Selling Your Professional Services Firm

Blair interviews David about his new book, Selling Your Professional Services Firm: A Primer.

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Transcript

Blair Enns: David, when's the last time we recorded a podcast?

David C. Baker: It was before you canceled your trip to Australia.

Blair: Huh, you didn't think I'd answer it that way, did you? [laughs] I'll just get over my crying fit and then we'll resume recording. It's been a while. It's nice to be back recording. It's not nice to be back in Canada, but it's nice to be back recording. I'm holding in my hands a brand new book, Selling Your Professional Service Firm: A Primer by David C. Baker. Congratulations.

David: Ah, it sounds like a really good book. Oh, I wrote that. Yes.

Blair: You did write it. How are you feeling about it?

David: I didn't think I had another book in me.

Blair: Oh, come on.

David: No, I really didn't.

Blair: Really?

David: After writing the previous one, I was like, "Oh, I don't know if I can do this again." Then I wrote this and then I said the same thing. [laughs]

Blair: You not only wrote this, you outlined, wrote, produced, and printed a book in the time that my most recent book was in production.

David: Wow. Does that make me fast or are you slow or what?

Blair: I think both. Yes, I think both, but I'll state once again for the record, I am envious of how quickly you write books. You don't just write books quickly. You write good books quickly. You make it look easy, which is one of the few reasons I hate you, but there are others. Beyond that, you're a well-balanced individual. This is more of a limited audience for this book than, say, your books on managing or the business of expertise. I'm drawing a blank on your previous books, The Business of Expertise or Secret Tradecraft of Elite Advisors. Is that right?

David: Yes, that's right. It's correct in the sense that there's a smaller audience, but it's the same audience in a way. The last three books, unlike my previous ones, were written to the larger professional services space. Our advisory and M&A work is largely focused on marketing, advertising, digital. The last three books have been written to the same audience, but there's a much smaller portion of that audience that would be interested in this topic. In that sense, it's a pretty small niche sort of an audience because it's-- For one thing, there's hundreds of thousands of professional service firms, but not that many people are thinking of selling. I don't know. I really have no idea how well this book will do. In some sense, it doesn't matter too much, really.

Blair: Why is that?

David: Because the main two things that I wrote it for-- Money is a part of it. I would love for it to make money like the other ones have. It was just to force me to put everything in an organized box and think about the whole M&A process. The book forces me to do that. The other is that we love doing M&A work. It's busy, but we'd love to attract more opportunity there. Those two things are different from it being a bestseller. It's not in the right category to be a bestseller.

Blair: I guess the primary market is probably anybody who's looking to sell their professional services firm or specifically marketing, creative or digital firm over the next few years, I suspect. Talk us through the numbers. How many of these firms, maybe even are there, if you want to speak to that, how many actually get sold? How many are actively being shopped at any one time?

David: Depending on which source you look at, let's say there's 55,000 firms in the US Now, most of our clients are outside the US, but just using the US as an example, all things being equal. If you don't categorize anybody in there, just take the whole number, about 1 in 400 will sell over their lifetime. You can change those odds dramatically with some changes to how you run things and so on. I would say there are probably 15 to 20 of us in the M&A space just for marketing, advertising, digital and so on. I would guess that there are probably a thousand transactions a year, somewhere in there. I'm not sure. It's rare, but when it happens to you, it really matters. It's like the lottery, I guess, or getting struck by lightning.

Blair: You probably, if you're going to sell your firm, it's likely you're going to sell it once. Is that right? You'll sell one firm once in your career?

David: Yes. Right.

Blair: Although a small number have sold multiple. How many transactions have you advised on?

David: Between us here, more than 200, and then of course, know the inside of lots of other stories. Those 200 are of many different types, too, like traditional sales on either the buy or the sell side, internal transfers, roll-ups to the holding companies, mergers, acqui-hires, but more than 200. Then, I don't know, 500 or 600 valuations probably over the years.

Blair: You have some experience in this space. It's interesting, you point out at the beginning of the book that this isn't exactly a field where people say, "Hey, let's get into this business, spin something up, and then exit, then sell it." Is it?

David: No, and you're wondering why? That's something we probably oughta, "There's no money in it, is that it?" That's a small detail. No, this is something where it'd be fun to really put our heads together and figure that out. I was thinking about investing outside the stuff I read about, and I was thinking about that. I was thinking, "Oh, you know these young entrepreneurs, a lot of them male, want to buy something that they would view as a passive investment." In other words, they just buy it, and they've got to go poke their head in the door every once in a while, and then it grows pretty regularly over time, and then they have an exit, and then they can change their LinkedIn profile and all of that. W

When they look a little bit deeper into this kind of a firm, they realize, "Oh," in almost every case, "The president, founder, whatever is also working in the firm. That's interesting." Either you have to know a lot to do this, or is it a lifestyle business? I'm just thinking out loud here. That's part of it. They're not passive investments. By lifestyle business, I don't really like that term, because it's pejorative, but I just mean you're participating because you enjoy it, not just because you want to own a firm. Then in the scheme of things, they're smaller and probably nominally profitable as that lifestyle business. Somebody on the outside would say, "Ah, I think I'll buy a storage place first."

Blair: It's a services business. It doesn't have the same cachet or economics as a SaaS business. You look at, say, accounting firms. They're typically sold in roll-ups where the partners get to near the end of their career. They think, "How am I going to get out of this thing?" They sell it to a roll-up. We'll talk about roll-ups in a few minutes. That's just a natural exit strategy. I think maybe marketing firms are closer to accounting firms in that front than they are SaaS businesses.

I'm already dragging us on too long into places that I didn't want to dwell. You talk about 10 options in the book when it comes to selling your firm or a transaction. I want to list all 10 quickly, and then there are three that I'd like you to dive into a little bit. Then if there are others where you want to explain a little bit more, I'll invite you to do that as well. Your first option is to merge with another firm. Second option is to take on a partner. Third is internal sale to a key employee. I think that one's pretty common. We'll talk about that one.

Fourth is something that seems to be really common these days, and that's sell to private equity. Fifth is a sale to a client. I've seen that a lot. Sixth is an acqui-hire, where you are essentially selling to somebody who wants your talent, you to come on board in their organization. Seven is an orderly dissolution. Maybe we should talk about that one too. Eight is a roll-up. Nine is an ESOP, or an employee stock ownership plan. 10 is an outside investor. You're okay starting with internal sale to a key employee, because it seems to me that is one of the-- Over the years, some of these are more in vogue than others at certain times, but this seems to be the common one. Is that correct?

David: Yes. Sometimes it's the first choice. I've worked with this person. They've been a fantastic employee, key employee. I want this firm to continue. This is what makes it that most likely to happen. Then other times it's the very last choice, because no outside buyer appeared in the process. It can happen for all sorts of reasons. Frankly, I love to see it happen. Many of these are successful. I don't have specific stat, but I would guess that most of them are successful.

What holds them back is a couple of things, and it could be one or a combination of these. Often it's the money side. If somebody had the money, would they buy this firm with it? Usually, if that's the choice, they go start their own. They don't have the money. Then they have to look for outside money from friends, family, whatever. The most common place now is the SBA 7A loan, which you can use. I think it's up to 5 million or something like that. It's fairly easy to qualify and so on.

If that doesn't work, then the owner has to what's called carry the note. They have to loan the money. They have a really strong vested interest in staying around, at least close enough to monitor how the firm is doing. It gets a little yucky. Those are some of the challenges of it. The problem on the principal side is that if you have multiple people, it's very difficult for you emotionally to make a choice and to select one of those because of the signal it sends to somebody else. You'll often and inappropriately just approach the team to buy you out. That's one of the challenges there. Another is just whether the person who you're in discussions with is actually entrepreneurial. Some people are working for you because they're not entrepreneurial and they never will be. Other people are working for you as a stepping stone to be an entrepreneur somewhere. Anyway, I'll stop talking, but that's a rough outline of that stuff.

Blair: It occurs to me that of these 10 different options you have when it comes to selling your firm, we could do podcast episodes on all 10. In fact, we have done some of these. We have done dedicated episodes to some of these. I'm grinning as you described the principal trying to combine a team of people whom they think it would make sense to participate in the purchase of the firm, and basically saddling these team members with each other. What happens in an ESOP as well.

I've seen that go wrong. We could dwell on this but we won't. You say sometimes it's the last resort, sometimes it's the first resort when it happens. It's a pretty satisfying thing to witness, I imagine, when there's a clear obvious key employee where everybody's rooting for that person to be the next owner of the firm. I'm sure you've seen a bunch of those and you feel the satisfaction of participating in that transition.

David: Absolutely, yes. Especially the ones that are really fun to do are the ones where you make the announcement to the team and nobody's surprised. It's like, "Yes, we figured. That's a natural leader. We've been listening and we've seen the transition happen informally and so on." If it can happen, that's fantastic. There are a lot of really good stories of that happening. One downside to it is that once you start that process with an employee instead of just hinting at it, you're going to get an answer. It's going to be yes or no. They're either going to buy you out or they're going to be gone, right?

Blair: Yes, it's over.

David: You have to be serious. There's no turning point here. You're moving forward.

Blair: Fourth on your list where I wanted to spend a couple of minutes as well as private equity, because it seems to me there's something in the air. It's maybe a slight exaggeration to say every week I'm talking to somebody who has sold their firm to private equity or is considering it. Is that an exaggeration? Are you seeing it as more commonly?

David: No, that's same thing.

Blair: What's going on? Why is that?

David: You wonder when these PE firms are going to wake up. [laughter] It can work really well.

Blair: I think they're actually making money. I think most of them know what they're doing, don't you?

David: In many cases they are making money. When we're managing this kind of a sale either on the buyer or the sell side, the PE firm is always on the sell side. You can expect a very different transaction. They're going to have professional managers and negotiators on the other side of the table They may bring four people, one CPA and three attorneys. You have to be prepared. You have to know how to navigate that. They ask very different questions, and they'll say, "Can we get a copy of your last quality of earnings report?" Somebody who's running an agency is like, "Sure." Then they go ask somebody what that is.

Blair: It's something you have to go pay another consultant to do.

David: Right, exactly. They also care a lot more about your growth pattern. They care more about your profit percentage. They'll care a lot more about not so much your new business plan but how many of your clients are on a recurring revenue arrangement. Then you have to realize that they're going to sell your firm someday. There's no PE firm in the world that has kept a firm forever. They are going to sell it, so there will be expectations you have to decide. I think it can be a fantastic option and sometimes it's not. It's just different than selling to an internal buyer.

Blair: More than any other buyer, as you point out in the book, they are really focused on growth. They're not buying net present cash flow. They're buying an expectation of future cash flow at a significant increase. They're looking your firm thinking, "Can we buy this, grow it in top line and bottom line and then sell it again?

David: They're looking at you like they want to see a small really well-tuned engine with all kinds of processes in a way to fill the new business pipeline. They're just going to put more gasoline on that fire. They don't know how you do what you do. They're just going to say, "Hey, talk to me about these financial results, and do you need more money?" All of their interaction with you is about money, which is gasoline on the fire.

Blair: Are you encountering more and more PE firms that specialize in this space?

David: Yes.

Blair: I'm seeing them. I can't keep track of them, but I hear a small number of names that come up over and over again.

David: There's at least 10, probably closer to 15. They might focus on tech. MarTech. I know there's one on higher ed, for instance. Our friend Hamid Ghanadan, what's the space he's in?

Blair: Biotech.

David: Yes, there's ones on biotech and so on. Yes, for sure.

Blair: Of your 10 options here when selling, the other one I wanted to speak to just a little bit was roll-up. It seems to me, over the years, you see roll-ups come and go. They're in vogue or they're not in vogue. The difference that I see today, and you didn't really speak to this in the book, but I was hoping maybe we could speak to it, that's what PE is doing. I think the difference is PE is backing these roll-ups where it used to be a really entrepreneurial agency principle typically would start buying other agencies. Is that the difference?

David: With the PE firm, the exit is almost always going to be selling it to another firm or to go on publicly traded markets. That's not always the case with a roll-up. A roll-up might very well be doing one of those same things that PE firm is. In other cases, they just want to be the next holding company, so to speak. There's a couple of those growing that way. In other cases, they want to sell to somebody that wouldn't buy all these little firms and wouldn't pay exorbitantly for all of this together, but it's going to be a pretty decent profit. A roll-up basically spends very little money of their own. That's why it's bad for the seller in most cases because they're assuming that they get your balance sheet, which they're going to use to fund the next purchase and so on. There's a lot of overlap, and there are PE-backed roll-ups, but there are differences too.

Blair: Got you. Let's speak now to the listener who is considering selling their firm. They're trying on this idea. They're thinking about reaching out to you. Beyond profit, what are some of the less obvious things that buyers care about? I'm thinking maybe some of the things that might surprise the seller. It's not just profit that's being purchased. We've probably touched on a couple of these in other episodes, but can you hit the highlights here? What's a buyer looking for beyond just the obvious of profit and profit trend?

David: Half a dozen things come to mind, but the first one is just so glaringly different from the rest because it always happens and it's almost always a surprise. It's always a surprise in one direction or the other. What I mean is it's almost always a bad surprise. It's normalizing principal comp. If you have been achieving-- Let's just say you want to achieve a 20% EBITDA every year and you've been hitting it, but you've been doing that in part by underpaying yourself. The buyer, they're going to adjust all that or normalize it. That's probably the first thing I would say is the fact that you're not doing yourself any favor by underpaying yourself.

Blair: You think you've got a business that has an EBITDA of 20% and you're quite proud of it. Others look at the numbers and say, "You only paid yourself a salary of $50,000 when maybe it should have been $350,000." You're artificially inflating your EBITDA by decreasing your salary. Is that what you're speaking about?

David: Yes. In some cases, the owner, the principal of this firm is so unsophisticated financially that all along they've been assuming that their profit at the end of the year is their salary. The problem is you can't count it twice. It's either EBITDA or it's comp. That's a surprise. Other things that come up that maybe people, if they thought about carefully, they might've anticipated, but it still comes out of the blue for them is how the seller's really nervous about client concentration. Sometimes the buyer is, but sometimes they just say, "Oh, don't worry about it. We'll build that into the terms and not the price." That's a pleasant surprise for people to hear.

I think everybody expects that a multiple of EBITDA at your firm is where it's going to start, but they might be surprised that the buyer doesn't even pay attention to it if they're not buying it for financial reasons. They might be buying it for capacity or for a geographic presence or for a recruiting hub or something like that. Those are some of the surprises. I'll give you one other one. Sellers think that buyers are going to care a lot about that second level team. I think it surprises them most of the time that there's fewer and fewer questions about them. They just assume that you've made a good choice there. They know you're going to be, in almost every case, there for an early portion of the earn out. They figure, "If there's a problem, she'll take care of it." That's something that surprises them too.

Blair: That surprises me hearing that because I assumed that having that second layer of management team in place was important to buyers. You're saying it's not as important as either it used to be or as the sellers think it might be.

David: If the principal is leaving right after the transaction closes, then they care a whole lot about that and they'll have special arrangements for them. Otherwise, they'll want to meet them. They'll ask questions. They'll look at whether there's an employment agreement, what non-compete there might be that's enforceable and so on. No, they're just like, "Hey, we trust you. You've achieved this with them. Why would things be different?"

They also are usually experienced in doing previous transactions. If they are, they know that very seldom do employees leave at that transaction boundary. They'll almost always give the purchase firm nine months, a year, year-and-a-half, because to them, it may be better benefits and a salary bump. Mainly, it's now there are more rungs on the career ladder for them. Unless the purchasing firm really messes things up, then these people are going to stay. Plus, if the principal is staying, this team trusts that the principal will protect their interests along the way.

Blair: Let me jump ahead a little bit and just pull in this thread a little bit more. Talk about cash on closing and earnouts, because you're referencing the principal staying. I know of some examples where principals just sold at a discount so they could walk away early. That's not typical in this space, I don't believe, is it?

David: No, it's not. We've done the range of cash at closing as a percentage of the purchase price. That would range from 0 to 100 when I look across all of the deals that we've done. Typically, you just assume that the cash at closing is going to be somewhere between one-half and two-thirds, maybe, depending on the deal. Every once in a while, it's more. Other times, it's less. You really have to balance the price with the terms. People focus too much on price. They should be thinking more about terms.

You can sign whatever you want. Now, you can leave at any point. Your employment agreement will end, and the terms of the earn out might mean you get a whole lot less money, but you can always leave if you need to. More or maybe equally as important is how long the earn out is. If it's just a year, you probably can endure something more than you could if it was-- None of them are more than three years anymore. They used to be five years, but now they're all three years or less.

Blair: I saw a five-year deal at the beginning of COVID. I was talking to the principal who sold, and I just went, "Oh my God, you poor thing." She said, "No, no, I'm actually quite happy to stick around for five years." The numbers were massive, so-

David: Oh, yes, right. A little different.

David: -I understood why she was happy to stick around. I know it's a big topic and we don't have a lot of time, but do you want to just go over the broad strokes of how a firm is valued? We know it's a multiple of EBITDA, but it's more about the non-obvious things that might not occur to a first-time seller. Go ahead and speak to the multiple as well, but then maybe to some of the other key things that a seller might not have thought about.

Blair: Here, you could answer the question by saying, "This is how a valuation is normally done in a normal transaction." If that's the case, then you're going to answer a very specific way. You would say, "It's probably always going to start with some multiple of EBITDA." EBITDA has to be adjusted for all those four things, earnings before interest, taxes, depreciation, amortization. Then you have some add-backs that you might argue for and so on. Then the other elements that are built in would include normalizing your compensation, how to weight previous years, how to think about your client concentration risks and so on.

There is some judgment in there, but most of it is very scientific. That's how you would start with a traditional valuation. Like I said, there are many valuations that aren't traditional at all. That doesn't mean they won't use your poor financial performance against you, even if that's not the reason they're buying your firm. Some people, really, they just need talent on a team that has built the culture and knows how to work together. They don't even care if you bring clients to the table. In other cases, they really want to add an entire service offering to their portfolio, and they assume you're going to lose your other clients. They have to think about how that would impact evaluation and so on. You're always going to start with some multiple of EBITDA, but it's not as simple as just that. That's just where you start.

Blair: You've got a really interesting, to me, chapter on contesting the valuation. It's really a bit of a detailed negotiating playbook. It's probably too deep to get into here. In fact, we could probably do a whole episode on that if you want to do that in the future.

David: That might be interesting to do, yes. I don't remember for sure, but I think I apologized at the beginning of that chapter, because basically, this is how you screw the person who bought you and is not living up to their word. It's also because we design these, if we're working for the buyer, or we'll negotiate them if we're working for the seller. You know exactly what you would do.

It's like, "Ah, I've worked at that bank a long time. I know exactly how I would rob it at this point." [laughter] That's what that chapter is about. It's just all the ways that you can maximize your opportunities if the working relationship has faltered. If it hasn't, then you ought to stick with the spirit of the agreement and not use any of those loopholes. There are loopholes and there are ways to use them.

Blair: You talk-- I'm looking for the chapter now, it's escaping me, but there's a part where you talk about the letter of intent, and you basically say there's two different types of buyers where one will invest a lot of time ahead of the letter of intent, and one will invest a lot of time after the letter of intent. They issue letters of intent or LOIs pretty readily. This had never occurred to me before, but as you were describing it, I was thinking, "Oh yes, I've seen both of these."

David: How about requests for proposals too, right?

Blair: Yes, it's really the same thing, isn't it? The client who's just like, "Let's send an RFP to 12 firms. Let's issue an LOI to four or five different firms. We don't really have a strong preference for either. Let's just shake it out. Let's drag out the negotiation, the due diligence and negotiation process." That's beyond saying it's quite similar to the RFP behaviors that some buyers demonstrate when issuing RFPs. What else would you care to say about it?

David: If you have a serious, respectful buyer, they're also careful about how they make acquisitions. They're going to do a lot of thinking and asking questions before they send you an LOI. They also will probably not give you busy work because of their experience and because of their level of respect for you. When you get an LOI at that stage from that sort of a potential buyer, all they're doing after you sign it is just verifying the assumptions. They're not looking to change any of the terms. They're just like, "Verify these and make sure we're okay." That due diligence period is shorter too. It might be six or eight weeks instead of four to five months.

The other buyer is the one that they don't really have a strategy. They're hoping to see who will send signals of urgency or desperation. There's no cost to them, just like that client you were talking about that said, "Hey, let's send an RFP request to 12 firms." There's no skin off their teeth, just a little bit more to read. Everybody else is the one jumping around. They do this, and often you can spot these because they don't spend a lot of time getting to know you, and you're surprised that you got an LOI after that. It's like, "Wow, that's really flattering," when it isn't necessarily the case.

The other way to see them is that they will send you a list of materials to send that they just copied off of Google somewhere. It's like, "Please send your such and such." Like, "How frequently do you oil the tractors or something?" Those are the firms where they'll see how desperate you are. You'll have to do all this work to clarify their expectations. You'll send this stuff to them, and meanwhile, they're having to sort through four of these instead of one.

They get in and they say, "Oh, we didn't realize such and such." That's one of the most basic facts about your firm's performance. Then they want to change the terms, and then you've waited all this time and done all this work and you feel a little bit trapped. There's ways to see these signals all over the place. This is just one example of how professional, how serious it is, what the culture is going to be like too, because that's really-- How do you say it? The sale is a sample. The dating here is the marriage. How you're treated here, it should send you a pretty reliable signal about what life will be like a bit later.

Blair: It blows me away that Warren Buffett can issue a letter of intent on a multi-billion dollar business and close in 30 days. That's his commitment. We will close within 30 days. Then somebody buying an ad agency for $5 million will take the better part of a year to do due diligence.

David: Exactly.

Blair: You can hear it in my voice. I get riled up. I haven't been through these. Personally, I've never sold a business, but on behalf of my clients, when they're in this position, they've signed the LOI and they're just-- I see it as an ongoing negotiation in which you have no power. They just keep coming back and back and stalling and stalling and asking for more information and driving your sunk costs deeper and deeper to the point where you just want to be done with this, and you will cave. When they come back and inevitably say, "Yes, it turns out for all these reasons, your business isn't worth what we thought it would be."

David: The market has changed.

Blair: All these things. That drives me crazy. There's got to go be a way around that. Do you have any advice for people on handling the due diligence period and the negotiation other than not wanting it so bad?

David: The life-saving thing you could do is buy this book. That seems so obvious.

Blair: [laughs]

David: It seems so obvious. I feel very strongly, and every one of our clients gets this advice. The biggest danger is taking your eye off the ball and letting things-- the reasons you might be considering selling, letting things slide even further so that you're more desperate. You want to run your firm during this process as if you're not going to sell it because you have to be able to walk away from it. If it makes you mad enough, you may walk away and hurt yourself in the process. I'm a big believer in that sometimes too. It's absolutely, don't take your eye off the ball. Just assume it's not going to happen. Keep making the big choices you would have made before the courageous ones, and that way you'll have the power to walk away.

Blair: Negotiating, they refer to it as your best alternative to a negotiated agreement. Your point here is your best alternative to a negotiated agreement is to continue to run a profitable business. I think that's what you mean by 'don't take your eye off the ball.' In your chapter 23, D-Day, It's Time for a Decision, you list three things that drive people forward to maybe make a decision that isn't in their best interest. I'm just going to read them out here because I thought they were bang on.

The first one is you've encouraged sunk costs, time and money, but the distraction is actually more impactful than the money. That just gets me when I try this on, the distraction of always, is this thing going to close? Is this thing going to close? The second one I hadn't thought about, you've told some people about this already and you'd be embarrassed if you had to reverse course. That had never occurred to me, but as soon as I read it, I thought, "Oh yes, I can see how that--" I would do that. I would get all excited and confide in people, and then be like, "Oh, now I've got to go back and say, 'Yes, it didn't work out.'" Because they've already started to plan in their heads to spend your money. [laughs]

David: Right, yes.

Blair: Then the third one is you've allowed yourself to dream about that next stage in a way you've never done before and you can't bear the thought of abandoning that dream. That's sunk costs of emotional sunk costs. You've already mentally moved on. That's what you mean by 'don't take your eye off the ball.'

David: Yes. If for some reason that deal falls through, that person is a walking dead person after that until they find another buyer. I know you know John Warrillow and you've read Built to Sell as well. He really had a huge impact on my M&A career, because I saw so clearly what he was believing that you need to build your firm to sell it, and then adding the idea that if you don't sell it, you'll love running it so much more. It's one of those very rare times when you can have your cake and eat it too, essentially.

Blair: The better job you do of getting your firm in shape to sell where it becomes desirable to a buyer or multiple buyers, the more valuable that business is to you and the less you would want to sell it or the more money you would want for it. Therefore, you have this greater alternative, "If nobody buys it, it's still a profitable business, and if I've done this right, I'm not a slave to it." Would you ever sell Punctuation?

David: Ha, I've had nibbles. Went nearly to the altar with a 30% owner who's still a great friend. It was a really wonderful process that I learned a lot in. Yes, I would. If it was enough money for me and Jonathan, he and I do this together, and if it led to a role of me speaking, writing, and sales, then yes, but we're pretty darn happy and make a lot of money doing what we love here. The answer is yes. Is that an offer?

Blair: I'll have ChatGPT write up an offer, and then I will drag out the negotiating process for over a year.

David: Right, and send it to eight other people too.

[laughter]

Blair: Last question, you and I know lots of principals of these firms who have sold, and you can put them into two camps, never been happier, best thing they ever did, and also the other camp of, "Oh, he lost his identity and his sense of purpose, and he died six months later." Recognizing you have a bias here, you help people sell their firms. What's your observation? Generally, if you make a generalization, are these principals who sell, are they appreciative, grateful? Do they look back on their decision that it was the right one? How often do you see the pattern of, "Oh, I should have kept it?" That's Dan Sullivan's advice.

David: Really?

Blair: Founder of Strategic Coaches. You sell your business, then what are you going to do? You're going to start another one. Just fix the one you've got.

David: I think that, to answer your question specifically, that principal who sells very seldom regrets selling. In fact, once that idea is in your head, I don't know what percentage, maybe a fourth of people actually fix the problem that was underlying that hatred of your business, and then they go on and love it and just give themselves a dope slap that they ever thought about selling it. That happens sometimes.

For a lot of the people, once you have that idea of selling, you're going to sell. I don't think people regret selling. I think they regret selling to the wrong firm, the wrong buyer, and with the wrong terms. Maybe half the time, I would guess, they sold to the wrong buyer. For all of them, their worries about the team are displaced, and they wish they'd been a little bit more selfish. They don't come right out and say it, but if you get them talking after a few beers, I'll bet you they would say that. I have had many people actually tell me that.

Blair: Meaning they felt, in hindsight, they were too generous to their team in participating in a sale?

David: Yes, exactly. Then just thinking about the earn-out experience, roughly, I would say a third of the sellers really loved it. It was great. A third of them thought, "This is what I expected. It's okay. I like these people. I'll be fine quitting, but I like coming to work every day." That middle stuff. Then a third have renamed the earn-out to a sentence. They're like, "Ah, I got to go get out of here." They knew. It wasn't usually a surprise, but they didn't know it was quite that bad. They just hate every minute of it, and they cannot wait to get out. Frequently, they'll leave early.

Blair: I think that's about the pattern I see right across the spectrum. Interesting. There was a time when the obvious buyer was a network agency, especially when the agencies we were dealing with were more pure ad agencies before they became more specialized and more niched. There was a time when most of the principles of these ad agencies who'd sold to network agencies that I talked to stated their regret about selling. That time seems to be behind us. I think more frequently now, I talk to founders who have sold their agencies or their marketing businesses, whatever we call them now, and are happy and thrilled and have moved on to the next thing.

David: It really has a lot to do with the cycle that we find ourselves in. Having been in this space for 30 years now, I've been able to see some of those. Whatever cycle we're in carries with it certain expectations about sales, price, and about terms, and about how long you're going to stay, and why even it's being done. If you think back in the early days, the geographic moat was just destroyed. National businesses at the same time needed agencies that were more national. The M&A activity was being driven by finding representation in these cities. Then after that, it was the heyday of inflated stock from the holding companies. I know it's hard for people to picture that, but that was happening at one point.

They had all this stock. The purchases were made with stock and not with real money. Then you had Dentsu after that. Japan that had 90% of its revenue in that country alone, and they realized, this is, especially given Japan's financial growth stall and so on, it was just getting difficult for them. Then you had firms that-- More the consulting firms. Now, this is where people will start remembering, that needed creative, they needed data, they needed digital chops. They couldn't get any of that. You had the whole S4 thing when Sir What's-His-Name was banished.

Blair: Martin Sorrell.

David: Yes. He had to start another competing one, and that drove a bunch of prices high for a moment. Then you had COVID when agencies needed to smooth out their performance because of dips in certain areas. That drove a lot of stuff. Then right now we have lots more buyers than we have sellers who are willing to sell for the price they're being offered. There's lots of sellers, more sellers than ever, but they're more just like, "I'm tired of this business right now." Wherever you find yourself in this cycle, it's just interesting. It's better to see the arc of history over this stuff too so that you know what to expect.

Blair: That's a great history of M&A activity in this space. Nice summary. Thanks for that. This really is a good book. Even though the title Selling Your Professional Service Firm: A Primer is an accurate description of what it's all about, I would encourage the broader listener who is interested in getting better at running their business and who isn't currently thinking about selling. I think it's a great manual for optimizing your business today and optimizing it for profitability and enjoyment. I think it's got a broader audience than just the obvious one. I suspect it will sell very well like all of your previous books. I wish you the best of luck. Thanks for the conversation on the book, David.

David: Thank you, Blair.