Ep 374: Buying A Digital Agencies Nobody Else Wants And How To Scale Them with Karl Hughes

There is a huge amount of information asymmetry in acquisitions, and typically it is in favor of buyers. Here's what I mean. We got to look at the P &Ls of at least 20 podcast production companies before we made an offer to the podcast consultant. That is a huge advantage.

Jaryd Krause here, host of the Buying Online Businesses podcast. And today I'm speaking with Carl Hughes. He's a former CTO and serial agency acquirer. And he founded Draftdev in 2022, which is a content marketing agency. And he scaled to 2.5 million revenue before stepping back from the data and data to operations.

So in 2023, he then partnered with his co-buyer to acquire the podcast consultant without a broker, sourcing the material directly through LinkedIn. And in this podcast episode, we talk about how he sourced that deal and how many companies he reached out to to find that business.

He also now hosts the retain trust podcast, and he's actively building a portfolio of niche digital service businesses in the one to five million range. He's acquired two great businesses, and he's looking at another acquisition at the moment. And we talk about his first acquisition, the podcast, a consultant, how much he paid for it, the multiple, how he financed it, and how he structured it.

Also, talk about the few things, the biggest things that he learned, and what he would share with you as a first-time acquirer. We also then talk about his second acquisition and how he merged that acquisition into his primary business, his platform business, DraftEv. And then we talk about his questions, and we flip the script, and he asks me a couple of questions on Menae Advisory and what I think about acquiring, giving a big portion of equity to the seller, versus vying mostly with finance.

Then he also asked me about how to merge the deal the right way in terms of team and offerings, cross-selling, and promotions, and what my advice would be with that. There's so much value in this podcast episode. I get to share, he shares a lot,t and if you're looking at buying an online business, I'm sure you're gonna absolutely love it. So let's dive in.

Carl, welcome to the pod. Thanks for your time.

Of course, Jaryd, it's good to meet you in Riverside. I know we're on opposite sides of the world, right? So we probably won't get to shake hands for a while.

Yeah. No, I live in Bali, Indonesia. I'm in Australia at the moment and do a bit of traveling, a lot of surf trips, and we'll meet. We'll meet. I'm sure.

Someday I want to get out there. Yeah, I have not been to Australia yet. I'm a big fan of traveling, though, and as my kids get older, I'm extending their reach further and further. So we'll make it out that way someday. Three and six.

So I just got back a couple of weeks ago from a trip to Spain. That was our international trip this year. Good, manageable trip for three and six-year-olds. They can walk a fair bit now. So it was pretty fun. But yeah, think, yeah, this is kind of one of our family goals.

What ages are they?

Stay traveling and mobile even with the kids.

That's why everybody listening to the pod is here. We want to spend more time doing what we love with the people we love. And normally it's our kids most. So that's why everybody wants to make an income through acquiring a business and scaling it.

That's why I wanted to bring you on. You started a business and scaled at this marketing agency, and you still own it with your partner. But then you decided, I think you grew up to two and a half mil, right? And then you just…

What made you decide to buy and acquire? And where did you come up with this growth by acquisition strategy? Where did that come from?

Yeah, sure. As you mentioned, the first couple of years of draft dev were wild. It just grew really fast. It was a bit of right place, right time. And then I write skills, write network, you know, it all kind of came to play.

If you gave me 10 more shots like that, I don't think I'd grow that fast again. It was just luck of the right time and place. I do think I'm a decent operator, but I don't think I'm that good. So anyway, that was a great out-of-the-gate entrepreneurial experience. So about three years in, I was like, I want to do something bigger.

Draft.dev is a great little company, but it works within a very narrow niche. does content marketing aimed at software developers. So there are only a few hundred companies that really care about that kind of marketing. It's never going to be a hundred-million-dollar business. There's just not a path to that. And so I wanted to work on something bigger. got together with my partner, a friend of mine, and we became partners through this, but I was like, let's go out there and just try to buy a bunch of these small really niche agencies and grow them and figure out, you know, what's the operating system to make these things work better without us day to day involved.

So we bought this company three years ago, called the podcast consultant, which does podcast production primarily for financial advisors and investors. So, a very good niche business, very focused, that had a very light team, a lot of freelancers, but not really anybody in permanent roles.

So we saw the opportunity to kind of come in there and operationalize it, take it out of the founder's hands, and take it to the next level. Our long-term vision initially was to kind of buy and continue buying. There have been plenty of little hurdles and learnings along the way.

We've not made any other large acquisitions, although we're currently under an LOI to buy another similar company that could change very, very soon. You know, we could dig into all the finer details of what works and what doesn't when you're buying small agencies, because it's been a fun ride, and I've picked up some things I think are good and probably some things that I would do differently if you gave it over to me again.

Sure, for sure. How many would you say you've acquired? And when did you start acquiring?

Yeah. So, like we acquired the podcast consultant three years ago, and then we acquired a small add-on last year, which was kind of a competitor to Draft.dev. We have offers out to buy a couple more this year. Those are still in progress, and they may fall through.

We've made a couple of other offers too, but that's been it as far as acquisitions go. We're not, you know, we haven't been operating at like lightning speed or anything, but to your point at the beginning, a lot of this is about balance for me and doing something that meets the creative and like growth I have, also, lets me not have to work 80-hour weeks. Cause I just, you know, I got other things I want to do.

Absolutely. I was going to say operating at lightning speed is not the best strategy. The faster you go, the faster things break, and the more mistakes you can make, the bigger risk you can typically take without seeing them.

So it's so much wiser to be very strategic and take your time and not rush. I think this is a common life philosophy. How did you even, how did you decide, how did you build your buy box? How did you decide what you wanted to acquire?

And did you know you want to acquire something that you were going to try and merge with Content Dev, or something that would run alongside it separately? How did you build your acquisition strategy?

So initially, my thesis was like all these small, let's call them one to three million dollar marketing agencies that serve various niches and subspecialties. They have a really hard time exiting, so there's an opportunity there where they get kind of undervalued, not many people buy them, and so a lot of times they just die, you know, and they never actually have an exit.

So that was one part of the opportunity. The other part I saw was running draft dev as it grew. It was like we had all these functions where we couldn't hire a full-time person, and we knew we had to bring up like accounting and bookkeeping and CFO work and even marketing, and some of the operational roles, they were all part-time fractional people.

And I just knew we were losing a lot of efficiency and having these fractional teams that kind of stepped in because obviously those are run by, we'd work with an agency or a consultant, and they have a markup on it. I knew there's like, there's something there. So, like I figure all these small businesses, agencies doing one to three million in revenue have to have these back office teams that are conglomerated from fractional people or the owners doing it themselves.

There's probably an opportunity here to merge several of these together and share those back office resources that are not sort of essential to the brand and the core work we do. So that was the initial thesis. What I realized as we've gone through this journey in the last couple of years has been while we've had periods where we've been able to really step away from the day-to-day in these one to $3 million businesses, it doesn't last for very long.

And part of that's because they're just such small organizations, there's not a lot of redundancy. So we have a key salesperson leave or something, and now we've got to step in there, and I've got to be the sales guy for the next few months until I get somebody on and trained and blah, blah, blah. So it really slowed down our ability to make more acquisitions and acquire.

So one of the big things we've been working on is figuring out how to build these things up big enough to where they can actually stand on their own two feet, have a little more redundancy, more of the key roles in place, and leadership hires in place before we continue on the path of more acquisitions.

And to be honest, one of the ways we're doing that is through add-on acquisitions rather than trying to add whole new verticals like we were initially thinking we'd do. Well, you know, again, we haven't maybe gone the direction we thought we were going to go. That's what this is all about, right?

That's what entrepreneurship is. You make a thesis, you try it for a bit, you say, okay, that didn't quite work the way I thought, but here's an interesting opportunity that opened up along the way. And you just kind of keep on that road until you eventually end up on the top of some mountain somewhere.

You don't know if that was where you're going initially, but there's a lot of like, it's again, like being opportunistic mixed with being honest about yourself, what you're learning and what you're doing that you like and don't like, and then trying to stay focused on the highest leverage things that we can do with our time.

So yeah, that's kind of where that's evolved. And so again, still pursuing acquisitions, but a little bit from a different angle than we initially thought.

Yeah, it's cool. I think it's fascinating how you found your first acquisition, a podcast consultant. How did you find it? I'd love you to share that with us. It's a little bit different than what most people are doing, going to the brokers and just looking through a bunch of listings that so many other people are looking at and fighting for.

Yeah, that's right. What I realized so there's this whole community of entrepreneurs that do what's called ETA or entrepreneurship through acquisition. a lot of them, obviously, this involves your community, but also, like, there are a lot of them that do this through their MBA programs at school.

So they go to graduate school, they raise some money from investors, and they go buy a small business. And they have these words that they've put behind all these things. They call it like, you know, you use a broker or a brokered search, or you have some kind of proprietary search, which means just I called outreach to a bunch of businesses to see if they want to sell.

What I realized was that, as a small business owner already, I had a huge leg up when it came to that proprietary search, as they called it. So I started meeting people doing this, you know, entrepreneurship, their acquisition stuff in MBA programs that were friends of mine who had gone to business school.

And I started to pick up that, that's a really interesting opportunity for me as a small business owner to go buy other businesses. But I was like, my advantage is I'm already a small business owner. I'm not some random guy who just got his MBA who wants to go run your, you know, don't know, chemical warehouse or whatever.

Like, I actually have some legitimacy here. So what we did was say, okay, what's an area of marketing? We think there's going to be more demand in 10 years than there is today. That's the simple benchmark we used. wasn't like.

We need something with super high growth or super like trendy or cool or whatever. was just like something slow, steady, and consistent. And we said, I think business podcasting has legs because YouTube is becoming a bigger and bigger platform.

Podcasting, the barrier to entry is going down and down. And these conversations are super valuable. Even this connection here, Jaryd, I mean, like, look, I wouldn't have met you otherwise, and you're the kind of person I want to talk to all the time.

This is, this kind of thing is just hard to pull off organically unless you've got a good reason, which is come on your show, right? I think what's cool about it is that it meets a lot of needs. And so we put together a list of a couple of hundred podcast production agencies that, according to LinkedIn, might be between 500,000 and 2 million in revenue, because we figured we could probably finance that level of size and just started reaching out to them cold.

And it was just a bunch of cold DMS on LinkedIn and emails. I probably had 30 to 50 conversations with people, probably 10 or 20 or so were legitimately like, worth talking to again, and came down to two or three we made offers to and eventually bought one. So yeah, super interesting, and it was a good process.

And what's interesting too, just kind of as a side note to this, is like, because we were so focused on this one vertical and one space, we now have a ton of connections of people that didn't want to sell at the time that may come back to it, and some of them have come back to us. So even though it's easy to look at building your own deal flow, you know that's the right time.

Exactly. It's easy to look at and be like, you waste all this time with all these conversations, and you could just have a beverage, go find you want somebodet. Like, we got a deal off market, which means we got a fantastic like dehere was no market for it. It was just us, the only offer, you know, and B, we now have this network of people in the space that we can kind of leverage for other things. So lots of reasons to do that, even if it is a long game.

The big reason I want to share with you shawith re that is that it's an offer to people listening that you can use AI to help you build your criteria, your acquisition criteria. Obviously, be careful. I think it's probably best to have an advisor help you with that because it's a wealth strategy, but then you can use AI to fill in some gaps.

Don't use it as the answer. It's definitely not the answer to an acquisition. I see a lot of people use it and either run into a nightmare or dismiss something that might be good. But if you know what you want and it's a smart strategy, help with an advisor, then you can go and fill in the gaps with AI, find those X amount of companies, outreach to them, and see what happens.

It's a lot of legwork on your end. This is what I do as an advisor when I'm searching and finding for businesses. And yeah, people can do it themselves. And it's a really cool strategy than just waiting for an email from a broker or looking at exactly like looking at all those Sims that 30 million other people looked at, know, and you just know there's what's hard about those.

I've made some offers that way through brokers and through a deal team. What's so hard is that we often can't compete on the cash offer or, you know, some of the terms we're not going to be the most competitive because we don't have as much sitting around in the bank.

We're two small individuals who take debt on these businesses to buy them or our own for cash flow. Like, we just don't have the same level of resources that some people do. For us, an unfair advantage is that we're willing to kind of grind.

Do think to youraboutoint, like I don't know that I would recommend necessarily doing this on your own for everybody. It really just comes down to your situation. I was sort of fortunate. I had the time freed up, and I thought even if this isn't the best thing I could do forever.

It's a good learning experience to do it once. Next time we go out, and we have a targeted acquisition, not going to necessarily be like me grinding on my own. It's probably going to be me outsourcing that to somebody who does this all day because again, it's just ROI for time. It probably doesn't make sense, but it was a good experience to do one.

It's great that you say that because a lot of people coming into this are wanting to buy something that they can make money with. They want to save as much money as they can as well.

Doing is one of the options, which is totally fine. But even if you have done it yourself and then you've learned so much, you could go away and do it yourself again more easily than what it was the first time because you've learned so much and you can refine the process. But you're still going to go, hey, let's go with a service.

I would approach this with every area of my business. Like when I took over the podcast and sold, and I stepped in and did sales for the first year. Did I like, that's not my long-term role.

I didn't want to be there forever, but it was a fantastic way to learn this business and the market and how we position ourselves and how we can talk to, you know, build out the sales collateral we need for a real salesperson.

So, like all these things are really good to do once when you're in a small business, but the tricky part is knowing when to bail out and go do the higher leverage stuff, the hiring of the right people.

Putting the right pieces and strategy in place, the focus on the big picture in the network, the strategic partnerships, and the next deal. So it is like, it's good to have the boots on the ground experience once or twice, but you don't want to live there if you really want to grow something beyond just you.

Yeah, that's right. You don't want to be a self-made person. Self-made entrepreneur, millionaire. Nobody's really self-made at the end of the day anyway.

Yeah, it's a misnomer for sure.

Yeah. So you mentioned financing for these deals and stuff like that. What did you, if you're open to sharing the price, the structure, and then how you financed it, that'd be pretty cool.

Yeah, I did an episode of Acquiring Minds, which is a podcast well-known in the acquisition space. I'll just plug in because I think they do a good job. Yeah, he's great. Will Smith's great.

I've had him on my show before. I like the guy. He's a good dude. Yeah, yeah, yeah. It's a small world, so anyway, I did, and I shared all the numbers there, and I',m happy to share it again. Likely when we, these are going to be rounded for the sake of I don't have everything in front of me.

We looked at the podcast and Sultan that w, who is bringing in eight or 900 K, maybe 800 K in revenue or something like that. We looked at the SDE number. So, the seller's discretionary earnings, for those of you who are maybe new to all these acronyms, is basically the amount of cash flow that was generated by the owner, including his own salary through the business.

And then we gave him an X or an.7 X multiple on that SDE, which is fairly good for a very small agency, was somewhere around 300k. So, was it the total purchase price was just under a million.

So fairly good, honestly, a fairly good valuation for a small agency. But what was really attractive about the deal for us was the consistency and longevity of clients. Almost all of them had been around for five plus years. They were very steady. These were well-known, so we knew we could leverage their names to kind of get more shows like them.

Again, against the end of the day, it's been a great investment, and it's it's woand rked out for us. But I do think it's, you know, when you're, when you're approaching somebody who didn't want to sell their business initially, you're not going to get the bottom of the barrel price, right? That's the price you get when somebody is desperate, and they have to get out.

Around the molars' skin liability.

Right. That's right. So the offers around are 900k, but we're talking about a healthy business that was consistently cash flowing over the years. retention, good client diversity, and all the check boxes that we wanted to see.

There were certainly some things to improve, and we can kind of talk about that, but the way we financed it was an SBA loan. So here in the U S, we've got the SBA program, 7A program. There had been some changes to that in the last couple of years. It changes with every administration they come in, and they tweak the knobs of what's allowed. Sok up.

What's the latest? It has gotten a little bit harder to access. In GeneInl, what's good about it is that it allows banks to make a loan to somebody like me who doesn't have a hard asset business. They normally, as a big bank would, never lend to somebody to buy a cash-flowing property.

They want to see, like the physical office space, warehouses with inventory, real estate that they can leverage, things like that. And so it's a really unique program because it allows the bank to make these riskier bets like ours, on people like us who have these cash flows. But that financed the bulk of it, and we put about 10 % down and then 15 % seller financed.

Cool. And how long was the sale of finance over?

Years. Yeah, so we're still paying a little bit on that. And then, you know, all of these in general with the SBA programs, and when you, you know, sell our financing, you've got a lot of latitude, but you kind of want to make them no prepayment penalty, so you can always, you know, pay us early if you want.

But, to be honest, like if it's cash flowing and it covers its own debt, there's kind of no reason to pay it off super early because it just, you know, it just sort of limits your cash flow time. It really depends on your situation, though.

For sure. I think it's better to pay it off as fast as possible, depending on what strategy you want to go with. It's crazy growth or whatnot. There are ways to deal.

Exactly.

What are the two biggest things you probably learned from that acquisition that you would share with a first-time buyer? And it doesn't have to be two, it could be one or I; it could be more.

Yeah. So, a couple of really helpful things is there is a huge amount of information asymmetry in acquisitions, and typically it is in favor of buyers. Here's what I mean. We got to look at the P &Ls of at least 20 podcast production companies before we made an offer to the podcast consultant.

That is a huge advantage. He had never seen anyone else's P&L in this industry. So we not only had this other agency, but we also already ran and knew what it looked like on paper.

We now had seen 20 or so other agencies that were very similar sized ain sizesource to him and saw their P&Ls what was good and bad. We looked at his and said, " This is 'Thisnner. Like it was a, in our mind, this is a great deal at three, two X 2.7 XSDE. He had no idea. And again, we weren't taking advantage of the guy. We're just saying, like, we laid it out very clearly from day one. were like, look, you've got a good steady business.

We can offer this kind of multiple. This is why, because it covers the debt. We even showed him, I'm like, this is, we take debt, on this, and this covers our debt service coverage ratio safely, and makes sure that if there's a downturn, we still can pay everybody.

And you know, it was like, I'm very transparent and I'm very like honest with buyer sellers because at the end of the day, even if the deal went through and I got some kind of awesome, you know, deal and I ripped this guy off, if this thing goes into a legal battle for two years, I just lost all the upside, right?

Like it's not worth it anymore. So I want to make sure that people know what they're doing, and I want to make sure that I'm transparent about how this works and why I can offer this and can't do that. It's not a random number I pulled out of the air to give you a million dollars, as I said, it's not like that, it's a math formula that's very simple to explain if you just take some time.

So anyway, I was very. That's the way I approached it, was like just be honest with people and tell them what your limitations are, what you can do, and if it makes sense, let's do it, if not, that's fine.

I love that approach. It's what I share is like the, often the most valuable part of the acquisition is the person that is selling it to you. There's so much value in there, and a deal is only going to happen when there's so much trust,t and there's a lot of trust built by being just honest.

Yeah. Yeah. Totally. Yeah. You don't have to overshare, you definitely want to communicate more than you think you should, and make sure everybody's on the same page as much as possible, right?

And how do you give them what they want? And if you can give them what they want and get what you want, that's when we all win, and a deal comes together. And so, how's your relationship with the seller now?

Yeah, it's still good. mean, every year. Actually, we don't live near each other, but I happen to vacation close to him every summer. And so when I go out there, I always get lunch or whatever with him.

We see each other at He's still in the space. We were pretty generous with letting him of stayvolved in the podcasting space. I think he had to get clearance from us for the first couple of years if he took a potentially competitive job. again, Againre very transparent. He was very transparent.

And it's been fine. Yeah. I mean, he's still, we talk on email probably every month or two. So yeah, that was a good thing. The business has evolved a lot. It's not the same as when he sold it. So I don't really feel, you know, I don't feel it's like a threat that he's going to come back and, you know, mess with it.

He's not that kind of guy. um, yeaUm I think for us, it was like, we just want to treat him fairly and be like, you know, real people with him. And at the end of the day, we're going to make the business our own after the acquisition anyway. And that's been true.

Awesome. So congrats. Very, very good. First acquisition, very successful. Tell us more about the second acquisition. What was it? How did you find it? Why did you go for this type of deal?

So we started to build out this, this kind of like structure for it actually happened. I think it probably happened two years ago. We had somebody come to us and say, " The bus' Thess is in distress, and I need to offload it. What could you guys do? Basically? Like she wanted to go, you know, she needed to sell the business. It was not doing well. She just needed to go get a job, and she was ready to move on from it.

There were some clients there, there was some revenue there, but there wasn't like great final revenue, there wasn't, you know, a great team in place anymore. A lot of it is falling apart.

And so we started to put together this structure for what would we do for a distressed agency that would be a good merger with one of our existing companies, because that's a really common pathway for acquisitions, especially if you have a good network, you've met a lot of people in the space, you know your competitors, and that's, I've always been a natural at that kind of thing.

I just love to stay in touch with the people who are in the space. Peoplee will come to me. People say, " Hey, look, this thing can go well, what do I do with it. What, you guys take it off my hands and just give me something, right?

So what we put together for her, and then we actually executed this on this other deal that we're kind of getting to here, was basically a rev share model. Here it's like, you give us your clients, you give us whatever elements of the branding we need, and whatever processes we need to understand what they're getting.

We may hire some of the key team members if they are necessary. If not, we'll just absorb into the roles we already have. You make the client intros, and then we pay you a revenue share for the next one to three years, again, depending on all the terms that we negotiate, for all the revenue that those clients generate for our business. And those numbers, I've done different offers. I've actually made this offer two or three times.

It's, you know, again, it's not getting accepted every time, but it's certainly a way to do it. And what it does is it de-risks it extremely well for me, where I'm not going to pay them unless we actually make revenue off these customers. It does, there's some risk because I may not make profitable revenue, or it may be a bad margin, but for me, at least I know there's some money coming in from this.

And then for them, it just takes the load off their plate. And usually, they're at a point where they just need to get it off their plate. So that particular seller, two years ago, that I'm talking about, she went with another offer that was another very similar offer, the same kind of thing. I think I don't know what the specifics were that were different; it basically kind of proved out that this model can work for me. And then we made a similar offer to a person who was trying to kind of offload their clients because they wanted to just go get a job again, like last year, and absorb that. And that was great. Mean, actually, a couple of their clients became some of our most consistent long-term clients for the last year.

It definitely helps a lot, and it can be a really good way to do an acquisition,n no money down and very low risk for buyers. But you do have to have the network that people will come to you because in those cases, you know, they're not listing those businesses because there's nothing, you know, they're not good businesses. They're just desperate to get it off.

Yeah.

An agency is a tough one to operate by yourself, for sure. Totally. There's aThere are moving parts, and that's just like, that's why so many are for sale. people like you who have the resources to scoop up that operational complexity. Right. It's massive.

Never sell. They can't sell. Like, there's nothing there other than the, you know, the owner's personal network and knowledge. And it's like, if it's that bad, it's really hard. But yeah, there certainly are opportunities to buy distressed agencies, and we get a lot of them coming across our, you know, our desk at this point.

And that's again, one of the, you know, we've got a couple acquisitions in flight right now. One of them is kind of more on that side of things. So yeah, I'll be interested in six months or so, maybe I'll be able to talk about it more.

Yeah, for sure. And so what's your strategy moving forward with acquisitions? Is it just absorbing some marketing agencies and merging them into your primary platform business? Or do you have other acquisitions that you think you might make that will run alongside and not merge? And if so, why and what does that look like for you guys?

Yeah, so I think this last year we've refocused our kind of core acquisition strategy to only do add-on acquisitions that will make the existing two businesses we have larger and more resilient. So we're looking for a couple of different types of acquisitions.

Some are where we would acquire the company and bring on the owner as a leader in the combined entities. That would be really interesting because it allows us to step back a layer and let them run the business. And then those can be done through a combination of either sharing equity.

Yeah, exactly. We can have equity, we can have a mix of cash, we can have a mix of payoff, you know, paying off their debt and things. So there are a lot of ways we've structured or looked at that.

The other option is just outright acquisitions that give us more revenue and cash flow to then hire bigger hires and new leaders that we couldn't afford at our current size. So both of those are happening again.

So we're looking at acquisitions, the podcast production and podcast agency side, and then on the content agency and developer marketing side, where we're drafting out that work. So yeah.

Both are sort of in progress, and we'll see where that takes us.

Congrats. Congrats on what you've done so far and what you're looking to build. Now, I'm going to do something completely different here that I don't normally do, but you're in acquisition,s and you mentioned something before we jumped on the call, some things you'd run by me.

Some of those things that you'd want to run by me, I'm sure you could share publicly, but some might not be able to. Did you? It might be valuable for me to answer some questions that you might have if you wanted to bring those up.

Yeah, yeah. I love it. Yeah, I'll pick your brain for free. One of the things I'm curious to hear about is the pros and cons of debt versus equity. And I don't know if you haven't listened to enough of your show to hear if you have a strong opinion about this, but I know plenty of people who have strong opinions one way or the other.

We have so far only used debt, but I also used to work in venture-funded startups that were largely equity investment-funded. So it's something I've always thought about exploring again. What's your opinion on it, or how do you advise people to weigh the difference of pros and cons?

It's an awesome question. would say more equity typically comes into play the larger the business is. I'm talking five mil plus equity rollover. Or what that actually means for listeners is where the seller will retain some equity within the business,s and they might have a set list of tasks or advisory role that they would need to continue with.

My take on it is that it's safer the larger the business is, typically. And it depends on the individual. That's really what it depends on: the individual. It's very valuable to have somebody retain equity because they've got an incentive.

The smaller the business and the smaller the equity, the less incentive they have to try to help the business scale and grow. I think it's when you're first starting, it's like I said, it's much of a muchness really. I think it's just not really that much. Most people who want to sell their business between the 4K range to maybe five mil.

They mostly just want cash. Because it's hard to just deal with that sort of business for five plus years, they just wear out, and they just typically want, just give me some money, cash out of this and move to my next thing, reset, refresh. So I don't know how much of an option it really is.

Where it makes the most sense is where the seller has some sort of key role in the business, and key dependency in the business is where it makes most sense. If that's not really a thing, then I would say going with finance is a pretty good option as well.

What's your, do you have any follow-up questions to that? Because I could take this in so many ways.

No, this matches what my philosophy has been too, which is when you've got these really small businesses, the equity, like selling them on keeping equity, is kind of tough because it's probably a long time before you're going to roll up enough of this to really exit for a big multiple anyway. Like this may never become liquid, which isn't a great deal. And it kind of makes our structure more complicated to have one more person on the cap table.

There's a lot of risk for the seller to retain equity on a smaller deal, you know, where they're like, I don't know this person that's going to buy.

60 to 70 % of my business, maybe 80 % of my business, can I trust them enough to do the right thing, where I can take that money off the table in an exit in X amount of time? If you're a new buyer, it's less likely that somebody is going to retain equity because you haven't done an acquisition,n and you might not have proof of scaling before and proof of doing this before. whereas if I was to come in and I was to offer that as an acquirer and say, hey, I bought this many deals, I've looked at this many deals, scale this many types of businesses, I'm specific into say Ecom, they're gonna go like this and I make a pretty strong argument for in five years, we're gonna exit for this amount and I have a financially forecast of that and with growth strategies that I've implemented on other deals before as proof, they're gonna be like, the upside is good enough for them to take that risk of retaining equity.

But as a new buyer, it's typically not going to be a thing. Mean, sometimes it can be if they don't want to sell the finance and they still want a part of the business, and they don't want to have to show up too much and advise too much,h and they can retain 10 to 15 %, then sure, because the risk isn't too significant. That's typically the way I look at it.

Yeah, I like that. The other thing I was going to ask you about, which is somewhat related,d is integrations. And if you have any thoughts on integrating with the previous team and founder, especially when, like in our case, we're looking at acquiring a business or two that are extremely similar to ours.

And in theory, we don't need everybody from both businesses to run this thing. But also, we don't want to cause a bunch of disruption and issues on day zero by just cutting half of our staff on either side. It doesn't make sense.

So there's going to be a period of like figuring out where all the pieces fit, right? I haven't done this before, so I'm super curious to hear if you've got any good experience or advice for me as I head into that next season of life.

Yeah, because it's a good question, because it seems like your team, existing team, is going to absorb a lot of the roles of the businesses you do acquire. And where that gets challenging is if the team of a business that you're acquiring, some of the members have some very specific traits that the business loves and helps the business thrive and the customers love the business, but they're non-tangible for example, how somebody does customer service, how somebody, maybe they are an account manager and how they just some of the things they say to clients to keep retention, removing them too fast without understanding the intangible things that they do for the business, its brand and culture is and end up being a significant loss for the business if you just remove them too fast without understanding what those things are.

Personally, it's really hard to answer because it depends on who the person is, what their job is, what the deal is, and what the client is. But I would say typically, and this is a very general statement, it's best to really have your existing team shadow them as much as possible and your team and not think about offloading them, right?

Thinking about how your existing team learns from that? And then how does that person that you're bringing in learn from your existing team, and you keep them both. So two plus two can equal three.

Yeah, yeah, and I mean, these are very people-heavy businesses. So my guess is we're not going to want to get rid of everybody on any, you know, any acquisition we do. But there's just going to be some economies of scale and some redundancies that, you know, are going to be avoidable. Yeah.

The key people to retain are the key people, right? Yeah. They're in the business. So say, for example, you've got, like, in an agency, you might have a, like,ike 10 virtual assistants that you're, you know, this agency that you're going to acquire or try and absorb, you might have 10 virtual assistants, and you might have one person that is like the ops manager.

Have that ops manager work with the new one, with your other ops manager, and understand how they do that. And then the other, like, nine or seven or eight VAs, what they're doing is working with those other VAs.

You could absorb those tasks a little bit easier, and that might not be so brand-heavy or client-facing, but the client-facing ones are going to be ones that you want to really understand how they retain. Then you can incentivize your existing members to work on retention, and you just give them the right incentive.

What you want to do is like, it's not like how do we remove people? It's like, how do we make the key people win? And they do the work to make sure the team is happy. And maybe you've got like, you bring in that head operations person in the 10 virtual assistants, and then you've got the other nine.

Ask, you know, what, like, who is the hardest one? Who's not performing in your team and why, and how can we make them perform better? Or is it better to just have, absorb that work into some other VA,s or yeah.

And just like we said at the start, the philosophy really is like no rushing.

Right. Yeah, I agree. I think that's a good way to think about it is like, you're assuming you're not buying a very distressed company that is underwater on day zero, you shouldn't like go in there and just think you're going to immediately change everything and get huge economies of scale wins because you got rid of half the team.

Like that's a really dangerous approach. Whereas I agree with you. think my approach is wait and see how things shake out as we have both of them and start to figure out where the natural place is to cross sell and do overlaps and you know, cross train and then eventually will some people will move on because they just, you know, this isn't for them and they're scared of change and other people will really step up and want to do better.

And so I think we'll kind of see some of this happen naturally, even if we don't explicitly go out and say, all right, we've got to cut half the team next year. Who's going, you know, like I don't, we're not going to do something like that.

And you mentioned the team. We just talked mostly about the team, but you mentioned cross procross-promoting like that. I think that can happen sooner rather than later, mostly. And just what I would be doing is when people come when you buy a new business and ask, put out some feedback and get some feedback, put out a little form, it be two twould o three questions, make it simple anas d easy as possible.

Give them a little gift if you'd like for them to complete it, but get some feedback on what they love and what they don't love and what their goals are. And then once you know those three things, really, that's some key data to go, okay, on this person needs this, that's what their goal is, but we don't have it in this business, we use what we got in our primary business.

Like we could offer that, know, and that's when you start to get like really customized cross-selling for the right people at the right time. And that's the way I would approach it is feedback first and then give them what they want. Coming back to buying something that's did, like, yeah, you'd have to change things pretty fast with that, but just don't buy something that's did.

Like what people's goal here typically is it like, just make more money and bring the stress along with it or make, just a little bit more money and make our life better agree especially as a first acquisition would never tell somebody to buy a distressed one, right?

Like the only time that it, yeah, the only times it makes sense is when we have an existing platform and their clients add on direct,ly and we don't have to take the team and a lot of mess that's coming along with it. But yeah, you're totally right.

Yeah. Yeah, exactly.

Yeah. You don't want to like absorb or just your first acquisition to be some dumpster fire that you have to go fix every problem in.

I take away the risk.

It's like if you are buying a distressed business for yourself, it's like what? It's only really worth buying that business if you have what it needs, which is the service offerings and the team to turn it around.

You already have that piece of the puzzle that is totally, they don't have and they can't get, and then you can complete that business and bring it around with something you already have, versus buying something that's stressed and then having to work out how to build that when you already have that asset. Yeah. Any other questions you would ask before we wrap this one up, Carl? I don't think so, Jaryd. Yeah, thanks so much for the thoughts and assistance there. It's something that I'm excited to do and learn how to do. I think this whole journey for me, like half of the motivation is just doing fun, difficult things. like, yes, I want to, you know, have a good lifestyle and make money and all that. But like, if you get to do that, but also like most of your work, it's super rewarding. So, yeah, we'll both be on those journeys doing that, I'm sure.

We're always doing that. So yeah, Carl, thanks so much for coming on. I'm glad that we got to flip the script and you asked me some questions. I'm hoping that was pretty valuable for people.

You guys think that was valuable, reach out, email me, let me know, give us some feedback. And Carl, where can we send people to find out more about you? You give a link?

Yeah, sure. Carl will.

Yeah, carllhughes.com, and then my LinkedIn is carllhughes. Carl's with a K, it's the only weird bit that'll get you. And then you can look for our companies, draft.dev, and the podcast consultant, if you're curious to see what they look like.

And I share a ton of my personal websites, so there are a lot of stories of what we're doing and how we're evolving and figuring things out. Yeah, so thanks for having me on, Jaryd. It's always fun to tell these stories and learn along with everybody, because this is not a, I'm not the expert yet.

I don't know that I'll ever be. I'll never be, hopefully.

People call me an expert, but I'm still learning.

Yeah, you gotta have that mindset.

Absolutely. Yeah, Carl, awesome. So good to have you on. Thank you. And thanks everybody for listening.

There'll be links to CarlHughes.com, and he's linked in the show notes, and I look forward to speaking to you guys soon.