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A Rembrandt in the Attic

April 16, 2021 |  

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James Prebble co-founded Palladium Digital, a consultancy helping companies think about their digital strategy.

The company experimented with various business models until they landed on helping private equity groups get a return on their investments. Private equity groups hired Palladium to perform “digital due diligence” before they invested. Along with identifying any flaws in a target company’s digital strategy, Prebble and his team were also asked to identify any untapped digital assets that, if adequately exploited, had the potential to transform the business being considered for investment. Discovering these so-called “Rembrandts in the attic” is what private equity groups often look for to jack up their return on investing in your business.

Offering their services to private equity groups allowed Palladium to crest one million pounds in annual turnover quickly. Prebble thought his consultancy could fetch 5-7 times EBITDA, which is why he was keen to engage when he received a call from Next Fifteen Communications Group, an integrated marketing services giant with more than 2,000 employees.

In this episode, you’ll discover:

  • How to attract talented workers before larger competitors snap them up
  • The downside of fixed price billing for a services company
  • One approach to dealing with “scope creep” on a project
  • What to do when you feel like your “driving your business with the hand brake on”
  • When an earn-out can make sense
  • How to perform reverse diligence on your acquirer
  • What acquirers will consider a problem when they perform digital due diligence

Wondering if you have a Rembrandt hiding in the attic of your business? Complete the Value Builder Score questionnaire, and we’ll help you see how an acquirer will view your business across eight unique dimensions that drive the value of your business.

Show Notes & Links

(11:58) James Prebble: “ultimately you have to get to the point where the business isn’t the two founders but actually the business operates despite the two founders.”

(13:57) James Prebble: “we weren’t ready in the early stages to hire the next mid-mark, mid-level, or senior talent. One, we couldn’t afford it. Two, we were worried we wouldn’t have the work to stimulate those individuals. But instead, what we wanted was young, hungry consultants who are eager to learn.”

(16:15) James Prebble: “it wasn’t about remuneration. It wasn’t about salaries and bonus… we don’t expect them to stay forever. Use us. We’re your Launchpad. And we were really honest about it.”

(17:25) James Prebble: “You might be that launchpad to their next big thing but embrace that. Enjoy the years that you do work together.”

(17:51) James Prebble: “we started with fixed price. We drew a line in the sand…Very quickly you realize it’s not the way, because what happens is, “Can we just have a bit of this? Could you just do a bit of that? Can we have a revision here?” And very soon, you’re starting to compromise margin, because you’re way in excess of what you thought you needed.”

(18:39) James Prebble: “if there’s scope creep, if you fixed priced it, and it keeps rolling on, your capacity to take the next project reduces or another project is compromised. So we realized very quickly, you can’t fix price with these things, what you have to do is time and materials.”

(20:56) James Prebble: “If you’re an early-stage business selling, you need to be fixated on where you can get to, not where you are today, and make sure that you’re getting value for where you get that business to.”

(22:33) James Prebble: “I always felt we were operating with the handbrake slightly on because every day there was a check of the bank account. Have we got enough cash flow?”

(27:41) Next Fifteen Communications

(38:15) James Prebble: “the regulatory environment in which we work needed a lot of legal support. And they were able to provide that. The HR capability, the finance capability, the bit that allowed us to do what we do best, and not all of the stuff around the periphery. That was what they offered plus any investments we needed to make in team technology.”

(39:46) James Prebble: “a piece of advice I would offer to anybody selling their business into a group especially if you’re marketing a services business into a group. Do not sell it if you think it’s going to give you access to new clients.”

(41:34) James Prebble: “we went from being a 20, I think at the time it was actually a 12-person boutique to part of a global network of 3000 people working across the globe. And it immediately created a reassurance to clients.”

(46:10) James Prebble: “The number one thing is typically some bespoke software development that makes the business utterly dependent on a couple of developers or individuals, where they cannot find a justification for why an off the shelf solution or a more open-source solution wasn’t sought. Because that for an investor is nothing but risk.”

(47:48) James Prebble: “the other one that can be a deal killer is, I guess in a digital space, there’s marketing practices that aren’t sustainable. Where the business is over-reliant on a single channel to generate its leads or its opportunity.”

(48:59) James Prebble: “That’s why I deliberately went the bad things first because actually flip it around the other way. If you developed a piece of bespoke technology that you cannot buy in market, that has a justified need in a space, you are sitting on a goldmine.”

(51:19) James Prebble on LinkedIn
Palladium Digital Group

About Our Guest

Co-founder of the digital consultancy firm, Palladium Digital Group, James has been supporting businesses to advance their digital capabilities for the past 18 years. Prior to founding Palladium, James was strategy director at an award-winning, London-based digital agency before going on to lead large-scale digital transformation programmes at a number of globally recognized consulting firms. A true digital native, James has spent his entire career in the digital sector which has seen him work all over the world and across a huge variety of sectors.

In 2018, alongside his co-founder, James oversaw the sale of Palladium Digital Group to Next15 communications PLC. The business has continued to thrive under their leadership, recording triple-digit growth in the first year post-acquisition.

Outside of work James is a father to two girls and a keen golfer and runner.

 

Connect with Palladium Digital Group:
On their website – Palladium Digital Group
On LinkedIn
On Twitter

Connect with James:

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Transcript

John Warrillow:

This episode of Built to Sell Radio is brought to you by MassMutual. MassMutual helps business owners identify and prioritize the protection and financial strategies that are critical to the ongoing success of your business. With understanding the value of your business as the foundation, they can help address the core planning pillars, which includes your family, business, future, and team, so you can help minimize risk and protect what is most likely your largest asset.

Every business owner will leave their business at some point in time, either by design or by default. Let MassMutual help you stay focused on the task at hand – running your business – while together in concert with your trusted advisors, help to create a financial roadmap for long-term success and an eventual exit that’s on your terms. Visit massmutual.com.

John Warrillow:

So do you have a Rembrandt lurking in your attic? It’s a term that acquirers use when they’re describing a business that has some sort of asset that the owner has ignored, overlooked, forgotten about, that when properly leveraged, could be worth an incredible amount of money. My next guest, James Prebble, built a company, helping private equity groups identify when the target company they were about to invest in had a Rembrandt in the attic. They did something called Digital Due Diligence.

I want you to listen to this through two lenses. First, James’ story of selling a company is interesting in and of itself. But what’s also interesting is digital due diligence. Because when a company does digital due diligence on your business, they’re going to be identifying something that you could be better leveraging today. And my question for you is, why let the investor have that gain? Why not know now what drives the value of your company in the eyes of an acquirer and leverage that asset, that hidden gem if you will, and build your business so that you can take advantage of some of that digital asset that other people will find attractive?

Here to tell you James’ story through two lenses. Number one, his own story, but also the things he looked for in companies that had a Rembrandt in the attic is James Prebble.

James Prebble, welcome to Built To Sell Radio.

James Prebble:

Thanks, John. Great to be here.

John Warrillow:

Palladium Digital Group. So you guys were a digital agency of some sort. Tell me a little bit about this company.

James Prebble:

Sure. I mean, I think like any company that’s quite young in its life, it goes through a few iterations before it finds the business that it wants to be and the space that it operates in. We were born out of, I guess, two jobbing consultants who’d worked across a number of the Big Four, had grown a little bit tired of that way of working, and wanted to do, I guess, digital consultancy that had real impact for medium-sized businesses where we could really get under the skin of operations-

John Warrillow:

When you say digital consultancy, do you mean like the thinking behind digital strategy, or do you mean the execution? When I think of digital agency, I think of making social media campaigns and making websites. Were you guys executing or more the strategy behind it?

James Prebble:

Yeah, we couldn’t be further away from that. In essence, we always saw the agencies in our space as the executors, the social media campaigns, the SEO, the PPC. For us, it was about helping businesses find their digital future. So there was always an inherent need for businesses. “I want to be more digital, I want to work with… technology can make us a better business.” Okay, well, let’s stop and let’s understand how and the real value behind that [crosstalk 00:04:35]

John Warrillow:

You and a partner? It’s just you and one other person?

James Prebble:

It was just me and one other person fully bootstrapped business, nothing but an idea and a brand name in our head.

John Warrillow:

Did you guys just divvy it up 50/50, or how did you decide what the company was worth in the early days?

James Prebble:

Yeah, so in the early days, it was easy to decide what the company was worth because it was worth nothing.

John Warrillow:

Zero.

James Prebble:

Zero, and nothing in the bank. Like I say, two ambitious guys with a dream. And so we split that 50/50 with a view to, I guess, taking our brand of consultancy advisory in the digital space to businesses in-and-around the mid-market space that we thought we could influence. And as I was saying, that iteration came real quick.

John Warrillow:

Got it.

James Prebble:

If we didn’t want to be everything to everybody, you’re nothing. And so, really quickly, we realized we needed to find a specialism.

John Warrillow:

And so, what was the specialty that you guys chose?

James Prebble:

That specialism was within private equity and merger and acquisition. As guys that had previous experience in building things and developing things, we’d been at the sharp end of digital within agencies once upon a time. I guess you get bored quite easily; we liked to do things all the time, we liked to solve problems. And we didn’t want to narrow ourselves to a particular vertical: financial services, pharmaceutical, eCommerce. What we wanted to do is maintain that breadth that we could work across. But we knew we needed a niche, a specialism. And private equity and M&A allowed us to do that. Because the very nature of these businesses is to buy and sell companies across a very broad spectrum, and all of these companies, when they’re bought, they need to be worth more than what they were bought for when they exit.

Well, to support that, they need technology-led change, digital transformation, which is exactly the brand of consultancy we were offering. So for us, it felt very neat.

John Warrillow:

So let me make sure I get this. So a private equity group would hire you, and they would say, “James, I want you to look at this company. We’re thinking of buying it. I want you to give us a sense of its digital potential. Could we transform this business with enough money and time and technology to be a digital leader?” Is that it? Or “there’s something flawed about the business that it will never have the ability to transform into a digital leader.” Was that effectively what you were doing?

James Prebble:

Yeah, your first description, John, nailed it. I mean, it took us several months to get there, and you got there in a minute. But that’s exactly what we set up to do, and that’s exactly what we did do. Private equity firms will come to us, as you described, “We’re thinking about buying this business, how digitally competent is it? And what’s the future for this business in the digital space? How far can we take it?” And with our experience of building digital businesses, of working in digital businesses, of driving transformation when we were consultancies, we’re able to offer an expert perspective on the potential of that business. And just like you said, at the end there, if we don’t think there’s potential, why?

John Warrillow:

Interesting. It’s a fascinating niche. In the M&A world, they refer to this, there’s a sort of analogy, you may have heard it, a Rembrandt in the Attic. Is that something you’ve heard?

James Prebble:

Absolutely, yeah. The Rembrandt in the Attic, The Sleeping Giants, The Next Unicorn, all of those sorts of things. I think one of the things we get asked a lot, and this is the same for those that are trying to build a business to sell. Often, the private equity firm or the big investor is looking, “Does this business realize its own potential? Can I help it realize its potential?” Which is often how these relationships start and how businesses come to be sold, because they work with a partner who can help them realize their potential.

John Warrillow:

And the private equity group presumably, is trying to buy that and – to use this Rembrandt in the Attic analogy – they’re trying to buy that home without tipping off to the owner that they’re sitting on this incredibly valuable piece of art. To what extent did you have to keep your cards close to your vest when interacting with the owner of these target companies so as not to tip them off that they may be sitting on digital assets that they’re not taking advantage of?

James Prebble:

Yes, and that’s interesting because there’s a degree of discretion. I think, ultimately, in that stage… So there’s two parts of our business, there’s the diligence part, which is for the private equity investor, and we were duty-bound to tell them what we see and where we believe the potential is. But the second part half of our business is working with the invested companies to help them realize their digital potential. So you’re going to have to excite both parties. You want the company that’s about to be invested in to be excited about what the future holds for them and that there’s a partner here that’s going to help them get there.

On the flip side, you want to hold a little bit back so the private equity firm and I, we’ve got something here that we can really accelerate.

John Warrillow:

Oh, that’s a fine line to toe.

James Prebble:

It is.

John Warrillow:

Threading the needle.

James Prebble:

And then, of course, as the premise of this kind of chat is about that the focus of this chat, then being on the receiving end of that questioning whether or not the guys who bought us actually see more potential than we’ve realized? The psychology behind that you start to question, can I get more here? Should I be valuing us more than we are being valued?

John Warrillow:

Yeah, we’ll get to the sale in a minute. But I’d love to ask first, how you grew this business beyond just you and your partner? Because here’s what my experience is. You’re dealing with a very, very sophisticated customer, a private equity group among the most sophisticated people in the business world. That’s going to, I would imagine, require an equally sophisticated staff complement for you, you and your partner to be able to so-called go head-to-head or toe-to-toe with a customer, in terms of just the level of the conversation, you’d need to be pretty sophisticated. How did you go beyond just you and your partner to hire people? Because I think a lot of those people aren’t for hire, they’re digital consultants who would rather have their own shingle and be hired by the hour, by the project, then go work for a company like Palladium.

So I’d be curious to know how you managed to scale beyond just you and your partner effectively and hire employees?

James Prebble:

Yeah, that’s a great question, as one I love talking about as well. I think I will forever remember the employee 01, as it were the very first person that we hired when we were brave enough. And I can remember having debates over the salary we think we can afford. And you look back on that now, and you laugh at how cautious you were about that. But I think one thing we realize, and for a long time, as you go through stages of scale, ultimately you have to get to the point where the business isn’t the two founders. But actually, the business operates, despite the two founders in some respects. I think that starts with, so firstly, how did we grow the business?

I mean, look, I’m not going to tell you what happened by happy accident. Actually, we had a very good plan. We had a really, really good plan. Once that light-bulb moment, the one light-bulb moment in the business’ history, which was, “We should do this in private equity, our model fits perfectly. We like to be broad, digital adds value, let’s align ourselves there.” After that moment, that’s when the planning starts. “What are the associations we need to join so that we have reputation and we can meet people? What does the service offering need to look like? How and who are we going to network? Where have we got reference models that we can draw from? Where have we got the most experience? What are the skills gaps that we’ve got that we’re going to need to hire real quick in order to deliver into this space?” And genuinely, it did. It came from proper planning; sitting down, writing a strategy, setting some numbers, and monitoring them.

As a young business in today’s times, tracking the impact of your activity with the right setup of your CRM and your marketing activity and a correct plan is really easy. Impact of activity on revenue can be practical all the way through.

John Warrillow:

But how did you guys do it? I’m genuinely curious, who was employee number one? Was it an administrative person, like deep strategy guy or gal? Who did you hire?

James Prebble:

Yeah, so we had a commitment to hiring young, raw talent that we could shape in some respects. So we weren’t ready in the early stages to hire the next mid-mark, mid-level, or senior talent. One, we couldn’t afford it. Two, we were worried we wouldn’t have the work to stimulate those individuals. But instead, what we wanted was young, hungry consultants who are eager to learn, who’d perhaps done first job, really wanted to be part of that startup culture and grow and benefit as we grew. That was our commitment. The first employee was someone we knew, someone we’d worked with, they were in a reasonably junior level. We brought them on as a consultant and immediately set to educating them into our ways of working, our models, methodologies, and just incredibly bright individual, she was, who really helped accelerate capacity that suddenly had someone who could help you produce things that you needed to produce.

You could lighten the load and spread things around you and soon you get confidence that they can run without you. And that’s how it started.

John Warrillow:

How did you convince an incredibly bright consultant to join you and your partner? I mean, here’s my skepticism, like Deloitte, McKinsey, KPMG, they all have digital strategy arms, right? And they’re growing like a weed, like that’s where the growth… it’s not in tax and accounting and audit, it’s like digital strategy is where they’re all placing massive bets. McKinsey is going to Oxford and Cambridge and saying, “Give me the top 1% of your graduates, I want to hire them right now.” How did this little company with just you and your partner literally punch above your weight to convince this brilliant junior consultant to join you guys and not enter the fast track at Deloitte or KPMG or McKinsey?

James Prebble:

Okay. Again, I think you’ve got to be really honest with yourself, we leant on our relationship with them. We knew who they were, they knew who we were, we trusted each other. And there was a journey there. There was a vision, like I say, that plan. Without that plan, I don’t think we would have attracted people because what we did in the early years was, every time we were ready to hire a new person and they came in, we were so transparent. “Here’s the plan. Here’s where we are, here’s where we’re going to, here’s your role in that plan. Here’s what we’ll give you.” And it wasn’t about remuneration. It wasn’t about salaries and bonus. “Here’s how we’ll help you evolve. Here’s how we’ll help get you exposure to senior leaders in businesses. Here’s how we’ll help you prove your consultancy credentials.” And we don’t expect them to stay forever. Use us. We’re your Launchpad. And we were really honest about it.

And I think that plan served us really, really well, for at least the first 18 months as we started to bring staff on. Because-

John Warrillow:

I love that. I love that idea of the launch pad, because so many companies, like McKinsey is famous for this, right? Like, “Come to work at McKinsey for a couple of years. If we don’t think you’re going to be partner in 10, we’re going to find you into a client’s business and it’s going to be amazing. You’re going to have a couple years of the kind of McKinsey way and then you’re going to hire us when you’re senior person at that business.” So this idea of a launchpad is such a cool idea.

James Prebble:

Yeah, yeah. I mean, you have to recognize that. I think any businesses I speak to, that are now in startup mode, the employee number one, or two, three, four, they’re probably not… Some might stay forever, but it’s unlikely. You might be that launchpad to their next big thing but embrace that. Enjoy the years that you do work together.

John Warrillow:

How did you charge these private equity groups for your services? Was it hourly or by the project? Did you have them on retainer? How did that work?

James Prebble:

I think again, I mean, that evolves as you get a little bit more mature. And I think as business confidence grows, that changes. But-

John Warrillow:

How did it evolve for you guys?

James Prebble:

So for us, we started with fixed price. We drew a line in the sand, “This is how much this is going to cost, give-or-take.” Very quickly you realize it’s not the way because what happens is, “Can we just have a bit of this? Could you just do a bit of that? Can we have a revision here?” And very soon, you’re starting to compromise margin, because you’re way in excess of what you thought you needed.”

John Warrillow:

Scope creep, the worst.

James Prebble:

There’s two knock on impacts of scope creep that I think everyone needs to be aware of is number one, I’m not making my margins. And I mean, cash in the bank is everything, right? If I’m paying out because I’ve got some freelance consultant supporting on a day rate, I’m losing money right now. And it can get to the point where you are paying to do the work rather than actually making money.

The second part of that is if there’s scope creep, if you fixed priced it, and it keeps rolling on, your capacity to take the next project reduces or another project is compromised. So we realized very quickly, you can’t fix price with these things, what you have to do is time and materials. “Here’s the team, here’s the number of days that we think you need to deliver this program. And should we get to the end of the program, and it’s not delivered, well, we have an agreement that we will continue until it is delivered within reason. And we will be compensated accordingly.” So we give them a kind of a range in which we work within. And that has served us very, very nice.

John Warrillow:

Got it. So you moved to kind of an hourly, or day rate, if you will.

James Prebble:

Day rate. Well, a team day rate. So you take the full team, you look at the average day rate? You put that forward as your day rate and then you run it on a time and materials basis.

John Warrillow:

Got it. How big did you get this company before you decided to sell?

James Prebble:

Where were we? We were probably just around £1.2 million when we decided to sell in terms of turnover. I think we probably had about 12 or so staff at that point. Maybe 10 or 11 staff.

John Warrillow:

Did you have any sense of what it would be worth? I don’t know what digital consultancies trade at. Is there a rough range of…

James Prebble:

Yeah, I mean, we had a really good idea, because of the private equity work that we do, we’d seen so many businesses and been privy to the transaction values. So we had a really good understanding of what the multiples should be and where the value was. We knew it would be on a multiple of our profit, we expected it to live within a range of professional services at that time between five and seven, probably never going to get higher than that, for an early-stage business, if we’re really honest, we were not mature enough. So you could start to get a sense of what you were worth. But when we get into the details of what we were looking for, and I guess again, another thing that I do talk to a lot of businesses about when they’re getting into this process is, depending on how that deal is structured, the first payment, you should not be fixated on that first payment.

Because you’re… If you’re an early-stage business selling, you need to be fixated on where you can get to, not where you are today, and make sure that you’re getting value for where you get that business to. That’s certainly the attitude we went in with.

John Warrillow:

Got it. Okay, so I definitely want to dig into that for sure. So your million, or two, or so pound turnover, you’re figuring it’s somewhere in the kind of five to seven times EBITDA ish, roughly. What triggered you to want to sell? It seems like a fairly early stage of the company. Was there a trigger, or what happened?

James Prebble:

There’s a couple of things. Both of us had been in businesses in the past that had opportunities to sell. But always put it off in the hope that they could get the higher valuation, the higher valuation, the higher valuation and eventually finding they’re not as desirable as they once were, and they’re not achieving the exit. So there was definitely a kind of when it comes, we need to consider it because it tells us we’re doing something right. That was always in the back of our mind. But the one thing that really triggered it was, we knew we were in a niche that we could exploit. And we knew that we had a genuinely, and still do to this day, had a really fantastic service offering.

And I don’t say that because it’s my company, we had a great service offering and it was being adopted, and we were getting great feedback. And winning work we had no right to win at our size. But because we were committed to quality and delivery. But I always felt we were operating with the handbrake slightly on because every day there was a check of the bank account. Have we got enough cash flow? Can we afford to make this hire? We should be investing here, here, and here. And you’re not making decisions that are right for the business. You’re making decisions that are right for the bank account and making sure you can put food on the table, you take a responsibility, you’ve now got seven mouths to feed in terms of employees on top of the directors. We spent the first I think 18 months taking no salary at all. Just enough to keep us going.

So yeah, you operate with this handbrake on, kind of you’re not doing it the way you should be. And when the opportunity came along, and because of the way they offered to structure a deal that would allow us to take a very, very thin slice upfront and put a lot of the earn-out potential in the back of the deal, because we backed ourselves, that appealed hugely to us and allowed us to operate without the handbrake on.

John Warrillow:

Got it. Okay, so you felt like you had this handbrake on. I mean, I think people kind of intuitively would understand what you mean by that, always checking the bank account. I totally get that. Can you give me a specific example of how that changed your decision-making? I’d love to hear like a real-life example of a hire you didn’t make, an opportunity you didn’t take advantage of because you felt like, “Oh, I’m still not sure we have enough cash to sort of do that.”

James Prebble:

Yeah, and that’s one that still haunts me today. That we met with a data strategist. Data has always been on the roadmap or had been at that time and today is now part of what we do. But data strategy, data diligence was absolutely key. We met someone who was absolutely fantastic, brilliant track-record, great pedigree and really liked our plan. That famous plan again. Really liked the vision that we had for the business, was really bought into it and essentially said after us courting him for a long time said, “I’m ready. I’m ready to take the plunge, let’s do this.” And he wanted a salary in the higher ranges of our pay structure.

John Warrillow:

Like hundreds of thousands of pounds a year?

James Prebble:

No, no, not at that time. Again, in those days, probably kind of, I don’t know, maybe 60-, 70-, 80,000 around that band somewhere. And we were reluctant. And we said, “We can’t do this, we can’t afford this. This is too much to bear.” And I guess we looked at that and said, “Can we feed it? Are we going to get the business for it?” And we passed up the opportunity. And he’s gone on to great things, he would have been a brilliant addition for us. We always look back, both of us on that opportunity, and regret not doing it sooner, because we’ve done it now but with someone else, but we look back on that one a thing, it really wasn’t that big a burden on the business, we should have done that. But now we don’t think like that, like I said, we think for the best of the business, rather than the impact that it will have on short-term cash flow.

John Warrillow:

It’s so funny. I’ve heard that before that when the owner, and it’s the owner’s money, there’s a different way of thinking about the business, right? It’s almost like you’re spending money that is yours personally. And then when you have backing like a private equity group, or a financial backer of some sort, the reins are off, and you’ve got the opportunity to kind of make the decisions. So you felt like you’re, in your own words, sort of you had the handbrake on as you grew. Were you approached with an acquisition? Or did you shop the business? Did you get on your front foot and actually kind of start talking to people? What was your-

James Prebble:

We didn’t shop the business, we were picked out. You make a lot of connections, obviously working within private equity. We had a non-executive director on our board who advised us around decision-making. And we mentioned to him that we’d had some interest from private equity. He said, “Well, I’m involved with a business that I think would make a great home for you.” He said, “If that becomes the case, I can’t be your non-executive director anymore, but you want to explore that too.”

John Warrillow:

Why? Was he or she on the board of the other company, or had an operating role?

James Prebble:

Well, I think he was about to go over to that other company, at that time. He wasn’t there. And we said, “Look, we’re interested in exploring”, so we agreed “you know look I’m going to be working over there. So I’ll mention you when I get there. And I think I’m going to step down from the NED side thing anyway, with you guys.” Fine no problem – off he went, and sure enough a couple of months later, “We want to talk to you, we’re interested, we think you’ve got a good proposition. Before you explore these PE deals further, talk to us.”

John Warrillow:

This was Next Fifteen Communications?

James Prebble:

Next Fifteen Communications, right.

John Warrillow:

Tell me about Next Fifteen, what do they do? And what did they see in you guys?

James Prebble:

I feel like they’re kind of like marketing data technology services world’s biggest kept secret because there’s 23 brands in the group. Most of them have got really, really good and well-known big reputations all over the world. And essentially, they’re a collective of a number of brands that offer marketing, professional services, data services, technology services, independently, but operating under a single umbrella. So benefiting from group efficiencies, cross-pollination of clients, etc.

John Warrillow:

Got it. And so what was the next step? I mean, you got a call from them. What was your reaction to their initial outreach?

James Prebble:

I think our reaction was one of skepticism to start with, in that we’re such an early-stage business, we’re never going to get the full potential, we’ll never get the full value. Our experience was, of course, again, in M&A private equity, where the majority of your cash is paid to you, your sale value, right upfront. We want to acquire 100%, or we want to acquire 59%, as it were, “Here’s your cash.” And then we’ll split some more further down the line, that classic PE kind of model deal. So we were worried that it would be very similar in trade. So there’s a bit of skepticism. But of course, there’s some excitement because you know that you’ve got something that somebody wants. And that’s a real mark of the quality that you’ve started to deliver and the standing you got in market.

So the next steps were that we met with them and they made their intentions pretty clear that they can see a home for us, that we would be a good fit into the business. And I think they just played it magnificently when I think about it because the next step was for them to step back and introduce us to all the other brands that they bought along the way. So we were now surrounded, having meetings with former kind of business founders that had been acquired by the group and hearing their stories. And they were very genuine stories about the pluses and the minuses of doing deals, in joining the group, but it gave us nothing but encouragement because everybody we met, it felt like looking in the mirror. They’d all been through the same journey. They’d all had success off the back of it. They’d all operated with the handbrake on and then seen success as business confidence grew. And that really attracted us.

John Warrillow:

And so you said there were 23 brands?

James Prebble:

I think there’s about 23 brands in the group. 21 to 23 brands.

John Warrillow:

How many of the founders of these brands did you meet with?

James Prebble:

I reckon we met with about five? A lot of them were US-based.

John Warrillow:

How did you, in your mind, reconcile that the guys from Next Fifteen are likely to serve up to you the five or six success stories. And that there may be skeletons in the closet that you’re not talking to? Did you go out of your way to talk to people that weren’t – “Hey, you should talk to Bob or Cindy?” – that weren’t strongly endorsed by management [inaudible 00:30:58]

James Prebble:

How we knew we weren’t being fed the good stories is we were allowed to pick any of the brands in the group that we wanted to meet. And we said, “This one, this one, this one, this one.” These all feel like brands similar to us. Similar journey, similar trajectories, bigger obviously but in complementary service areas, they’re the ones we want to speak to. And the answer was, “No problem, speak to anybody you like.”

John Warrillow:

Wow, that’s going to give you a lot of confidence.

James Prebble:

Yeah, huge confidence. I mean, from meeting one, the very first founder we met, we left there and said, “If the rest is like this we’re in.”

John Warrillow:

And what was it that first founder said that made you so confident?

James Prebble:

I think the fact that he joined a 1.3 million pound business which is now worth about 20 million helped. In a very short space of time. It gives you a little bit of a “This Could Be Us” type of thing. But I think more than anything, the way that the group operates is they bring the brands in. They provide them with food and shelter, let’s use that analogy. But they leave you to operate. And that was the most appealing thing for us.

John Warrillow:

Interesting. And so when did the specter of valuation come up? Was it discussed verbally or did they put an offer in front of you or how did that work?

James Prebble:

There was a model that was put in front of us. Again, what we liked about that is that we could flex it to suit us. So the model was put in front of us it says, “Hi, here’s how we value companies. We’re going to take your profit, we’re going to apply a multiple to it and that’s going to be your initial upfront value. Okay?” Pretty standard so far. The difference is we know as a PLC, we want to acquire 100% of this company. We have to. Okay understood. But how we phase your enumeration, let’s talk about that. Maybe we do a little bit now and some down the back end as you grow, then you’re worth more. We value you more further down the line. So that flexibility that you don’t perhaps get in your traditional PE M&A space, that was really appealing to us.

John Warrillow:

You’ve lost me a little bit. So the offer was a multiple of profit. But what profit they were applying that multiple against, could vary based on when you chose to take the money. So if you take it all up front it’s a smaller number. It’s the same multiple, but it’s a smaller number. If you take that multiple in five years’ time hopefully your profit has grown a lot and we will still apply the same multiple.

James Prebble:

Exactly. Don’t you just love that risk-reward dynamic? I think that’s what gets the entrepreneur out of bed in the morning sometimes it’s kind of “How much do I back myself?”. “Okay, here’s your profit let’s apply multiple. You going to take the lot? Okay.” Or maybe “a small slice now but next year we’ll reapply the multiple to your new profit. And then further down the line reapply the multiple to your new profit.” Again here, I’m going to keep coming back to, we had a plan. And we believed in it. And that plan got us to a bigger number further down the line. And so of course, we went into negotiation saying, “Oh, we’ll take a thin slice now, please. Let’s split the rest of it a few years hence because we’ve got a long way to go and with your help, we’re going to get really big, and let’s all enjoy the spoils.”

John Warrillow:

Yeah, that can work for sure if you’ve got confidence that you are indeed going to be able to grow profitability in the context of an acquirer.

James Prebble:

Don’t get me wrong, it’s a huge risk. It is a risk, that strategy. But you know, when you’re very early-stage and you can see the trajectory in front of you. I think it was an educated gamble.

John Warrillow:

Yeah. I can hear people, listeners going, “Yeah, but you took a huge risk in doing that.” Because if you just kept going and funding it yourself, you would have obviously enjoyed all the spoils. But also add more options and not be beholden to head office for decision making et cetera.

James Prebble:

Yeah. But again, the market dynamics dictate that a little bit. We in our space. We had it kind of to ourselves, but for how long? And with their help, we have accelerated. I mean, we did triple-digit growth first year.

John Warrillow:

Wow, good for you.

James Prebble:

And it was key to supercharge that part of what we did, the consultancy into private equity was key to supercharge that before market caught up. And this for us was, it was opportunistic and we think it was the right time for us.

John Warrillow:

Are you able to share what multiple a profit they were offering?

James Prebble:

No, unfortunately.

John Warrillow:

Okay.

James Prebble:

Okay, that’s the one piece. A quick note here says, “No.”

John Warrillow:

Don’t share that. Yeah, I know. That’s fine. But I understand the model. So what proportion of the profits did you take up-front versus defer to the future?

James Prebble:

Oh, we were like, I think sub 20.

John Warrillow:

Sub 20%?

James Prebble:

Sub 20% yeah.

John Warrillow:

And then the rest, did you tie it to a specific year? Or did you blend it over a number of years? And I think other people would be curious to know, can you decide to sell it at any year? Or is there a fixed year in the future which you’ve signed up to say-

James Prebble:

I mean you can’t go forever. I mean, eventually, I think we could push it I guess as far as we could. But one, I think we might lose a bit of momentum if we push it out too far. And two, if it’s too short, you’re not going to reach up to the numbers you think you’re going to get to. So for us, it’s very much okay, so this is year one. Let’s then take a year off. Let’s not do anything in the next year in terms of the exit because we need to invest in the team. We need to build and we need to grow and it’s going to be an investment year. Let’s go in the following year. And that’s what we did. And then let’s go the year after that. And then the year after that, let’s close it out. So we put the [crosstalk 00:37:09]

John Warrillow:

Second, third and fourth year.

James Prebble:

Yeah – second, third, and fourth year. And that was the first year; let’s invest, let’s grow, let’s develop, and then let’s go after that.

John Warrillow:

You mentioned invest. What commitments did you get from Next Fifteen around investment? Did you get them to agree to a specific amount of money that they would be willing to invest in?

James Prebble:

No, we didn’t. We didn’t. But I think as one of the smallest companies ever to join the group, which again, we saw real pride in, actually. The fact that they would take the time to acquire us, they saw something. No, we didn’t get a number. But what they did say was, “If you need it, we have it, feel reassured.” And we’ve spoken to all the other owners of course, who had benefited from said investment. And we have reasonably modest investment requirements.

It was much more, I guess, access to international markets that they gave us through their footprint, the regulatory environment in which we work needed a lot of legal support. And they were able to provide that. The HR capability, the finance capability, the bit that allowed us to do what we do best, and not all of the stuff around the periphery. That was what they offered plus any investments we needed to make in team technology and so.

John Warrillow:

I’ve interviewed a bunch of folks in the sort of professional services realm. Admittedly, mostly marketing agency owners. And what I hear a lot is that the pitch that the consortium of companies goes is, “Look, we’ve got 21 brands and each of these brands work with all these wonderful clients and we’re to cross-pollinate all the brands and it’s going to be great.”

The reality for many of them is that each of those brands is run by a leadership group who consider their clients, their territory. And so they’ve had a 12-year relationship with Procter & Gamble, with Ford, with Microsoft, you name the big brand. And you rock up and say, “Great, we’re all part of the same family, can I go talk to Procter & Gamble?” And they look at you and go “Not without coming through me first?” Did you run into any of that sort of resistance from the other brand saying, “Hey, back off, hands off my clients”?

James Prebble:

So no, we didn’t and there’s a reason. And it’s a piece of advice I would offer to anybody selling their business into a group especially if you’re marketing a services business into a group. Do not sell it if you think it’s going to give you access to new clients. Because exactly as you describe, it is like that. We came into this group with no expectation on cross-pollination of clients. Mostly because the clients that they work with aren’t clients that we would touch. But because we had a business development machine. That wasn’t part of the problem.

Part of the problem was operations and capital to invest. That’s why we joined the group. Sure, if an opportunity came along, we’d be delighted to support on it. But it was never part of the future plan that we put to them before we were bought, “This is where we’re going to go with your help.” At no point said, “And you’ll provide us with leads or access to new clients,” because it doesn’t happen for exactly the reasons you’ve described.

John Warrillow:

If capital was the main reason you joined, did you consider other sources of capital? Did you think, “Maybe we’ll kind of raise some money?” You had all these private equity connections – presumably, you could have raised a minority round, or maybe even taken on some bank debt. Did you weigh all the pros and cons to the different ways to finance the growth?

James Prebble:

Yeah, we did, because raising money is really easy. Really easy. People don’t know where to put it. There’s a lot of dry powder. So actually getting capital on favorable terms is straightforward. And for small businesses, I mean, you can get more capital than you need which can get you into some trouble, too. That’s obviously something to bear in mind. But that said, it was more than that. Yes, there was the investment side of things. Absolutely was. Another part of it was, we went from being a 20, I think at the time it was actually a 12-person boutique to part of a global network of 3000 people working across the globe. And it immediately created a reassurance to clients.

As we went to clients, instead of the question that all the agencies get, “How big are you? How many clients have you got? How long have you been going?” And we would say, “Oh, well, we are we’re a niche arm of the Next Fifteen group. We do the digital consulting for private equity, 12 specialists, five associates, and 3000 employees worldwide operating in 22 countries.” [snaps] Stops.

John Warrillow:

Boom, you got credibility.

James Prebble:

You got credibility.

John Warrillow:

Love it.

James Prebble:

That’s what we were buying into as well. And vast… [crosstalk 00:42:21]

John Warrillow:

It was capital, but it was also credibility that the Next Fifteen brought you.

James Prebble:

Capital, credibility, and scale, because they took away the operational headache. The bit we weren’t good at. The HR, the finance, the legal.

John Warrillow:

Yeah. Makes sense. I’d be remiss in..- Actually, before I ask you that, you mentioned that you didn’t take any of the profits in year one of the acquisition, post-acquisition. But you chose to take some in year two and yet, some in year three and yet some in year four. What year are you in?

James Prebble:

Three?

John Warrillow:

And how much has your profit improved since you took the first 20%?

James Prebble:

I would say something like 300%.

John Warrillow:

So three times more profitable than you were when you took the 20%?

James Prebble:

Correct.

John Warrillow:

Fantastic. What has been the most surprising thing about being part of Next Fifteen that you did not expect before you did the deal?

James Prebble:

I think the camaraderie amongst the CEOs is absolutely incredible. So you’re very disconnected because you have your very separate groups. Yet, there’s a bond because you’ve all been through the same process, you’re all pulling in the same direction, you’re all working for the same group, you all believe in the group’s vision, which is to make clients a better version of themselves. So we all buy into that side of it. And as a result, when we had obviously our global pandemic last year in March and a lot of the businesses in the groups or clients pulling back revenue. I’ve never seen anything like it. CEOs I haven’t met giving me a call. How’s your business? Is everything okay? How can we work together and help each other? Me calling CEOs I haven’t met saying, “Listen, I know you’re probably having a tough one because of the market that you operate in events or whatever that might be. If there’s anything we can do to support.”

It was astonishing. Honestly, the camaraderie from a bunch of reasonably geographically disconnected individuals coming together to support each other with that umbrella network from Next Fifteen who were also incredibly supportive. I think almost justified every decision we’ve ever made at that point.

John Warrillow:

That’s great. I’d be remiss in not asking you about digital due diligence because everybody listening to this podcast, most people have a business. They own a company, and they want to sell it. When they go to sell it, some will be subject to digital due diligence. So I’d love for you to give them a heads up on the kind of things that you in your capacity as someone who would be hired to do this level of due diligence would look for in a business that was an acquisition target. What are the things that you’d look at and say, “Wow, that’s a Rembrandt in the closet or the ceiling of the attic?” And then what are the deal killers? The things that you’d be like, “Hold on, do not buy this company for any amount of money? This is a problem.”

James Prebble:

Let’s start with why you wouldn’t buy. Let’s start the other way around.

John Warrillow:

Sure.

James Prebble:

What are we going to find that’s going to tell us to tell our clients, “Hey, you need to stay away from this.” The number one thing is typically some bespoke software development that makes the business utterly dependent on a couple of developers or individuals, where they cannot find a justification for why an off-the-shelf solution or a more open-source solution wasn’t sought. Because that for an investor is nothing but risk. These developers get hit by a bus who can maintain it. That code base which is super niche stops being supported, how’s the product going to evolve?

John Warrillow:

And for people who aren’t really digitally savvy, they don’t know. They’ve hired developers, they have no clue whether they used X or Y. What are the other ways to know what code base your software or your technology is built on?

James Prebble:

So I guess it’s less about the codebase and the software, the technology. The software maybe it’s the point. It’s less about the codebases. I guess, today most modern development techniques that they use open source technology and coding frameworks. It’s much more about, “Did you just go and build something that you could have bought somewhere?” Is there a solution offered? Have you just gone and bought a booking management system when there’s 10 recognized booking management systems in market today, that you could have bought and customized because they’re supported globally and adopted universally abide by businesses? And yet you saw to build your own version that needs specific support? That can be a deal killer.

And then the other one that can be a deal killer is, I guess in a digital space, there’s marketing practices that aren’t sustainable. Where the business is over-reliant on a single channel to generate its leads or its opportunity. If you’re an E-Commerce business, maybe you’re a marketing services business and you sell a particular piece of software. If you are over-reliant on SEO, or over-reliant on paid search or social media, even let’s even talk about a referral network or channel like that. You’re over-relying on one area? That’s a risk. So anything that can be deemed risk, I guess is the deal killer? Diversified sales models. They love them. Markets with more headroom in there. So you’re not capped in a certain space is love them, of course. So there’s the sort of things that might kill it.

John Warrillow:

Got it. Okay, that’s super helpful. So I’ve captured in over-reliance on one channel in any bespoke software, where you’ve got a couple of developers who know all the code and nobody else. What about the other side? What is it that you see a Rembrandt in the attic near like, “Oh, my gosh, you guys are sitting on a goldmine.” [inaudible 00:48:57]

James Prebble:

That’s why I deliberately went the bad things first because actually flip it around the other way. If you developed a piece of bespoke technology that you cannot buy in market, that has a justified need in a space, you are sitting on a goldmine. If you have built something that can’t be bought off the shelf, that’s difficult to customize but it’s serving a market and doing well and growing, you own some IP. You own some technology that commands a much greater multiple because technology is scalable. If it’s a licensed business, if there’s a product that goes on license that’s infinitely scalable, you don’t need to have more headcount to make more revenue. You’re in a great space.

Similarly, if you own a subscription business, you don’t need to add more headcount to make more revenue. You need to keep the customers and make sure they don’t chair. Those sorts of businesses, they come on the really big multiples. Or if you’re operating a niche and you’ve got absolute specialism and it’s very difficult to replicate it, again, they do well. And then finally, and the reason I talked about the diversified channel mix, if you are a business that is operating with a well-diversified channel mix, we often talk about the marketing flywheel. So component parts operating together to deliver optimum outcome. Which means if you start to get outbidded in one area, that’s okay because you’ve got other channels.

If you lose some SEO rankings that’s okay, you’ve got your other channels. If you’ve got that interplay between your marketing channels and you’ve built nice big defensible moats because you’ve got good strong positions and intelligent bidding strategies and lots of data to support your decision-making, you’re a very attractive proposition.

John Warrillow:

I love it. This has been so helpful on two levels. One as a story on Built to Sell Radio. I think your story is fascinating. But also helping people think through this digital due diligence is really, really an important and growing area. So thanks, James. I appreciate it. If people want to learn more about what you do and how to reach you, where would you direct them to?

James Prebble:

I guess if anyone who wants to reach me, I think, find me on LinkedIn James Prebble. There’s not many of us, especially James Prebble working at Palladium Digital Groups. You’ll find me pretty quickly on there. And of course, you can visit palladiumdigital.co.uk where you’ll find all my contact details too.

John Warrillow:

Awesome. James, thanks for doing this.

James Prebble:

Pleasure, John. Thank you so much.

John Warrillow:

Hey, if you like today’s episode, you’re going to love my new book, The Art of Selling Your Business. The book was inspired by the cohort of my guests over the years who’ve been able to negotiate an exit far better than the benchmark in their industry. Sometimes two or three times more than I would have expected. I was curious to understand the tactics and strategies of these entrepreneurs, and what they do differently from average performers. The result is a playbook for punching above your weight when it comes to selling your business. To learn more, go to builttosell.com/selling where we put together a collection of gifts for listeners who order the book. Just go to builttosell.com/selling.

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