, events, a lot of things to keep that pipeline going and you've launched new products. And again, Yet there's so much work that goes in to retain your clients, but also generate new clients. Now, let's look at the alternative. You dedicate about 5 % of your resources for acquisitions. You buy one business every year that's half your size. One business every year for half your size. At the end of five years, you'll increase your enterprise value by 1 ,200%, not 50%, by 1 ,200%. That is the power of M &A. Now, you don't have to buy a business that's half your size.

10:53Tom Shipley:You can buy a third of your size. You can do two acquisitions. But I just want you to understand that if you understand that this is a lever for CEOs and founders, if you want to just invest the time and the resources, and it doesn't have to be, do not internally hire all these people internally. Don't ever do that unless you're doing five, six acquisitions a year. When you're starting to, there's a lot of resources of people out there that will show you how to do basically acquisitions. And the first is, and we can go through the process of that, on what it actually takes to actually create the lead flow of the conversation, the conversion, but it's the fundamentals.

11:32Jeff Shannon:So when we talk about acquisitions internally at Pilate House, there's always differing opinions from leadership groups. And people are like, well, we've got to spend$5 million on buying an agency. That's a ton of debt to put on the books. Can you talk about how do you build an acquisition machine that doesn't risk the whole business?

11:54Tom Shipley:Yes. Well, basically, so let's put it this way. A lot of the deals you can do in the agency world can be off-seller financing. So again, it's stacking understanding is how much equity, if you're putting your own capital into a deal, if you're borrowing debt, and then also you could have burnouts as well as you could have seller notes. So again, I have experience buying a couple agencies where the deal we negotiated, one was doing$250 ,000 in EBITDA, the other was doing$550 ,000 in EBITDA. both the one deal we close with five percent cash it close the other ten percent cash it close with an average of a three times multiple in those businesses okay so just run that now i can show you a resource that anyone almost anyone could borrow one to two months of revenue on any business you're buying within seven days you you're buying a business i'm going to borrow it on the business just simply on the business that i'm buying and the rest of it so i bought two of them with that and the rest were seller notes and with some kickers on performance and the guaranteed of the seller notes were on the business themselves not my business so i was funding 90 % of the deal 90 95 % on seller notes but if the deal didn't work out what i said is uh two things are going to happen the the consequences and the remedy for a lack of payment was number one is that i would go out and number one if i can't cure it there's some default interest rates.

13:21Tom Shipley:And then if I can't cure it, I would actually go and sell the business. And if I can't sell the business, then I turn the business back over to them. Oh, interesting. So therefore, I'm not risking my business on it. So I want you to understand that it all starts with motivated sellers. And let's change paradigm. You have to get out of the fact of what you would sell your business and what your business is worth and the terms that you did. Understand there are other motivations out there. Let's go back to my own business. I owned a$7 million beauty brand. We couldn't focus on it. We were focusing on everything on our$50 to$100 million beauty brands.

13:57Tom Shipley:So what did we do? We wanted to close it down, but I didn't want to take the write-off. I wanted someone to buy. We couldn't find a buyer. So I said, if someone will just sign for the inventory that they're going to give us a note, and they'll pay for this business by buying off the inventory. And inventory is typically in the beauty business is 10 % of your cost of sales. So as you're selling every unit, pay it for us. Therefore, I did have to go right down. This is a$7 million beauty brand. Let's talk about in the world of agency and business in general. There are 12 in the United States. There are 1 ,200 business owners retiring every single day.

14:31Tom Shipley:Understand that 75 % of them, over 900 of them will never find a buyer for the businesses. Some will have term sheets and have brokers and investment bankers, but the deals won't close. And if you've been in business for 20, 25, 30 years, you're just ready to move on. Most of those businesses will close down. There are motivated sellers. And that's why I have conversations with people and you have to find out there's an area of trust. You're carrying their legacy, which people hate to lose their legacy after so many years. If you're treating their legacy, if you have a great vision for your business and you're taking care of their clients and you're taking care of their people and you're giving them away through just monthly payments.

15:09Tom Shipley:They don't have to operate the business. They give some transition support. They're there after monthly payments. You could pay off that business. There are deals out there. It's just having enough seller conversations to get to it. So you're not risking your business.

15:23Jeff Shannon:That's super cool. The idea that you could put 5 % kind of in cash. I'm sure there's a multitude of different ways you can acquire. There are so many.

15:32Tom Shipley:So, you know, Eric Huberman, Talk Media. Eric's speaking at our next event. And Eric has spoken a couple of them. He is a great model. Well, in ballpark, what he does is he basically gives an agency, he wants to take all the implementation off their plate and he'll take it on. And he basically gives the owner somewhere between on average 7 % of revenue for of existing accounts and somewhere about the same thing for new accounts that they bring in over X amount of years. So they're getting the payoff from a revenue. So the risk he's taking is zero risk. So again, and he's buying some great agencies.

16:08Tom Shipley:he's taking care of them. He's scaling. The owners are getting their money and getting great return. They're getting a great home. He's done, I think, 20 acquisitions in this model. So it works. So again, so if you have enough seller conversations, there are ways to minimize the risk on your business.

16:24Jeff Shannon:Very cool. And I was going to ask, how do you match? Because I can imagine someone retiring and getting basically an annuity for the next five years or two years or whatever it is, versus what you need. Like if I say, hey, I need a TikTok shops team. Is the game just volume of conversation in order to find the people that are both motivated, but also have what you need?

16:45Tom Shipley:A hundred percent. So here's what we do is, first of all, is we start off creating a buy box. What's a buy box? It's a criteria. It's like setting up your ideal customer acquisition profile. Same thing here. It's what did you write? What are you actually looking for? Okay. And then we use tools like Clay and Apollo and we LinkedIn Navigator to find the companies that meet that port with that profile. Then we create very simple messages going out to them. My goal is just to get on a phone call. So we do simple messages. Here's what we are. Here's what we're doing. We're basically looking to collaborate or to acquire a business just like yours.

17:24Tom Shipley:And you meet the profile. We love what you're doing. Let's hop on a call and just chat. Now, when you have a company like Pilot House with the caliber and the reputation that you do, you have an unfair advantage in getting those phone calls and having those conversations. And if you set that pilot, and again, we hire an outside company that does it for us very inexpensively, and basically they're filling up my calendar so that I can have a conversation a day. even if you're going to think about it, if you have five conversations a week, spread that over 50 weeks a year, you're having 250 seller conversations.

17:59Tom Shipley:Those are once-in-a-lifetime deals, and you don't have to do that many. Typically, I say if you end up having, the numbers are, if you absolutely have 100 conversations, you will end up closing the ideal acquisition, even 50. Sometimes you get it. The other thing you do is you can even post. We had someone at our event, and we ran a little exercise. We said, let me show you the ideal LinkedIn post to do. So right now on your Facebook, Instagram, and LinkedIn, post this and we give the exact wording. So there's a great agency out of New York City. So Scott ended up doing exactly that. He had 30 responses and he had basically within three weeks he had a term sheet out.

18:37Tom Shipley:It was perfect for his business. He has a very large, more traditional direct response agency. They wanted to, they are basically referring all their Amazon businesses. They want to buy an Amazon shop. So that was their target. And this was the ideal acquisition. And again, this is done through just social media posts. And again, there's so many different ways of creating late legit, but it's just having conversations. Now, if I can teach you a secret, something that, understand this, I do not have seller conversations in order to collect competitive information. I do it because I'm interested in some type of investment.

19:16Tom Shipley:I don't want to waste my time as I use my time. However, when you have those calls, the sellers will share with you information about their business, what's working, what's not again. Their goal, your goal is to build trusting relationship and really having clear. You're going to learn so much ideas and things that will inspire you that will make your business stronger. And if they're a great partner, you will collaborate, do JVs, or you'll buy their businesses, period. However, you can't learn this information by calling up people that are in other agencies or areas you're interested to get into or direct competitors and say, hey, tell me what you're doing for a lead gen.

19:51Tom Shipley:Hey, how are you doing such a great, you know, what's your churn rate? How are you doing such a great job with stickiness with your customers? What are your different approaches? In general, you're not just investing in developing your lead flow. you're investing in becoming a better founder, CEO, and operator of your own business.

20:12Jeff Shannon:Yeah, I love that. It's one of the reasons we built agency, which is our vetted peer community, because those conversations just weren't happening. And I have tons of conversations with agency leaders, and it's so, so valuable. We find the same thing with hiring, honestly. We're hiring VP level roles and that kind of thing. You just talk to a ton of different people. So you get such a cool cross-section of how the agency community does things. With these conversations, not to get too into the weeds, but with these conversations you're having when you're doing outreach, is it beating around the bush?

20:44Jeff Shannon:Is it saying, hey, I want to invest? Is it saying, hey, I'm looking to buy an agency?

20:48Tom Shipley:I don't know what the structure is, and therefore it is. So basically, but I'm very, very transparent because I want to be having a trusting relationship going in. So basically, your first call is a 30-minute get-to-know-you call. The idea is that you want to share with them and inspire on who you are and what you're doing and what your vision is for your business and the opportunity that's there. You also want to learn about their business, who they are as people. If basically, if you don't like them, then you're not going to have a second call. And so your goal is to find out about their business.