Another Bite at the Apple with Todd Taskey, CEO of Potomac Business Capital

Russell Benaroya: Hello, everybody. Welcome back to another episode of the Stride 2 Freedom podcast where we help business leaders get and stay in their zone of genius.

What is your zone of genius? It is that thing that you do that is effortless for you, where you lose track of time, where you’re in your flow, where you get recognized for the work that you do and you wonder, “Huh, I didn’t think it was that impressive or that hard.” But it’s uniquely yours to own. And if we can get you staying there, it is highly likely you will drive improved equity value in the business that you’re building.

I am your host, Russell Benaroya, and the Stride 2 Freedom podcast is brought to you by Stride Services. Stride Services is an outsourced bookkeeping, accounting, and fractional CFO services firm serving high-growth professional service companies like digital marketing agencies and IT service providers.

What’s our genius zone? Our genius zone is helping business leaders use data to make better business decisions.

Let’s jump into the podcast today. I am super excited to introduce Todd Taskey from Potomac Business Capital. Todd, how are you?

Todd Taskey: I’m wonderful, Russell. Happy to be with you and your audience.

Russell Benaroya: I’m so happy to have you here. And to give credit where credit is due, Todd and I were introduced by an individual named Jason Swenk. Jason runs the Digital Marketing Elite Mastermind Group and is a guru in digital marketing agency entrepreneurship.

Todd is an M&A advisor, and he’ll talk about what that means in a second, at Potomac Business Capital. He is Jason’s go-to introduction when there is a digital marketing agency that is interested in looking at the opportunities available to them to exit their business and realize the equity value they have created.

What I appreciate about Todd, and I think this will come out today, is that Todd is not in the deal business. Todd, in the relationship business. It came across very clearly when we met. I’m sure it will come across in this podcast.

I want to get into the head of an M&A advisor today and understand how he guides companies that have a desire to sell their business. Why don’t we jump in? Todd, ready to do this thing?

Todd Taskey: I am ready to do this.

Russell Benaroya: For folks that are listening to this podcast, could you define what we mean when we say M&A? What does that really mean?

Todd Taskey: There are a couple of terms. One of them is M&A, mergers and acquisitions. That just means when it’s time to do a transaction with your business. A lot of people think that a transaction with my business means I’ve grown to a certain place, I’m going to sell it, and I’m going to leave the business or I’ll do an urn out for a couple of years, or whatever the case may be.

In fact, many of these deal trophies over my shoulder are people that have done a transaction with their business, taking liquidity from their business, realize some of that in cash, but also have a very meaningful chunk of equity in the company that they’ve joined. I’ll give you two quick examples there and we can dig in as much as you want on either.

We did a transaction in November 2019. It was Thanksgiving week. My client was about 2 million in EBITDA, on 10 million revenue, performance marketing, mostly SEO and pay-per-click with a little bit of email as well. We sold them to a private equity group in Boston. My guys got high single-digit millions of cash at close and they also retained 40% of the company.

That was just about three years ago. The end of ’22. As we approach the fourth quarter starting on Monday, they’ll close 2022 with 17 million of EBITDA. So it went from 2 to 17. My client still is the CEO of that business. I would guess that a business of that size probably trades for 15 or 16, or 17 times on EBITDA. So that’s like $250 million.

They’ve got like 30 million or so of debt from the other transactions so they’re done for. My guy has been diluted down to roughly 25% equity in the company. But he, three years ago, sold his business for eight or nine million in cash, the 60%. The 40% he didn’t sell today is worth close to $50 million.

He’s having more fun than he’s ever had, doing things he never thought he’d be able to do. That’s one example. I got that transaction from a company called Worth eCommerce. Worth is a great business in Portland, Oregon. They do email marketing for e-commerce customers only.

We did a really good transaction for my client, which people can listen to on our podcast. It’s called the Second Bite Podcast. Dean, who is the CEO there, talks about it. We sold him to two SmartBug, which is a HubSpot partner. He took half of his money in cash and rolled the rest into equity of SmartBug.

SmartBug is owned by a private equity group called American Discovery Capital. And they’re just starting their journey for growth. He would expect to see a lot of growth. For him, he got a chunk of cash, he’s part of something larger.

SmartBug has a ton of clients that are not doing email and not doing it well. So they’re bringing him new clients. He’s having a greater experience in his business than he had when he was independent.

That’s a lot of what we help people do. We talk about an exit transaction and we do those sometimes. We like to talk about evolutionary transactions, where the question for your listeners or any CEO is, what is the best path forward for my business?

We try to introduce people to the idea that it’s not just hiring more salespeople, trying to get new customers, trying to expand into different regions, or different service lines. Maybe what’s best for me is to become part of something larger and more dynamic and play an important role there.

Russell Benaroya: I really liked that orientation. Bring me into the head of both your clients as well as the many conversations you have with individuals that aren’t quite ready to undertake the transaction but want to get oriented toward understanding whether they might.

What’s going on in the head of the entrepreneur at that time?

Todd Taskey: That’s a really good question. I’ll share what I see a lot. Let’s just use round numbers. Let’s say, you, Russell, and your partner, you’re 50/50 owners. You’ve built a nice business. You’re doing a million and a half of EBITDA. Let’s say you can sell that business for six times. So that’s nine million.

On the $9 million, if you sell the business, you’re going to get $4.5 million each. You’re going to pay taxes on that, you’re going to be left with three million bucks. You’re still flying commercials after that transaction. You’re not set for the rest of your life.

What I always tell people is people do this evolutionary transaction because we solve two problems. Number one is money. Can we get you the right amount of money for the right value that you’ve created in your business? The answer to that is always yes. Otherwise, we wouldn’t do the transaction.

The second problem is the thing you struggle with most. We can’t get access rapidly enough to the customers we sell to. We can’t build a real sales team because of whatever the reason is. We do really good paid media, but we don’t do earned media real well. We need to add email marketing. We don’t do content.

Let’s go back to your four and a half million bucks. If I can get a couple of million bucks in cash, and then another two or two and a half million in equity in a bigger company, and I don’t have to pay tax on that roll forward, that would be pretty good. But the reason I do it like I talked about with Dean, is because these guys have, in his case, 400 customers, and they need email marketing.

These guys have a sales team of eight people and they’re not doing email, or content, or data, or whatever the case may be. As an entrepreneur, you grow your business and you realize, we keep losing customers because we just do this. Every time we lose them, it’s because we do social things really well, but we lost them because those guys who don’t even do social as well as us, also do email, paid SEO, they do everything else.

How are we going to compete with that? So it’s a combination of those two things.

Russell Benaroya: I’m definitely grokking the theme of evolutionary M&A. I really like that as a part of the entrepreneurial journey. How do you guide clients to prepare for those types of opportunities and increase the probability for them that that will be a viable path to continued growth?

Todd Taskey: The short answer is just run a good business. The question then becomes, how do you know if it’s a good business? What are the measures?

In the digital marketing space or the IT services space, number one is, how long do you keep your customers? It’s interesting because when you do M&A, you put a deck together. It’s a PowerPoint presentation. And everybody wants to talk about culture.

Here’s culture: how long do people stay with you? And we have this slide on every deck we do. If your senior team is with you 5, 7, 8, 10 years, now I know there’s really a culture. Awards are good if you have them, otherwise, it’s all lip service.

The same thing with customers: what’s your retention? How long do they stay? What’s the average retention per customer? Your retention of customers and how much of your revenue is recurring are two of the big determinants of the value that you’ll get for your business.

Russell Benaroya: Because of the evolutionary nature of a transaction portends that your client is going to be part of this other company, what level of diligence do you do on the acquiring company to increase the probability that it is the path toward growing to do equity value

Todd Taskey: The folks that we deal with are at another level. This is what I mean by that. I get calls all the time, people want to do a roll-up and most of that is smoke and mirrors. The transactions we do, looking at the things on my board here, we’ve got a deal that we’re negotiating right now. My client is going to get $42 million of cash at close plus a big chunk of equity. We have another deal, my client is going to get $8 million of cash at close.

It’s always significant numbers, almost always backed by private equity, either to deal directly with a private equity group. Most private equity groups are going to want to see at least $2.5 to $3 million of EBITDA if they want to partner with you directly.

Part of their playbook at private equity is to acquire other businesses. A lot of times people think that means a roll-up. So we do SEO work: I’m going to go buy a bunch of SEO companies.

One of the best private equity groups out there is a company called Mountaingate Capital. Trent and Corbin and the guys there are terrific. But if you look at their last exits, they sold Tinuiti for 20 times EBITDA. They sold Bounteous for 23 times EBITDA. They sold Ansira for $450 million, Olson for $300 million, on and on.

They talk about an “arc of services”. We’re not going to buy a bunch of SEO businesses. We’re going to be great at SEO, then we’re going to buy content, we’re going to buy paid, we’re going to buy social, we’re going to buy email. So when we bring someone in, we’re going to own that whole spectrum.

That’s what a lot of the great companies have done. so they have a vision for that. So a direct answer would have to be something like reputation, number one. Number two, when I think about the firms that we typically deal with — Everlane capital, Gemini, Court Square, Boathouse Capital, groups like this — you’re looking at me like, “Wow, if I could be in business with those guys…”

We were talking with Bill Dyer the other day, of Boathouse Capital. They’re on their third fund. They average return of four and a half times on investor money over their last three funds. There’s a reason why all these guys do what it is that they do. There’s a lot of great private equity firms out there that have a track record doing that.

Russell Benaroya: Like I said at the beginning, I don’t fancy you as being in the deal business, I fancy you have been in the relationship business. You can correct me if you disagree. But when you do formally engage for the purpose of effecting a transaction, what do you actually do in stewardship?

Todd Taskey: You can kind of think about it in a funnel. What we try to do for our clients is get them liquidity up front and a bigger exit than they could accomplish on their own and a lot more fun along the way.

What I’ve learned is people will tell me, “Well, here’s my vision. Here’s what I want to do.” And I’m good at listening, but I discount all of that. One of the great things about going through this process is the clarity that it brings. I’ve had people say to me, “I’m selling, I’m done. I’ve been doing it for 15 years, I want to move out. Sell it. I’ll do an urn out for a year or two and then I’m out.”

That same person has decided to partner with private equity and go on a run for another five-plus years. They’re like, “Wow, I never realized it could be this great before.” They feel like they want to do this, and they wind up doing that.

It’s the combination of: how much do I believe in my new partner? How much cash do I get at close? Now that I have all this cash, what am I going to do? People get exposed to worlds and opportunities that they’ve never been exposed to because they’ve been working in their business and not on their business.

What we do is we help get their finances organized in a way that buyers want to see it. We tell the story through data of their business: customer retention, diversification, all the things that buyers look at. We put it together in a deck, a 25-page PowerPoint, and we go specifically to the market that wants to acquire businesses like this.

One of the things I tell people is, we are the greatest consulting they could ever get for their business. We’re going to do a bunch of one-hour calls with a group that only speaks the truth. They speak the truth because they’re about to write a check.

So if we go through 10 or 15 or 20 of these one-hour calls over the course of a month or so, you’re going to hear the same things over and over again. How come your retention is like this? How come you’re not doing enough of that? How come your pricing is like this?

So if we don’t do a transaction, it’s only because the client doesn’t get the value they thought they would get. But now they know exactly why they didn’t get that value. So if you’re going to go back to work and work hard for the next year, or two or three, at least here are the two things you got to work on if you want to improve the value of your business.

Way better than hiring a consultant that is going to tell you what they think you want to hear. It is incredibly valuable from that standpoint.

Russell Benaroya: The truth, as you said, speaks for itself. Or maybe I’ll say the facts are the facts. However, there’s a story around those facts that help indicate what a combined potential could look like. What I’m curious about is that in your camp, to help articulate to that prospective buyer, something that they may or may not fully see, or appreciate from the outset.

Todd Taskey: That’s such a great question. I’m going to answer it in two ways. The first way, we have a client right now and their average retention, if you measure it in months, they’re in the paid social space, is like eight months, which is not good.

But these guys have a very low cost of acquisition of new customers. They have a four-month minimum. And in a four-month period of time, the customer is profitable. So their approach is to bring them on. There’s less than 10 million in revenue. This is how we do it here.

We get a lot of pushback on that. So we took the analysis and said, What if we measured people that went beginning in month five forward? What’s that average? 14 months. So these guys are killing us, but we’re still going to do it. But it is 14 months. Our retention here is fantastic.

So when people would ask us, what’s our retention? We’d say 14 months. Is it really 14 months? Yeah. Once you get past the trial period, it’s 14 months. What does that mean, the trial period? Well, here’s how we do it, we test. And if you don’t like that, then we would create a higher hurdle rate to become a new customer.

But we’re profitable with this. We’re going to make a profit, we’re going to test them out, we’re going to learn. And by the way, the group that acquired them said, “It’s painful to our team when they lose customers and I don’t think you guys are measuring that well.” Well, that’s true. But our team maybe is a little bit more callous to losing customers because, in our mind, they are not a customer until they get past four months.

From that standpoint, that is important. I’ll give you an example. When we sold to SmartBug. SmartBug is a HubSpot partner. I called the guys at American Discovery Capital and said, “I’ve got a great HubSpot partner you guys should buy because I know you’re in the HubSpot business.” They said, “We’ve got HubSpot. We don’t need that.”

“Well, what are you looking for?” “We’re looking for Klaviyo and Marketo because if we have those three things, we’re going to dominate the world.” I said, “Well, wait a sec, I got a Klaviyo guy. He’s fantastic.” That’s how we did that transaction.

I have calls and conversations like that a dozen or so every week as opposed to me having to convince a private equity group. I work with private equity all the time. They’re the smartest people in the room. So don’t try to win that argument. I don’t call them and say, “Hey, I’ve got a great idea.” I call them and say, “Hey, what do the smart guys think?” They go, “This is what we’re looking for.” “Great. Let me tell you what I’ve got.”

I’ve got a group looking for healthcare marketing. I’ve got a group that wants more paid social. I’ve got a group that wants more data-driven marketing. I’ve got a group that needs better email marketing. So I don’t have to convince them of that, I just have to help them find what it is that they’re looking for. And when I have conversations with groups, I say, “Okay, that’s great.”

Russell Benaroya: Talk a little bit about the art of negotiating when there is expressed interest a party wants to move forward. They obviously have to undertake their more detailed full body cavity search/due diligence. Then there’s the actual art of the transaction structure. That’s really where I know you add a lot of value. Could you talk about that and what’s entailed there?

Todd Taskey: What’s entailed could be a whole separate episode. However, I’ll say a couple of things. So it starts from a Letter of Intent. Letter of Intent says, “We’re going to pay $9 million, and pay 5 million in cash and $3 million in equity.”

They’ve got a whole bunch of questions around equity. They need to understand the cash, the $5 million, how much is in escrow. What’s your Rep and Warranty insurance like? What does the non-compete look like? But it’s pre-LOI. Until we sign that, we are in charge. We are the company that people are courting.

So I’ve got a couple of things. Number one, I want to have three or four, or five interested parties. That’s the best way to negotiate. Many times we don’t have three, or four, or five, but I know where the market is. So we can give a pretty accurate picture to whoever the buyer is, what it is that we’re looking for.

All of those things need to be negotiated upfront as many as possible before you sign the LOI. Because once you sign the LOI, you cannot continue to talk to other buyers. There’s an exclusivity period there. Then they’re going to do all their work.

The bigger the challenge for the buyer to get that LOI signed, when you go through due diligence, there’s going to be unexpected bumps in the road. Things I didn’t realize. You lost a customer. One of your people quit, all that stuff. Due diligence takes about 60 days.

I don’t want them changing anything in the deal. And if it was an easy win to get the deal in the sense that the buyer didn’t have other options, or the seller didn’t have other options, or the seller was weak, they negotiate differently. I want the buyers to be high-fiving each other when they sign the LOI. And when we hit that bump in the road, I want the buyers to look at each other and say, “Listen, it took us forever to get this thing, just because this one customer left, I don’t care. Let’s close.”

There’s a long art that goes along with the science and melding those together is what makes it work pretty well.

Russell Benaroya: Love it. I imagine you talk to a lot of prospective clients that aren’t ready. How do you guide them so they get off that call with you and feel like they’re more informed about what it is they can do to be in a better position to engage you?

Todd Taskey: This is super helpful. Number two, it’s also super helpful for people to hear from their peers as opposed to from me. Our podcast, the Second Bite Podcast (www.secondbitepodcast.com), you can hear from CEOs, founders, and people like that about what their experience is like.

We have lots of conversations with people. Most of our clients are $1 million of EBITDA to $4 or $5 million of EBITDA. We talked to lots of people that are below that. I have a deal right now that is below that. It is in the email marketing space. In one of the conversations I had, the buyer said, “We really want email marketing capability because we’re not great at it, but we want it to be offshore and a low-cost center.”

I said, “I’ve got a guy like that.” They are in Singapore and it’s a great fit. Everybody likes each other. It’s going to be great for my clients. So researching the industry and learning about transactions is always helpful.

To get the kind of value that is going to make somebody do a transaction, you probably want to be near at least a million of EBITDA or very close. The combination of that plus solving the second problem, whatever that is for you, is where deals get done. They can reach out to us. They can listen to the podcast. They can listen to other things online and get a sense in that way

Russell Benaroya: Talk a little bit about missed deals that you’ve been a part of or not a part of.

Todd Taskey: Not every deal closes and there’s a couple of reasons. For us, the financials are number one. Your financials have to be rock-solid. They have to be accrual- based. They have to be accurate and you have to stand up to due diligence.

You know this from an outsourced standpoint. It is critical. As the CEO, you have to understand what your financials mean. Your retention 70%; don’t argue with me that that’s good. That’s not good. Where you’ll win is saying, “Here’s why it’s 70%. Here’s why we think we could be better and here’s why we’re not. This is why we’re having these conversations because we’d like to do a deal that will help solve that for us.”

You need to show some awareness. You’ve got to have rock-solid financials, number one. That’s why deals fall apart. We lost a deal earlier in the year because my guy lost two of his top five customers during due diligence and we couldn’t recover from that.

Then sometimes clients change their minds. A few years ago, I had a client. He’s in the digital marketing space. We had a really good offer of $15 million for his business. It was a terrific offer. His EBITDA was just under two million bucks. $12 million in cash, $3 million in stock, all of it paid at close.

My guy said no to that deal, which I thought was a mistake because it was a terrific offer. But he wanted to go do it on his own with private equity. As a side note, the company that made him that offer, they sold earlier this year, that $3 million would have been worth almost $40 in four years. $40 plus $12; passed on that.

Now we’re talking to private equity and he just wouldn’t let go. He wanted to be paid on next year’s EBITDA. He wanted this for working capital. He didn’t want a non-compete. Finally, the private equity group said, “No, we’re out.” I said, “No. Let me show you this other deal which is very similar.”

The other deal was the one I told you about earlier where they got the high single digits and $40 million. Again, another $50 million deal. My guy is about $2 million of EBITDA still four years later. He and I are still in contact. He said, “I think I made a mistake.” I said, “You haven’t made a mistake because a mistake is at the end and we haven’t written the end yet. We’ve just got to do a great transaction for you.”

I was like, “All right, you didn’t get $50, but you got $30 or whatever it’s going to be. You keep building and we’ll do some great things together.”

The thing that I would point out to him is, “You were too focused on this, that you didn’t see this.” You were too focused on every penny today that you didn’t see the bigger picture and how difficult it is. I see this a lot, Russell. Guys grow their business to $800,000 of EBITDA, and then a million and they think the stairs will just continue to go up.

Until you get kicked in the teeth and you realize, oh, I lost a big customer or both of my salespeople left, or whatever the challenges might be, you’re a little bit arrogant. You’re not humble because you have no reason to be. Everything works out in your world.

From that perspective, that’s why I see deals go awry a little bit. People that understand the other side that they don’t have, whether that be more analytical, more creative, more whatever, and that if they are great at doing digital marketing or IT services or managed services and they partner with somebody that’s great at building businesses, that’s private equity, they know how to do it, they do it all the time at a super high level.

If you can combine your day-to-day tactical stuff with a good private equity partner, whether that’s directly with a private equity partner or a company that’s got private equity behind them, you will probably have a bigger success with more fun than you would otherwise.

Here’s one last thing I would say because there’s plenty of stories out there about private equity — hard to deal with, cutting people, they fired. But at this size, you cannot financially engineer success. It’s too small. The only way for success is to grow a business in the mid and lower end of the range. It has to come from growth. Growth needs more people, not fewer, more salespeople, more admin.

If you’re $200 million in EBITDA and I buy your business, I could probably trim some people in different departments and make it $220 million of EBITDA. There’s plenty of companies that do that and you read about them in the Wall Street Journal.

In the world that you and I are in and that our clients are in, it is about building value. So most private equity firms, again, if you listen to our podcast or any of the people that focus on the lower middle market, most of them get A-plus for how they treat entrepreneurs.

Russell Benaroya: A couple of last questions for you, Todd. First is just the fee structure. How do you work with clients that engage you?

Todd Taskey: All investment bankers are about the same. There’s an engagement fee upfront and then there’s a success fee. Our engagement fee upfront is a little bit below where the market is because we want to be considered a partner in the process, not a vendor. We feel like we’ll act like a partner in the process.

Our success fee is 5% for the first $10 million, 4% for the next $10 million, and so on. Some of the pricing, on a scale of 1 to 10 with 10 being most expensive, we’re probably around 6.5 or 7. So we’re right where we want to be.

Russell Benaroya: Just for clarification, is that just on the cash consideration, or is that on the total consideration? Would you take equity?

Todd Taskey: That’s a really good question. I’ve had some of these deals behind me where I have said, “I’ll take equity.” And they’re like, “No, we’ll just give you cash.” Because people are so excited about the future. I’ve had others that say, “If you want equity, you can have equity.”

It usually comes down to the buyer because they don’t want some random on their cap table for $100,000 or $200,000 or $50,000, or something like that. Sometimes they’re cool with it, sometimes they’re not. That’s always a conversation that we have at the time and that never seems to be a problem.

Russell Benaroya: We came to this podcast today through the digital marketing agency channel. But is that your specialty or niche? Or do you deal with companies in other services and industries as well?

Todd Taskey: I would say this, all the customers that we deal with are in digital transformation. Probably 80% of them are in digital marketing and the other 20% are in what I would consider digital transformation. People listening would say, “Geez, anything could be digital transformation.” Yeah, it’s probably true.

We have right now a company that does managed services, IT infrastructure stuff. It is a really good business on the East Coast that we’re doing a transaction for. That’s about where we are usually.

Russell Benaroya: Well, I’m excited to plug you in with our clients and make some introductions. I think having a relationship with you is a great arrow in their quiver as they’re building their business.

That is all we have time for today. I feel like I was drilling a bit because I was so engrossed. Thank you so much, Todd. Super helpful. Great foundation. The way you answered the questions was so approachable. And if this podcast is truly designed to meet its objective of helping business leaders get and stay in their zone of genius, they have to surround themselves with experts like you. You bring such a wealth of experience to this discipline of M&A.

I cannot thank you enough. I already know the title of the podcast. Maybe it’s your name, the Second Bite, but really this concept of evolutionary M&A, I love the theme. I think it’s going to be rich to write on and share with our community. Thank you.

Todd Taskey: It was my pleasure. I was really happy to be part of the podcast, Russell. Thank you.

Russell Benaroya: All right, Todd. Have a great day, everybody. We will see you on the next episode of the Stride 2 Freedom podcast.