John Corcoran 10:37
thing I’m curious about, and the nature of the way the business is structured, now you make money when when a transaction happens, but imagine you, potential clients come to you all the time. They’re like, oh, I want to sell but you discover, when you look under the hood, there’s a bunch of things that need to be done. And so the challenge for you is, you know, in any profession, where it’s kind of a brokerage, and you get paid based on commission, based on a transaction happening is, on the one hand, you want to make a transaction, on the other hand, you want to, you know, be an advisor how trust and eventually make a bigger transaction in the future. So how, I’m not sure where I’m getting at with this question, but but when you have clients come to you like that, and in your field, like, well, if you really want this number, then you got to work on it for a couple years, you got to put a lot of work and you know, talk a little bit about the challenges of doing that for you.
Todd Taskey 11:30
Yeah, so that’s a great question, because because we do this quite a bit. First of all, most of the clients we work with are at least a million of EBITDA. Right. So there’s a reasonable size to the business. From that standpoint, that is the very lower end of lower middle market as people define it. So we’ll have clients. So for example, if you’re a digital marketing is what we do a lot of, if you’re a digital marketing firm, and you’re about a million and most of its recurring revenue, and you’ve got good retention, and on and on, at a million, there’s a value probably between six times and eight times that million dollars, six to $8 million. If you think it’s worth 10, or 12, to your point, we get paid for a transaction, I am very confident no one’s going to pay you 10 million for their business, because I’m in this space all the time. So we’ll just take a pass on it. If somebody says, this is, I think at a million dollars, I think six to eight is about the right number. But it depends on where the fit is. And you know how we’re going to view and step into the next several years. And so what I tell clients is because we get a small fee up front, which is 10s of 1000s of dollars, maybe. And what we tell clients is it is the best consulting that you could ever hope for or pay for. Because if I said between six and eight, and we got four offers, and they were all at five and a half million, we’ll know why they offered us five and a half million, because your retention is not quite where the market is, or because your reoccurring revenue is only 70% of your total revenue, not 90%. Or you’ve got customer concentration or a whole bunch of things. But you’ll hear the same thing over and over and over again, when we go talk to potential acquires. And since you’re going to work hard over the next two or three years anyways, why not understand the things that the market values most specifically about your business, and then go work on those things, go and prove those things. And what we find that talk about this all the time, there’s two problems that we solve with our transactions when we do a transaction with the client. And the first one is money. Right? Can we get about the right amount of money for the value that you have built into your business? And the answer that John has always yes, because otherwise we wouldn’t do a transaction. So that’s number one. Number two, though, is a fill in the blank. And the blank is something like we need a better sales organization, I need to offer additional services that I don’t know how to do, I need a bigger balance sheet, I need access to those type of customers. So when I can combine getting reasonable value for the business, part of that value is comes in equity in the bigger company. So you still have a lot of upside. And we solve for whatever your biggest challenge has been in your growth. That’s when people start to get excited about a transaction. Even if it’s well before they envision themselves retiring and not doing this anymore.
John Corcoran 14:45
This is probably a good segue into kind of the area that you focus on you so much so that you even named your podcast after the Second Bite podcast. So so first of all, explain to me what that means. Why do you call it the Second Bite podcast?
Todd Taskey 14:59
Well There’s the way we view the world, there’s two types of transactions, there’s the exit transaction. And then there’s the evolutionary transaction. The exit transaction is, you know, I’ve been doing this for 20 or 30, something years, I don’t want to do this anymore, I don’t want to do anything anymore. So sell the business, get me as much as you possibly can. And that’s what I’ll do. And that’s relatively easy. It’s very binary decision, whoever has the most amount of money to close, you take that off. The evolutionary transaction is one where let’s stick with the numbers of $8 million. On that $8 million, you might get paid 5 million in cash, and 3 million in equity in the acquiring company. So you have a significant part of that business. And you play a specific role in that business going forward. And it solves all those challenges and problems for you, that you either couldn’t or didn’t want to solve for yourself. Right? Yeah. And so my experience with those has been, you know, just large successes, we did a transaction, we have a great company that’s in Colorado Springs, digital marketing firm, they were doing about 2 million of EBITA on 10 million of revenue. So their transaction, they got high single digit millions of cash at close, and they kept 40% of the business. Today, three years later, John, that business will close this year at 17 million of EBITDA up from two to 17 million in three years. They did for acquisitions, my guys have been reduced, they own about 24 25%. Now, but I would guess that business is probably worth 220 to $130 million. And my guys are having more fun than they’ve had over the prior 10 doing almost the exact same type of thing. So, listen, do this over and over again.
John Corcoran 17:03
Yeah, I, I made just a lawyer means I was thinking about the worst case scenario type of thing. We’d love to hear the success stories. But to be devil’s advocate here, or if someone’s listening to this and thinking, oh, yeah, but you know, I’ve heard a horror story about someone who sold their business and it didn’t work out that well. How do you protect against that sort of thing, being a wrong fit, not going? Well, that sort of thing?
Todd Taskey 17:27
Yeah, to two ways. Number one, you have really good documents. And the documents, you’d like your operating agreement, if there’s an earnout, right earnout is not equity. earnout is additional that you get over time earnout, you you have to have control of your business until you’ve gotten your full earnings. They can’t change the rule, they can’t change the business, a whole bunch of things, but really, really good documents. And the other thing is to have a really, really good strategic fit up front. And this, for example, I mentioned to you, if you get three or four or five offers, right, if we do a full process with clients, and we get multiple offers, we don’t have to take something and hope for the best. That’s where you get into trouble. That’s where somebody says, Listen, John, the buyer wants to hear this, make sure you tell them this. And you say yeah, but that’s not really what I’m feeling. John, we got to get a deal done. Just tell him, right? Yeah, if you’ve got four or five interested parties, see, John, just tell the guys whatever you think. And if we lose two of them, so be it, we got three that are interested, right. And so you when you’re not trying to fit the the round hole into the square peg, then it gives you a much better chance for future success. And on all of these over my shoulder 100% of my clients have gotten their full earnout. Sometimes it’s inequity. So they get it right at close, sometimes it’s over a period of time, but they get it and they get it mostly for those two reasons.
John Corcoran 19:08
Imagine, do you ever find yourself in the position of when it comes to the burnout? advising them to to be more cautious with it to ensure that they do get that urn out when it’s
Todd Taskey 19:20
not you know, in close? Yeah, this might be the best takeaway, because it’s a little gem. But here’s what happens. For a deck that we’re putting together now, any deck that we do, people are gonna say what are these guys going to do in 2023? And here’s the gem, whether you project 15% growth, or 50% growth. Number one, nobody believes it. Number two, they’re gonna pay you the same amount of money for the business because of point number one, right? They don’t believe it, but they’re gonna hold you to it to get your earn out. So I’ve got clients who do 25 30% growth For years, our projections 20%. The bar says, Why are you guys projecting 20%? I say, because that’s what my guy does every year. He always projects 20% It doesn’t have some big sophisticated thing. He projects 20% growth. That’s what we’re gonna do. Judges based on that. And they do. And my guy hits it, and he gets it and he wins. And he probably doesn’t like 25 or 30%. Right? Yeah. So from that standpoint, projecting a bigger number never gets you anywhere. And buyers in almost every deck, see this big hockey stick starting next year? It’s a little bit tiresome for buyers. I would think it’s nonsense. Right?
John Corcoran 20:42
Right, right. Now you had another client that this is kind of more of on the horror story and from the buyer from the sellers perspective, because he had a company that was doing one almost 2 million in EBITDA and had an offer on the table a bit, they passed up. Walk us through that one.
Todd Taskey 21:01
Yeah, so and this happens sometimes, when guys get just too focused on what’s immediately in front of them, as opposed to the big picture. So this is a client, and we got a great offer for his business, he got 12 million a cash, 3 million of equity. All I close, it was the greatest loi I’ve ever brought to a client and couldn’t, couldn’t couldn’t stop patting myself on the back. And he said to me, yeah, you know, I think I’m gonna take the other offer. And the other offer was a private equity offer. And it was mostly because he wanted to do his own thing. He want to be his own man built his own business. So it’s hard to fault somebody for that. Fast forward four years, that $3 million dollars that business has sold, his 3 million would have been worth about 40. Wow, in addition to the 12 of cash, says about a $50 million mess. Wow. But anyways, we went on to the private equity group, we got to the private equity group. And my guy just would not stop negotiate. He wants to be paid on his forward multiple. He doesn’t want to have a non compete. He does he wants to negotiate on the reps and warranties on the amount of working capital on and on and on. And he went in the private equity groups. He said, We’re done. We’re out. Forget. I said, No, no, no, don’t forget it. But look at these guys in Colorado Springs, I think you would like them. They’re very similar type of business, different personality. Those are the guys I told you about earlier. And that’s been about a $50 million win for those guys. And my guy three years later, is slightly above 2 million today.
John Corcoran 22:47
So yeah, yeah. So mental growth versus exponential, basically correct.
Todd Taskey 22:53
So as I say, as I’ve said to him, because we stay in touch, I say, Listen, the lessons are hard, man, but you got to benefit from those lessons. So from that perspective, he hasn’t written his last chapter yet. And I’m sure we’ll get a good outcome for him eventually. But it really hurts when you miss like that
John Corcoran 23:15
first. Yeah. Well, on that topic of when to stop negotiating, how do you know when to stop negotiating? You know, for many, these the sellers, very different scenario, from their usual negotiation that they would do in the course of their business. This is something that you do, maybe once in a lifetime, maybe twice in a lifetime, not very often.
Todd Taskey 23:33
Well, so one rule is, when I tell you, John, you have to listen, stop, you have to stop. That’s
John Corcoran 23:40
probably, that’s a big red flag right there.
Todd Taskey 23:43
100%. But to your point, you will push it as much as you can, right. And you know, how we will oftentimes operate, we have a deal like this right now, where we have four offers for a business. And I asked my client, which rank them forget the value rank who you want to be a part of. And so he has 1234. So number one, that he wants to be with his number two in the offering, and not missed by less than 10%. I called him on Friday, and said, Listen, here’s the good news. Good news is you’re you are the preferred landing spot for John in the company, not not your job, right. And here’s the two or three areas we need to we need to improve. And if you can do these two things, and we’re done, and that makes it easy. Sometimes you’ll come back and say yeah, I can’t quite get there on cash, or I can’t quite get there on equity. I can’t do this. I can’t do that. And then my guy has to make a decision. You want to be a part of these guys. You want to be for a little bit less or part of those guys for a little bit more. And you know, they’ll kind of make the decision. But in either case, you go in there with strength and this is really important to another call this number two Tibbett it’s gonna get bumpy during due diligence because it always does it 60 days, and it’s hard and there’s gonna be stuff that they didn’t like and stuff you didn’t like, it’s all part of the process. The group you signed an LOI with, they need to be high fiving each other after we sign that they won the LOI. This is their company, they know it was competitive. And they were the best choice. Because when we start to hit those bumps in the road, I want them thinking, listen, we fought hard enough to get this, I understand he’s off by a little bit here, or is retentions not as great as we thought here, this is different or that’s different. I don’t want to jeopardize and those other groups, we can always go back to if need be. So going through that process is an important part of getting the kind of return and results that our clients who are looking for
John Corcoran 25:55
what you’re talking about is so interesting to me, because it’s really in how you kind of communicate to the other side to make them feel like it’s a win. And it’s a good segue, because I was going to ask you about this. When I was practicing law, I think, for a lot of clients, the more savvy clients got it, a lot of clients didn’t, they didn’t realize that your representative, which is you in this case, doesn’t have to be exactly aligned, or the same persona as your seller. In other words, like, your representative can be good cop can be bad cop, they can, they can throw wild offers, they can, they can do a variety different things. It’s like a bribe different jujitsu moves. So speak to that a little bit about the kind of different ways that you can be separate from the seller that you’re representing. And you can take on kind of different personas to achieve your strategic and negotiation objectives.
Todd Taskey 26:55
Yeah, so that’s a great point, too. Because when we, you know, from from a seller standpoint, they’re looking at let’s identify a buyer and try to negotiate a deal get that deal done. For us, we have a wider aperture on that. And I would say to you, John, I need to have different pieces on the board. Because you’re a $10 million business. We can’t push anybody around 10 million bucks. Right? Yeah. So what we can do, though, is position other people so we can push them because of the process.
John Corcoran 27:29
So like, for example, having other buyers in play, right?
Todd Taskey 27:33
exactly correct. Yeah. If if I call you and say you have to have your offering by Friday. And if you show up on Monday, right, so I draw a line in the sand, you show up on Monday, right? So they’ve called the bluff and one from that standpoint, if I call you and say, Hey, John, all of our, you know, our process is letters do indications of interest to do on Friday. And Johnson super excited to get an offer from you? Are you going to be on time? And if the answer is no, we talked about why the answer’s no. And when are you going to be on time? And what can we do? How do we make it work. But you and I are working together to solve what your problem is because of the market for this company. I think what you’re getting
John Corcoran 28:19
at is, is when a client maybe undermines you by by saying, you know, oh, they came in with the offer late. I’ll take it anyways. That like what yeah, that
Todd Taskey 28:29
is a good point, because I’ve never really happened. But what when we’re lining up the pieces on the chessboard, you and I are also deciding how are we going to play? What are we going to play? Right? So here’s what I’m going to take them with, here’s what you’re going to take, here’s what you’re going to say, here’s what I’m going to say. And by the way, I can just keep hitting and hitting and hitting. Until Until we find out the answer is no. Until we find out he won’t go any higher. And then you can reach through the back door and say I just found out Todd was pounding you like that. I just shut down my God. I mean, let’s, if that’s the number then that’s the number. My goodness, I didn’t realize. Right. Yeah. So when you have a team, it’s just a lot more effective way of doing that,
John Corcoran 29:18
to me is one of the big advantages of not negotiating on your own, you know, because that gives that separation. You know, which is correct. Notice huge advantage. Yeah,
Todd Taskey 29:29
yeah, number one that number two negotiating with multiple parties at the same time. And then we know if if the issues are reasonable or not, right, and I don’t go back to the potential other buyers number two, three and four on that list and say your offers too low. I just tell them how they stacked up verse the other offers. So we had four offers you were number four, by a big distance or you’re number four To get you to the top, I mean, that was like 15% More, you’re not that. I mean, that’s that’s how tightly bound the offers were. If you really think there’s an opportunity here, we can get you to up to number one. Now I personally, I wouldn’t do that unless my God wants to be with that number four. But if I do my job well, and doing my job well means all the way from the very beginning of how we put the deck together, put the financials together, start doing phone calls everything. If I do my job, well, I can get the place you want to land to also match up to be the the company that provides the top dollar amount. Right, because that is what the market says it’s worth.
John Corcoran 30:44
I recently interviewed one of your other clients, Matt Sunshine of the Center for Sales Strategy was another company that you got a case study on that they did a deal to talk, talk us through that one.
Todd Taskey 30:59
Yeah, so Matt’s deal was interesting, because he had a 5050 partner, and he wanted to buy out his partner because he was 10 or 12 years older. And he wanted somebody that would help him grow Centre for sales strategy into a much bigger business, right, and offer different services and do all that kind of stuff. And so, Matt, like everybody wants fair value for his business. But he wants it from the right buyer with the right vision and the right thoughts. And it feels like we think alike, and like each other and like the same things. So that is different. And this is what makes our transactions I think, more fun. Because it’s not just economics, economics is, you know, very binary, higher or lower, more or less, and that’s easy. But the other component, who can we get to the promised land with, right, as I like to tell clients, I said this to Matt, you’re the first transaction, once we get it done, you’re still flying commercial. It’s the second transaction where maybe you get to fly private. So let’s focus on that focus on who can help get you there, based on their thoughts on the marketplace, their past track, record, how they build companies, you know, on and on. And, by the way, on our podcast, Second Bite podcast, I probably have a half a dozen private equity guys that we’ve interviewed from time to time that talk about, this is what we look for. But once we have one of these guys, man, this is the stuff that we do with them. It works every time. Because we know how to build businesses, if we find the right dynamics in an entrepreneur up front.
John Corcoran 32:41
Talk about what the value has been for you interviewing talking to some of these private equity companies on your podcast, I know that you’ve had some great, you know, representatives of them interesting. PE companies.
Todd Taskey 32:55
Yeah, I mean, private equity, private equity, guys are at the level idea with you cannot financially engineer a success. You have to grow a success. We need more people here, not less people, we got to hire more, we got to do more. We got it. We’re excited. We’re doing a whole bunch of stuff. Those people are business builders, and they’re great. And they’re focused on growth, and they’re not afraid of anything. So from that perspective, they’re great people to talk with. And again, if you go on the podcast, you’ll see a few of them that have been on there. And, and so what you learn from them, I had the guys from mangrove capital on these guys are on their fourth fund, John, their first three funds average, four times the investor return. So if you put in 100,000, you get 400,000. out at the end of the fund, they’ve done this over 30 years. Something’s going on there now. Right? The guys at boathouse, Bill Dyer. Fantastic. Same thing, long term, long track record, right? Everlane, same thing, mountain gate saints on and on life. So these guys have a formula, they know how to do it, and they know how to work it. So there’s so many of them where I say, Man, if I could get my money, in this case, my clients money next to a group like that, whether it’s the beginning stage, right, the what they call a platform company, and a lot of my guys are small, too small to be a platform. So Dean,
John Corcoran 34:38
what does that mean your platform company? Say it again? What does that mean? A platform company.
Todd Taskey 34:43
A company means you’re the first we’re going to start with you and then we’re going to build on top of that. Got it. And then the other form are tuck ins. So we have you and then we’re going to talk in other companies. So one case study at the end they’re worth e-commerce, and Dean
John Corcoran 35:00
Then assign a virus Great, yeah, great guy,
Todd Taskey 35:03
the terrific guy, his business is right in the range, we talked about roughly around a million issue VIPA, he said I want to be, I want to partner with private equity and grow big business. There’s a team, there’s typically private equity need to be four or 5 million of EBITDA. I’m like, you’re just not there. But I’ll tell you what we could do, which would be great, if we found a place to tuck you in, where they were in the early stages of growing that business. So we sold them to a company called smartbug, out of California, American discovery capitalist, a private equity group there, it was the very first tuck in to that business. So Dean’s gonna get all of the accretion, almost the identical economics, that the founder that the platform company at smartbug had on a million dollars of EBITDA. So his in private equity, when they get a platform company, they expect, they’re gonna get between four, and call it eight times on whatever the investment is. Right. So if somebody were to roll forward $1 million, when they eventually exit, that, hopefully, will be somewhere between four and 8 million, could be less, could be more, but that’s what expectations are. But in addition to that, it immediately solved some of Dean’s problems, why they have 200 customers, they’re not doing any email marketing for any of them. And they’ve got a sales team in doesn’t need sales, doesn’t, right, and so you get the fish in the barrel concept. And so when you get to my earlier point, so now I get cash, I get really good partners. And I get all my marketing really solved for me. Geez, yeah, I’ll do that deal. Now. And so that’s what we did. For Dean, it was great. It’s been a great success. We’re,
John Corcoran 36:58
we’re almost out of time. But I want to ask about when you see, what do you see as best practices when you see a private equity group that rolls together a bunch of these different companies in order to make them really gel together, you know, to cultural fit and kind of synthesize what what do you see as kind of best practices.
Todd Taskey 37:18
So two things jumped to mind. Number one is culture, right. And that’s hard. So you got to work through that and just think about it and see if you like the guys or not, but number two is treating me like a partner. And so this will be our gym number three for the day. So oftentimes, in a private equity deal, let’s just say the value company has 10 million bucks, I say, John, I’m gonna give you 7 million in cash, and you’ll have 30% equity. Guys, great, that makes sense. What really happens in the world, though, is private equity is going to in my example, here is going to go borrow $3 million. So in reality, when you close on this business, and you’ve got 7 million bucks and 30%, the company has $3 million of data. In reality, private equity, put in 4 million, and you put in 3 million. So you put in three out of seven, that’s 41.6%, not 30%. The guys in Colorado Springs, that’s the deal we did with private equity. That particular private equity firm. We didn’t have to ask them. They said, Geez, man that we’re, if we’re partners, man, this what we do is how is how it goes. Others are like, wow, you know, we got this and this and this, and you’re getting all $7 million. And then there’s a whole bunch of other things, right? Who gets the first preference of money paid out how to distributions go? Do we get a yield on our money, all that kind of stuff. But if I were to sum it up, it would be other than culture, you should treat as apart. full transparency on everything. Hmm.
John Corcoran 38:59
All right. Last question that I always enjoy asking. I call this my gratitude question. So I’m a big fan of expressing gratitude to peers and contemporaries who’ve helped you along the way. So who would you want to just shout out and thank for helping you in your journey, Todd? Yeah,
Todd Taskey 39:15
I’ve got two really good ones. Don Keninitz is a CPA extraordinaire here in the DC area. He’s with E. Cohen. He’s been on my podcast. Don has taught me so much, just about the grind of due diligence and financials in the rest. But I’m super appreciative because he gets so much more for my clients by understanding at a high level, he brings knowledge and access to the size of deals that I work on that that is typically reserved for people 10 times that size. So Don is one and then also David Schwinger, who is an m&a attorney. He’s tremendous. He’s not as funny as he thinks he is. A lot of his jokes are kind of lame. However, he creates. And I tell this to clients, now he is an attorney, you know, he is an attorney. So he creates friction in in transactions. And we are almost always the beneficiary of, of that friction. A lot of lawyers like to create friction, because it’s in their nature, and it’s who they are. David does it with the express purpose of getting a better result, which is usually better protection for my client for his client, which is the same person. And because of that, I don’t have back ends and loi as to the back ends and earnouts and the rest that don’t come to fruition. So, because this work is so important to me, and those two guys make me dramatically better at what I do. I appreciate them. Equally and very much
John Corcoran 41:01
we could have a whole nother conversation about similar to what we were talking about with you and the separation between you know, the the representative and the the seller, ways in which to use an attorney where they can kind of give you leverage and friction as you mentioned, you know, if you if you use them strategically, but for another podcast, ah, this has been such a pleasure. Where can people go to learn more about you?
Todd Taskey 41:25
Potomacbusinesscapital.com. You can also find me on LinkedIn, which is pretty easy to do. And we’re good about using that and connecting so I can be found there
John Corcoran 41:37
and go listen to and subscribe to the Second Bite podcast, which is excellent, Todd. Great job. Thanks so much. You bet, John. Thank you.
Outro 41:44
Thank you for listening to the Smart Business Revolution Podcast with John Corcoran. Find out more at smartbusinessrevolution.com And while you’re there, sign up for our email list and join the revolution. And be listening for the next episode of the Smart Business Revolution Podcast.