9. 1. Where is your company in the Inbound Revolution?
2. Are you positioned to buy?
3. Are you a candidate to sell?
4. Hallmarks of a well-run firm
5. What is your business worth?
6. Parting words of wisdom
AGENDA
12. INBOUND15
1. The small happy “family”
2. Conservative, organic growers
3. Aggressive entrepreneurs
PERSONAS OF BUSINESS OWNERS
Contentment
Modest growth
Big dollar potential
13. INBOUND15
1. The small happy “family”
2. Conservative, organic growers
3. Aggressive entrepreneurs
Understand how M&As work…
PERSONAS OF BUSINESS OWNERS
14. INBOUND15
1. The small happy “family”
2. Conservative, organic “farmers”
3. Aggressive entrepreneurs
Understand how M&As work…
…MAY BE MORE DOABLE THAN YOU THINK!
PERSONAS OF BUSINESS OWNERS
15. INBOUND15
PROFILE OF INBOUND PROVIDERS
2015 HubSpot Partner Benchmark Survey
All Partners Gold + Platinum
Age of firm 2-5 years 2-5 years 2-5 years
Total revenues $100K - $500K $100K - $500K $100K - $500K
Number of full-time employees 2-5 2-5 26+
Annual revenue growth < 10% 21 to 50% 100%
Operating margin 11 to 20% 11 to 20% 11 to 20%
Cash to support expansion < $50,000 < $50,000 $100K - $250K
Average service fees $3K - $5K $5K - $10K $5K - $10K
Percent business = inbound < 25% 75% - 99% 100%
Most Common Responses
16. INBOUND15
PROFILE OF INBOUND PROVIDERS
2015 HubSpot Partner Benchmark Survey
All Partners Gold + Platinum
Age of firm 2-5 years 2-5 years 2-5 years
Total revenues $100K - $500K $100K - $500K $100K - $500K
Number of full-time employees 2-5 2-5 26+
Annual revenue growth < 10% 21 to 50% 100%
Operating margin 11 to 20% 11 to 20% 11 to 20%
Cash to support expansion < $50,000 < $50,000 $100K - $250K
Average service fees $3K - $5K $5K - $10K $5K - $10K
Percent business = inbound < 25% 75% - 99% 100%
Most Common Responses
17. INBOUND15
PROFILE OF INBOUND PROVIDERS
2015 HubSpot Partner Benchmark Survey
All Partners Gold + Platinum
Age of firm 2-5 years 2-5 years 2-5 years
Total revenues $100K - $500K $100K - $500K $1M to $2M
Number of full-time employees 2-5 2-5 26+
Annual revenue growth < 10% 21 to 50% 100%
Operating margin 11 to 20% 11 to 20% 11 to 20%
Cash to support expansion < $50,000 < $50,000 $100K - $250K
Average service fees $3K - $5K $5K - $10K $5K - $10K
Percent business = inbound < 25% 75% - 99% 100%
Most Common Responses
24. INBOUND15
WHY BUYERS BUY?
1. Increase REVENUE and/or PROFITABILITY
2. Strengthen MANAGEMENT team (including potential successors)
3. Add COMPLEMENTARY TALENT & capabilities (technical, strategic, branding,
PR/content, etc.)
4. Gain access to seller’s CLIENTS
5. Expand GEOGRAPHIC footprint
6. Position the company to be MONETIZED
25. INBOUND15
DO YOU HAVE WHAT IT TAKES TO BE A PLAYER?
1. Clear VISION of the how an acquisition might enhance your business (are you
buying talent, capabilities, managers/successors, revenue, cash flow?)
2. An UNDERSTANDING of the M&A process & a good team of advisors
3. TOP-LINE REVENUES of > $1 million or approximately 3x value of the target firm
4. Access to CASH to fund 20% to 35% of the purchase price upfront
5. Consistent CASH FLOW, ideally 15% to 20% of Adjusted Gross Income, to fund debt
service and grow your business
27. INBOUND15
POTENTIAL DEAL ELEMENTS TO ACQUIRE
PROFITABLE, GROWING FIRMS
1. CASH (20% to 40% of the deal value)
2. GUARANTEED DEFERRED PAYMENTS
3. EARN-OUT PAYMENTS that offer the opportunity for increased value
4. EQUITY in the larger enterprise
5. PHANTOM STOCK PLAN
6. EMPLOYMENT CONTRACT
28. INBOUND15
PHANTOM STOCK PLANS
1. CONTRACT to pay benefits upon certain triggering events; i.e., the sale of the company
2. You custom DESIGN the plan elements
3. Can include a VESTING schedule
4. Can base the payouts on APPRECIATED value
5. NOT REAL EQUITY so you are not required to share financial information or buy back
shares
6. Ownership is not DILUTED
30. INBOUND15
SAMPLE CASE #1
Buyer: Inbound marketing agency
Seller: Inbound marketing agency
Seller’s revenue: $1,400,000
Seller’s EBITDA: Negative $75,000
DEAL TERMS:
1. Down payment of $100,000
2. Commissions of 20% of AGI in excess of $900,000 for two years
3. Six-month consulting contract of $75,000 for seller
31. INBOUND15
SAMPLE CASE #2
Buyer: Inbound marketing agency
Seller: Web development & digital marketing
Seller’s revenue: $700,000
Seller’s EBITDA: $53,300
DEAL TERMS:
1. Down payment of $50,000
2. Deferred payments of $60,000 per year with earn out safeguards
3. Phantom units in Phantom Stock Plan
4. Employment contact for owner
32. INBOUND15
SAMPLE CASE #3
Buyer: Integrated marketing agency
Seller: Design firm
Seller’s revenue: $1,700,000
Seller’s EBITDA: $168,000
DEAL TERMS:
1. Down payment of $300,000
2. Commissions of 15% of AGI above $1,100,000 for a four-year period
3. Employment contracts for two principals
36. INBOUND15
WHY SELLERS SELL?
THE NOT-SO-GOOD REASONS
1. Unable to achieve PERSONAL FINANCIAL GOALS on own
2. Burdened with DEBT
3. SALARY lower than Fair Market
4. NO GROWTH
5. LOSS of big account(s)
6. No BENEFITS or 401K
37. INBOUND15
WHY SELLERS SELL?
THE NOT-SO-GOOD REASONS
1. Unable to achieve PERSONAL FINANCIAL GOALS on own
2. Burdened with DEBT
3. SALARY lower than Fair Market
4. NO GROWTH
5. LOSS of big account(s)
6. No BENEFITS or 401K
DISTRESSED BUSINESS ?
=
OPPORTUNITY FOR BUYER
38. INBOUND15
WHY SELLERS SELL?
THE NOT-SO-GOOD REASONS
1. Unable to achieve PERSONAL FINANCIAL GOALS on own
2. Burdened with DEBT
3. SALARY lower than Fair Market
4. NO GROWTH
5. LOSS of big account(s)
6. No BENEFITS or 401K
DISTRESSED BUSINESS ?
=
OPPORTUNITY FOR BUYER
&
STILL COULD BE A GOOD DEAL
FOR SELLER !
39. INBOUND15
WHY SELLERS SELL?
OKAY REASONS
1. Be part of a GROWING ENTERPRISE
2. EQUITY opportunity with larger enterprise
3. Play on a BIGGER FIELD
4. EXIT plan
5. Greater LIFE BALANCE
6. Be RELIEVED of management and administrative responsibilities
40. INBOUND15
WHAT BUYERS DESIRE
1. Net after-tax CASH FLOW
2. CONFIDENCE cash flow will persist
3. SYNERGISTIC savings
4. LEVERAGE opportunities
5. Ability to INCREASE VALUE
6. Fit with their STRATEGIC PLANS
41. INBOUND15
PREPARING YOUR BUSINESS FOR A SALE
1. Paint a PICTURE of what your company can be or do
2. Create a MARKET
3. Seek buyers that can leverage your resources and realize SYNERGISTIC savings
4. Address key DEPENDENCIES & VULNERABILITIES
5. Demonstrate stability and CONSISTENT CASH FLOW
6. Get your financial RECORDS IN ORDER
7. LOCK IN key employees
8. Confront potential “DEAL KILLERS”
9. Have a realistic expectation of your FIRM’S VALUE
42. INBOUND15
Key Value Drivers
What buyers look for…and sellers should flaunt!
Factors that impact the multiple or company risk factor in VALUATIONS
1. Consistent cash flow > 15% to 20% 7. Diversity/longevity of accounts
2. Strength of senior management team 8. Sales trends/growth potential
3. Limited dependence on owner(s) 9. Lack of debt/long-term obligations
4. “Golden handcuffs” for key people 10. Financial controls and reporting systems
5. Market niches/specialty services 11. Reputation & goodwill
6. Systematic approach to new business 12. Technology/digital capabilities
43. INBOUND15
Key Value Drivers
What buyers look for…and sellers should flaunt!
Factors that impact the multiple or company risk factor in VALUATIONS
1. Consistent cash flow > 15% to 20% 7. Diversity/longevity of accounts
2. Strength of senior management team 8. Sales trends/growth potential
3. Limited dependence on owner(s) 9. Lack of debt/long-term obligations
4. “Golden handcuffs” for key people 10. Financial controls and reporting systems
5. Market niches/specialty services 11. Reputation & goodwill
6. Systematic approach to new business 12. Technology/digital capabilities
44. INBOUND15
Key Value Drivers
What buyers look for…and sellers should flaunt!
Factors that impact the multiple or company risk factor in VALUATIONS
1. Consistent cash flow > 15% to 20% 7. Diversity/longevity of accounts
2. Strength of senior management team 8. Sales trends/growth potential
3. Limited dependence on owner(s) 9. Lack of debt/long-term obligations
4. “Golden handcuffs” for key people 10. Financial controls and reporting systems
5. Market niches/specialty services 11. Reputation & goodwill
6. Systematic approach to new business 12. Technology/digital capabilities
46. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE
Net income as % of AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
47. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000
Net income as % of AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
48. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % of AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
49. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
50. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
51. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
52. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
53. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
54. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
55. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.)
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
56. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
57. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $175
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
58. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
59. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
60. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $250
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
61. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $250
Owner’s discretionary income
Billable to non/low-billable FTE ratio 1:5 1:25
62. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $250
Owner’s discretionary income $90,000
Billable to non/low-billable FTE ratio 1:5 1:25
63. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $250
Owner’s discretionary income $90,000 $350,000+
Billable to non/low-billable FTE ratio 1:5 1:25
64. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $250
Owner’s discretionary income $90,000 $350,000+
Billable to low-billable FTE ratio
65. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $250
Owner’s discretionary income $90,000 $350,000+
Billable to low-billable FTE ratio 1:5
66. INBOUND15
Key Financial Ratios & Metrics
TTG client database of 100+ marketing agencies between $500K to $5 million
Factor Average Top
Revenues per FTE $100,000 $250,000
Net income as % AGI after FMS 10% 35%
Labor costs as a % of AGI 65% 55%
Staff utilization rates (non-mgt.) 70% 95%
Average hourly billing rates $90 $250
Owner’s discretionary income $90,000 $350,000+
Billable to low-billable FTE ratio 1:5 1:25
77. INBOUND15
COMMON VALUATION METHODS FOR AGENCIES
1. Multiple of EBITDA (Earnings before interest, taxes, depreciation, & amortization)
2. Capitalization of historic earnings
3. Discounted future cash flow
4. Percentage Adjusted Gross Income
78. INBOUND15
Some Problems with the EBITDA Approach
• PRETAX estimates of cash flow
• Does not take THE FUTURE into
consideration
• Often results in UNREALISTIC VALUES
that future cash flow may not support
• Certified Valuation Analysts (CVAs)
frown upon the approach
EBITDA Is 'BS' Earnings
Forbes, November 13, 2014
“Beware of geeks bearing formulas.”
– Warren Buffett
Buffett’s long-time business partner,
Charlie Munger, expressed Berkshire
Hathaway’s position on this particular
formula best: “I think that, every time
you see the word EBITDA, you should
substitute the word ‘bullshit’ earnings.”
79. INBOUND15
Making Common Sense Out of Valuations
• Historic numbers don’t lie…high EBITDA or CAP RATE will drive higher value
• Valuations provide a BASE LINE FOR NEGOTIATIONS
• CAP RATE may be more realistic than multiple of EBITDA
• If buyers and sellers can agree on upside potential, DISCOUNTED FUTURE CASH FLOW
should be considered
• MULTIPLES are highly SUBJECTIVE
• Potential FINANCIAL SYNERGIES should be factored in
80. #INBOUND15
The ultimate definition of FAIR VALUE
What a willing buyer and
willing seller agree to when
neither are under undue
pressure to buy or sell.
