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Inside the Mind of an Acquirer

February 25, 2022 |  

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Robert Glazer started an affiliate marketing agency called Acceleration Partners in 2007. Glazer never took outside capital and grew Acceleration to almost $28 million in sales before he sold a majority interest to Mountaingate Capital in 2020.

This is the second installment of a two-part interview with Glazer (grab part one here). In this episode, we ask him to wear his acquirer’s hat. Glazer has spoken with more than one hundred owners in the last couple of years and speaks passionately about the “unforced errors” owners make when negotiating with an acquirer.

Specifically, you’ll learn how to:

  • Know the “market-clearing” values in your industry.
  • Decipher between interest and value.
  • Present your financials to a buyer.
  • How not to answer the question, “how much do you want for your business?”.
  • Avoid the “Annie Syndrome”.
  • Create competition for your business.

This episode was brought to you by Work Better Now. Work Better Now has helped match hundreds of businesses with talented virtual assistants. Reach more clients, expand your influence and be more productive – not busy. Work Better Now is currently offering Built to Sell listeners and readers $150 off per month for three months, just by mentioning Built to Sell.

Show Notes & Links

Robert Glazer’s blog post: Marketing Services Agency Valuations In M&A In 2021

Jon Claydon’s episode: 3 Ways to Play an Industry Roll-Up

Ryan Moran’s episode: 6 Lessons Ryan Moran Learned From a Seven Figure Loss

Ari Ackerman’s episode: How EBITDA Adjustments Impact The Value Of Your Business

[40:49] Robert Glazer: “I’ll tell you the advice I got from everyone, which is in these 60-40 deals, or 70-30, or 50, make sure that if you never got another dollar, that the initial is enough, that you’re okay. Not that you wouldn’t have some regret, let’s be honest, but it’s enough. You’re not going to lose sleep, that it meets your threshold. That if you never got that again and in some cases you couldn’t work for a while, you’d be okay. So I took that advice to heart, and when a lot of people think about going to market, or they do the math.”

[47:08] Robert Glazer: “The two things I would recommend if you’re thinking about selling your business is one, understand the market and the deals. And like we’re talking about, have a really good understanding of what they’re going for, and what the structures are, and what market range is. And then two, whether it’s a CFO or a banker or otherwise, have someone take your books and show you what proper… It’s still going to be negotiated, but properly adjusted EBITDA.”

About Our Guest

Robert Glazer

Robert Glazer is the founder and CEO of Acceleration Partners, a global partner marketing agency and the recipient of numerous industry and company culture awards, including Glassdoor’s Employees’ Choice Awards two years in a row. He is the author of the inspirational newsletter Friday Forward, author of the Wall Street Journal and USA Today bestseller, Elevate, and the international bestselling books, How To Make Virtual Teams Work and Performance Partnerships. He is a sought-after speaker by companies and organizations around the world and is the host of The Elevate Podcast. Outside of work, Bob can likely be found skiing, cycling, reading, traveling, spending quality time with his family, or overseeing some sort of home renovation project.

 

Connect with Robert:
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Transcript

Disclaimer: Transcripts may contain a few typos. With most episodes lasting 40+ minutes, it can be difficult to catch some minor errors.

John Warrillow:

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John Warrillow:

Well, welcome back to another edition of Built to Sell Radio. My name is John Warrillow. I’m your host. This is the podcast that helps you punch above your weight when it comes to selling your company, and today is part two of a two-part episode with Robert Glazer. Robert started and sold Acceleration Partners. Started from scratch, built it to $28 million in revenue before he sold it to Mountaingate Capital. And when I say he sold it, he carried a significant amount of equity into the Mountaingate deal, and now acts as an acquirer for companies. And so we thought it might be fun to sort of turn the tables on Robert, and have him discuss what he looks for in the companies he acquires. What are the deal turn-offs? What are some of the things that excite him about a deal? What are the three things he looks for in a deal?

John Warrillow:

And this was all sort of inspired by a blog post he wrote, providing some benchmarks around the likely outcomes of service-based companies. He bucketed service-based companies into three buckets. So you can get that at BuiltToSell.com, and I think it’s a really helpful framework to think through. So just go to the show notes on this episode, part two of the Robert Glazer series. Go to BuiltToSell.com, and you’ll find it. I also want to make a shout out to Jon Claydon. Jon Claydon was episode 316, and he was also acquired, same industry, by Mountaingate Capital/Acceleration Partners. As Jon Claydon describes, the deal came together right about the same time Robert Glazer sold to Mountaingate. So it’s a really interesting juxtaposition to listen to both Robert’s story and then follow it up by Jon Claydon’s story. Jon Claydon was episode 316, so you may want to check that out. Just Google “Built to Sell Radio and John Claydon”, and that’ll pop right up. But here to tell you his perspective from an acquirer’s point of view on what he looks for in a deal is Robert Glazer. Robert Glazer, welcome back to Built to Sell Radio.

Robert Glazer:

Thanks, John. Good to be here. I’ve turned my hat around, so from seller to buyer.

John Warrillow:

Exactly. So listen, for those who have not heard your episode last week, I interviewed Robert last week in regards to his sale of Acceleration Partners to Mountaingate Capital. And I use the word sale in air quotes, because actually it was a majority recapitalization, meaning Mountaingate bought the majority of his company, but he’s still very much in the company running the business as a platform. And now, they are in the process of acquiring other companies in the same industry. They’re in the, broadly speaking, partner marketing, affiliate marketing space. And it was a great interview, so if you haven’t had a chance to listen to it, Robert started from scratch his business, and over 14 years grew it to $28 million and almost 200 employees, and had a fantastic exit event. So welcome back, Robert.

Robert Glazer:

Thanks. Good to be here.

John Warrillow:

Yeah. And this is the first I’ve ever done, so if this really tanks, I’m going to blame you for sure.

Robert Glazer:

All right. Blame me, because it was my idea? That’s fine, sure.

John Warrillow:

And it’s great. It’ll be like the Glazer effect. It was so amazing. In any event, when I say the first time we’ve ever done this, we’re going to reverse the hat and talk to an acquirer of businesses. So for today, I’d like you to wear your acquire hat. And now, you are talking to dozens, if not hundreds, of entrepreneurs about their business, the potential of acquiring them. And I want you to wear the hat of business buyer: what you look for, what’s a deal turn-off, what personality traits you like, despise, et cetera. So that’s the hat I’ve asked Robert to play, so as we go through this, that’s the lens through which we are going to attack this question. And I think it was prompted by a blog post. In fact, I know it was prompted by a blog post that you wrote, providing some benchmarks for people in the marketing services space to think about their company. And so again, I’m going to do my best to try to bridge the gap, because we’ve got listeners from different businesses.

Robert Glazer:

Yeah, and those metrics probably apply generally to professional services, not just marketing services.

John Warrillow:

Good, okay. That’s great. So as we walk through some of these benchmarks, I’d just encourage you to not get too myopically focused on the multiples that Robert references. If you’re in marketing services, they’re probably pretty close to what you’ll see in the market, and by extension, professional services. And if you are in a different kind of business, if you own a car dealership or you own a dental practice, or you have a tech company, it’s likely to be different. So I think what’s interesting here is not only the benchmarks, but also the thinking that went into them and the way that Robert looks at a potential acquisition. So maybe we’ll just start there. What prompted you to write this blog post?

Robert Glazer:

Yeah, a lot of frustrating conversations. And I actually found this in my business over the years too, where if I’m seeing something over and over again, it actually was better to point to an article that already existed, rather than to sound like I was saying it to just that person. People used to say, “Hey, how come you guys can’t work on a performance-only basis?” Let me point you to this article about why that doesn’t work that I wrote two years ago. So it’s not… Versus telling a story. So as we started, we’re a platform company. We’re hoping to do three or four or maybe more acquisitions over our four to five-year period.

Robert Glazer:

And so as someone who had been on that side, and now got out in the market and talking to companies, in particular smaller ones, I just realized there was… I think you asked me one of my regrets was last time. That was just not knowing the metric of the industry. And there was just some confusion around why these businesses are bought, how people pay for them, where the value is. And like anything, supply and demand are pretty powerful. They’re market-clearing prices. And when there’s been 20 market clearing-

John Warrillow:

What does that mean, market clearing price? What does that mean?

Robert Glazer:

Price at which deals get done. And if you look across the industry, you will find a cluster of dots. Also, this is services. This isn’t tech or something, where someone might just come in and just dramatically overbid because they need to have it. I mean, services are really driven by EBITDA and sort of size and scale. And I think people, what I said, sometimes they confuse interest with value. There are a lot of people interested… And sometimes that is true, that interest in value, but there are a lot of people interested, but then when you present your information and it is not in a form that is sort of market-ready or detached from a lot of market stuff… I think first impressions really matter in this industry, and I saw a lot of people confused or not putting their best foot forward, or just totally off in terms of what someone would pay for their business.

John Warrillow:

When you meet with a founder, entrepreneur, how do you try to ferret out their valuation expectations? Do you just ask them right upfront, like “What do you want for the company?” Or how do you sort of give that-

Robert Glazer:

Well, as you know, this is a two-part problem, I would say, because enterprise value is usually trailing 12 months EBITDA times the multiple. So there’s two weight varies. Is the trailing 12 months EBITDA accurate? Because there’s net income, and then there’s sort of adjusted EBITDA, and we can-

John Warrillow:

Explain the difference between the two.

Robert Glazer:

… talk to that. Yeah. So net income is just what the profit statement says at the end of the year. So let’s say it says a million dollars. But there are what the buyer is looking for, abnormal things that they have to add in, or they could take out. So let’s just say there’s $100,000 in net income, but the owner has been running all their vacations for the last couple years through the business last year, $50,000.

Robert Glazer:

Well, you’d say, “Well, I’m not paying for vacations when this is done, so it’s really $150,000.” Well, then it turns out they’re only paying themselves $50,000, but they’re the head of marketing sales and otherwise. And if you were buying the company for its profit stream and you had to put a person in there to replace them, maybe that’s $100,000 role, so now we’re back down to 100. We marked it up to 150 and then we said, “Oh, well you’re only paying yourself 50, but that’s a 100k-role.” So a company that has a banker, this is usually what the banker does with them first. They go through all the numbers, they make these adjustments, and they take it to market at a clean number.

Robert Glazer:

Often, a business that you call or find or that’s not at market, they are throwing out a number that may not be clean at all. And the extreme example is where you have multi-partner businesses where they’re paying them all their money as profit. So they say, “Hey, well what’s your profit level?” They say, “Well, I’m 500,000,” but then you find out there’s three partners who are taking zero salary, and they’re 120 each. Well, actually that’s a $100,000 EBITDA business. I mean, that’s a big change, and even the… Before you even talk about the multiple, that’s a… So to me, there’s sort of… What’s the number?

Robert Glazer:

The other shocking thing I would find looking at mostly services business is the amount of services business that didn’t put their people against a gross margin. There’s GAAP, but this is just basic good accounting, where if people are providing a service, they’d say, “Our gross margins are 80%.” And you look in there, and you’re saying, “Wait, wait. You don’t count any of your people who are delivering services as gross margin.” So there’s some baseline numbers, and then there’s-

John Warrillow:

Wouldn’t the GAAP way to look at people be if they are salaried employees, they’re below the line? They’re not part of gross margin. Isn’t that the way-

Robert Glazer:

In a professional service business, if they are delivering the product or service, then that is a cost of goods sold.

John Warrillow:

You consider that a cost of goods sold, even if their compensation is fully salary, it’s not variable, it’s not hourly. You would-

Robert Glazer:

Yeah, the variable comp is actually usually more in the sales department, or the stuff that is below the line. But if you’re an accounting firm, the accountant is a cost of goods sold, because you are delivering accounting services. You can’t say, “Our gross margin 90%, and then we have all these operating people.”

John Warrillow:

Is that your opinion, or the way you think about it at Acceleration Partners? Or is that-

Robert Glazer:

I think that’s a accepted best practice in the industry. I don’t know whether it’s technically GAAP, because GAAP doesn’t affect taxes. I mean, it’s revenue recognition, but that is a generally agreed upon… If you were to look up white papers on stuff on how do you look at… Because most services businesses, they tend to be… Good is 50 or 60% margin, not 90% margin. You tend to find it in that way. But the definition of a cost of goods sold is anything supporting the delivery of the actual service. So really, it should be the people working on the accounts, it should be their computers, and even in their benefits.

Robert Glazer:

So again, you get some numbers that are distorted, and then you get into multiple. And we talked about this before in the last episode, where our industry, it ranges maybe from five to 10, but there’s a big-

John Warrillow:

Times EBITDA.

Robert Glazer:

Times EBITDA, but your friend had a $5 million EBITDA company and got a 10 times multiple, and you have a million-dollar company, and you just heard that your friend got a 10 times EBITDA. So these numbers, they’re very much a function of scale, which is a function of risk.

John Warrillow:

So a lot of people listening to this is saying, “But why? I run a million-dollar company, and it’s a great business. We’ve got good housekeeping, seal of approval-type of clients. Why would my multiple be any different than a $10 million business? I mean, it’s the same business, the same industry, the same-

Robert Glazer:

That’s a great question.

John Warrillow:

“… profitability. Why do you get such a premium just for size? I don’t get that.” That’s what some people are listening to this say.

Robert Glazer:

Yeah, because the problem with services businesses is you’re either buying a founder, or you’re buying a business. And when you find… Let’s just say that 20% is a healthy margin, so that means a million-dollar EBITDA business, probably a $5 million business. In a lot of those businesses, if you go down the line, the founder is the chief salesperson. They are key overseeing delivery. They are very involved in finance and operations. And so when you think about the risk of that and what you are buying from sort of a cash generation, it is very founder-dependent.

Robert Glazer:

The EBITDA also just tends to correlate with size and level of sophistication, so a $5 million EBITDA business then may be a 20 or $25 million revenue business. Well, at this point there is a head of sales and a sales team. There is a marketing leader. There is a finance leader. You are buying either as a CRM system… There’s some GAAP accounting. The risk of both the scale and the risk of that revenue is so much less. In a lot of those 1 million or half-million-dollar sub-EBITDA businesses, the founder get hits by a bus, there’s no business. I think that’s the key takeaway.

John Warrillow:

Yeah, for sure. I want to go back to the question I asked earlier, because it got us into a rabbit hole around GAAP, and I apologize for that. When you’re meeting with an entrepreneur, your time is valuable, and you’ve got to pretty quickly ascertain whether this guy is so far out of the realm of reality.

Robert Glazer:

So I do ask them, yeah. I will ask that what-

John Warrillow:

What do you say? What do you ask?

Robert Glazer:

Yeah. I might say, “What is your understanding of market for the business,” or, “What’s the EBITDA, and what are you thinking would be a multiple that you would be looking for?” And that just tells you whether you’re even in the ballpark or not. And a lot of times, what you’ll find as an answer start talking about, “Well, our brand, and our this, and our revenue.” And again, these are… Services businesses are the good news and the bad news. And I found this out the hard way, as I said in the last episode. They are valued on EBITDA. And so it is generally good to understand what the value metric is for your business in your industry, because that… If it’s private equity or otherwise, they’re buying their earning stream, they’re using debt in a lot of cases, and that income is a key leverage against the debt as well.

John Warrillow:

Right. So just to explain that, what you’re saying is that that EBITDA goes to enable them to expand their debt facility which they need to buy businesses, because part of their model is using leverage.

Robert Glazer:

Leverage, yeah. And there’s coverage ratios. The banks will let you borrow. And the banks are the ones who look at not, “What did you do the last three months?” They’re very big on trailing 12 months, because a lot of businesses grow dramatically, and they say, “This is our run rate.” That is not how banks lend. Banks lend on previous 12 months. And you could go from conservative to one or two times leverage for debt, to maybe up to four or five times, if you’re really stretching it.

John Warrillow:

So explain what you mean by that.

Robert Glazer:

Yeah. So I think a conservative approach on a $5 million EBITDA business, if you were going to take two times leverage, you’d be $10 million in debt. You’d have probably no problem getting from a bank on that, because remember, that debt’s also… It sits above all that equity. So they see all that equity in there and they say, “We’re pretty sure the investors don’t want to lose all that equity,” so they’re going to make sure that this loan is repaid. A business using five times leverage would be a $5 million EBITDA business borrowing $25 million. And let’s just say that business was worth 10 million, so that’d be a 50% doing on debt, which obviously is great if it’s doubling. If you run into some hiccups, that can… Just like buying a house, you either really juice your return or wipe out your equity.

John Warrillow:

And so how much equity do you guys… How much leverage do you guys use at Acceleration?

Robert Glazer:

We’re pretty conservative. So we do two to three at the outset, knowing with our growth rate that that comes down pretty quickly within the first year of a deal.

John Warrillow:

Got it. And what advice would you give to entrepreneurs who want to understand the leverage the private equity group is planning to use to buy their business?

Robert Glazer:

Yeah. I mean, they should ask that, particularly if they’re going to be part of it, because again, that can impact their equity. And they got to understand it’s just like putting down a 5% down payment on a house. If the market goes up 5%, you’ve doubled your money. If it goes down 5%, you’ve lost all of it. So it can work for you or against you, and so it really depends on… That gets into the whole deal terms, and what the value of the deal is.

John Warrillow:

Yeah. So when you talk to an entrepreneur, you say, “What’s your understanding of market in our space?” What’s a response to that that is reasonable, that you’re like, “Okay, we can keep talking,” and then what would you say is a deal-breaker? If they say this, I am done I’m out.

Robert Glazer:

I took a buying a business class 20 years ago, I think when I was 22, when I wanted to buy a business. And one of the things I’ll never forget of the woman that… [Marcia Rosman 00:20:31] taught this class, and I learned this when I was trying to do it then, and I didn’t buy a business. Run from anyone who tells you that the value of the business is related to their personal needs or things that have nothing to do with the business.

John Warrillow:

Right. Well, I need a million dollars to retire.

Robert Glazer:

Like, “I’m getting divorced,” or, “I need this,” or, “I need to retire.” And I heard that from people, literally. Like, “Well, my wife’s leaving me,” and this and that and otherwise. And while I don’t think people say that, the more that they get away from the actual economic engine of the business, the less I am interested in having that conversation. When they start talking about, “Well, we’ve built a great brand and we have great people, and people love us,” and all this stuff… And then you look, and they’re not making any money. Look, I talked to… I mean, we can talk about this for hours. I talked to probably 30 businesses last year, and all of the ones I marked as “These guys are not going to sell,” when I checked in at the end of the year, they hadn’t sold, because they were kind of running fake processes.

Robert Glazer:

Their numbers weren’t clean. They were all over the place. They were trying to do it themselves. And we talked about a process on the other thing. Momentum’s really important in these deals, and you get one chance to do this right. And so this is why a banker who runs a process, who gives people timelines, who synchronizes the process… When you try to do this yourself and you start telling everyone else that everyone else is interested, and then a couple of those things fall out, that momentum really tarnishes your deal really quickly. So we had a couple that were like, “Oh, we’ve got people, tons interested. You got to hurry.” And I literally looked at the numbers, and we looked at the thing. We were like, “Nah, it’s not that interesting.”

Robert Glazer:

And you just check in three months later, and “Oh, yeah. We decided to take it off.” And we had one person that told us, “Can we get an LOI?” And I’m paraphrasing this, but again, this banker was trying to work with him. He was trying to do it himself. So the banker was on the thing, and he was basically like, “Can you send us an LOI? We want to know where you are, but I’m not actually sure if we’re going to sell this year.” And we’re like, “We don’t just send LOIs for fun.” And again, he has not sold this business. I mean, I’m sure you’ve talked about this, but this is the biggest one-time thing you will get to do in your life. When you don’t know how to do it, you might want to get someone who’s done it 100 times to help you.

John Warrillow:

But the [inaudible 00:23:04], the other side of that is, again, I want you to wear your hat [crosstalk 00:23:09] Robert Glazer, person who is right now buying businesses. The other side of that equation is I would imagine… Well, let me ask it differently. What is your reaction when you learn that a company you’re interested in has hired an M&A professional?

Robert Glazer:

I just asked our investor this. I said, “Let me ask you [inaudible 00:23:29] experience this year,” because we lost out on a deal that went for a ridiculous amount of money last year. I said, “Which do you prefer? Do you prefer going through this one-off thing?” Because a lot of times, the other thing is people always want to wait six months. They just want to wait until it’s 10% better, even if the market is paying premiums it has never paid before. There is the sort of Annie syndrome that I’ve called it of-

John Warrillow:

Sorry, the Annie syndrome? What is that?

Robert Glazer:

Yeah, tomorrow.

John Warrillow:

Oh. I’ve never heard that term, and I love that.

Robert Glazer:

Call us tomorrow. Because again, I had this too. If we just do 20% more… But again, you want to tell people, “Look, if the market just cools down…” Someone just said to me the SaaS public market has… 40% down. That hasn’t hit the private market yet. That’s about to all roll down, and those people that waited are actually going to be worth less money. So it’s hard when you’re in a euphoric market. But back to the question, it’s tricky. So you know in a process usually that that business is going to sell. You know if you make an offer, you have a chance, and they’re going to go through it. You might pay more that you want, but you’re likely to waste less time right. I think that is the trade-off.

John Warrillow:

Got it, got it. And so you know what’s going to sell, so you know they’re probably polished, they’re ready to go to market. They’re probably relatively-

Robert Glazer:

They’ve maybe probably done a quality of earnings, a sell-side quality of earnings. You know that the numbers have been scrubbed through, because a good banker does not want to get surprised later in the process. I was literally having this talk with him. I mean, we were laughing about it. I was like, “Which is better?” Because ostensibly, you could probably get a better deal, but those deals seem much harder to close. There’s no impetus. There’s no deadline.

John Warrillow:

Yeah, yeah. That makes total sense. So what is it that you look for in companies to acquire? What’s on your wish list?

Robert Glazer:

So as a platform, I think there’s sort of three things, and we talked about this last time. We’re not one looking just for scale. So strategic piece, that is part of our clear three to four-year strategy picture, where we think it’s super complementary. Their clients are going to want to buy from our clients. Our clients come on to their clients. The culture and the team, again in services, probably… People always say this, and not to sound old… I was going to say, “If you sell TVs and I sell VCRs, the team’s really important, but we’re trying to-”

John Warrillow:

You just lost 80% of the audience.

Robert Glazer:

Trying to put the products together.

John Warrillow:

I knew what you meant, Robert.

Robert Glazer:

Yeah, I know. We’ll go a little analog for that analogy. But in service businesses, when you’re merging people, you’re merging egos in a lot of cases, so you’ve got to have a good cultural fit. You have an honest discussion about where those people… Why they want to be in it or not be in it. I mean, we talked about platform versus rolling before. The difference is when you lead the platform, it’s your management team. And when you’re staying, I think a lot of the people coming in, they might say [inaudible 00:26:41] 6 or 12 months and have that discussion. They might want out, and they’re able to do that because they’re the smaller business selling into the bigger platform. So I think it’s the strategic fit. I think culture and team, and then sort of the operations, the performance, the best practices, how does that stuff all match up with what we do? What does the degree of integration look like from a difficulty standpoint?

John Warrillow:

Got it. How do you ascertain in a… I get the cultural fit. You go out with the people, you have a couple of beers, and you’re like-

Robert Glazer:

Have some Zoom beers, yeah.

John Warrillow:

Yeah, Zoom beers. I could work with this person. I get there is a qualitative, subjective element to this. But I think people would also want to know: Is there a way to make that more objective, more scientific? Do you use personality tests? Is there some tool out there that you can recommend that allows an acquirer to evaluate a cultural fit?

Robert Glazer:

Yeah. We weren’t able to do this in our first two deals. We knew the company really well. One actually didn’t have people that came along with it because of the timeline and because of COVID, but one of the things we talked about was really interviewing members of the team pretty deeply as we got to that last step. We spent a lot of time looking through social media. What do people post? What are the core values? What’s the Glassdoor feedback? What is the market? You can find a lot of backchannel stuff. Do we know their customers? What do we think of them? What’s the market reputation? People just don’t do their due diligence. I mean, I’ve got backchannel due diligence. I’m always actually shocked when someone we know, like a partner, hires one of our exit employees, and no one called us to say, “Hey, we’re talking to this person. Good, bad?” You get a lot of information in the marketplace these days. But I think those in-person interviews and really sitting down and talking are really important.

John Warrillow:

Got it. So you’re looking for a strategic fit so you could cross-sell your services to one another. For example, as one element of that, cultural fit and an operational fit. If you’re all on Salesforce and they’re on some other CRM platform, it’s harder to integrate.

Robert Glazer:

Yeah. Something I took from your thing too, which was the… I think it was the one to four rule, or the one to five rule. I’m very wary of 50-50 services things. I really think when you talk about size to scale, if you’re a 100-person company swallowing a 20-person company versus swallowing an 80, the degree of difficulty goes up a lot. And I think you said the sweet spot was sort of one to five, or one to four, or something-

John Warrillow:

Yeah, the 5 to 20 rule. Most acquires are somewhere between 5 and 20 times the size of the target acquisition. And that’s not always the case, clearly. There’s lots of examples that fall outside of it. That’s kind of more of a rule of thumb, but you’re right. If you’re more than 20 times the size of the company you’re acquiring, it’s kind of like, “This is a waste of time. This is going to chew lot of our resources.” Whereas if it’s a company half the size of yours, if it goes sideways, it could kill both companies.

Robert Glazer:

Yeah. I think 50-50 services mergers are really big risks. Not that they can’t work, but you’re talking full management teams. You’re talking a lot of people, particularly if they’re built-out. If everyone’s got a CFO and a head of sales, you’re talking picking a lot of winners and losers, unless they’re in totally different segments and you need all those people. So I just see the degree of difficulty as going up. So I think that’s what we sort of mapped that out. But again, it’s really… Does this fit the strategy? I think it’s so tempting to fall in the scale for scale sake. Or does it cover something we don’t do? Does it cover a different region? Does it cover a different vertical? Does it cover a different part of the market or customer base? I remember hearing someone say, “The ones that were just done for scale almost always underperform what people think they’re going to do.”

John Warrillow:

One of the things that I’m sure you run into is the entrepreneur who says, “Look, Robert, I appreciate the conversation, but I want 100% cash at closing. I’m not interested in ruling any equity, or I don’t want any sort of earn-out or any [inaudible 00:31:33].” What’s your reaction when people say that?

Robert Glazer:

Sorry, you made me forget the third. I was like, “I know there was a third thing I wanted to say on the last one,” and that was it, which is actually that they are super excited about the vision and the platform and otherwise, because we’re pretty upfront that that is our part of our pitch. And one thing that’s, again, in that chart I think that’s helpful in that industry is people don’t buy services businesses for all cash. They just don’t, unless they’re huge. They’re either private equity rollout, or they tend to be three to four-year earn-out, because of the concentration on the people or the customers or otherwise. So that is actually the third pillar, and thank you for reminding me about that. So they have to be psyched about what we’re building, and believe in the upside and really want to be part of that, or the team-

John Warrillow:

But what if I say, “Look, Robert, I get you’re building this thing, and I get it. But look, I’m a lone wolf. I’m an entrepreneur. I built a great company. I’m happy to sell it to you, but don’t expect me to work for you or work with you. I’m out. It’s 100% cash, and I’m gone.” This is a good company. This is a company that you could cross-sell all day long to your existing customers. It’s a cultural fit with the employees, but the entrepreneur is just a hard-ass. He’s a maverick. He doesn’t want to work for somebody.

Robert Glazer:

That’s a great question. They’re nuanced answers. Well, one, we just wouldn’t do the deal for all cash. It’s just not our model. Everyone needs to be in on the same incentives. He could roll it in, or she could roll it in, and quit if we said, “Look, we actually…” If they are the key person in that business, then no. But if they have built a management team and they are sort of not day to day, and they’d say, “Look, I don’t want to go with this,” we say, “Great. You don’t have to go with this, but you need your equity to ride on this, because you’re going to be a board member and a champion and whatever.” But again, we have a specific model, and that’s right for some people and not right for others. But if that person was-

John Warrillow:

Sure. I’ll roll 10%.

Robert Glazer:

Again, it’s going to come down to nuance. Again, John, if you’ve built a management team or you were really not necessary to that business, maybe we look at that and say it’s worth it. But if you’re key to that business, don’t want to be part of a team, want to be out, then it’s not the right deal for us. And honestly, it’ll be hard to find that deal in marketing services, unless it’s a $20 million EBITDA company that has so much scale where the founder’s not relevant.

John Warrillow:

Yeah, yeah. Why do you guys use an equity carry? And for folks who are listening are like, “What is that,” basically, you agree to evaluation with the acquirer, and you as the entrepreneur say, “Great.” You get offered, let’s just say, 60% of that upfront in cash that you put in your jeans, and then you’re asked to roll. In other words, not take cash, but basically take the equivalent.

Robert Glazer:

Tax-free roll into that.

John Warrillow:

Yeah. So you’re not actually paying tax on that, you’re rolling that into a new entity. Then you take that… Let’s say you sell for… The valuation is $10 million. You get 6 million upfront, then you take 4 million, and you basically convert that into equity in the new… So now, you’ve got shares. You’re a minority shareholder in-

Robert Glazer:

In a bigger business, yeah.

John Warrillow:

Yeah, in a bigger business. So every part of my being says that’s a bad deal for the entrepreneur, so I want to unpack why you think that’s a good deal. But let me just… Before we go further, why do you use an equity carry instead of an earn-out?

Robert Glazer:

I mean, I’ll flip back to the seller side. I don’t want an earn-out. I mean, most of the disasters I’ve heard were earn-outs, because… Here’s the problem with earn-outs and why… You asked me this last time, why the holding companies are not winning businesses. You talk about a two to three-year, four-year earn-out. First of all, the founder’s probably a little bit burnt out. Now, they’ve got to stay around and be there to do that, even if they’re not needed, and then they don’t have control. So let’s just say you have Marriott as a client, and the new company has Hilton, and you have this earn-out based on those metrics. And they go, “You know what? You guys have Marriott and we have Hilton, so you got to tell Marriott you can’t take the business.”

Robert Glazer:

There’s this paradox to me, where long earn-outs, I think, are a disaster. Because I think if you truly want to let a business do its earn-out, you need to leave it alone. Well, if you’re buying a business and integrating it for synergies, why do you want to leave it alone? The only way to make an earn-out clean is to leave that thing alone. Are you really going to leave a business you bought alone for three years if you just said you’re buying it for all these synergies? So I have found most entrepreneurs… And again, most people in services business do not have an option of an all-cash exit. It’s just not. It’s people, it’s you, it’s the management team. They’re not buying any assets, so the sophisticated sellers kind of know that that’s probably not an option.

Robert Glazer:

So then you can either do the rollout or the earn-out. I think the rollover is 10 times better, and here’s the reason. Every person I know at a two to three or four-year earn-out went to HoldCo or whatever. They begged to get out after year two. They took a haircut on it. They were so miserable. [inaudible 00:36:43] HoldCo, but their job is tied to their earn-out. What’s really different… And we talked about this last time, the way our investor does it a little different. Everyone has the same security. Some people have preferences. People say to me, “Well, what’s your handcuff. Can you leave?” And they assume I can’t leave. I’m like, “I can leave tomorrow.” They’re like, “Well, how can you do that?” I was like, “Look, if I leave tomorrow, I lose my salary, but my equity is my equity.”

Robert Glazer:

And this is part of the thing too. What’s the thing a founder going to do in most cases? They’re dying to go start the new firm, and the competitor. So everyone is on the same page. Everyone is moving towards the same outcome. My employment and my livelihood, my happiness, is not tied to my equity. They are one and the same. Now, there are different provisions, and you have to be careful. Sometimes, you’re allowed to keep it and let it grow. Sometimes, they can buy it out when you leave. But to me, that’s the freedom you want. And I think if your partner is flexible, you’d say… The person rolls into a platform after a year, and they go, “You know what? I’m good. I’ve done what I needed to do here. I’m going to be a champion of this platform. Maybe I’m a board member. I’m rooting for you, because I have significant equity in this.” So you don’t have to worry about them going and starting a competing business, worrying about them badmouthing the business.

Robert Glazer:

Yes. Versus all cash, maybe some people take all cash. The goal of these deals, frankly, is that people make a lot more on the back end than upfront, but obviously that’s a risk trade-off. But I am not in favor of anything more than a six to 12-month earn-out, because I think anything after that starts to get really… You can leave an integrated business alone for six to 12 months to do what it’s doing, but you shouldn’t buy a business that you’re leaving alone for three years. And that’s the only true way to… I mean, there’s so many lawsuits over earn-outs. I bet if you do a study on the longer the earn-out, the more problems there are.

John Warrillow:

Yeah, yeah. And agencies were getting into seven-year earn-outs. In fact, Happy Marketer, we did an interview with someone. I thought it was seven. I’d have to go back and re-listen to the transcript.

Robert Glazer:

I mean, the chance of that person being there on seven years is probably zero. But they’ll hang around and it’ll be miserable, because that’s how they get paid out. It’s just not-

John Warrillow:

Okay. But in fairness-

Robert Glazer:

Be a devil’s advocate.

John Warrillow:

What’s that?

Robert Glazer:

I said be devil’s advocate.

John Warrillow:

Yeah, yeah. No, I was going to say in fairness, there are examples of private equity deals that go south.

Robert Glazer:

Sure.

John Warrillow:

So I’ll give you the example, and we can… And the reason I share this is I’d love your insight as to how entrepreneurs can evaluate and vet a private equity group to avoid this scenario I’m about to describe. So it was Ryan Moran… Can’t remember. You can google it, Built to Sell Radio episode… Maybe around 200. But if you just Built to Sell Radio Ryan Moran, it’ll pop up. I may be getting the numbers a little bit wrong, but essentially the kind of general themes are, I think, correct. I think he built his business to around $20 million in revenue. And he got burned out, tired, and decided to sell. Sold to a private equity group. It was a 60-40 deal, to my recollection.

John Warrillow:

It may have been 70-30, but it was a majority recapitalization. He kept in 40% roll, but he was burnt out, tired, and wasn’t prepared to be the CEO, but was prepared to stay on and kind of advise, and to your point, remain as a shareholder. So the private equity company does a search, brings in a new CEO for the business, and the CEO struggles. The private equity group struggles to pay back the debt. The business goes to zero. Ryan loses all of his equity. So he essentially sold his company for 60% on the dollar, if you think of it that way. So again, I’m not suggesting that’s the norm, but it is the risk, to your point. It does happen. And so how can an entrepreneur listening to this do their best due diligence to avoid that sort of situation? What can they do? Because you must-

Robert Glazer:

I’ll tell you the advice I got from everyone, which is in these 60-40 deals, or 70-30, or 50, make sure that if you never got another dollar, that the initial is enough, that you’re okay. Not that you wouldn’t have some regret, let’s be honest, but it’s enough. You’re not going to lose sleep, that it meets your threshold. That if you never got that again and in some cases you couldn’t work for a while, you’d be okay. So I took that advice to heart, and when a lot of people think about going to marketer, they do the math. The second is sort of due diligence around the private equity firm. How much leverage do they use? What’s their track record? We didn’t talk about this last time, but I called 20 references on our private equity firm.

Robert Glazer:

They gave it to me. They told me it was the most anyone had ever called. And I called people, and I joked. They said, “I feel like I’m getting married and I’m calling to ask you about my bride.” And I called people who had… I actually said, “Can you give me people that you’ve worked with that exited a deal that you didn’t do or that you lost?” Because I wanted to see how’d they do in that. One of someone who rolled in, and then left. I actually gave a bunch of different scenarios. They gave me all the names. I called all of them, and I just got comfortable with how they did business. But I think how they do business, how much leverage they’re going to use… I don’t know whether that firm used five times leverage or they used one time leverage. That also probably matters a lot. But the first principle is the 60 or the 70 or whatever it is, that’s got to be the cake, and the rest is the icing.

John Warrillow:

Yeah. And how much or how little equity roll would you be prepared to do? And I think I know the answer depends on the scenario and so forth, but give people a ballpark. Is it reasonable to ask for 80% and roll 20? If it’s a PE deal, is that a reasonable ask? Is that beyond-

Robert Glazer:

Yeah. My guess is most PE platforms, 20 is going to be the minimum of feeling like they have some skin in the game, and then it’s going to be a trade-off. Again, you might get the higher valuation you want, but it goes up to 40. These are all deal lever points, where you can get the enterprise value, but then if you’re going to pay that, if you really think that’s the value, then you should be willing to roll in and take the risk on that value. So I think these are lever points, and this is stuff that entrepreneurs can negotiate too. I think we were in the middle of a negotiation where someone got the number that they wanted, but then they wanted some of these extra variables. And we’re like, “Well, look, if you want these extra variables, then that number’s going to change.” So I think those are key leverage points. The general range is 20 to 40. I think 40 gets to be on where the price is really high, or the business is riskier, or it’s newer, and you’re compensating for higher price with a higher roll.

John Warrillow:

Got it. That’s super helpful, for sure. I feel like I could talk to you for hours. We already have spoken for hours between part one and part two in this episode, but I’m going to leave it there. Maybe we’ll do another session if people-

Robert Glazer:

Can I just throw in one other thing? Because I think this is… We didn’t talk about it.

John Warrillow:

Yeah.

Robert Glazer:

When people hear rumors, this is the problem, I think, that drives false expectations. “Oh, my friend sold his marketing service business for $10 million.” The how makes a big difference. That’s the problem. Because someone hears that, “Oh, we got 5 million upfront, and then he got a million over a year for five years.” The Bobby Bonilla deal, where I think the Mets are still paying him 20 years later.

John Warrillow:

Right.

Robert Glazer:

I think when you are thinking about selling your business and you’ve heard these numbers, the number doesn’t reflect the true story of the deal. The equity rollover, the 10-year earn-out, all of these things, I’d encourage you to dig into those things, because I think that’s where people would build a false sense of… Because I’ve heard people say, “Oh, well so and so went for 10 million.” You’re like, “60% of that deal was in a 6-year earn-out, so that was really a $4 million upfront.” The chances of either party paying that out over six years is pretty low, to your point, so that’s how an earn-out can go sideways. People like to share their headline number. Or if you hear that something went on their LOI, or an offer, 80% of those don’t close, I think. This, I think, is really important from setting expectation, is when you hear a number, make sure you understand that that closed. What was cash, what was upfront? I think this is where people get a lot of their bad market information from.

John Warrillow:

I’m so glad you shared that. It’s actually one of the hidden reasons we do Built to Sell Radio, is because we want to unpack that. So someone will say, “Yeah, I sold for 10 times,” or whatever, and I’ll say, “Okay, great. So what proportion of that was cash?”

Robert Glazer:

How’d you get that money? Yeah.

John Warrillow:

“What proportion was the equity roll, and then what proportion was earn-out?” And to your point, oftentimes it’s the majority of cash. And that’s not necessarily a bad thing, but it’s the nuances. And I think that’s really, really important for folks to understand, is where is the cash moving, when is the cash moving, and what’s… The devil’s in the details. The other piece that you referenced earlier, in fact, the very beginning of our conversation today… And a former advisor of mine years and years ago used to say, “Great. So they got six times earnings for their business. Was that six times what? Six times trailing 12 months, six times weighted three-year average, six times EBITDA?”

Robert Glazer:

Six times three-month run rate.

John Warrillow:

Yeah. Six month run rate, six month next year’s profit. What is it a multiple of? And of course, the most important thing is going to be an adjusted normalized trailing 12 months, and that is a subjective exercise that can be negotiated. One of my favorite episodes-

Robert Glazer:

Right. And it’s negotiated around the margins. But I would say to you the number… The two things I would recommend if you’re thinking about selling your business is one, understand the market and the deals. And like we’re talking about, have a really good understanding of what they’re going for, and what the structures are, and what market range is. And then two, whether it’s a CFO or a banker or otherwise, have someone take your books and show you what proper… It’s still going to be negotiated, but properly adjusted EBITDA. You don’t want to go to the market as I have seen many times, where people [inaudible 00:47:34] they had a million dollars in EBITDA. And in five minutes of cursory look, it’s 500k. Because then, you’re off by a function of 50%.

John Warrillow:

Sure, [crosstalk 00:47:43] by half.

Robert Glazer:

Applying that, it’s really important for you to know that and know how they look. Those are the two biggest pieces of advice. Sorry, I cut off your story.

John Warrillow:

No, no. Great. If folks want to listen to how the adjusted EBITDA can affect valuation, I’d encourage them to go back and listen to Ari Ackerman’s Built to Sell Radio episode. Just type in Ari Ackerman Built to Sell Radio. You’ll find it. And it’s a great example of how adjustments can manipulate your overall price that you get for your company.

Robert Glazer:

If you’re going to sell your company in the next [inaudible 00:48:18], put all of your management team at market-level compensation, including yourself. Figure out that if your roll is 200,000, then that’s the 200,000 on your books, and then everything else you’re making is profit. It just makes your life much cleaner. Because here’s the other thing that happens, by the way, in every deal, and I’m sorry to keep going on this. You’re at 100, and you’re carrying on the books, and you sell at a certain thing of EBITDA. And then you say, “Well, I want to move my salary to 200,000.” And they go, “You can’t do that. You can either have the 6x on the $100,000…” You can’t. It’s one or the other. You can’t suddenly add a $100,000 and… Let’s say it was a 10x multiple. That was just a million-dollar difference. So you’re stuck. The salary you have on your books is actually the… Most investors will hold you to that as the salary that you’re going to carry going forward.

John Warrillow:

Yeah, yeah. Well said, indeed. Man, we could go for hours. We should do this again sometime.

Robert Glazer:

Part three.

John Warrillow:

Tell people where they can find Robert Glazer if they want to reach out.

Robert Glazer:

Yeah. If you’re looking for that chart, or you’re interested in it, I think John will put it in the notes, but it’s at-

John Warrillow:

Yeah, I’ll put it up [crosstalk 00:49:21].

Robert Glazer:

… robertglazer.com, and it’s under the article section.

John Warrillow:

That’s awesome. And the company is Acceleration Partners.

Robert Glazer:

Yeah, Acceleration Partners, accelerationpartners.com. If you are in partner marketing, affiliate marketing, influencer marketing looking to sell your business, we’d love to talk to you.

John Warrillow:

Just bring adjusted trailing 12 months with you.

Robert Glazer:

Exactly.

John Warrillow:

Thanks so much for doing this.

Robert Glazer:

Thanks, John.

John Warrillow:

So I hope you enjoyed that conversation with Robert Glazer. It’s the first time we’ve ever actually talked to an acquirer on Built to Sell Radio, and I’d really love to know what you think of that format. We may do more of this if you like it. Let me know on Twitter. I’m @JohnWarrillow, and you can let us know what you think and what you’d like to hear more of or less of. Again, if you want to figure out how to spell that, BuiltToSell.com, and you can spell Warrillow. Thanks for listening, and we’ll see you again next week. Built to Sell Radio is produced by Haley Parkhill. Our audio and video engineer is Denis Labattaglia. If you like what you’ve just heard, subscribe to get a new episode delivered to your inbox each week. Just go to BuiltToSell.com.

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