I just play SimCity 2000, and on that 30,000 view, I deploy capital, I deploy concepts and things, and then I look to see if people come. What happens with business acquisition? It's like I've sat back in my chair in the internet cafe, and the guy next to me taps me on the shoulder and is like, Hey Mike, your city looks pretty healthy and I can see all of the people moving around. Mine's on fire. Do you mind if I just give you my mouse and keyboard?

Because I've had enough. Welcome to the Agency Podcast where we help web designer digital agency owners create abundance for themselves, their teams, and their communities. This week, we're joined by Mike Spratt all the way from across the ditch in New Zealand. Mike is the managing director and owner of Girken Media, and in this episode, we are discussing all things agency growth, specifically through acquiring other agencies. This is not Mike's first rodeo, he's been here a couple of times on the podcast, and some of you will already be very familiar with his business model. We explore the risks involved in vendor financing, the ins and outs of growth through acquiring other agencies, why you need to be building to sell, and much more. If you're looking to grow your business through acquisition without your existing team burning out from dealing with deferred obligations, as Mike puts it, then you're in the right place. I'm Troy Dean. Stay with us. Alright, without further ado, ladies and gentlemen, please welcome to the Agent Tower Podcast, the one and only Mike Spratt. Hey Mike, how are you, my friend? Good better, thanks, mate. Thanks for having me back. Excellent. Thanks for joining us. Now, this is your second appearance here. Uh the first time that you joined us. Is it your third? Is it your third time on the Wow, you're a you're a threefer. You've joined an elite club, my there aren't many people. Aren't many people that get on three times. Uh one of the times that you were on, um, it kind of blew up, and you got a whole bunch of people uh that messaged you as a result of that podcast. For those that don't know, just tell people who you are, where you're from, what you do, and then maybe just give us like a 30-second overview of what we did on the previous episode that blew up. And because I think that'll be a nice segue into what we're doing now.

Yeah, yeah, for sure. So um Mike Spratt, I own a company called Gherkin Media. Uh we started in uh Auckland, uh, but we're now um predominantly an Australasian company. Um the reason why we've expanded uh was because of what we're gonna talk about today, which is uh growth through acquisition. Um and so we moved to Christchurch with an acquisition and we were scared about that. We thought proximity was gonna be a problem, um, and that was successful. Uh we then acquired a company um Gold Coast kind of Brisbane, and we were scared of that because it's now international and again proximity, and that went really well. Uh, and then we've uh acquired two other businesses uh since then. Um and whilst it's a unique uh way to grow, it's actually become our uh our favorite way to kind of grow the business. So we're an Australasian company now and we specialize in the biggest, I think, the biggest niche uh uh for web design development SEO companies, which is small to medium-sized uh businesses who are in trouble uh and um sit somewhere in between the fledgling and viable kind of space. Um and uh and and we help them out. Um we help them out with um really good extraction tools uh so that we can kind of figure out quickly how to uh get them out of a pickle. Uh then we have really kind of uh good design development and uh deploy website design and development products. Uh we can then help them finish their online ecosystem uh through uh high level. And then we also have a performance product uh that we you know wrap into our growth plans. And um uh so we are a productize, we're a value upfront productized service delivery agency that helps small to medium-sized business owners where we have a direct relationship with the business owner. Um yeah, virtually.

Love it, love it. And now I do need to call out what's going on in your background because for those of you who are watching the video, this is this is not a Zoom virtual background that that mike's uh chosen here. This is what what what's going on? There's a trade walking around in trade shorts, but what the hell? What's what no, that's no, I love it. What's uh what's going on?

Uh so I've I don't have a seat in my own office at the moment because we're too cramp-packed. Um yeah, so we've outgrowing our our offices downstairs uh and we're moving upstairs now. We're we're gonna be in here, I think, August 1st. Um but it was either that I come up here and just kind of chill out with uh Colin. Or um or do it at home and right now in New Zealand, it's school holidays. So uh school holidays, it should be a nightmare.

Right. So we're literally seeing the growth of your agency behind you. You you you've taken over the upstairs uh of the building, you're you're fitting it out and painting it. Uh it's fantastic to see. Uh I love the authenticity of it. Um now let's I want to talk about growth by acquisition. A lot of people won't understand what that means. You're actually acquiring other agencies, and that's the way that you're growing your agency, right?

Yeah, so we um have referral, uh, we have organic, uh, and then we have acquisition. So those are the only three ways that we grow. Uh we have never spent a single dollar, and I I literally mean a single dollar on uh marketing. Um so initial growth was stimulated through referral. Uh after probably the first little while in um Mavericks, we decided to do a website for Gherkin Media. Um uh because we just never had time or or whatever to do our own, and that started to bring in organic leads. Um and then uh we went into the, you know, uh from when we got to the stage where we had capital to deploy, uh, whether it was in terms of uh uh surplus funds, surplus cash, or uh debt, um we started to to grow through acquisition, which is uh basically where we uh buy other agencies uh and then we roll out the red carpet to to their clients and and uh so far in the terms of acquisition, um dissolve the the the originating IP. Um some of the times we keep it, the most recent one we're keeping it, um, but largely in the deals that we've done so far, um the uh outgoing uh business owner uh you know um wants nothing else to, you know, that they just want to go. Uh and so what we do is we uh yeah, roll out the red carpet. Hey, you know, business X has been acquired by Gherkin Media. My name's Mike, we're here to help. Um, you know, blah, blah, blah, blah, blah. And and and and away we go. So uh we've had a look at 12 businesses now. Like and and what I mean is we've got past the stage of uh NDA and into uh an opportunity to start to write a letter of offer on 12 deals. Um we've bought four, uh, we've missed out on one, uh one where I made an offer, my offer was the best offer, uh, but they didn't choose us because of proximity, uh, which is fine. It's fine, uh, you know, um an outgoing an outgoing business owner will make a um decision based on you know not just money. Um the other thing with that fifth one was um it was very small. I think it was only like $15,000. I think I think the the business was doing about a grand a month in recurring revenue and um it was all very uh farm-based in Tasmania or horses and farms and uh all of that type of stuff. So you know, not a massive loss. And then the I guess the seven um that we've looked at and haven't acquired, uh, you know, the the there's all been there's always been like a a reason um from from from fraud right through to um they're too far gone to be able to how uh through to you know the the owner who's selling you know it's just absolutely kind of you know dreaming on on on on on what the what it all looked like and um and all the rest of it. And so um it gets me excited. I I really like to grow that way. It's a it's addictive uh way of of growing. Um but you gotta I guess you've gotta really kind of be um in a position where you can uh you know like um where you can actually help. You know, I I don't think it's a a beginner tactic. Um I think it's probably for um you know uh businesses with a a little bit of a track record and uh a team and processes in place. Um uh but uh if you're good at it, it can be it can be really fun and uh yeah, a great way to to grow.

I imagine it's also a very expensive way to grow, uh maybe not in the long term, but in the short term. And obviously you can only talk about what you can only talk about. I'm not asking you to divulge any sensitive information or anything that's under an NDA, but are these deals usually uh all cash up front or is it some of a vendor finance? Like how how how are you funding these deals? Because I imagine it's you know, you I mean you I don't imagine you've got a war chest of millions of dollars just sitting around waiting to buy agencies. How does that all work?

Yeah, so uh couple through debt, couple through cash flow. Um some of the ones that we've looked at, we've offered vendor financing. Uh when I a lot of the times if I offer vendor financing, it's because I think I I'll use it because I don't but because I believe that the outbound owner doesn't believe that uh it's actually gonna cash flow the way that it's gonna cash flow. And so if you say to them, hey, let's do vendor financing, and they believe it's gonna cash flow, well then they wouldn't have any objection to uh vendor financing, especially if you can give them say, hey, I'll give you a lot of people.

Can you just can you just explain vendor finance for those listening who don't know what we're talking about?

So the four deals that we've done, uh within three days of being tapped on the shoulder, uh, I've put uh exactly the amount of money that they want in their bank account, right? That's that's my money. It's either through uh uh Mike Sprat's personal kind of like uh cash flow introduced as capital, or it's through debt uh because I haven't had the enough money to um uh cover it. So there's another way that you can finance a deal, and that's when you say to the the outbound owner, I will give you basically like your profit over a sp a certain amount of time. So, say for example, if you do a deal for million a million dollars for Easy Maths, uh and you say, Hey, I'll give you like vendor financing over 25 months, uh, you know, and I will give that to you out of the uh surplus of me running your business. Uh and so it's a great way to kind of ascertain whether the the business owner who's selling um believes that the business will continue to do so. Or if normally you've kind of deferred any fears that they would have of you taking the range anywhere. Um but vendor financing is where you use the surplus cash left out of the business that you've just bought to pay back the vendor over time. Uh therefore you don't have to have any of your own money. You just got to make sure that that uh business that you buy remains profitable.

Um and the risk for the for the vendor, for the outgoing business owner is because I've actually heard a story of a buddy of mine who sold his business, vendor financed, uh he got I think he might have got I think he might have got 600 up front, vendor financed the rest. Within a year, he had to take the business back over from the new business owner because the new business owner had completely ridden it into the ground. He basically got his business back for free, plus he got the 600 deposit, and he ended up with the business, which he didn't want, but he had to take it back because there was no chance he was ever going to get the rest of the money because the new business owner completely screwed it up. So there's a risk, there's a risk on both parties with vendor financing.

Yeah, yeah. What what I do is um there's a um uh because I I I again I said to you at the at the top of the meeting, I obviously want it to be more kind of like educational and give uh the people who are watching today the ability to maybe start to conceptualize, you know, how they would do you know their first deal or kind of how it all all looks um on my kind of like list of things to check off. Um I've got some notes around talking about my letter of offer and how I actually do a deal, uh, which covers what you were just you know kind of mentioning, like the clauses around financing and stuff like that. But the other night when I was thinking like what's the best way that I can kind of um conceptualize um what it looks like to have a growth through acquisition uh uh uh model, one of the things that that really kind of like came up for me was the idea around the uh like deferred obligation that comes with um what people assume that they do versus what they're actually doing. Um for the idea of growth through acquisition, say at its simplest form. Say for example, someone who's just getting into the industry says that they want to uh you know build a website. That's the place where a lot of people start. So I want to build a website and I'm gonna do that for my customer. What I mean by deferred obligation is instantly there's actually a difference between the idea of building a website and what you're actually doing, which is probably more along the lines of like adding to or building a part of the internet. And so you go to a customer and you say, I'm gonna build your website, and what you mean by that is I'm gonna install WordPress or get a shop theme off Shopify and and I'm gonna make it look pretty and I'm gonna do some content and all the rest of it. What the client uh kind of uh expects back is sometimes a little bit wider. It's that you will register my domain, right? That's that's that's that's that's a different uh thing. You'll set up my email. Well that that's kind of like a different thing. Um you know, uh you will you know build the website and anything that you use to build it, you will kind of like look after, you know, from a maintenance point of view afterwards. Um and so the analogy that I would use is you know, if you're gonna like build the internet. So it's a sort of on the concept level of building the internet, there are you know, you've got to ask like what is the internet? The internet's a place where you can go. And it's made up of lots of other little places, some of those websites, some of those social media, some of those kind of other bits and pieces. And the you know, the simplest thing is you build a house. Well, who builds a house? Well, a builder. But if you if you think about it, a builder isn't the only person that builds a house. You've got an electrician, you've got a plumber, you've got a um uh uh uh architect, you've got an interior direct decorator, you've got a landscaper, you've got you've got actually quite a lot of uh people that come together to to build that house. And so what people who build websites do is they will kind of like defer all of those other things. So instead of figuring out how to host a website, they'll go and they'll talk to SiteGround or Kinstar or kind of whatever. Instead of figuring out how to set up an email, they'll put it into you know 365 or or or Google. Uh instead of you know creating their own HTM email form, they'll use uh, you know, Fluent or Gravity or all of those things. And as soon as you do that, you defer the obligation of what you kind of you know could have conceptually done or perceivably done at the beginning. And when you do that one times for one client, you know, it's it it's fine. So when you but but when you kind of like start to go when you you know build 10 houses, now you've built like a little online neighborhood, while there's different types of deferment, you know, across different types of clients, across different kinds of websites. And what happens is all of these little things start to uh gradually grow. Your obligation to your clients, right, and to the websites that you've built and to the part of the internet that you've uh you know started to put together grows and grows and grows. And all of a sudden, your lowly little builder is now responsible for something that uh is getting a little bit complicated, a little bit big. An annual subscription rolls around that was annual. Is the client going to pay for that? Am I gonna pay for that? Well, I didn't talk to my client about that. Something breaks, is that my fault? Um, you know, you need Shopify support, or they don't give you human beings. When all of these things start to build up, and then what happens is there's a point at which the lowly uh builder or web designer developer at this stage goes, oh my God, like this has gotten too big for me, I'm starting to freak out, it's costing me money, I don't want to hire staff. There's all of these things that on this residual, you know, you know, obligations start to build up and build up and build up. All of a sudden they're in in in charge of a city and they just wanted to swing a hammer. And so from a conceptual point of view, again, just to keep it simple, you might think, well, Mike, well then in this analogy of building places, you know, from a house to a neighborhood to a city to a state to a country to the world, well, who are you then? Are you like are you the mayor of the city? Are you, you know, the prime minister of the city? And I think that's where I you know I can best frame how and why and who should really kind of look at growth through acquisition because I'm actually none of those things. If you were to kind of uh finish off this analogy that I'm using, I would be more uh, you know, kind of uh it would be easier to articulate what I do by kind of pretending that I just play SimCity 2000 and I'm at 30,000 view and I don't do any of that stuff, right? I deploy capital, I deploy people, I deploy I deploy concepts and themes, and then I look to see if people come. Right. And when what happens with um uh business acquisition, it's like I've sat back in my chair in the internet cafe, and the guy next to me, who's also playing some City 2000, taps me on the shoulder and is like, hey Mike, your city looks pretty healthy and I can see all of the people moving around. Mine's on fire. Do you mind if I just give you my mouse and keyboard? Uh, because I've had enough. My my city's on fire. Let's just share screens. And can can I have a little bit of money or can I have you know a lot of money? And you just take over my city because you know, you're you're prepared to uh remain hands-off and you're and and you're a little bit kind of um further ahead and uh in this uh ability to uh you know weather the deferred uh obligation that's uh you know been created in my environment.

Um does that make sense? Yeah, it does. It does. It's a it's a it is a really good way of looking at it. When you take on another agency, how do you deal with all that deferred obligation or the technical debt or the the you know the shit show for want of a better term? You you ingest that. How do you then clean that up and streamline it and optimize it without your existing team going, oh, for God's sake, Mike's bought another bloody agency and this is gonna take us three months to clean this up? What's what's the process there? And also the dovetail question there, I think, is at what point is it too much of a shit show for you to go, you know, like what's the criteria?

So um simultaneously, if you if you're thinking about uh growth through acquisition, you should already be building to sell. I I think that's probably important, right? If you if your uh initial business, uh your day-to-day business, so Gherkin Media for me, um, I'm building to sell. So uh read cadence, read bit build to sell, you know, talk to people who have done it before. And if you're already doing that on your business, then you should have uh systems, tech stack, staff, uh operational, you know, kind of um uh you know pathways through your business that will uh allow you to um wear the burden of a of an acquisition. And so, you know, I always think about it in terms of kind of like horses in a stable, right? Gherkin Media has to be a donkey, right? It has to have the additional kind of like carry bags needed to uh you know uh wear the additional weight of anything else that I buy. And the reason why I need Gherkin Media to be a donkey in a stable full of stallions is normally because of the debt servicing. So say for example, I use my own money, well, I still pretend that Gherkin Media has a debt to me. Say I borrow the money well now, I have a very real obligation to repay that debt. And so what I want to do is I want to take any saddlebags off that next horse that I buy, I want to put them on my donkey, which is Gherkin Media, which can carry the weight, it can carry the additional cost, it can carry the burden. And that frees up that stallion to run as fast as it can and keep all um uh uh top line revenue to drop down to debt servicing until I've paid back the money. Um and so you know, you you need to build a donkey first, is is the way that I would kind of uh say that. And the way that you do that is to be already building to sell. Yeah, I I think anyone that owns a business should be build to sell. I I think it's a really kind of like a important, important, you know, uh um framework to have in your business. Yeah.

I I I'm gonna say something quite controversial, I I don't actually think it's that controversial, but a lot of people are not gonna like what I'm about to say. But I think the difference between and I hang out at a lot of groups where there's lots of entrepreneurs, lots of business owners, I'm putting that there, quotes. The difference between owning a business and being an entrepreneurial. And just having being self-employed and having a job for yourself is whether or not your business could ever operate without you for a period of three or four weeks without running out of money and completely hitting the wall. Now, if you're now, by the way, there's no judgment here, and there's nothing wrong with either of these scenarios. I just want to make sure that we're all talking the same language. If you're building websites for clients and you've got a VA in the Philippines and you go on holidays for four weeks and nothing gets done, no invoices are raised, no money's paid, no value is delivered, no profit is declared, you don't have a business. You're a self-employed freelancer with an assistant, which is totally fine. There's nothing wrong with that. But that is not a saleable asset. You'll never be able to sell that because you're it. You are the business. And I think the d I think the difference between that and a business owner is someone who is interested in utilizing people, processes, and capital to build something that can operate without them, not because I want to go and sit on the beach and be a lazy prick, but because I want to build something that is an asset, whether I keep the asset or sell the asset, I'm interested in building assets, not just giving myself a job. And I just want to draw that distinction and I hope I haven't offended anyone in that.

Yeah. And so the the people that have sold to me have been probably categorized by what you just described. Someone who has um not had the opportunity to uh move past that one plus, you know, a couple kind of um thing. And and and and didn't and and sometimes didn't want to, right? The most recent business that I bought, the person just wanted to be free from obligation of a division of his business. But then he wanted to kind of um uh continue on on the parts that he loved because he's a builder, right? He's he he's not playing some city 2000 like me, and it's all conceptual and 30,000 views and and trying to build a big business and building to sell. He likes what he does, he makes good money doing what he does, but that the deferred obligation of a division of his business just got too much. And so, you know, for him to be able to go, hey Mike, tap you on the shoulder, look, give me some money, uh, you know, one times annual is this this amount. Um, you know, if it's in my account in the next three days, you know, you know, I I'll I'd be happy to work walk away from it. And so obviously there's a a period of there of um doing my due diligence and stuff like that. Uh, but but largely the the deals that I've been doing up until this point are characterized by people who have got to that point where you know there's just a problem, you know, and they don't want to uh uh or don't or don't know how to you know get rid of that problem. So it's easier just to kind of sell it. So it's it's worth something. They don't quite know what it is. Um, you know, as I as I said before, we've looked at 12. I would probably categorize two of those. Uh now I didn't figure this out until afterwards. I would probably categorize two of those of people who just used me to price the book, but they didn't know how to uh establish a figure of which they should be um uh you know selling the business for and and all the rest of it. Um but I I agree with you. There's nothing wrong if you want to own your own job and design and develop kind of like websites and and uh and and help people with a uh single category or limited character uh category agency. Um just be aware of any kind of deferred obligation that you're building because it can come back and it can kind of uh you know.

Absolutely. And then when you're on holidays in Bali with your partner, you're opening the laptop every day because you've got to stick shit that's broken. Exactly. John Warlow talks about this on Built to Sell, it's a great podcast, it's a great book. He talks about this a lot. Uh, that the best time to sell a business, and it feels to me like you're buying businesses at the best time to buy a business. He says the best time to sell a business is when is not is not uh there's push and pull factors, right? A push factor is when you are just cooked, you're exhausted, you're done, you don't want the bloody thing anymore. It's a pain in the ass. You just want to get rid of it. That's the worst time to sell a business. The best time to buy a business, probably. The uh the best time to sell a business is when it's doing really well, but you are just being pulled so much so that you want to do something else with your time and you are competing, maybe you've found your calling, whatever it is, but there's no real major problem with the business. You could just hang on to it if you wanted to, but selling it is appealing because then you're really freed up to go and do this other thing. It sounds to me like some of the deals that you're doing, the the people are just like, I just need this problem to go away and I don't want to fix it myself and I'm happy to offload it.

So we've got uh a better opportunity, we've got a death, or we've got a divorce, and we've got a divisional restructure, you know. So those are all under some form of GRS. And that's not that's not because I've purposefully positioned myself to acquire through GRS. We've I I I would be more the the last uh one of the last ones that I looked at was a really healthy business. Uh and it actually probably is a good kind of segue into how I do a deal in the letter of offer and how we do it. But sometimes uh accountants and lawyers and brokers can sometimes destroy a deal. Um, because uh a lot of the times uh there is this uh idea uh of uh what a you know how to value a business and and what a business should be worth and and all of these types of things. Um you know, and and you know, one of the business that we looked at was a very healthy business, although it had massive um kind of problems that were you know not easily kind of like uh overcome uh overcome. But one of the biggest problems was that the accountant was in the room and the guy was an absolute he's probably a good accountant, but an accountant doesn't know how to buy or sell a business. They know how to like you know push some numbers around a spreadsheet and you know get you out of your tax obligation. But um uh normally what's been really beneficial uh for me and one of the things that I do really well and uh and to start the kind of like process of talking about how I do a deal is normally you'll get a tap on my experience is I've been tap on the shoulder and and someone's showing interest that they're you know wanting to sell their business. Um they will uh get me to sign a non-disclosure agreement and say, hey, basically, um, you know, you can't talk to anyone um, you know, about uh what I'm gonna show you. You know, please don't discuss it with anyone, you know, all of those types of things. What I think's really cool about the way that I go about it is I uh put into the middle of the table a letter of offer. It's it's my letter of offer. Um it hasn't been kind of looked over by a lawyer or an accountant or you know, anything like that. And I explain to the business owner that this is our document, not my document, this is our document. And on this document, you can write whatever you want on. You can write, Mike, you're not allowed to uh you know, fire my staff for the first six months. Um, Mike, I I want to carry on doing web design and development, so I'm not gonna assign a restraint of trade. Um when you take over the business, uh you've got to take over these servers, these softwares, you know, all of those types of uh you know things. And so uh, you know, at the beginning, what I'll say, and my last swear on this podcast, by the way. Of course. What I'll say at at the beginning is hey, outbound bound business owner, this is my letter of offer, and in here there are a whole lot of clauses, but you can write whatever clauses you want into it. And then what I do is I show them all the ways that I can fuck them, right? I go, this is how I can fuck you, right? I love it. And this is how you need to write against me to make sure I don't do that, right? And they're like, okay, thanks. Yeah, okay, well, you know, let's write against you so you can't, you know, uh fuck me. And then what I do is I say, and this is all of the risks that I'm taking, right, when I buy your business, and this is how I'm going to write against you to make sure that those misks, uh those risks are mitigated. And and normally that's a really, really good kind of like uh um start-off point. The biggest one largely that I've found is that I don't uh nickel and dine them. And on the last one, I didn't even look at the PLs, right? I I looked at the book value again the one times, you know, put that money in his account three days later. So so he's so he's happy anyway. We don't probably need to go too deep into why I'm prepared to overpay overpay for a business, uh, but it's just uh it's it just comes from confidence. You know, if if if you can buy on a one times annual and your lifetime uh you know, your lifetime um relationship with your average client is ten years, well then you're fine. Right? If you're you know buying at a one times annual and uh you know your clients you know get the you know annoyed with you within two years, well, you know, you probably shouldn't be uh you know uh growing through kind of acquisition.

Um and when you say one times annual, you're talking one times annual what?

Uh recurring revenue. So we don't buy any recurring revenue. We don't buy any project work. All we do is we up until this point we buy a what on a one times annual.

So one times annual recurring recurring revenue. Yeah. Which is different to like a lot of most businesses are valued at a and in fact the the kind of global benchmark for agencies, most businesses are valued at a at a um a multiple of what's called EBITDA or net profit, and agencies are typically valued at somewhere between three and six times net profit, right? Um, which is and again, that's a whole other conversation, but you're valuing your the businesses, the agencies that you buy at one times recurring revenue. So if they're doing $100,000 a year in recurring revenue and they're a $400,000 a year business, they're making $100,000 in recurring revenue, you're saying it's worth $100,000.

Most of the businesses that I deal with don't have a lot of project work, they don't have strong intangibles, they don't have brands that are um, you know, kind of like received as industry kind of like uh uh you know leaders. Um and often the brand's going in the bin, right? Because we're gonna roll out the red carpet from Gherkin media, uh, and there's a tax advantage to doing it that way. Um, but I mean, and and and and obviously all all deals are different. Um, you know, there could be some that come in and it's like, well, that that brand's actually really strong in that niche, or um, you know, or or for some other reason we have to buy it as a going concern, any of those types of things. Um but um but but largely what the people that I deal with want is they want to be free from it tomorrow. They want some money in their account, and they want to kind of know that you're gonna you know create that triple win where they get a good result, I get a good result, and the clients get a good result. Um, and we can pretty much kind of like guarantee that. The other reason why we're uh prepared to over like potentially perceivably overpay, right? This there's there's two things to a one times annual deal. Number one, um they are happy, right? Most small to medium sized business owners, you give them one times revenue, they're happy. And the reason why they're happy is because they know that even if they got ten times a bit there, ten times zero is zero, right? And what does a small to medium sized business actively try to do to avoid tax is they zero out their net profit uh through other, you know, all you gotta do to increase it to to decrease your net profit is up increase your salary. So there's there's all of these things that a good accountant can do to make sure that a a small to medium sized business has zero net profit anyway. And so if you've been doing that, and then someone comes in and goes, hey, 2.5 to 10 times a bit, well, you zeroed out your net profit. And even if you use a um uh what's it called? There is a term for um if you use uh uh the one where you put back into all like you put back into the all of the service uh uh salaries and stuff like that, um uh, you know, it it it really doesn't matter. The other thing as well is by the time I've done my due diligence, I know that there's gonna be a huge portion of costs that aren't actually gonna ever apply to me, because um, you know, there's gonna be maybe um subcontractors that I don't need, there's gonna be servers that I don't need, there's gonna be softwares that I don't need, and all of those types of things. Um and you know, if I if I keep the book for 24 months um, you know, and I make no changes, I've got my money back. Um if I make the changes that I know I can make, uh, you know, sometimes like you know, on one of the more recent ones, I had my money back within four months. Right, because of the changes that we were prepared to do and and a few other kind of bits and pieces. So um so yeah, so my my letter of offer goes into the middle um and it you know it basically says, hey, there's going to be a pro rot router clawback. Um, hey, if it's a big business, there might be some uh vendor financing or some other kind of uh way to do that.

So what's a pro writer clawback? What is that how's that work?

So say for example, for Easy Maths, I buy your business for um $100,000, which means that it would have been uh it should have had $8,000 worth of recurring revenue uh per per month. If um if sell if a if one of those clients is two thousand dollars a month and they leave, well, I've got a six month pro writer clawback, so you've got to give me back twelve grand of the hundred that I gave you. So it's a clawback, a pro rider clawback. We do six months and basically what that says to the outgoing business owner is don't sell me any client that's volatile right now. Right. If I bump them, there's no clawback. Right? So the most recent so people people might be interested to know. So the the first what the first that book that we bought now operates at a 12x. From what I bought it to what it is now is a 12x. The second one is a 6x. The third one is a 3x. And the reason why I'm talking about this is because the fourth one is a 0.75x now. What does that mean? It means that it's currently operating at only about 75% of the book value that I bought, right? And so uh there was a portion of that that unfortunately for the outbound uh uh business owner, he sold me good clients and they didn't even give me a chance. We wouldn't even have a chance to bump them. They were just like, we're not being acquired, fuck off, like no way, get nah, send all my stuff to this other agency now, right? And I was like, you know, well, I mean, imagine if you bought a business and and then the the clients were like, I I don't want to meet you. I'm not even gonna meet you, right? So I felt a little bit sorry for him on a couple of those ones. And then there was uh another client who's like probably one of the first real true kind of like narcissists that I've ever come across in my career. Um, and I I I I I figured her out pretty quick and got rid of her. Now I can't claw that back, you know, because it was kind of like my decision. It was no uh no fault.

It's an investment in your mental health, yeah.

Like so bad. Yeah. Um and and and so that's your um that's that's actually your clear crawlback clause. And the three big big ones are normally vendor financing. So, hey, you know, I'm not prepared to put my money into this thing. I'll buy your company back off you over time using a different finance uh technique. Uh the second one is restraint of trade. Um and and how that works. And sometimes people need you to avoid your restraint of trade um because they want to keep on operating in some format. And so that comes down to trust. Uh and then the third one uh that protects me is uh is the pro radar uh clawback, which is again like a financial clause. That um means that if you sold me something that you shouldn't have, it's likely that I'm gonna be asking for my money back. Um but what we do I actually kind of um uh create a ledger within the letter of offer even after it's been signed off and finished with the with the deal. And normally what I'll do is I will uh put in up to like a level of uh uh clawbacks, um, but it will be be it'll be balanced out on the performance of the rest of the book. So say for example, the most recent one that I bought is operating at about a 0.75. In fact, it's it's not now, it but it would be back up to about a one because we've sold some of the existing clients on uh more project work and some SEO uh growth plans and some discovery and um and all the rest of it. Um but sometimes what I'll do is I'll say, hey, I'm gonna put the clawback amount back into the letter of offer, right? And let's just see how we go over the next six months. If you send me any new work or if someone you know uh elevates to a uh a higher plan and you had mentioned that to me, maybe it will all kind of like balance out. And and I I prefer to do that um rather than like hammering the clawback the the the minute that it comes. Um and so if you're if you're reasonable um in the letter of offer, um if you are reasonable in the um financial clauses that you put into the letter of offer, if you pay them what they want, right? It's a big one. You know, if if you if you give them the ability to kind of like uh walk away um and you don't burn them on clawbacks or or kind of uh you know be a you know be difficult to to um uh deal with afterwards, the the reason why I like to do that and and the reason why, apart from the guy who died, I have a really good um relationship with the people who have sold me businesses is because that's what I want. I I I want them if someone rings, oh hey, um hey, I'll finally get ready to go on that website that we've been talking about for the five year the last five years. Well then they'll send that to you. You know, they'll they'll they'll they'll kind of um uh you know that the just because they sold the business doesn't mean that all inquiry to them as a is as a person will kind of stop. Um and in fact, um the second person whose uh business I bought, he's actively building another book um and will likely come to me again uh in you know two, three years and say, Hey, you know, I bought you know, do you want to do that deal again? You know, and I'm like, yes, let's go again. Yeah. Who died? You you just mentioned a Yeah, so that's um uh it's funny, there's two little stories that comes that come come out of this. We had uh um someone tap us on the shoulder. Um, hey, you know, this this this guy's died of COVID. Um, you know, we are acting on behalf of the wife and we'd like to sell the book. Yeah. So that one was tricky because I couldn't write against anything. There was no protection clauses, and so we got it, we got it like basically cents on the dollar on the deal. But it was again a number that represented it was a number that represented enough money for the wife to uh, you know, go and do whatever you know she needed to do next. And it also meant that she was no longer obligated to to look after any of the um uh clients. And for us, it was um we can't put any think again, well, you know, like I'm not gonna put a clawback um clause on a widow. You know what I mean? Uh and so what we said was rather than one times annual, this is a number that I would be comfortable to take a risk on running your book into the future, knowing that I can never ask any questions. Like there's no one to go to and go, hey, this client did this or that or said this or that, um, all the rest of it. Um yeah, so yeah, so it was it was a COVID death, uh decent sized book. Um, but um yeah, but it's a kind of uh an outlier, uh uh, you know, an outlier. M most people will have some form of succession planning, uh, even if they um uh aren't expecting to die.

Uh you would hope. I don't think most people have some form of succession pleading, Mike. I think most people are living in denial and uh haven't thought about it. What's one of the weirdest things you've seen? I I have this conversation all the time. People approach me all the time about wanting to sell their agency, and I have to give them a reality check. I had a guy recently actually who put a who was uh looking at acquiring another agency. And I was brought into the conversation and this PL, you know, I signed NDAs and all that kind of stuff. This PL comes across my desk and the guy's making about 580 grand a year in revenue. Um, but uh there was you know, again, he deliberately kind of reduced his um his profit, was paying himself and his wife, who didn't work in the business at all, was paying her a you know 70 grand a year's salary or whatever. And um and I said, you know, uh based on this PL, I reckon this business is worth about 100 grand, right? And uh the guy wanted 1.4 million for it. So he wanted three times revenue, right? And I said, Well, uh, that's three times revenue or about twelve times profit. Like, is he stoned? Who's it which podcast has he been listening to? Because no one's gonna pay 12 times profit or or three times revenue. I said, first of all, tell him to go and clean up his fucking profit-loss statement and come back with something that's legit oh yeah, because there's all the car payments go through the business. And I said, okay, well, take all that shit out of the PL and then come back with a real PL so we can actually have a look at what it's worth, because at the moment it's worth about a hundred grand. That that's why sometimes avoiding the PL is a good idea, right? Yeah. So what what's the but what's the advice you give someone who's who's who's got an agency that's doing 500 grand a year in revenue and they think it's worth a couple of million to buy?

Well, what you've got to do is you've got to think about who just put put yourself in the other person's shoes. So we had one recently, um, you know, guy wanted a million bucks, um, that was making 250, um, and uh had a very small count of clients. And his uh accountant had told him that it was worth a million bucks.

And so based on what? Based on what? The hallucinogenic mushrooms I had for breakfast? Based on what formula?

So I said to him, Hey, uh, you won't let me do vendor financing, you won't allow clawbacks, and you won't allow a restraint of trade. Um and I would need to run your business exactly as it's running now for five years to get uh my money back. Um and for every client that leaves I lose 120 grand. And then I say, would you do that deal? And it's like, well, this is just what my accountant's told me to do. And I was like, yeah, but I'm talking to you, would you do that deal? And I say, I'll do it with vendor financing. I I'll and I'll I'll make the first quarter of a million dollar payment now. You know, no, no, no. Um my my my accountant told me all up front, no restrained trade, no vendor financing. And I was just like, Well, you say you're not actually selling your business. That's right. That's right. You're just wasting everyone's time. Um that's right. The weirdest one was the fraudulent one. Um I I I consider it fraud. Um couple of guys uh hit me up. Um hey Mike, we've got 400 clients. So this is my uh by the way, this is my dream acquisition. Hey Mike, we've got 500 clients, they're all paying about twelve to thirteen dollars on average per month for WordPress hosting, and they haven't been talked to in a while. And then I was just like jackpot, like, let's go. Like, I want this, I want this. Service structure was in a mess. I knew I could make money there straight away. Um signs of life. So we audit for what we call signs of life, uh, and we can do this whether the client uh whether the outbound vendor gives it to us or not, because most people will put a citation on the bottom of Fed websites, and so basically they they wouldn't give me the client list. Oh yeah, we're a little bit uncomfortable about giving you the client list because you could talk to them. Actually, there's two there's two weird ones. Uh uh, I'll do this one first. And so on on the 10, it was like my perfect acquisition because if we buy 500 clients who are on WordPress who have just got basic hosting for twelve, thirteen dollars a month and they haven't been talked to in two years, and we roll them up to care plans, that's another 10, 12, 15x company uh for me to acquire and enough work. We do uh we do about 150 websites a year. So that's the next three I I can go on holiday for three years if I buy a business like that. Right. And you know, long story short, it was uh a hosting business, right? But then a lot of the clients were owned, like the relationship was owned, and the hosting was put in by one of the partners who had uh agency. And I was just like, so I can't talk to 350 out of the 450 clients. Right, right. Right?

So so let's value it on the 150 that I can talk to.

And then there was a whole lot of other weird stuff that I that it was quite funny that because they wouldn't give me the client list. I was like, by the way, guys, here's your client list. I I can find out whether you give it to me or not. Right? And I was like, which let's have a look, let's go through and take a sample sample size. Which are the ones that I'm buying and which ones are the ones that I'm not? And by the way, the ones that I would be buying are the ones that have poor signs of life. Poor signs of life are you know that you can basically tell that that business isn't functioning anymore by looking at their website and and social media profiles and stuff like that. The the second one, I don't know whether it was on your community or whether it was on the admin buyer community, but this guy posted, hey guys, um my friend's husband has died. Uh he has an agency and uh we're looking for potential buyers. I've rang them all to let them know what's uh happened. I've I'd be I'm keen on taking some of the clients on my own and I've had a conversation with them. Um we have sent them all their um uh logins details and all the rest of it for if they want to leave. Um and and something else. And I was just like you just threw this widow's last payday in the bin with this post, right? Because no one's gonna buy it now. Right, hold on. All the clients have been made aware that something bad has happened. They've been given everything that they need to leave. You've picked through the clients and had conversations with some of them, right? And there was an another really big thing that he did wrong, and I said, like, congratulations on throwing the value of that book in the bin, right? And everyone was like, hey, don't be mean, he's just trying to help. And I was like, Well, what he did whilst uh trying was completely alienate someone like me to buy him that book because there's no value on it, you know? And so it's one of those things, you know, like uh from for any form of capital deployment um that you use to grow your business. Uh so we're we're looking at, you know, talking about my kind of um uh uh you know, donkeys and and and and stallions in the uh in the stables. We we're looking at a new type of capital deployment into the states in March. Um uh, you know, we think there's kind of like opportunity for a business like Gherkin Media to to to operate, you know, uh out of there. We'll obviously continue to grow through, you know, kind of like uh uh acquisition and and later on in the year we'll also try and get good at actually marketing Gherkin Media um uh you know through kind of like uh uh traditional realms. But but once you get to the point where you have surplus capital and you want to use that capital to grow, or you actually you should be using that capital to grow because there's a massive tax advantage to do so. Um I think it it all helps if you've got your company, you know, ready to go. You know, so the the biggest advice that I can give to someone who's looking to do this isn't necessarily go and look at businesses to buy and and have these conversations, all the rest of it. Or obviously that would that would help. But it's it's build to sell in your own business first. Because once you've done that, you will understand what to look for in businesses that you look to buy. So the pick the person who buys me, it's gonna be the quickest decision of their life because I've I've I've removed all of the risk, right? Large number of clients, small average order values, uh, really good team, really good brand. Um not dependent on you as a designer. Uh globally positioned, not that great. Australasian business. I like I'd love, you know, and and and hence why I'm excited about some American deployment uh in in March next year. I already know what city I'm going into. I I've I've I I know the stats of that city, I know that it will kind of like work, you know, perfectly. But uh, you know, um to to be in a position where you're gonna start to kind of grow through these uh these um means is basically pretend if I have to go on Dragon's Den tomorrow and they're gonna ask me some questions, am I gonna get caught out? If you're not gonna get caught out uh and you understand uh the metrics in which people look for when they're buying and selling businesses, then growth through acquisition is a really fun, um, you know, really kind of exciting, you know, somewhat kind of uh addictive uh way to grow your agency. Uh and if you can do so in a way that creates the you know kind of a triple win for yourself, you know, for the outbound uh business owner and and the clients that you uh you know take over. The first thing I think one of the first things I ever said to you on the original uh podcast that was on you is that uh opportunity lies where responsibility has been abdicated, and this also applies to uh growth through acquisition as well as as well as care plans for your uh for your clients.

Yep, totally love it, love it. Uh so some homework, uh, watch Shark Tank or or what is it?

Dragons, Shark Tank's the same thing.

Although Yeah, yeah, I love it too because I always put myself on that show and and and go, well, if they asked that, I wouldn't know. So I guess what I'm doing tomorrow at work, I'm figuring out what that number is and what the answer to that question is because it makes you a better business owner. And read Built to Sell by John Morrillow. It's a great book. And check out the Built to Sell podcast, it's a fantastic podcast. I love because it's all about stories about people who have sold and bought businesses. The one from Rob Walling when he sold uh Drip to Lead Pages is a fascinating episode. It's it's I mean, I know Rob and and um and um his wife, Sheree, uh I think that's her name. I think I just got her name wrong. I'm sorry if you're ever listening to this, Dr. Walling. Uh, she's been at our shows and spoken and been at our events. Anyway, the story of him selling drip to lead pages, which was amazing. And then lead pages, they that company ended up selling lead pages to an investment arm and just kept a drip. It's a really interesting story. Um, anyway, built to sell, checking out also got me to read. Watch out.

Yeah, you uh you got me to read uh early on Cadence as well. Cadence by Pete Williams. Yes, fabulous book. Is really good. And um, yeah, uh again, you know, hopefully the stuff that I've talked about today is is kind of like uh helpful to the people who watch the podcast. Uh and just like last time, um, if you want to know how to price a book, if you're thinking about um, you know, building for sale, if you want a conversation with me, there's a little book and appointment uh tab at the top of my um website that any agency owner or anyone's welcome to book a call on and and and um you know have chat. Last time I said that, I think I had about 50 agency owners uh take me up on it and talk to me about care plans. And I loved every single one of it, so thank you to those that did. Um and then lastly, from me guys, just remember, uh, and Troy probably doesn't like me talking about this, but just remember four years ago I lied to Troy about my uh um monthly recurring revenue to get into Mavericks. Uh, you know, and so uh it doesn't take long uh once you've been incubated into the Mavericks community to get to where I am. So four or five years um ago, I didn't even meet the base pre uh pre-uh requisition or pre-requirement uh to even make it into Mavs. Uh and and now I've been on uh you know uh uh multiple times uh you know talking about how we've uh you know we've done some cool stuff and and uh and all the rest of it.

So um you know make the most of that Mavericks community and uh you know if you can yeah come Maverick because that's uh that's where I was Adam Adam Silverman also lied to get into Mavericks Club too, and he ended up becoming a coach. So there's something in there. Thank you. Uh that's what Mavericks do, right? That's what Mavericks do. Thanks, thanks. I appreciate the kind words, and I will say you've done all the work, mate. Um, so credit to you. Thanks for coming on and sharing again. Uh Mike's Bratt from Gherkin Media. We'll put a link to Mike's website in the show notes here to hit him up and have a chat. And uh yeah, thanks too. Looking forward to doing it again sometime. My pleasure. Talk soon. Hey, thanks for listening to the Agency Hour podcast and a massive thanks to Mike for joining us. Our next live event is happening in San Diego in October and it will sell out. So if you'd like to get a taste of Mavericks Club and want to tap into our amazing community of agency owners and coaches and mentors, then check out the link in the description and book your ticket to Mavcon. Today it is in San Diego, October 14 to 16. And early bird tickets are on sale for a couple of weeks, so uh check this out and get your tickets before they sell out. Okay folks, remember to subscribe and please share this with anyone you think may need to hear it. I'm Troy Dean, and remember, it's possible to turn peanut butter into diamonds. Is that right?