Patrick discusses his background and how Level Agency was founded in 2010. He talks about their initial focus on the education vertical and expanding to other verticals like B2B, financial services, home services, and e-commerce. Patrick emphasizes the importance of being experts in a specific vertical while also having the ability to learn from different accounts. He mentions that agencies have an advantage in learning about channels due to their exposure to various clients. The conversation then shifts to M&A activity, specifically the management buyout of one of their partners. Patrick describes how he approached the idea of buying the agency from his partner and how they secured an SBA loan for the transaction. Overall, it was a smooth process guided by SBA guidelines which required a 100% cash deal without earnouts or rollover equity. Patrick discusses the process of selling their company and the involvement of the Small Business Administration (SBA). They explain how they had to follow SBA guidelines, go through a fair market valuation, and come up with a down payment for the sale. Patrick also mentions that they had favorable terms with the buyer and were able to borrow against their 401K for the down payment. They compare the process to buying an expensive house and mention that they had to complete all paperwork within a specific timeline. They emphasize that having experienced advisors was crucial during this process. Later, they talk about how a private equity firm was interested in acquiring their company after nine months of running it themselves. This decision turned out to be one of their best as it led to a successful partnership. Patrick acknowledges that their friend who sold them the company might have felt some regret or envy seeing what happened next but highlights their continued friendship. In terms of advisors, they initially worked with an MA attorney acting as an advisor during management buyout (MBO) due to dealing with an SBA loan, and later set up an advisory board consisting of industry experts when considering offers from potential acquirers. Patrick discusses the decision not to go through a formal process when selling their organization, as they believe it resulted in a fair deal. They highlight the benefits of working with agencies and employees that are not actively looking to sell or leave. The speaker shares an experience where running a process led to a higher offer for their company. They express satisfaction with partnering with Dubin Clark, emphasizing their financial expertise and support in mergers and acquisitions. The partnership also provides access to operating partners and financing opportunities. Patrick values Dubin Clark's belief in their vision and appreciates the ability to take risks while receiving guidance from experienced professionals. They stress the importance of assessing how potential partners handle difficult times before entering into an agreement. Lastly, they advise understanding concepts like adjusted EBITDA during the MBO or private equity process and recommend seeking assistance from a reputable sell-side advisor. The transcript discusses the importance of structuring books, representing expenses accurately, and understanding valuation methods for selling a business. It emphasizes the need to sell when the business is doing well and highlights the impact of showing a down year on valuation. The conversation also touches on the significance of having succession plans in place and being replaceable as a CEO or founder. It advises against overinflating one's value and stresses the importance of scalability and contingency planning. Additionally, it mentions that enterprise value increases when CEOs are replaceable and have built strong teams around them. The transcript concludes by discussing post-sale changes in responsibilities and the necessity of succession planning at all stages of a company's growth.
Patrick discusses his background and how Level Agency was founded in 2010. He talks about their initial focus on the education vertical and expanding to other verticals like B2B, financial services, home services, and e-commerce. Patrick emphasizes the importance of being experts in a specific vertical while also having the ability to learn from different accounts. He mentions that agencies have an advantage in learning about channels due to their exposure to various clients. The conversation then shifts to M&A activity, specifically the management buyout of one of their partners. Patrick describes how he approached the idea of buying the agency from his partner and how they secured an SBA loan for the transaction. Overall, it was a smooth process guided by SBA guidelines which required a 100% cash deal without earnouts or rollover equity.
Patrick discusses the process of selling their company and the involvement of the Small Business Administration (SBA). They explain how they had to follow SBA guidelines, go through a fair market valuation, and come up with a down payment for the sale. Patrick also mentions that they had favorable terms with the buyer and were able to borrow against their 401K for the down payment. They compare the process to buying an expensive house and mention that they had to complete all paperwork within a specific timeline. They emphasize that having experienced advisors was crucial during this process. Later, they talk about how a private equity firm was interested in acquiring their company after nine months of running it themselves. This decision turned out to be one of their best as it led to a successful partnership. Patrick acknowledges that their friend who sold them the company might have felt some regret or envy seeing what happened next but highlights their continued friendship. In terms of advisors, they initially worked with an MA attorney acting as an advisor during management buyout (MBO) due to dealing with an SBA loan, and later set up an advisory board consisting of industry experts when considering offers from potential acquirers.
Patrick discusses the decision not to go through a formal process when selling their organization, as they believe it resulted in a fair deal. They highlight the benefits of working with agencies and employees that are not actively looking to sell or leave. The speaker shares an experience where running a process led to a higher offer for their company. They express satisfaction with partnering with Dubin Clark, emphasizing their financial expertise and support in mergers and acquisitions. The partnership also provides access to operating partners and financing opportunities. Patrick values Dubin Clark's belief in their vision and appreciates the ability to take risks while receiving guidance from experienced professionals. They stress the importance of assessing how potential partners handle difficult times before entering into an agreement. Lastly, they advise understanding concepts like adjusted EBITDA during the MBO or private equity process and recommend seeking assistance from a reputable sell-side advisor.
The transcript discusses the importance of structuring books, representing expenses accurately, and understanding valuation methods for selling a business. It emphasizes the need to sell when the business is doing well and highlights the impact of showing a down year on valuation. The conversation also touches on the significance of having succession plans in place and being replaceable as a CEO or founder. It advises against overinflating one's value and stresses the importance of scalability and contingency planning. Additionally, it mentions that enterprise value increases when CEOs are replaceable and have built strong teams around them. The transcript concludes by discussing post-sale changes in responsibilities and the necessity of succession planning at all stages of a company's growth.
00:02
David Rodnitzky
Okay, Patrick, welcome to the Agentic Shift podcast. Thanks for joining us today.
00:08
Patrick Patterson
Absolutely. Thanks for having me. I'm excited.
00:10
David Rodnitzky
Yeah, me too. Let's start out. I'd love to get the sort of background story around level. How did you get involved? I think you joined it midstream, if I'm not mistaken. Maybe I got that wrong. But give me the two minute story of how Level became Level.
00:24
Patrick Patterson
Yeah, absolutely. The story I like to tell about myself. I was a math computer science guy that went to the dark side, that is, sales and marketing, in 2005. So I actually worked on the client side for about five years in sales and marketing. And then it was 2010, the company decided to outsource all of our jobs to an agency. And so we looked at each other at that time, and the founder, Thomas Donahoe, and I were coworkers at that time and said, hey, let's never let that happen again. Let's start an agency. So in 2010, I helped him, in a consultative way, stand up what is now level agency, and the goal was to create the agency we wanted to work with when were on the client side and build the company we wanted to work for. That started in 2010.
01:05
Patrick Patterson
I went into the tech startup world for about two and a half years after that, and when it was at a size that was able to bring me on, I came on in about 2012 to run operations. It was kind of a joint effort between Thomas, myself, and another Patrick, and the three of us ran this. We were Pittsburgh's fastest growing company, focused predominantly on performance marketing in a couple of chosen verticals, and then became president about 2018. Somewhere around there and over a period of time, the founder, Thomas Donahoe, wanted to leave a legacy and take some chips off the table, and so we ended up actually doing a management buyout in 2021.
01:46
Patrick Patterson
And so it's Patrick and I that did that, and then very recently took on a private equity partner about nine months ago in an exit that we did in man, that was September of last year, September of 2022. So it's been a journey along the way. We've spun off a few divisions. We've started some things. It hasn't been a straight line to where we are, but it's been a fun journey.
02:11
David Rodnitzky
So the two leaders are both in charge. The answer is Patrick.
02:17
Patrick Patterson
Yeah, that's right. We only hire Patrick's here. It's a very important pre rec. Yeah. So it became confusing. At one point, we shared an office, and someone would come in and say, Patrick. And we'd both just say, yes. We've gotten really good at knowing who you're talking to, and we actually go by our initials. So I'm PRP, he's PVG, and it's been really good.
02:36
David Rodnitzky
There are other agencies that have been founded by Patrick's. I know there's a guy named Pat East who founded Hannipin Marketing, which is a PPC Hero. I think that's another Pat that immediately comes to mind.
02:46
Patrick Patterson
We're really good at think. I think that's the idea. I'm a big fan of all Pats.
02:50
David Rodnitzky
Yeah. Are you a Patriots fan, then?
02:53
Patrick Patterson
So I'm in Pittsburgh, so those are fighting words, David. No, we're Steelers fans here.
02:58
David Rodnitzky
Yeah, I know. I figured. So what would you say? So you said level. I think if I read on your bio, you actually started an online lead gen for education.
03:07
Patrick Patterson
Is that right? Yeah, that's right. Yeah. So that was the client. We were at one of the large for profit education systems. So we had a lot of really good experience in education. So we started predominantly, we're 100% education. We were actually named university Bound. And so that's where we started in 2010 and then quickly developed a really powerful playbook for the education vertical. And what we found was that Playbook actually translated really well to complex sales environments like B2B. And so we added B2B as a vertical around 2014, 2013. And at that point, it didn't make sense to go to market as university bound anymore. So we changed our name to level agency to expand our reach. And since then, we've added financial services and home services and ecommerce as verticals as well.
03:58
Patrick Patterson
So we've taken this idea of data driven marketing and a complex sales environment that could use a lot of really sophisticated targeting and audience segmentation. And how do we translate that into verticals for success?
04:13
David Rodnitzky
It's great. Yeah. I always recommend to people that they name their agency something that means nothing because you get trapped if you're university bound. When Pepsi comes to you and says, we're thinking about using you, but it seems like you're only selling to universities, you run into trouble. So I think level is a great name.
04:32
Patrick Patterson
That's exactly what happened. And it was funny, we had a counterpoint to that very early on when were talking to a university system and were named university bound, and they said, we don't want to work with an agency that only does.edu. We want to work with an agency that does more than that. And it's interesting. I think there's value. You talk about why do you hire an agency? And you hire them for a couple of reasons. One is we work in all the platforms. We're not just Google, right? So we know we can put together an omnichannel plan. So that's exciting. But also, we work with multiple accounts, and we've tried it over here. And what might work in ecommerce might work in education.
05:10
Patrick Patterson
And we've actually pulled some user generated content best practices from ecommerce and brought them over into B2B, and education in some cool ways. So there's that great network effect you get by working in multiple verticals. I think as long as you're still able to, I think, be experts in that vertical and hit home runs and grand slams, I think you could go too wide and try to do everything. So it's that what we're all trying to do is just find that balance between how do we do really good work, but how do we expand our total addressable market in smart ways?
05:43
David Rodnitzky
Absolutely. I've always said that agencies know more about channels because they look at so many different accounts, they just learn faster. And the client really should know more about their vertical. You can be an expert in, but ultimately the client team should know backwards and forwards. It's January, and it's time to start promoting New Year's resolutions ads, because that's when we get most of our clients, whatever. But it's a good partnership. When you have the agency that is looking at many different accounts and can speak in very great detail about best practices in the channel, and then you have the client who can speak in very best practice, deep detail about what's happening in the vertical.
06:20
Patrick Patterson
Well, 100%. Specifically, in the past three years, this has been true of marketing since you and I have started this. But specifically in the past three years, the pace at which things are changing and the complexity of an omnichannel marketing approach, the playbook. Having a playbook in a certain area is only the first step. Right. You need best practices, but then you also need this ability to test and to learn and to grow with your clients. Right. And a lot of times, we encourage all of our clients to have test budgets. But if we have, let's say we have 50 accounts and they all have test budgets, that means we can collectively learn, and we're not learning on everyone's dime, and then we can pull those best practices through. And it's really powerful.
07:04
Patrick Patterson
But it's not just the big clients that are innovating for the smaller clients, it's vice versa as well. Because there might be a nimble, smaller client that can do something that then you can take to a larger account and say, hey, this really worked. Let's try it for you, and we'll find out. And that ability to really stay agile and stay nimble in the face of everything that's changed over the past year, three years, year, six months, has been really valuable.
07:27
David Rodnitzky
Yeah. Standing still is moving backwards.
07:30
Patrick Patterson
That's right.
07:31
David Rodnitzky
So let me ask you about some of the M&A stuff, because that's what I really want to focus on. You've built a great business, and you obviously have a great amount of experience running an agency successfully. So you said that you initially did a management buyout of one of your partners. Talk about that. Just generally, how did that happen? Was it easier than you thought? Harder than you thought?
07:54
Patrick Patterson
You know what? Looking back on it, I remember that it was 2020. A few things happened in 2020 and in the world. It was a weird time for all of us. And I had never gone through. We had spun off a few divisions, and we had gone through some smaller transactions. This idea that Pat and I could buy the business, it seemed like a dream, right? It seemed like something that was not attainable by a kid who grew up on a farm in La Trobe, Pa. And it was through a lot of really great conversations in my professional networks, either through vistage or YPO, where were having these conversations. Tom was looking to derisk, and he was entertaining some conversations around selling the agency. And there was this moment, and it was December of 2020.
08:44
Patrick Patterson
I was like, hey, if you're going to sell the agency, would it be possible to sell it to us? It was literally that naive. I didn't know. And he's like, man, if we could do that solves all my problems. Right? Because he had built something. He was the founder. There's that founder feeling of, this is your baby. And he named it, and he built it from scratch. And his house was second mortgage to run it, and we had built something together. And in his mind, if he could preserve that legacy and give it, to hand it off to the folks that he really trusted to continue on where he started, he was really excited about that.
09:25
Patrick Patterson
I entered into that month knowing nothing about M&A and saying, basically calling up a friend who is one of the top M&A attorneys in Pittsburgh and saying, hey, if I wanted to do this, what should I do? And that started the had some. We ended up at our level, at our size, being able to talk with the SBA, and we ended up doing an MBO through the.
09:53
David Rodnitzky
And that was an SBA loan. Is that what you got?
09:56
Patrick Patterson
Yeah. So we got an SBA loan to bridge the amount that Pat and I didn't, because were running a successful business, but also, the books were clean, and were running it the right way. That SBA conversation, everyone told me that was going to be the worst part of the whole thing, is actually pretty smooth. We went through it. They asked a whole bunch of due diligence questions. That was really helpful for me, having never gone through it before, because the SBA actually has all these guidelines of how to do it the right way and what they're doing. And it may seem archaic to folks that have done it a thousand times, but for me, it was really nice to say, oh, this is what the SBA does, and so this is what we're going to do.
10:41
Patrick Patterson
So it actually made that whole process really easy, because were just following their playbook, their guidelines, their suggestions, and I didn't understand this at the time. One of their requirements in a management buyout when you're dealing with the SBA is that it's 100% cash on the barrelhand, so there's no earn out and there's no rollover equity, and that was one of their requirements. Now, I don't know if that's still a requirement or if that's still a thing. I think because of that, it forced us to create a really positive deal from go. And I know. I think you and I have talked about the problem with earnouts, or the problem with maybe even just understanding the problem with a founder sticking around for that period of time after it created this clean break that I think was hard for Thomas to let go.
11:35
Patrick Patterson
But also just like a clean break of, hey, this is the next chapter. And so, following the SBA's guidelines, and it forced us to be really buttoned up with paperwork and put together the data room and do all the things we had never done prior. And so it's just a really good. That detailed process forced us to understand what it took to do it the right way, if that makes sense.
11:59
David Rodnitzky
Yeah, that's very interesting. So, SBA basically saying, you got to give the entire value of the deal in cash on the day the deal closes. Is there a ratio that they had? Did they say, we're willing to give you 30% of the total value or 70%? Or did you just ask for a certain amount of money? How does that work?
12:20
Patrick Patterson
Yes, went through a fair market valuation at that point. And the understanding from Tom and a manager buyout is about other than an ESOP is probably the most favorable situation for the buyer versus the seller as you're going to get. So we had very favorable terms with Thomas, and as long as the valuation came in at a certain point, and were good. And so it did, and were good. So we paid market, or a little bit under market because it was an MBO. And so the SBA was good with that. And then Pat and I had to come up with a down payment, basically, at that moment as well. And that's a moment where you're looking at and you're like, hey, in my life. Again, this is a newer journey for me.
13:07
Patrick Patterson
That was the biggest check I ever had to write personally, coming up with that, which I literally borrowed against my 401(k) to pay for at that moment to take out a loan. A little scary moment at that time. But the requirement was basically for us to get under the value, make sure were getting a loan that was, the loan to value ratio was right against a fair market value, and then also making sure that we had a down payment. It was a lot like buying a house, to be honest. Just a very expensive house.
13:37
David Rodnitzky
Yeah. Without a roof.
13:40
Patrick Patterson
That's right.
13:43
David Rodnitzky
I want to ask one question about the fair market value. So, fair market value, sometimes there's something called a 409(a) valuation for stock purchases, where you determine the fair market value, but you're really doing it to come up with the lowest valuation possible so that you can give people attractive stock options. And then there's an evaluation where you have someone who's an expert in the industry, who knows the multiples and tries to come up with a, this is really what the company would be worth if it went out and sold. I'm guessing that your fair market value was the latter and not the.
14:12
Patrick Patterson
That is correct. That is correct.
14:14
David Rodnitzky
And so who was that group that you found that you both trusted to come up with this valuation?
14:19
Patrick Patterson
Yeah, were given options by the SBA of folks that they worked with, and we agreed upon it. Buyer and seller agreed on this was going to be the right person. It was absolutely a third party. Right. Because everyone has a different idea of value, especially in our businesses. And so, again, it was really nice. The SBA was a handholding process where it's like, hey, we have these three people that we work with to do this. Pick one, and we picked one, and everyone is pretty happy with it.
14:48
David Rodnitzky
That sounds like a great outcome. So I think you and Tom are still friends, and to this think yeah, it seems like everyone left this deal happy and got what they wanted. It doesn't sound like M&A is terrible, but I always say that the definition of a good contract is everyone is slightly dissatisfied with the outcome.
15:11
Patrick Patterson
Yeah. And there were moments of that. One of the nice things with the SBA is the sales purchase agreement and his contract and non competes, and all that stuff had to be done well ahead of time. We signed an LOI, I think it was end of December, early January, and we closed at the end of March. So it was a quarter that we spent. So 90 days. But we had to have all the paperwork done within the first 45 days. Right. And having gone through just a more recent transaction, I can say a lot of the paperwork was done in the last week versus the first 45 days of due diligence. So that was good, because it gave us a lot of time to make those compromises.
15:53
Patrick Patterson
And yeah, there are absolutely things at that moment where maybe we didn't get exactly what we wanted and maybe he didn't get exactly what he wanted, but cooler heads prevail in those moments. And because were aligned on the broad strokes, a lot of that stuff was just small tikitaki stuff, which, as you can kill deals. And I think were probably just lucky that we're logical people and were able to make logical arguments, and we came to it. But as far as everyone being satisfied at the end, I believe I've talked with Thomas since, and the next part of the story has Thomas involved in it with the private equity firm. So explain that in a second. But Tom and I are still friendS.
16:39
Patrick Patterson
He has a great job as a CMO of a large company, and he's enjoying himself there, and we still remain close. And he felt good that he was handing it off and the legacy was being preserved. He was able to take his extract value from an amazing thing that he built. And the hardest part from there is the next part of the story, which is at that moment that became our company. Right. And it's hard for anyone, I would think in Tom's shoes, to not look at the next chapter and say, man, I wish I would have, or I could have been a part of that. But actually. So it was six or seven months later, this private equity firm had actually hired Thomas to help them vet a potential platform, a digital marketing platform company that they wanted to add to their portfolios.
17:28
Patrick Patterson
And he talked to a few, and when none of those worked out, he was like, hey, I know it's maybe a conflict of interest, but you should talk to these guys at level. I'll stay out of the deal completely. But he actually made the introduction to this private equity firm, saying, why don't you talk to these guys at level? And I'll be very honest with you. We were nine months into running the business, owning the business, and a private equity firm was probably, were getting private equity firms reaching out to us once a month, if not once a week at that moment, and I would turn all of them down. And I got a text from Thomas saying, hey, this is the real private equity firm you should be talking to.
18:05
Patrick Patterson
And so we took an introductory call, saying, I'm always open to learn, and I'm open to conversations. The more we learned, the more we understood how this firm and its Dubin Clark, which is a middle market private equity firm. The more we learned about them, the more we realized it was a really good partnership. And so Pat and I generally weren't taking it seriously. And then at a moment, it became serious. And I'm sure you have a lot of questions there. They came with an offer, and we had a lot of decisions to make, and we ultimately decided that it was a really good partnership, and we brought them on. And that has been one of the best decisions that I've made as well. And you never know until you get into bed with someone what it's going to be like.
18:51
Patrick Patterson
But it's been just a phenomenal nine months. And so Tom made that introduction. So Tom got to see this all happen in a company that he just exited, and then a second event happening. So I'm sure that was difficult for him personally, but I will say he's been professional, he's been a friend. He's been an advocate. He continues to be, and I'm hopeful that he remains in the A. He's been a great friend of mine for a very long time.
19:23
David Rodnitzky
Yeah. I'll just add two comments on Tom maybe missing out on this exit. First is he traded cash for freedom or freedom for cash, whatever. At the end of the day, he got out of the business, and he had freedom, and you were still slogging away. And so there's a huge amount of value there for him. The second thing is, my adage is, it's better to sell too early than to sell too late.
19:45
Patrick Patterson
That's right.
19:46
David Rodnitzky
And so who knows? He sold. It's not just as likely, but it does happen that someone sells their company, and then something terrible happens in the industry. Something terrible happens to the company, it goes down by 50%. And sometimes you get an outsized return. Sometimes you get too little relative to what the company is going to be worth. But I think it's fantastic that you guys are all, not only guys, are all still good contact. That he actually brought you the PE firm, that was a surprising twist. So let me ask you about that experience. I guess the first question is, when you did the MBO or when you sold to Dubin Clark, did you have an investment banker involved? Why or why not?
20:28
Patrick Patterson
Yeah. So when we did the management buyout, we did not. And I had an M&A attorney and a really good accountant, and my M&A a. ttorney was acting as our M&A advisor. And because he's a friend and because he's one of the best in Pittsburgh, it was easy for him to give that advice, especially during an MBO, with dealing with an SBA loan. Pretty easy stuff, right? It's very by the book. After we did the management buyout, we actually worked with an individual here in Pittsburgh and we set up an advisory board. And one of the members of our advisory board had M&A expertise that was important to us because we knew that acquisition was going to be part of our strategy. It wasn't just going to be purely organic growth.
21:20
Patrick Patterson
Pat and I wanted to dip our toe in purchasing agencies, and so we wanted to make sure that we had some expertise in house that were able to help us with that. He ended up not helping us buy agencies. He actually helped us sell an agency. So he was our advisor through the process, along with my M&A. Attorney and our accounting firm. And that was our deal team. And we are also very lucky. We have in house counsel, we have a general counsel on staff here, which was able to. He was able to do a lot of the heavy lifting. And so we put together a pretty robust deal team at that moment when we got the first offer, and then we had an advisory board as well that were able to run this up against.
22:03
Patrick Patterson
And these were industry experts that have gone through this a bunch of times advising us, and I would not have been able to do it had it not been for those smart people. I highly recommend that if you are going to go through this, you have someone who can tell you what's normal and what's not normal during the process. Literally, our sell side advisor, that was probably 90% of what he did with me, which was, I'd have a conversation with him. I'd be like, hey, they're saying this. Is that normal? Because, I don't know. I've not been through 100 transactions. And he's like, yeah, no, that's market. That makes sense. No, that's a little abnormal. Let's dig into that. And so it's that ability just to, there's no substitute for experience in those scenarios because it is moving at a fast clip.
22:51
Patrick Patterson
Once you sign the LOI and then once you're in due diligence, it's moving pretty fast and there's a lot of decisions to make. So I highly recommend you have someone in your corner that's helping you understand what's important to argue about and what's not. And what are hills we need to die on and what are hills that you should just give up on?
23:11
David Rodnitzky
Yeah, that's great feedback. I want to ask a question and then I'm going to get back to the normal versus not normal. You said that you had received emails or phone calls from other private equity firms or other acquirers before talking to Duban Clark. Did you do any sort of process where you called six potential buyers and said, all right, we're thinking about selling? Broadly speaking, would you be interested or did you just have such a connection to doom and Clark that you just went directly with them without talking to the other potential acquirers?
23:49
Patrick Patterson
Yeah, we did not go through a process. We were not preparing to sell. We were in growth mode, making heavy investments into growth to hit our five and ten year visions of the organization. And we had the conversation before we sold, hey, would it make sense to go to market on this? There's an opportunity cost that would have gone along with that. We may have gotten a higher multiple or we may have gotten a better deal. I actually believe that because we didn't go through a process, because we didn't make Dubin Clark compete for our business, we actually got a really fair deal. And I think if we would have taken a moment to pause and say, hey, really appreciate the offer, but now we're going to go through a process and try to get a better offer. I think they would have left.
24:43
Patrick Patterson
I would have left. Right. And now being on the flip side of this, of what, now we're acquiring agencies. I can say working with agencies that are running a process versus working with proprietary deals. The proprietary deals are more interesting for a lot of reasons and I think are better. And it's the same thing with hiring employees. I like talking to employees that aren't looking to leave. If you're trying to sell your agency, there's this sense that why are you trying to sell if you're not trying to sell Your agency? This is all psychology, right? If you're not trying to sell your. And I can talk you into merging with me or coming with me, man. That might be a really interesting prospect. So I think we would have lost the deal if we would have gone through process.
25:27
David Rodnitzky
I actually had an experience where I was talking exclusively to a potential acquirer, and I said to them, look, this is the number that I think we're worth. If you can offer me that amount, we'll just do the deal. Done. And they came back to me and they said, yeah, we're offering you 80% of that number. And I said, okay, fine, I'm going to run a process. So I ran a process, and we ended up getting about 20% higher than the number that I'd originally asked for. And they did participate in the process, but they ended up only raising themselves to the number I'd originally asked them for. Anyways. It's interesting because they had a chance to win it, but they missed their opportunity. And then I ended up getting more in a.
26:11
Patrick Patterson
Had. Looking back, and we've had a phenomenal story in the past nine months. It's been nothing but growth, and it's been nothing but charts going up to the right, which is wonderful. But who knows? Again, going back to what were talking about with Thomas, if we would have delayed that by four months or five months, who knows what would happen during those four or five months. And then you had bird in hand versus two in the bush type of situation. And knowing what I know now, if we would have ran a process, probably could have gotten more six months later, probably, knowing what I know now. But at that moment, we really, Dubin Clark, we like who they are. They are not an operational private equity firm. They are a financial private equity firm.
26:54
Patrick Patterson
They believe in our vision, support our vision, don't get involved in the day to day management of the organization. They wanted to make us the platform. These were all really good things. And I did a lot of due diligence, talked to a lot of different companies that had either were current portfolio companies of Dubin Clark or past portfolio companies of Dubin Clark, talked to a bunch of different CEOs that have been through it, and these were the good guys in private equity. And I think if I would have gone through a process, I think it would have been easier. Let's say it was 20% more, right. I think it would have been easy to look at money versus the experience that I felt good about and say, this is an investment, but then you forget that you have to work in that business afterwards.
27:40
Patrick Patterson
And I think we made the exact right decision. There's always the what ifs, and I don't live in a world of regret. Very happy with it. It turned out well. And so I think to me, knowing that making the decision based on the type of people you're going to be working with afterwards, especially if you're doing, like I did, Rollover Equity, and I wasn't riding off into the sunset. And the second bite or the third bite is very exciting for me. And making sure that I was with a partner that I wanted to interact with every single day and that I could align with was really important.
28:19
David Rodnitzky
Makes 100% agree. You mentioned that they were more financial versus operational. So are they mainly providing their value on the sort of acquisition side and just letting you run the business? And is that sort of the argument they came with when they were courting you?
28:41
Patrick Patterson
Yes, it's threefold. So, one, they're absolutely helping us with mergers and acquisitions. Right. They're helping us. We found a buy side broker, and we're working through that. And they are also developing their own deals, and they have their own business development and deal team. And then they're helping, and then they are helping us assess whether or not it's financially a good deal, really providing that expertise. They've collectively gone through thousands of deals. Right. So they've seen it. And that experience is super valuable to say, hey, no, this is where the market is. This is what you should be offering. This makes sense. This doesn't. So that's really valuable. So just helping us run that process. The second, they're also offering a lot of. They have great operating partners, and I'm working very closely with two of their operating partners.
29:37
Patrick Patterson
One is on our board, and one is an observer on the board and my executive coach. And these are CEOs that have gone through this process a bunch of times. And the one I call the PE Whisperer, he's a CEO that's been through a bunch of exits, and I've been a CEO of a private equity backed company before a bunch of times. And so to me, it's really valuable, since this is my first rodeo, to go to him and say, hey, is this normal? What do I need to be doing? What do I need to be focused on? Because your role changes a little bit on day one. And so that's been really valuable.
30:08
Patrick Patterson
And then my executive coach is really helping me become a better leader and to think bigger and to think like a company that we're going to sell versus the company we are today. And helping me see around a lot of corners. So bringing a lot of that expertise to the table and helping me grow professionally, which is really one of the reasons I did the deal, is I want to continue to grow professionally. And then third is their ability to find financing and the expertise of doing M&A the expertise of running a business. But also, I don't have a Rolodex of people. I can just pick up the phone and say, hey, give me some money for an acquisition and know who those good partners are and who those bad partners are, how to do that. So that's been extraordinarily valuable as well.
30:55
Patrick Patterson
That's where they came in, and they came in on day one and said, hey, we're not marketers. We are not going to pretend to be, which is surprising because everyone pretends to be a marketer and we want you to run the business. We're not just investing in level, we're investing in Pat, in your vision and would be really silly of us to come in and say, we know better than you. So we're going to surround you with a bunch of expertise. We're going to give you ability to ask questions. We're going to give you the supports you need to see your vision through. And they also are encouraging us to make bigger decisions. And it's sometimes easy. If you've ever been an agency owner, you can probably relate to this if you're listening.
31:37
Patrick Patterson
But when it's your house on the line and it's your family and your livelihood, when you make that big multimillion dollar decision that could, you don't want to have that conversation with your spouse and say, hey, I just lost it all. And there's that risk that's associated with ownership and that almost has to beaten out of you a little bit if you're going to really grow in exciting ways. And I will say, having Dubin Clark in my corner saying, we believe in you, but also let's take some risks and let's do this and let's grow this. We're not going to five X this if we make small moves. So let's go make some transformational moves.
32:20
Patrick Patterson
And that has been exciting, and it's allowed me to step out of my comfort zone a little bit, which has been great for growth, for the team, for myself, and for the organization.
32:31
David Rodnitzky
Sounds like a match made in heaven.
32:34
Patrick Patterson
It is. And I can't speak highly enough. I've heard enough horror stories as well to know that I got really lucky with this crew. And it's also easy when you're in a honeymoon phase and we're in growth mode. And all the charts are going up to the right to have really positive conversations. But that was one of the things that I asked to the CEOs when I was doing my due diligence. How do they react in bad times? And I think that's a really important lesson. And I talked to an events business that went through COVID, and we all remember events businesses in 2020. This is a private equity backed events business that went through COVID. Talk about one of the hardest times you'll possibly hit.
33:21
Patrick Patterson
And just hearing the story of how Dubin Clark rallied behind and really saved that company and now the crazy growth in that company, and it's doing so well. It's those moments that really, I think, are better to find out about early than, oh, everything's great on day one. Yeah, you're in honeymoon. Good luck. So it's really important to ask those questions. What happens when things go poorly? What happens if we lose our largest account? What is your game plan? And they should ask you the same questions. It's important to understand how your partner is going to react in those situations.
33:57
David Rodnitzky
Yeah. A friend of mine in the venture capital world once said the job of a venture capitalist is to sell money. Another way of saying that is at some point, if you're a successful business, you're going to have lots offers from people who are going to offer you money for part of your business. And the question is, what do you get besides the money? Because if two companies are each giving you a million dollars and one of them is going to do what all the stuff that you suggested, an executive coach, an operational partner helping you with add ons, et cetera, and the other one is just going to hold you for three years and then for five years, and then sell you, then one side's money is worth more than another side's money. And I think that's an important factor.
34:38
David Rodnitzky
And as you mentioned, you want to be happy with the people and you want to enjoy having dinner with them from time to time. I think it's great. I think you've had a great outcome there. Let me ask you one more overarching question. What piece of advice would you give to someone who's thinking about going through this process? Either the MBO process or, I guess, the private equity process.
35:00
Patrick Patterson
Yeah, probably a lot of advice. I've tripped over some of it in this talk already about making sure you're doing your asking the right questions and what you should ask about for me, I don't know if I fully understood, and this is going to sound, I don't know, maybe other people are in this and I'm just okay to admit it, I didn't understand adjusted EBITDA and what that meant. And specifically, if you're running like a lifestyle business and there's a lot of pass through costs and all of the stuff that's happening, I didn't truly understand EBITDA. I knew what EBITDA was, but I didn't understand how adjusted EBITDA was done. And that education at the beginning with Dubin Clark during that process was really eye opening because I was all worried about, hey, what about this? What about this?
35:46
Patrick Patterson
And if you can make a logical argument that, hey, this was a one time thing or this was an investment in growth, we had a very logical outcome and that was easily added to adjusted EBITDA, which impacts what you get. And I think I was more worried about those small things than I should have been at the beginning. And so I would say understand what it is. Take a look at your books and understand what this is, what a good sell side advisor is going to do for you. Right. They're going to structure your books in a way that makes sense. They're going to tell you how to represent certain expenses the right way so that you're getting an apples to apples comparison. If you are doing an EBITDA multiple for your valuation, that was one.
36:27
Patrick Patterson
Just being more educated around that you said it. But I think it's really powerful. It is way better to sell when things are going well than when things are going poorly. Right. What investors are looking for are compound annual growth rates. And if you are showing a year of a down year and you're like, now I want to sell, I want to get out, you're going to get way less of a multiple. So if you can string together a few really great years and you're seeing increased revenue and you're seeing increased margin and year over year, that's the time to sell. If you can put string together two or three really positive years and you can show that it's going up, one down year is really detrimental to the valuation you're going to get.
37:17
Patrick Patterson
And you may not even be able to get an investor at that moment. And I talk to a lot of folks, and next year I'm going to do $30 million more next year. So I'm going to wait till next year. I hear you. Part of the multiple that you're getting is us believing that you can do that next year. And if that doesn't happen and you show that it goes down, then maybe we're not going to have that conversation. So I think selling maybe a little earlier than you feel comfortable with and then I'm sure you've seen this as well.
37:49
Patrick Patterson
I think there's a tendency for founders, CEOs, operators to be the heroes in their organizations and to be too valuable in the organization and also maybe over inflate their value because they're afraid they're going to get fired afterwards or whatever it may be. And I think really looking now, if this is something you want to do in the future, you need to look at every single part of your organization, including yourself, and create a succession plan. You need to be replaceable. Everybody in your company needs to have a really strong succession plan. If they hit the lottery and they leave, right, what are you going to do?
38:33
Patrick Patterson
And I think in general, in a lot of these conversations, I don't see a lot of CEOs with succession plans and they are Spiderman holding everything together themselves and acting as the hero and haven't built the systems and the process and the support around them to truly create a scalable, growable company. And that takes a level of being humble and takes a level of understanding that as a CEO you are replaceable. And what would it have to look like for that to happen? I think that's a hard barrier for people to get over. But it would be my last piece of advice. If this is something that you're looking at, don't walk into that room and say you're the most valuable thing about the organization because that makes you less valuable overall. Right?
39:19
David Rodnitzky
Yeah. I've always said that the job of an entrepreneur is to fire himself from jobs, but I also think that there's an important thought process that has to be undertaken when you're looking to sell the business, which is do you want to continue with the firm or do you want to leave? And then the outcome of that decision will influence how you talk to your acquirers. Because if you want to leave really six to twelve months before you sell, you have to outsource or you have to give someone else delegate responsibility to everything in the business. So you really are almost a figurehead. Ideally, you want to have a CEO who you've brought in and you're just a strategic advisor.
40:01
David Rodnitzky
If you want to stay with the company, then you need to show that you're the leader who they want for the next potentially three to five years. And some of that may mean being open to having help, like getting a professional CFO, having a board, having a coach, having an active board. But some of that also is showing them I'm going to continue to work 80 to 100 hours a week. I am not just going to take this partial liquidity and then just relax on the beach. There has to be, I think, a strategy one way or the other, that you undertake.
40:40
Patrick Patterson
Yeah, I think absolutely. If you're not planning on staying with the business, you need to not be.
40:46
David Rodnitzky
The CEO and be honest with the acquirer and say, look, I built it to this point, but someone else needs to take it to the next level. The worst thing you want to do is tell Inquirer, oh, I'm super excited. I can't wait to work with you for the next ten years. And then two days after the deal. Yeah, and second thought, I think I'm out of here.
41:01
Patrick Patterson
I think in our business, I absolutely do think if you want to stay with a business, you need to show them that you're excited. I put a lot of value. It can't be just one person. It's got to be a team. And I have heard a lot of stories as well. And now we're moving into my new role, which is now I'm buying companies and I'm talking to CEOs and I'm having these conversations and everyone may say they want to stay, but then you get that paycheck, you get that bank account number, and you're no longer the CEO of your organization, and things might change three months from now. And so I'm really looking for scalability and contingency. It's derisking, right?
41:49
Patrick Patterson
If everything is contingent on the CEO staying and if the deal is contingent on them working that 80 to 100 hours a week, man, am I nervous. And so I love seeing process and sysTems, and I want really great folks, but if they don't have any idea of what would happen if they left, then that's probably an issue. Now that could be an area of opportunity in our world where we could say, hey, you don't have that support in that system. I can give that to you. So that's a strategic acquisition where I have a lot more support than maybe a 40 person or a 50 person agency because I'm bigger. And so I can give you that scalability. I think you're just like we're all trying to do. You're trying to find that balance between I'm really important, but I'm also replaceable, right?
42:39
David Rodnitzky
Yeah. I think there's a direct correlation between enterprise value and the degree to which the CEO or founder is replaceable. And to be clear at one end of spectrum, if the CEO is a complete train wreck and is getting in the way of the company's success, but won't give up control, the enterprise value is very low. But the flip side of that is the CEO is so important. And like you said, I call it hit by a bus problem.
43:08
Patrick Patterson
I like hit the lottery, David. I like.
43:10
David Rodnitzky
That's much more positive. I should learn from you on that, but. Yeah, sure. But there is an element of hitting the lottery here too. If the CEO is so important that you're worried that the moment that as an acquirer, you give them X amount of money that they no longer work anymore and there's a risk that person leaves and the business is in trouble. In many cases, that's not an acquirable business.
43:32
Patrick Patterson
That's right.
43:32
David Rodnitzky
Any CEO or founder who's looking to sell his or her company needs to build a team around them such that the company can do really well at some point without that CEO, I think. Yeah, that's enterprise value. That's the difference between a consultancy and an agency.
43:51
Patrick Patterson
Yeah. And the last thing on that is post sale as CEO, your job changes. And at least mine did in my experience. And so I was very happy to have a great support system and a great team and a great partner in Pat Van Gorder. We were able to, because we built these systems and we built ourselves to be replaceable if needed, that I was able to elevate my role and work on other things and focus on the things that I needed to focus on because we had spent that time building that support and post transaction, there's a lot more work that you're going to need to do. And if you are already working at 80 to 100 hours a week to just keep the lights on, and then I'm going to add another 20 hours a week of private equity stuff.
44:42
Patrick Patterson
On top of that, you're going to break and something's going to give. And I highly recommend succession planning at all stages along during this. And just having a plan and just being really honest about what would have to be true for me not to work here anymore and write that down and then start building systems and structures around it. And to your point, it will just make the company more valuable because it's bigger than any one person.
45:10
David Rodnitzky
It is. And as I often tell people, the cemeteries are filled with irreplaceable.
45:16
Patrick Patterson
Exactly right.
45:17
David Rodnitzky
Exactly. Patrick, this was great. I really appreciate the conversation. I think super valuable to hear both the MBO and the private equity side of things, and congrats on the success of the agency and the success of finding a great partner. And I wish you continued success.
45:34
Patrick Patterson
David, thank you so much for having me. I'm hopeful that one or two points of what I talked about can lead to better outcomes for folks, and I think it's an important conversation. So thanks for doing this, and I appreciate it.
45:45
David Rodnitzky
Yeah, feeling is mutual. Thank you.