David Tobin and Karl Skutski - Growth Through Acquisition

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Growth Through Acquisition

Should you BUY or SELL?

Karl Skutski&

David TobinThe Tobin Group

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45 minutes of Zen…

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…to meditate & do some serious soul-searching

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…about your future

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Where do you hope to be in 5 years?

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Are you getting there fast enough?

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Can you go it alone?

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Can you go it alone?

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

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Where are you in the Inbound revolution?

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TYPES OF COMPANIES

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1. The small happy “family”

2. Conservative, organic growers

3. Aggressive entrepreneurs

PERSONAS OF BUSINESS OWNERSContentment

Modest growth

Big dollar potential

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1. The small happy “family”

2. Conservative, organic growers

3. Aggressive entrepreneurs

Understand how M&As work…

PERSONAS OF BUSINESS OWNERS

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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

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PROFILE OF INBOUND PROVIDERS2015 HubSpot Partner Benchmark Survey

All Partners Gold + PlatinumAge 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

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PROFILE OF INBOUND PROVIDERS2015 HubSpot Partner Benchmark Survey

All Partners Gold + PlatinumAge 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

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PROFILE OF INBOUND PROVIDERS2015 HubSpot Partner Benchmark Survey

All Partners Gold + PlatinumAge 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

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WHERE THE INDUSTRY IS

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0

500,000

1,000,000

1,500,000

2,000,000

2015 2020

MAS Industry

Projected Growth: Marketing Automation Software (Frost & Sullivan)

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0

500,000

1,000,000

1,500,000

2,000,000

2015 2020

MAS Industry

Projected Growth: Marketing Automation Software (Frost & Sullivan) Typical

Marketing Agency(10% annual growth)

1,600,0001,000,000

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How can you capitalize on the growth of Inbound?

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Can you get to where you want to go alone?

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2 Are you positioned to buy?

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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

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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

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Should you acquire anunder-performing company

OR

a profitable, growing firm?

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POTENTIAL DEAL ELEMENTS TO ACQUIREPROFITABLE, GROWING FIRMS1. 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

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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

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SAMPLE DEALS

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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

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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

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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

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3 Are you a candidate to sell?

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WHY SELLERS SELL?THE SELLER’S MOTIVATION

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WHY SELLERS SELL?THE NOT-SO-GOOD REASONS

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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

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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

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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 !

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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

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WHAT BUYERS DESIRE1. 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

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PREPARING YOUR BUSINESS FOR A SALE1. Paint a PICTURE of what your company can be or do2. Create a MARKET3. Seek buyers that can leverage your resources and realize SYNERGISTIC savings4. Address key DEPENDENCIES & VULNERABILITIES5. Demonstrate stability and CONSISTENT CASH FLOW6. Get your financial RECORDS IN ORDER7. LOCK IN key employees8. Confront potential “DEAL KILLERS”9. Have a realistic expectation of your FIRM’S VALUE

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Key Value DriversWhat buyers look for…and sellers should flaunt!

Factors that impact the multiple or company risk factor in VALUATIONS1. 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

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Key Value DriversWhat buyers look for…and sellers should flaunt!

Factors that impact the multiple or company risk factor in VALUATIONS1. 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

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Key Value DriversWhat buyers look for…and sellers should flaunt!

Factors that impact the multiple or company risk factor in VALUATIONS1. 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

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4 Hallmarks of a well-run firm

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTENet 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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Key Financial Ratios & MetricsTTG client database of 100+ marketing agencies between $500K to $5 million

Factor Average Top

Revenues per FTE $100,000 $250,000Net 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

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5 What is your business worth?

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“1.5 times AGI”

“21% Cap Rate”

“6 times EBITDA”

“Book Value”

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THE PERILS OF VALUATIONS

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$ 0

BOOK VALUE METHOD

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CAPITALIZATION OF HISTORIC EARNINGS METHOD

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DISCOUNTED FUTURE CASH FLOW METHOD

$ 2,889,296

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THE HUSBAND’SCERTIFIED VALUATION ANALYST:

$0.00

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THE HUSBAND’SCERTIFIED VALUATION ANALYST:

$0.00

THE WIFE’SCERTIFIED VALUATION ANALYST:

$4,000,000

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COMMON VALUATION METHODS FOR AGENCIES1. Multiple of EBITDA (Earnings before interest, taxes, depreciation, & amortization)

2. Capitalization of historic earnings

3. Discounted future cash flow

4. Percentage Adjusted Gross Income

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Some Problems with the EBITDA Approach

• PRETAX estimates of cash flow

• Does not take THE FUTURE into consideration

• Often results in UNREALISTIC VALUESthat future cash flow may not support

• Certified Valuation Analysts (CVAs) frown upon the approach

EBITDA Is 'BS' EarningsForbes, 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.”

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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

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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.

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Cash FlowDrives the Deal Value!

MANAGE for 20% or more!

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6 Parting words

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1. Do some soul-searching

2. Know thy value

3. Consider the possibilities

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4. Learn, learn, learn

5. Get thy business act together

6. Don’t try this at home

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GO FOR IT!

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GO FOR IT!You deserve the

rewards of being an entrepreneur!

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Free E-Book

www.thetobingroup.com

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Karl SkutskiDavid Tobin

Pittsburgh & LA

412-418-1231

dtobin@thetobingroup.com