Successfully Positioning Your Service Firm for Sale with Jonathan Baker, Punctuation: Show Notes & Transcript

Post | Jan 21, 2025

Welcome back to Strategic Counsel by ForthRight Business! Looking for Marketing Smarts? You’re in the right place. After almost 4 years of helping to make you savvier marketers, we decided to broaden this podcast to include more business-oriented topics that will make you savvier business leaders.

In this episode of Strategic Counsel by ForthRight Business, we’re talking positioning you firm for sale with Jonathan Baker. Listen to the episode on Apple Podcasts, Spotify, and your other favorite podcast spots – follow and leave a 5-star review!

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***Strategic Counsel by ForthRight Business*: Successfully Positioning Your Service Firm for Sale with Jonathan Baker, Punctuation**

Interested in selling your service business one day? Service firms can be difficult to sell, because there are so many variables and so much emphasis on the people. Never fear, it can be done – even for an amount you dream of! But, you likely have a ton of work to do to make your service business attractive for potential buyers. We wanted you to learn from a thought leader who knows the M&A space super well, so we welcomed on Jonathan Baker, the Practice Lead of M&A for Punctuation and the Co-Founder of Monday Night Brewing. He advises small-to-midsize marketing services and digital firms on transactions and preparing for sale. Here’s a small sample of what you will hear in this episode:

Markers founders should hit to sell their business
Is your industry niche or broad?
What strategies should founders know about selling their service firm?
How do the right people help you sell the business?
How do service firms make themselves attractive to potential buyers?

And as always, if you need help in building your Strategic Counsel, don’t hesitate to reach out to us at: ForthRight-People.com.

Check out the episode, show notes, and transcript below:

Show Notes

Successfully Positioning Your Service Firm for Sale with Jonathan Baker, Punctuation
- [0:29] Welcome to Strategic Counsel by ForthRight Business
- [2:10] Introducing Jonathan Baker
- [3:39] The differences between brand power and tangible assets
- [4:54] How do you structure deals where you are bearing some of the risk of selling and the buyer is mitigating their own risk?
- [7:05] You have to demonstrate that your are replaceable
- [7:56] What strategies should founders know about selling their service firm?
- [9:51] What are the different markers founders should aim for?
- [10:47] What about founders who want to leave a legacy?
- [18:29] How do the right people help you sell the business?
- [19:27] Selling a business that you’re emotionally invested in?
- [25:57] Last thoughts on the people in the business
- [28:44] How do service firms make themselves attractive to potential buyers?
- [30:08] How to approach recurring revenue?
- [34:02] How does somebody know if they’re doing a self assessment?
- [39:18] Is your industry niche or broad enough?
- [41:13] What should a seller consider in terms of the sale?
- [44:59] When do people know if that have a good deal?
- Quick-Fire Questions
- [50:22] What is Jonathan’s favorite beer and why?
- [51:19] What are you reading or listening to right now?
- [51:58] What’s the best way or what’s one thing that you do to take care of yourself?
- [52:40] Connect with Jonathan Baker
- [53:12] Make sure to follow Strategic Counsel on your favorite podcast spot and leave us a 5-star review on Apple Podcasts
- [53:14] Learn more at ForthRight-People.com and connect with us on Facebook, Instagram, and Linke dIn

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Transcript

Please note: this transcript is not 100% accurate.

00:01
Welcome to the Strategic Council by Forthright Business podcast. If you’re looking for honest, direct, and unconventional conversations on how to successfully lead and operate in business, you are in the right place. In our discussions, we push on the status quo and traditional modes of thinking to reveal a fresh perspective. This unlocks opportunity for you, your team, and your business. Now let’s get to it.

00:28
Welcome to the Strategic Counsel podcast. I am Anne Candido. And I am April Martini. And today we’re gonna talk about how to successfully position your service firm for sale. So we’re focusing here because many of our clients and frankly ourselves as well, are service firms. Meaning what we put a price tag on is a service we provide. What makes these types of businesses slightly difficult to sell is that much of the assets that we hold are the people or…

00:57
More specifically, the brain and the brain power of the people. This is very different from product based companies, especially the tech companies who are the tourists who are fueling the startup boom, who have tangible assets and that’s not to say that humans aren’t tangible, but hopefully you get what I mean by the difference between service and offering a service through our own selves versus actually having a tangible product to sell.

01:22
This doesn’t mean that service-based businesses are any less valuable though, and that’s what we’re gonna talk about today. Yes, and it’s important to note that whether you have visions of selling or not, what we’ll cover in this episode is what you should be doing anyway to grow and fuel your business. So it’s more broadly applicable than just the topic at hand. And this conversation is gonna be a lot about getting in the right mindset, which will optimize your competitive advantage overall as a business.

01:48
And this is important to win in your industry as much as to make you appealing to potential buyers, therefore why it’s applicable beyond just the subject itself. And we have a very special guest to help us with this topic today and that’s Jonathan Baker of Punctuation. He heads up the M&A practice there, which will provide excellent perspective for this discussion. So, hey, Jonathan, thanks for being with us today. Do you want to introduce yourself, Punctuation, and give the listeners a bit of your story? Yeah, thanks for having me. So my name is Jonathan Baker. I’m one half of

02:17
punctuation, the other half happens to be my father. We are a small consultancy that works with marketing services firms, which from our perspective are very similar to many other professional services firms. And we help those companies grow and scale via things like lead generation, positioning, and then I handle the M&A side of the practice.

02:46
valuations and then prepare those firms for sale and then help find buyers and sellers. So we work exclusively with small to mid-sized independent firms. We like it that way. Well, you speak in our language. We like it that way too. That’s generally the people we serve as well. And there’s a lot of synergies between everything that you mentioned and everything that we talk about, about branding and marketing and that being…

03:13
a really fantastic basis for growing valuation. We’re probably gonna get into that a little bit, but all of that together is very symbiotic. So this is gonna be a great conversation. So Jonathan, let’s just start with how selling a service firm is handled differently than a product-based company. I mean, I mentioned this a little bit in the intro and talking about like the brand power of the people versus having tangible assets. Can you elaborate on that and provide more perspective on other key differentiators?

03:41
Yeah, I mean, you did hit on some of the big points, but all of that adds up to just kind of a lack of scale. So service businesses do not scale in the same way that a SaaS business does, that even a product business does. In those cases, you’re reliant on kind of technology or a brand, but in these cases, really what fuels growth is headcount. And so…

04:09
There’s kind of a cap on profitability in a way without growing. And you have to look at growing these businesses a little bit more organically, slowly over time. The biggest reason or the biggest difference, I would say, when it comes to selling a service business is the amount of risk that you’re asking a buyer to take on when you sell. Because

04:37
Yes, you have relationships with your employees, you have relationships with clients, and those are the two big assets. But unfortunately, you can’t control either of those assets completely, right? Like they’re humans. And so, how do you structure deals where you are bearing some of the risk of selling and the buyer is mitigating their own risk? And so that’s why these deals usually are structured a little differently.

05:06
Yeah, I mean, it’s so interesting because my background is agency, right? And so very specifically service based. And I’ve been through many acquisitions or mergers or sales or whatever over time. And so this part about how do you actually value the service? I think is so interesting. And I would love, you know, you said there’s different structuring. If you could just give a little more contextualization, whether it’s to the risk that the seller takes on for the buyer or how you.

05:35
how you value things. I mean, just give us a little bit more depth there because this is a question that I have in my mind all the time as I see agencies change hands. There’s two big sources of risk. One is the client portfolio. If you lose your largest client, will the firm be able to survive, right? And so buyers are going to want to see your largest client that know more than 20% to 25% of your billings.

06:03
And they do have different risk tolerances, so take that with a grain of salt. But beyond that, you might then just have to get a little bit more creative in how you structure your deal or accept less. The other big risk factor is the founder himself or herself and how integral they are to operations. So usually the larger the business, once you get to a million bucks in EBITDA or so, you

06:33
maybe like a $4 million business running at 25% margins. We’re just keeping this simple for now. Yep, yep. That is a signal to buyers that the business is big enough to not be reliant on the founder, right? At that size, you have a certain number of employees, you’ve got processes in place, like there’s no way you could survive and still be completely reliant on the founder. For smaller businesses below that million dollar in EBITDA mark,

07:00
you’re still sellable, but there are more question marks around what is your role and will this thing fall apart if you step away, right? And so you have to demonstrate how replaceable you are. You mean the opposite of what you want to do? Yeah, yeah. Particularly when it comes to the sales and business development process, because usually that’s where a lot of buyers have their attention focused.

07:29
Yeah, that’s, it’s almost a little bit, I think, counterintuitive, a little bit disquieting for, especially if you think about, and you’re talking to a founder who says, Hey, you know that this whole thing that you built, now you’ve got to show that you’re not actually necessary to this thing, right? And that’s a really hard thing, I think, for a lot of founders to swallow because it is their baby. It is, it has been their baby for a very long time. So can you share a little, some strategies that you’ve.

07:58
provided to these founders for how do they at least how do they approach this? Like how do they get in the right mindset that this is the right thing to go do if they actually want to put themselves in a sellable position or even just in a space like you said to scale and grow. I mean, look, if you’re thinking of the business as your baby, then you’re doing it wrong because you don’t sell a baby. I mean, I’m sure it’s been done, but pretty sure it’s illegal.

08:28
So you have to change your mindset first of all. This is a phase of your professional career. This is not who you are. I love this question because, you know, as an M&A advisor, I feel like a lot of my time is spent kind of as a therapist. Yep. We feel that too, very often. We do too. Yeah. And so you have to detach yourself somewhat, right, from the business. And you also have to think about what your end goals are.

08:55
Because people have different end goals when they’re selling. Some is to maximize the profit. Some might be more focused on finding a really good cultural fit for their employees or a really good fit for their clients where they have long standing relationships. And all of these are kind of at tension and you have to kind of figure out what’s trumping what. But we counsel folks to just build strong benches.

09:24
first of all, to make sure that you as a founder are not integral to daily operations. So you should never, if a client stops you in the supermarket, says, hey, what’s the status of Project X, you should not be able to answer that question. You should have to call someone to answer that question. And if you can answer that question, that means you are too involved in the day to day.

09:51
And so there’s like different markers, right? And different levels of, of as you grow, you should kind of be a little bit more removed from client work. You should be out of project management as soon as possible because you’re probably horrible at it. Most entrepreneurs are horrible at project management. I really wish my bosses at P&G would hear this about how they shouldn’t know exactly what’s going on in your project at fast, cause I felt like that was like the biggest…

10:20
like tension point ever. But I love what you had to say. Ava, what do you have to say about that? I think it’s so interesting, right? Because I’ve seen both sides of this where the founder takes that recommendation and approach, right? And does the steps you just said of backing out and, you know, being diligent about it and conscientious. And Anne, you kind of started down this path before, but the tension I think comes with the ego, right? And so, Jonathan, you said the thing about it can’t be your baby.

10:47
But I would love to hear what you have to say about founders who want to leave some level of legacy, right? Which means they don’t entirely go away versus the tension of, I have to get out of the business if I want to sell it. And what is sort of the conversation there? I think a lot of our job upfront is really to try to get behind the answers to those questions because the reasons for selling can vary quite a bit depending on the reason we might approach

11:16
the sale very differently. So a lot of these conversations will start, you know, two or three years prior to an actual sale. For some, we might actually suggest, Hey, you’re, you’re calling yourself Smith and co because your last name is Smith. We would suggest that you actually rebrand. Like if you want to get top dollar, you need to send a signal that this thing is not you, that it’s more than you. Um, and for some that’s that tough pill to swallow because, you know,

11:46
Maybe it is their legacy and the name is important. And if that’s the case, then it’s our job to just kind of set expectations and also figure out like where they’re willing to give if the goal is to kind of create that legacy. Legacy means different things to different people as well. For some, the legacy might be the money you get from a sale that you can then invest in your personal life or give to your children. For some, it might be more about the name.

12:15
You know, I think more often than not, we see owners who want to be done with the business entirely at some point, because it’s just stressful. Like running a business is stressful. We also, I think all have some kind of mild form of ADD and want to do different things with our lives. And like, let me, let me develop the brain space to focus on something else. And I still have to kind of get rid of this thing completely.

12:43
Yeah, I want to go back to the name piece because I think this is so important and I want to tackle it from two different sides. One, I couldn’t agree with you more and I’m sure April is going to wholeheartedly agree because this is exactly what we have talked to people about when they’re starting to even just set up their business is do you want this to be your business or do you want this business to extend beyond you? Right. Because a lot of people will just very easily call it their business, their name, and they’ll set up their website.

13:12
around their name and they’ll set up, everything is set up around their name. And that’s fine if you want to be the business forever and ever and ever. But if you don’t, then you definitely need to establish a presence that extends beyond you so that other people can actually contribute to what that actually looks like because.

13:32
One thing that we talk about a lot is when you, it’s just you for so long, you are the business. And so your personal brand is what is actually representing the business. But that is a little bit of a limited sphere because you can’t like regenerate you. You are who you are. So authentically the business becomes a part or an extension of you. But a brand or a separate business can be created from.

13:58
dust and sparkles and magic wand to so to speak. You can make it whatever you want, is what I’m saying. You need to intentionally do that, but it can be created from the ground up. So you can make that what you wanna make it, which doesn’t necessarily have to reflect you as a person. So just to reiterate that point, Jonathan, I think that is super, super critical for people to hear. And it’s really hard when you get down the road and you decide, hmm, I wanna sell it, but all my equity is based in this name. And then the other thing, the other mistake, and I’ll be very interested in hearing if you think this is a mistake or not.

14:27
but I think it’s a mistake that people make is they sell their name. So because the equity is established in their name, and this happens more on a product-based business than on a service-based business, they sell their name and then they can’t use their name. So a big example, and I’ll just, I’m just gonna say this very, can’t talk a lot about this, but if you’re familiar with Jo Malone, she was somebody that we were considering working with at one time at P&G, but she sold her name when she sold her perfume business.

14:55
she can no longer use her name. Her equity is that name. And so trying to then regenerate another brand without being able to use your name is very, very difficult. So those are like the two aspects of name that I wanted to kind of put out there and see what reactions you have to that. Yeah, I think that’s true. And with equity, that’s kind of tied up in a name or another example might be a…

15:21
book that you have written that has propelled the business forward, you know, thought leadership that’s connected to you personally. Like the guy who just saw him, remember his name, he just sold, he sold the EOS, like the person who built EOS and sold that. Traction guy. Traction guy, yeah. We should probably figure out what his real name is because that’s not fair, but Traction Guy. Now that we’re talking about names. One thing that, you know, we see done is kind of granting a

15:50
non-exclusive but perpetual license to use the name when you are selling, so that you still have rights to your own name or book or thought leadership, whatever. Now that can sometimes get in conflict with non-competes. And so you have to, you know, depending on how you want to use that name or thought leadership moving forward, you have to kind of negotiate that. But yeah, being able to

16:18
to still retain some power while still giving them the confidence they need as buyers to know that they’re gonna be able to use the actual asset. Yes, certainly to all of that. I mean, my perspective would be to go back to in the first place, I think sometimes, and to your point when we have these conversations with people, they feel like naming is another thing they have to figure out, so they just default to using their name at that point in time. And there’s not a lot of thought to what happens down the road from here.

16:47
And so then all of these problems that we just talked about occur. But I mean, I’ll use our service based business as an example. And you and I had a very specific conversation early on about, was it going to be Candido and Martini and man, those are fun names, right? Yeah, right. Especially Martini, if I do say so myself, but. It smells like a really fancy drink. Yes. It’s a Martini, it’s an Italian Martini. But in any case, I mean, very quickly getting to the point that

17:15
We wanted it to represent our business, whether it ever does expand beyond you and me, whether we ever get to the scale to wanting to do that, et cetera, et cetera. However, I think the other thing it’s done, Jonathan, you mentioned building a bench. And so building the brand outside of Anne and me has really helped us objectively align people that come on to work on our behalf to the way we want things done in the culture of our organization and how we treat our clients. And I think that gets a lot muddier.

17:45
and a lot more inconsistent and a lot more emotionally based when it’s based on the people behind the brand instead of the brand itself, which is then separate from who I am as a human being. Yep. Just for context, it’s Gina Wickman, just so we can close the loop on that. Oh, okay. It’s the traction guy. The traction guy. Just to give credit, was credit is a game. I hate to tell him, I think kinda he’s gonna be the traction guy from now on. Yeah, the traction guy. He’s like.

18:10
I’m Gina Wigman. Who, I’m sorry, what? No, the traction guy. Oh, the traction guy. Okay, yeah, we know who you are now. I mean, I think that’s a really good point. And I think it also lends to another conflict where I see and you see a lot too, April, and John’s gonna be very interested in hearing perspective on this, which is the people themselves.

18:29
So a lot of times in these small and medium businesses, you start with N equals one, and then sometimes it gets N equals two, and sometimes it’ll get to N equals 20, or to some extent of that. But sometimes these people have been around a long, long time, right? And they become like part of the fabric, if you will, very integrated into the business itself. But sometimes they’re not the right people for the business, and they’re not the right people to put in position to sell the business, but it’s very hard

18:57
because small businesses tend to be more emotionally connected to be able to say and be like, oh, we need to let so-and-so go or we need to put so-and-so in a different seat and we need to build our bench in this way in order to be able to make ourselves more valuable or put ourselves in a better position. So I’d love to hear a little bit more about, is this something that you tend to face when you’re in the process of these small medium-sized business discussions? And what’s your thoughts on how do you really address that?

19:27
Yeah, well, first, you know, don’t think of the business as your baby. Second, don’t think of the business as a family. And I think that’s when you get into trouble is when you, you know, start thinking of the business as a family that you kind of have to keep together. Right. Um, think of it more as a team and you’re going to have different pieces that are important at different times for specific things, you know, I’ve

19:55
built businesses myself. And I think at the outset, you often need kind of Jackson Jills of all trades, um, who can do a little bit of everything, but the bigger you get, the more specialization you need. You know, you might want an actual bookkeeper at some point. So you, you, I mean, there’s no easy way to do it, but you do need to let the people go that aren’t going to be able to

20:23
take you to that next level and you can do that in a way that honors them and loves them, right? But the business needs different skill sets at different times. It’s evolving just like a person would. And so the folks that you had at the outset might not be the ones you have at the end. And frankly, that could be you as well. Maybe you’re good at building something but not running something and you have to kind of…

20:49
understand that that happens a lot with with founders that they kind of work themselves out of a job and and then they end up Standing in the way of of growth if they do stick around for too long. Yeah I mean, I think that family point is so important and it’s something that I Feel like again, I’ll just go back to the agency experience because it’s where so many of my years live

21:14
But I think in an effort to create culture, especially in some of the smaller organizations that were trying to distinguish themselves from the big agencies of the world, they would say things like, you’re not a number. We treat you like a member of the family, all of that type of language, until it became what I would call a dysfunctional family. And a lot of it.

21:36
was surrounded by these types of tension moments where the business was ready to grow and expand, but the people weren’t what was needed. And what I often saw, actually, which was tremendously sad, is there would be momentum around legacy creating a plan. Here’s the people I think that want, I want to run the business. And then all of a sudden it would be like, but what do we do about these other people over here? And

22:00
that it would either be waiting too long or trying to try them out in positions where they didn’t fit or not having the tough conversation. And as a result of that, the valuation then wouldn’t hold up because it was such a distraction and it took too long to make the hard decisions. I mean, one of the very big things is when cuts needed to be made, right? And I would always say it’s a business, make them all in one fell swoop.

22:24
And often that wouldn’t happen. And then we would be left, you know, left behind or the deal would fall through or it wouldn’t go through the way that they wanted it to. And I just think it’s such a missed opportunity. You know, on that point, one thing that we see and try to call out when we see it is when, when businesses have too much cash on hand, they can actually become sloppy or decision makers. And so if we see, you know, you’ve got six months of cash in the bank, uh, no, take that cash out of there.

22:54
because you need to condition yourself to make quick decisions. Because not only will those decisions affect your bottom line, if not made quickly, they will affect your culture. And you will erode your culture if you’ve got the wrong people just kind of sticking around because you know, you feel like some, they were there at the beginning and you know, now they’re not as valuable, but you, you feel bad letting them go like that stuff is going to impact the rest of the team.

23:22
recognizing that maybe there isn’t as much accountability as there should be, or this is not just a top tier team anymore, there’s things that can slide. So don’t keep a lot of money in the bank. That’s interesting. I do think though it does put pressure on the system to make better decisions. I also find though that it’s interesting because, and I don’t wanna stay on the people side too much,

23:53
the whole valuation is based on the people. I think this is a really important point to make. That’s why I want to give it its due time. But I think that point is very, very interesting because if we’re swimming in money, we’re swimming in profit, and when the business is doing well, we tend to keep the people on, but we still get really nervous about hiring new people. We don’t want to necessarily

24:18
overextend ourselves and bring on the new people or the right people, but we’re willing to keep the people that might be dragging us down, which I find very, very interesting. And I think it goes back to the point that you were making, April, about culture, which is, the point you were making, Jonathan, about culture is like, when we define culture based on family, there’s no other way to go. Like, you don’t like, you know, although you can argue sometimes you disown your brothers and sisters and your moms and dads, but you tend to like…

24:45
harden them way more than you would or accept more quote unquote bad behavior or insufficient results and all those sorts of things more than you would for somebody that you have I’ll say transactional relationship even though that’s not exactly the right term for it either. But it is a time for money.

25:06
I mean, yeah, yeah. And so it’s really important to really kind of consider the fact that this is a business. And this is the conversation that me and April have a lot when we’re talking about business strategy, organizational development is that you have an obligation to your business and your business is made up of all the people, not just this one person. So if you’re gonna define your culture, define your culture, but define your culture aren’t well more than just that principle.

25:29
And that’s another important point is that culture is defined. It doesn’t just happen. And so you need somebody who’s responsible and intentionally setting that so that it is something that’s very, um, recognizable that it’s, um, it can be internalized, that it can be adopted by everybody because that is what starts to establish that tangible nature of the value of your business outside of just yourself or how to, how this whole thing started. So.

25:57
What else do you have any other final comments to make about the people before I move on from this topic? Because we’ve talked about them a lot, but I think this is a really important point to make. I mean, I would argue that culture is not defined at always, and it does just happen. That’s not necessarily the right way to do it, but culture will always take on kind of the form of the founder or founders. And then if you want to grow, yes, it needs to be defined. You have to start putting some process in place.

26:27
But at the beginning, if you as a founder can interact with every person individually, like at some regular level, the culture will just happen, whether that’s good or bad. Well, I think that’s a fair point. But I think your other point is like there reaches a point in the maturity of the business, right? Where you can no longer rely on the founder to be able to do that, or it moves past the founder, which is then the point when I think it really needs to be defined. And I mean, we go as far as to say,

26:55
Like we talk a lot about mission vision values in terms of culture. And I’m always known for saying you hire fire and evaluate your people based on that so that it becomes an objective criteria by which you do that. So that you don’t end up in these more subjective situations or I like this person as a person and look at all the good they did for all these years versus, hey, they’re really not fitting anymore with what we need for this organization. And therefore we have to let them go regardless of all of that history.

27:22
Yeah, and just to kind of round us out, I’ll go back to the traction guy one more time. And yeah, he said, if you consider how much time you are basically in pain over certain people in your organization, and you think about the time it takes to actually fire them, you’re talking about like this whole like maybe sometimes years of pain leading up to like a 36 hour period of pain.

27:50
from the time where you’re like, okay, we got to fire them to the time like you can move on from that. And usually at the end of the day, it’s best for both people. And I think that sometimes what we don’t internalize about these sorts of situations is that if we’re struggling with a person, the person is probably struggling too. And sometimes the best thing you can do for them is to let them go because sometimes they feel very obligated to stay despite the fact of however they’re feeling too. So if you put them yourself in their shoes,

28:16
and get out of your head a little bit about how it feels to you, sometimes you can get a more objective perspective about that. So I think that’s a really fantastic conversation because I think the people part is so important and I’m sure that’s gonna transcend into some of these other questions but I wanted to move on to some of the other aspects of selling the business. And one, we talked about a lot of these things about like what sometimes doesn’t go right or what can actually…

28:44
to track from a really good valuation of your business. But I’d love for you to spend a little bit of time, Jonathan, talking about how do service firms make themselves attractive to potential buyers? What are those valuation principles or points that buyers are looking at to say, yes, you’re gonna be a good fit for what we’re looking for? Yeah, some of the things that we try to coach our clients on, one is strong positioning. So no matter what industry you’re in,

29:12
making sure that you have a point of difference within that industry. If you think about particularly if you’re a smaller firm, the buyers of firms like yours are going to be larger firms that are less positioned. They’re going to want to buy you maybe to acquire your specific expertise, your specific client roster, your individual approaches. Speaking of client roster, that’s another one we touched on it, but

29:39
I do want to say again that you don’t want to be too reliant on a single client. Try to keep that below 25%. And to the extent that your client roster kind of makes sense together, that’s going to help you sell as well. If there are commonalities between those clients, that’s going to help you identify buyers. Any proprietary IP you can develop, that’s always a plus. It might not add.

30:08
to the sale price in the way that you’re thinking or hoping, but it does set you apart in the market. To the extent you can approach anything like recurring revenue, which is the holy grail these days, right? But do you have anything that looks like a retainer or a monthly fee? That is a plus because remember, these buyers are trying to mitigate risk. And so the way to do that is,

30:37
to be able to look into the future and know what revenues are gonna look like. And so recurring revenue helps a lot with that. Geographic location can be important sometimes, and that’s not necessarily something that you can do a lot about unless you’re willing to uproot your life. But, you know, there’s, in the marketing agency space, for example, there’s like plenty of Asian and Eastern European firms trying to enter the US market, but they don’t wanna do that via

31:06
Omaha, they want to do that via New York, Miami, Chicago, LA. So having that name can be beneficial. Your staff seniority, how long has your staff been there? So they know that you’re going away. They don’t know that your staff, you know, your staff might not follow. Are there enough smart people on the bench and are those people actually capable of handling more? You know, they might have.

31:35
because of the size of your own firm, they’re kind of capped at their potential with you, but would they be really strong managers of larger teams somewhere else? And, you know, I’ll throw in profitability, right? So being profitable is always a plus. So I would love to know, can you contextualize through an example or like how these conversations start and go? Because I think it’s a hard thing for people to picture.

32:05
Right? Like, how do I even begin to start to think about having these conversations? Or what do I do kind of first? Or how do I work towards some of the things you just talked about? I mean, give us kind of a picture from that perspective, if you could. If you are not using someone like me to help drive conversations forward, these often happen. They’re like two cocktails in type conversations. So.

32:33
Really speaking our language now. There’s someone in the market that you respect. You’re like, man, it’d be great to sell to them or be great to buy them. Like, let me just form a relationship with them over time. Then one night, two cocktails and you kind of strategically throw out like, OK, what if this happened? Like it won’t. Right. But what if it did? And then just kind of see how they react. Oftentimes you will be approached.

33:03
by potential buyers. There’s tons of folks out there just knocking on doors. And so you can get some good reps in that way, just understanding how these conversations go. But I would say at the beginning, I mean, it feels a lot like pitching a new client for the first time. You are sharing your capabilities, your approach, what makes you different, your team, kind of all that basic stuff. And then you add some financials on top of that. After that,

33:31
It’s a lot like dating. It’s like business dating. It can go a lot of different ways. Sometimes you’re not exclusive. Then you become exclusive. Do you send them a notice to check the box? Yes or no. Yeah. You want to be my buyer? Yeah.

33:57
Well, I think that’s really helpful. And I think you provide some really good analogies. I love analogies. So I think that really kind of puts it into perspective for people. But I would love to dig into a little bit more than how does somebody know if they’re kind of doing a self-assessment? And I know you guys have a valuation assessment that you guys do too, but how does somebody know, hey, I’m in a position where I’m going to be appealing? Like what are buyers looking for? You’d mentioned earlier on like 1 million EBITDA

34:27
25% profitability is kind of like maybe a good trigger point. Maybe we’re just using those numbers arbitrarily. But I’d love to understand a little bit of like for our folks that are listening, some of the, Hey, do I meet this criteria? Do I meet this criteria? Like what are they actually like trying to achieve in today’s day and age, knowing that it fluctuates? Yeah, I think the 1 million EBITDA is a true marker because it’s at that level that you start getting interest from different types of buyers, private equity, for instance.

34:57
is not going to be interested unless you’re kind of above one million. And private equity has horrible connotations for most people. And I will say there is kind of evil private equity, but there’s also less evil private equity. So it’s not all evil. LESLIE KENDRICK- SHARFSTEIN Evil and less evil, okay. BROCK POMP AND CIRCLE The 25% profitability is not a marker. I mean, you can get away with 15%, 20%. I think what you need to show is that you have a track record of consistent profitability.

35:26
And frankly, I think a lot of folks have in their minds that their revenue numbers need to go up and up and up and up in order to be attractive to sell. But you can have a down year. Like businesses have down years. You can still sell. What you need is good reasons for having that down year, right? Like, you know, COVID really impacted the travel industry. So that’s why, or we made the deliberate decision to step back and reinvest in

35:55
you know, the next level of management. And so, you know, our, our profitability looks low because we added three head count that we didn’t necessarily need, but we’re gearing up for the future. Having a strong business development process would be a good marker. You don’t necessarily have to use it all the time, but you need to have something that you can spin up quickly if business starts to dry out. And having a process also sends a signal

36:25
Business development is not 100% reliant on the friends and family of the founder, right? Like you can sell beyond that. So what does your inbound marketing look like? How are the leads coming in? The client roster, I mean, the client concentration rather really keeping that to a level where you don’t have a guerrilla client. I think that’s the other big marker. Honestly.

36:51
Though there aren’t that many though, like if you have, you know, two or three of those with profitability being the big one, you’re probably sellable. And there are plenty of firms sellable that are smaller than that. It’s just a smaller pool of buyers, smaller pool of M&A consultants because they’re going to not make as much money. It just becomes a little bit more challenging and it might be a little bit more DIY at that level.

37:20
client roster and then the word portfolio. And you had started down a path of like similarities between or how do you define them? And I totally get the mammoth client thing. And I’ve been in companies where we made that mistake and it did not fare well. But what about developing the profiles of the types of client you have and being able to speak to them and how diverse should they be versus how much should they be in a similar profile? And I’m sure it changes, but I’m going more to like

37:50
the strategy behind it because I think a lot of times this is a place where people do have situations where it’s like the founder, it’s all their friends. And so we do work that maybe we shouldn’t be doing anymore. Or, you know, we don’t think enough about who we’re going after. We’re chasing the dollar, those types of symptoms. So I would love to you to speak more to the balance of the portfolio. Or they go super niche versus broad. I think that’s the other thing is like being super niche versus being more broad.

38:20
similarities between the clients the better because similarities between clients allows you to develop more expertise because you see the same things over and over and then can apply those to new clients which then allows you to increase your rates because you’re now a specialist and you can become a more profitable firm and the other thing that allows you to do is

38:48
kind of create more packaged offerings, right? Like we see the same thing over and over. And so now we have a process. This is what it looks like. We don’t have to custom develop a proposal. Every time a client comes through the door, you can go to our website and see exactly what you get and it costs this amount of money and it can ease the burden of sales. You can’t take that to a super niche level. You have to have some level of, you know, broadness or else you just won’t be able to make any money.

39:18
I like to think of one marker for is your industry niche enough or broad enough? Is there a trade show for it? If there’s a trade show for it, there’s enough folks that have common ground that’ll come together. If you can get to that level, being able to market to a trade show, there’s so many things you can do there. You can buy the trade show list. You know exactly who to contact. So I think that’s about the right level.

39:47
Which is very interesting to consider and to think about because that could be a lot of different things. So that just begs the question though. Are there specific things that. Buyers are looking for right now they’re looking for specific. Capabilities or specific sizes or specific industries that are popular right now is there. Give us I guess I’m asking for a little bit of a lay of the land of like, what buyers are looking for right now.

40:15
I would say AI is super hot, but no one’s selling AI because they want to grow it more before they sell it. And people are a little bit scared of like content firms, for example, because of AI. But in general, buyers are not this like amorphous blob. They’re also individual companies run by individual people who have individual strategies. And so, you know, we see all types, I would say maybe during

40:45
during COVID, a little bit post COVID, you might see firms trying to get better deals when they’re buying, but that’s not necessarily a function of who they’re going after. I mean, we’re selling firms to family offices and individuals, and you might have an individual that wants to buy a firm and actually run it themselves, they just don’t wanna grow it. So you’ve got all these different types of buyers wanting different types of things, and so there’s…

41:13
There’s nothing in particular. What should then a seller be considering in terms of the sale itself? So if I was selling my agency or my firm, what should I be keeping in mind in terms of what the sale is potentially going to look like? We talked about, you know, we eventually, you know, the founder is probably going to go away. But is there like a time frame for that? Is there an expectation that the people are going to need to stay on?

41:42
What are you seeing right now in terms of those expectations for sale? Yes. Most of these deals are structured with a percentage of the sale price upfront and then the rest contingent on hitting certain financial targets in the future. And that’s usually called an earn out. So you might see, you know, 40 to 50% of the cash upfront, the remainder,

42:09
You have to hit certain top line revenue targets over the next three years. And then those are paid out in equal chunks. And you as founder are required to stay around for those two to three years via an employment agreement in order to actually get the rest of that money. So that’s one of the ways that buyers mitigate risk. You also might see them put employment agreements in place for key employees. But

42:39
Not necessarily. It’s not usually done unless, you know, it’s very clear that the business couldn’t run without so-and-so. I would say these days we’re seeing maybe a little bit more creativity in deal structures than we’ve seen in the past, uh, with rollover equity. So you might sell part of the business. The rest of it, you get equity in this new entity so that you have more of an incentive to stick around for longer.

43:09
And there’s less money upfront that the buyer has to give. That’s helpful. So, well, and specific to the, as you were talking, I was thinking about the people piece. And I get the point, like, you don’t put it in place too much unless they really need to run the business. But I remember a time when it was more about like, I want to run that because I’m going to bring my own people in, right? And take over that way.

43:35
Is that still often the case or is it more like, no, I’m really going to evaluate this business. And as part of what we’ve been talking about, the people that are there and I want to keep them on. Yeah. In service businesses, it’s usually the, the ladder where you want to keep the people. I mean, there might be some, you know, areas where you consolidate like admin back office type stuff, but, um, for the most part, because these businesses are not super scalable without people.

44:03
you are really trying to keep the people. And some founders are scared of a mass exodus once they sell. I think they have an inflated sense of what they are contributing to their own businesses. We’ve never seen that. That’s kind of not a real fear. If anything, selling can actually be really good for employees, particularly ones who have more career ambitions. They now have

44:32
more opportunities to move up or to move over. And most employees, just because they are humans, aren’t going to make any sudden moves. They’re going to stick around and say, well, I’ll give this a year and kind of see what happens, right? So that’s what we see. That totally makes sense to human nature of it all, but that’s really helpful information. I guess one of the last questions here as we kind of wrap this up.

44:59
But I would be remiss if I didn’t ask about what are some of the biggest mistakes that you’ve seen people make through this process, as well as, you know, on the other side of it. When do people know that they really have a good deal? Because sometimes I think it’s really hard for founders, especially if they’re somewhat attached to like know that this is the right thing. So are there also criteria where you’re like, hey,

45:21
this is the right thing. You know, not that you would tell somebody that, yes, you should go sell, but these are strong indicators that this is a good thing. To that second point, I would say that’s why you need to start having conversations with, you know, M&A folks, because they’re going to be the ones that can tell you if a deal is good or not, because that actually depends, yes, on like what you feel and think and whatever, but also what the market is telling you. And you might not know that you’re.

45:50
first question was, what are some things that go wrong that we see that go poorly? Yeah. I would say not negotiating enough upfront and leaving negotiations till the end of the deal. The further along you get in the deal process, which can take nine months, 12 months sometimes, the more emotionally you invested, you are. And so the more likely you are to give on key points.

46:19
and you’ll end up with a less, you know, a deal that looks very different maybe than it did at the outset. So you need to negotiate as much as you can upfront. We also see folks too unwilling to share information at the outset, but I liken this to, you know, it’s like dating in your teens versus dating in your thirties. Like when you’re in your thirties, you’d know what you want because you’ve had all the other stuff. And so dating is like,

46:47
Let’s get down to it. Like what’s your credit score? Maybe not that level, but you should not be afraid to share things like top line revenue, profitability, because you’ll be able to rule out bad fits quicker, which should be your goal, right? MBA can be a very big distraction, and you don’t want that to distract you from running your business. Bringing in someone…

47:14
You know, an advisor too late in the process is also a mistake when too much has already been negotiated or, or, or promised. I think you always need to have in the back of your mind that this might not work out. Right. So just know what a worst case scenario looks like and be okay with, with that. Um, so that means that you have to continue to focus on, you know, bringing new business in yourself.

47:42
Right? Like you can’t have a down year because you were focused on an M and A deal that went to South. Like that’s just setting yourself up up for failure. We also see mistakes where people don’t pay attention to the right cultural yellow flags. Remember that you’re going to be working for someone else now for two to three years. I mean, that’s a, you know, that’s a chunk of time and you don’t want to be miserable.

48:09
So especially if you’ve been running your own show and now you have a boss. Yeah, exactly. If there are things telling you like, I just don’t think this is going to go the right way. Like they’re not asking the right questions or they’re not letting me talk, then get out before it becomes too serious. That’s helpful. All of those being very important considerations. The first one.

48:32
when you were talking about the emotional hangover you get if you continue and it sounds more like a divorce negotiation than anything. So that was kind of like a little bit counter to the relationship we’re trying to build but it was just kind of funny as some of the analogies, how they kind of play out. But I think that’s very important. I wanted to specifically highlight that last one and we’re not gonna get into it now.

48:58
in depth, but it’s really important to realize that and set yourself up for being in a different space come the sale, that you aren’t going to be running your own show anymore. You are going to have a boss. This is not going to be exactly how you’re going to go do it. Making sure you’re preparing yourself for that. And I totally agree with you, Jonathan, using an M&A advisor, especially if you do and your knowledge of these kinds of service oriented businesses is

49:26
So, so important. I mean, it’s not something you want to be going on and going after on your own, especially when you talked about initially, which I hope people heard, that you should probably be starting to have these conversations two to three years before you’re thinking about selling. So that is a process and that process needs nurturing and needs development. And that also helps you not make a poor knee jerk reaction if you’re getting to the point where I’m like, I’m done, I’m out, I want this to be over with today.

49:54
Yeah. So anything else to say about that? No, you said it all. All right. Sounds like we’re ready for rapid fire. That’s what I’m hearing. Yes, but I think I think so, too. So we’re going to go to some rapid fire questions. This is just to, you know, get to know a little bit more about you outside of this topic. And then I’m going to give you an opportunity to wrap this up. So our first rapid fire question, and this one’s a little bit of a softball. So I hope you you hit this one out of the park, your favorite beer.

50:22
Oh, Monday night brewing. You want to say why? It’s a brewery that I own. Just say a little bit more about the brewery. Give us a little bit of that back issue. Cause I think it’s really important to set the context for why you are also a very credible source for this conversation. Yeah. I started a brewery with two friends, now business partners in 2011. Grew it. It’s now 200 employees, six locations.

50:52
Holy cow. The bigger it got, the less fun I was having. And so I realized I was built for something smaller. We actually years ago went through the M&A process and got left at the altar by a buyer. And that is what fueled my interest in M&A is being a bad seller effectively. And so I wanted to help coach folks on how to do things differently and better than I did.

51:19
Learning from your mistakes. I love it. All right. Next rapid fire. What are you reading or listening to right now? I’m listening to the economics of everyday things, which is a fun economics podcast. Current episode is on the beef industry. I just finished read rising the book. I read for pleasure, not for business. And so I tend to go in for nonfiction and every once in a while, a thriller and

51:49
some fantasy stuff. Love it. The last one is, what’s the best way or what’s one thing that you do to take care of yourself? I run. You run? Yep. You speak an April language. Same, 100%. Which I can’t. Today I trudged through the snow as fast as I could because I couldn’t run. We have an Australian Shepherd, which also forces me to run because he needs a lot of exercise.

52:18
I have a German Shepherd mix, so I feel you on that too. Yeah. Awesome. Jonathan, thank you so much for being here. I’d love for you just to wrap it up for us. Give us anything that we may have missed, any other words of wisdom, and then of course tell people where to find you. Yeah, we created a little webpage for your listeners. So punctuation.com slash strategic council, and you’ll be able to book time with me directly

52:46
There’s links to some of our free resources. We put out a weekly newsletter that’s chock full of information and learn a little bit more about what we do. Someone put that in the show notes. Everybody can get that link. And with that, we’ll say, we encourage you all to take at least one powerful insight you heard and put into practice. Cause remember strategic counsel is only effective if you put it into action. Did we spark something with this episode that you want to talk about further?

53:14
reach out to us through our website, fort We can help you customize what you have heard to move your business. And make sure to follow or subscribe to Strategic Counsel on your favorite podcast platform.