Developing a Successful Exit Strategy for Your Agency with Todd Taskey
Key Takeaways
- Private equity has religion in digital agencies. 51% of ad spend went digital last year, and the recession question buyers used to ask has been answered.
- Buy and build, not roll-up: PE groups buy an SEO shop, a PPC shop, content, social, and email so one client can be managed across the whole arc of services.
- Rough multiples Todd quoted: 6 to 7x EBITDA at $1M with good recurring revenue and retention, 8x plus over $3M, 12 to 14x over $10M.
- Recurring means under contract. Reoccurring is banker speak for clients who come back every year on one-year deals. Buyers pay more for the first, and for seven-year tenures.
- A well-run agency should sit in the high teens to low 20s on EBITDA margin. Expect it to dip between $5M and $10M of revenue when you hire a head of sales and a finance lead.
- Book deferred revenue the way GAAP says. If you don't, the buyer sets a higher working capital requirement at close, and sellers get upset.
Todd Taskey is an M&A advisor at Potomac Business Capital who works mostly with digital marketing agencies, a corner of the market most M&A advisors don’t focus on. He spent his first 20 years as a certified financial planner, built a small firm that sold to a group later acquired by Goldman Sachs, and moved into M&A because so much of his practice was entrepreneurs. Gray MacKenzie hosted and asked him what agencies actually sell for, what buyers look at, and what trips sellers up at close.
Private equity has religion in digital agencies
Gray asked how Todd thinks about the paths open to an agency owner. Todd started with the buyer side. Private equity drives most of the transactions he sees, directly or through portfolio companies, and the pandemic answered the one question buyers used to ask him.
Last year, for the first time, we had 51% of all spend was in digital. That’s projected to go up. Nobody thinks it’s going backwards. Five years ago, private equity… buyers would say to me, yeah, but when we hit a recession, I don’t know what’s going to happen to this business. Now we have the answer to that. It’s going to bounce back quicker than any other business. So private equity has religion in this space.
Most of Todd’s clients have between $1M and $3M of EBITDA. The road from $1M to $5M is well worn, he said, and neither straight nor easy. The alternative he represents: instead of keeping all your wealth tied up in the agency and spending future income to grow it, plug into a larger platform, take cash at close, and participate in the equity upside.
Buy and build, the multiples, and the second bite
Todd’s example was Bayshore Solutions, a HubSpot partner he had just sold to a larger HubSpot partner. He doesn’t like the term roll-up for deals like that.
A lot of people hear this term, a roll-up strategy, and a roll-up strategy is not, I think, the right way to think of it. A lot of private equity groups use the term buy and build. So they don’t want to buy five SEO agencies to be a bigger SEO agency. But what they will do is buy an SEO shop, pay-per-click shop, content, social, email. And so they’ve got this arc of services where they can manage one client across all of these things.
Then the numbers.
If you’re at a million dollars of EBITDA and you have a lot of recurring revenue, good client retention, at a million bucks you could trade for somewhere between six and maybe up to six and a half or seven times on EBITDA. If you’re over three million, definitely you’re at eight, eight plus on EBITDA. If you get over 10 million of EBITDA, that’s a 12, 13, 14 times business.
Todd’s framing for clients: your chips are worth six times today. You can grow from $1M to $10M of EBITDA, which he calls a lifelong journey, or sell them to a bigger platform. In a deal he had under letter of intent, the seller gets roughly two-thirds cash and one-third equity in the new company, plus a second bite at a much larger multiple when that buyer sells in a couple of years.
Recurring vs. reoccurring, and how buyers read your retention number
Gray asked what percentage of recurring revenue agencies should aim for. Todd’s answer: the higher the better, and some of his clients are near 100% because they turn down one-off work. He also drew a line that matters in a deck.
There’s recurring revenue… and then there’s banker speak for what we call reoccurring… Some of those people will come back year after year, but they only sign one of your contracts, your one-year engagements. So we’ll bill that as reoccurring revenue, and then the buyer will say, well, how have you had these guys? We’ve had them for seven years. Oh, all right, well, that makes a difference than somebody that has renewed once.
Gray asked whether Todd presents retention as monthly churn, the way software companies do, or annually. Todd’s answer was about how the number gets dressed up.
Two percent… retention is 98. That sounds great. 98 what? Well, that’s two percent times 12 is 24, so you’re like 76. 98 sounds way better. That’s number one. Number two, are you talking about revenue or are you talking about logos? Are you talking about clients? What’s the measure here?
Todd’s advice is to present it honestly. He sold one business at 8.5x EBITDA despite weak retention by pointing the private equity buyer at the fix: spend $40K on one good person whose whole job is retention. His line for sellers: “if you have a weakness, raise your hand and say this is part of the reason why we want to do a transaction.”
Margins: high teens to low 20s, and the dip between $5M and $10M
Gray asked about growth rate and margin. Growth, Todd said, matters less than people think. He has clients who’ve been flat for three years, and that’s fine as long as you understand who you are and sell into it. Margin is where he had a specific number.
A well-run agency should be in the high teens EBITDA percentage, could be in the low 20s… If you’re doing two or three million bucks of revenue, you should… at three or four you could be doing 35, 40 percent EBITDA margins. You don’t have a CFO, you don’t have a head of HR, maybe you don’t even have office space right now. You don’t just stair step your way up from 5 million of revenue to 10.
Somewhere between $5M and $10M you hire a head of sales and someone to run finance, distributions pause, and if it goes perfectly it takes two years to see the return. Todd’s point is that the buyer wants an owner who can explain the dip, the way a driver can explain burning more gas at 85 miles an hour.
Deferred revenue will bite you at close
Gray asked what trips up deals on the financial side. Todd’s answer was deferred revenue, with a 101 example: a $50K website, paid up front in November. GAAP says you can’t book it as revenue yet.
The day you booked it, the 50 grand, you have to go to your balance sheet and put a line item called deferred revenue for 50, because you haven’t earned the 50 yet. You haven’t done any work… Most people I work with say, oh, I understand. I’m not going to do that, though, because it’s just way too much work.
Here’s why it matters when you sell. Picture closing that deal on December 31.
I’m the buyer. There’s 30 grand of work that has to be done, and I get no money for that. I have to pay the people salaries to do the development. That’s not fair. So I want the right amount of money for that. How much should it be? Well, it’s on the balance sheet. It’s deferred revenue.
Since most sellers aren’t booking it, the buyer handles it through working capital: more cash has to stay in the business at close, and sellers get upset. Todd’s recommendation is to practice it along the way, and to know the number can get big. An agency that bills a month in advance has almost a full month of revenue deferred at any point.
Todd’s closing frame for any owner: the buyer is paying for a million and a half of EBITDA this year, next year, and the year after, so show how it’s been happening and why it continues. Nobody’s perfect on every signal. “Just sell into it, lean into it.”