In this episode of Agentic Shift, we talk to Phil Palazzo, founder of PALAZZO, a leading investment bank. Phil tells us why growth is the number one metric buyers of agencies want to see. Why founders are surprised by the complexity of due diligence, why most agencies aren't actually ready to be sold, the three ways to think about selling, and what happened when a buyer fell asleep during a pitch.
Phil Palazzo, founder of PALAZZO, discusses various aspects of selling agencies in an interview. He highlights that growth is the most important metric for agency buyers and explains the complexity of due diligence. Phil shares his own experience of selling and buying back his agency twice. He emphasizes finding the best fit with a buyer rather than focusing solely on financial outcomes. Phil also mentions red flags when assessing compatibility between buyers and sellers, including falling asleep during a meeting. He differentiates his investment bank by emphasizing their industry experience and understanding from both sides of the M&A process. Phil advises clients on considering private equity or strategic buyers based on their specific needs and goals. Lastly, he reveals that many companies are not actually ready to be sold due to factors such as inadequate growth or scale.
00:04
David Rodnitzky
In this episode of the Agentic Shift podcast, we talk to Phil Palazzo, founder of PALAZZO, a leading investment bank. Phil tells us why growth is the number one metric buyers of agencies want to see. Why founders are surprised by the complexity of due diligence, why most agencies aren't actually ready to be sold, the three ways to think about selling, and what happened when a buyer fell asleep during a pitch. Enjoy the show. All right, Phil, thank you for joining us today on the Agentic Shift podcast.
00:37
Phil Palazzo
Thank you, David. Great seeing you.
00:39
David Rodnitzky
Yeah, great to see you too. So you have been doing investment banking for the agency world, amongst other industries, for quite some time. I would love to start out with just hearing a little bit of your background, how you got into the space, and how you ended up founding your own investment bank.
00:55
Phil Palazzo
Sure. Spent the last 20 years or so investment banking. What preceded that was about 20 plus years in marketing and communications. So I started my career as a CFO, quickly got into a marketing agency I'm sorry, as a CPA, quickly got into a marketing agency as CFO, and over about a 20 year span, I've had positions in the agency world, from CFO to CEO. We went through two sales. I was an owner and negotiated both those transactions, had a buyback in between. Last transaction was to one of the holding companies, and I ran one of the international networks there for about five years and acquired maybe a dozen or so companies during that tenure. That kind of led to my joining a small investment bank as a partner. Did some transactions there and realized I could go off and do it on my own.
01:56
Phil Palazzo
I believed at the time I could do it a bit better and started my firm in 2009.
02:03
David Rodnitzky
Great. So you said I just want to follow up. You said you sold the company and then you had a buyback in between. So is that the same company?
02:11
Phil Palazzo
Yeah, it's very unusual. So after selling the company, it was a UK holding group that was looking to expand in the US. About a year after that transaction, they ended up getting acquired by Omnicom. It's fortuitous because we actually wanted to and were in negotiations to buy the agency back at that point. So when Omnicom stepped in, it allowed us to complete a transaction with them. So about two years after we sold, we bought it back, kept it private for about five years, and then sold it a second time.
02:44
David Rodnitzky
That's awesome. I did a similar thing, and it was also very serendipitous. It's something that you don't hear that often. So when you said that, I was like, oh, that's unusual. Yeah.
02:55
Phil Palazzo
Again, it was a lucky turn of fate, because after the first transaction and the lesson of that really has helped me today, after that first transaction, I would say within a three month period. We were ruining the fact that we had sold the company, wanted to buy it back, were actively attempting to negotiate the repurchase. So we ended up, again, very lucky that Omnicom back then stepped in. We were rife with conflicts with Omnicom, which really allowed us to pull out of the network and effectively become independent again.
03:30
David Rodnitzky
Was that the primary reason you wanted to buy it back? And it became immediately apparent that there were conflicts that were preventing you from being successful.
03:37
Phil Palazzo
The first transaction was with again, it was a UK group. I would say more than anything, it was chemistry and Fit. They had come into the market at the time, they were trading at very high multiples in the UK market. It was a small cap public company. They were paying and offered monopoly money in the US. We took the monopoly money, but quickly realized it was just really not a good partner. And that really is what drove the urge to buy the company back.
04:08
David Rodnitzky
Yeah. I guess a related question then is when you're advising companies today, I think this is a really big issue. I think people, probably first time sellers, they see big dollar signs and they think, whatever problems are on the other side, I don't care, because those dollar signs are going to allow me to get my villa in Cabo. How do you use your experience to persuade people to think about more than the financial outcomes of the deal?
04:33
Phil Palazzo
We're really upfront, we're very outspoken about this point and say to them that our role is going to be to find the best partner for you long term. It's not to run an auction. I don't really view a successful process as selling to the highest bidder. It's really finding the best, however you define best, whether it's compatibility, synergy around capabilities, but it really is finding the best fit. My belief has always been, if you find that company, the finances and the valuation takes care of itself.
05:10
David Rodnitzky
Yeah, that makes sense. What are some of the red flags, you would say, when you're looking at potential Fit that might suggest that it's not a good fit?
05:19
Phil Palazzo
I can tell you, I can quickly recall one meeting where the buyer, in the course of the first meeting with my client, fell asleep. One of the buyers. That was a pretty quick telltale sign that there was not going to be any compatibility there. But really is I'd start with the personal connection, personal chemistry, and then it really is, do the businesses fit? Will the buyer effectively be an accelerator for my client? Many of these mid sized companies are looking for help. They're looking for business development expertise. So we're often focused on, will this partner actually make us better, stronger in market post transaction than we are now? But it really does start with chemistry and fit.
06:10
David Rodnitzky
See, I think if you wanted to be glass half full, you could say the buyer was working so hard that he just fell asleep because he's just working to grow the business. Non 24/7, there were no words.
06:20
Phil Palazzo
The only fortunate part of that was the buyer walked in with about eight or so people. Eight folks? It was one of eight, but he just nodded his head and we lost him for the meeting.
06:32
David Rodnitzky
Wow. That I have not heard of. So when you're talking to potential clients to bring on agencies, obviously this is a big part of it. We're not just about the financial outcome, we're out about what's the best outcome for you. Holistically what are the other things that you share with potential clients in terms of what differentiates you in the market.
06:53
Phil Palazzo
As compared to other investment banks? Yeah, frankly, I don't think there's a firm, a banker, that has the level of experience industry that we bring to our client relationships. Having spent 20 years not only in the marketing communications industry, but having gone through a couple of processes as an owner, having participated in the emotional roller coaster that you go through when you sell a company, that really has made us made me a much better banker. I'm not a Wall Street guy coming into the marketing world trying to do transactions. I actually come out of this with a really strong financial background, know these businesses intuitively, and I think that's made us much more effective bankers.
07:43
David Rodnitzky
Yeah, that makes a lot of sense. Yeah. I think one of the interesting things about selling an agency is for most agency founders, it's the only time they'll be involved in MNA process, and everyone else involved in the process usually has done ten or 20 deals. I can totally see your point. Having the experience of actually done this both from an investment banker perspective and from an operator perspective, I think is very valuable too.
08:11
Phil Palazzo
And it's actually a 360 view because I was at one of the holding companies buying businesses. I bought about a dozen businesses over a five year period at Interpublic. So I've had the view from the holding company in addition to having been a seller and now being an advisor.
08:29
David Rodnitzky
Yeah. That actually raises another question, and maybe it's a delicate question, so I'll word it as best I can, but when you were talking to a client about holding company versus private equity versus strategic, how do you generally think of the pros and cons? I know every deal is obviously unique, but when you think of those three potential buyers, how do you explain that to a founder?
08:52
Phil Palazzo
We try to guide them and not go into a process with a firm point of view. Some of the clients we know pretty early on that it will be a much better fit with private equity. Others will know that we have to orient the process more towards strategic. One way of thinking about it is you've got potentially two very different roads that may get you to the same destination as a seller private equity. You are agreeing to a bite of the apple down the road. A second transaction at a later date. You don't really have control over that. You have to trust the partners that you are transacting with. The benefit of that transaction could be not having a financial earnout motivation each and every year to maximize EBITDA or earnings.
09:44
Phil Palazzo
But look, again, going back to what I said earlier, we're really looking for best fit. Often it's strategic, and often it's private equity.
09:53
David Rodnitzky
Yeah, actually, one of the things that I tell people, and you don't have to agree or disagree to this, but just me pontificating. But I feel like once you sell your agency, whoever you sell it to, in most cases, you end up at a holding company down the road. If you sell the private equity, you may eventually sell to bigger private equity, and then eventually you sell to a holding company. Maybe if you sell to a strategic, you stay within that strategic. But I think that people don't necessarily realize and there's nothing wrong with holding companies. There's holding companies of all shapes and sizes and personalities.
10:27
David Rodnitzky
But a lot of I think independent agencies don't realize that when you go down this process, there's a good chance that at the end of the day, after one or multiple transactions, you'll be at a holding company.
10:37
Phil Palazzo
I think that's fair. We see personalities that vary obviously amongst our clients, but there are some that want the clear definition of, this is where I've sold my company. This is my transaction. This is what's being measured. They want the definition, they want the certainty. And at the same time would be very uncomfortable in that private equity type transaction where there is more uncertainty around when is that second transaction? How do you get that value down the road? And I've had others that just really embrace the private equity model, which is, let's really build this out. Let's do something terrific together. My strategy, my vision, your capital. And together we can do something really unique and different. Again, I think it becomes a function of what the client's wants and needs are. And our role is to help guide.
11:29
David Rodnitzky
That process that makes sense. Do you ever encounter a potential client where after talking to them, you just say, you just shouldn't sell? Right now, I don't care if you're thinking private equity holdco, this is just not the right time for you.
11:44
Phil Palazzo
That happens all the time. David. We will talk or I'll talk without exaggeration to five or ten companies a week. And the vast majority of companies in the market are not saleable to third parties. They think they are, but at the end of the day, they really aren't. What we're looking at, obviously, is the overall M a market receptive because you want to transact in a receptive market. But importantly, when looking at an individual company, you're looking at growth over a period of time. You're looking at scale, you're looking at margin. And then you get into the qualitative criteria, like reputation, depth of management, reputation of management. When you put all that together, the majority of firms that are out there just really don't check enough boxes.
12:33
Phil Palazzo
And we often advise smart thinking about potentially an internal transaction or trying to initiate something on your own because the likelihood of retaining a firm like ours and successfully transacting in markets extremely low as a ballpark.
12:51
David Rodnitzky
Is that mainly a function of EBITDA? Is it? Usually, unless you have, let's say, $5 million of EBITDA, you're really not interesting to the majority of the private equity holdcos out there.
13:05
Phil Palazzo
That's certainly an important metric, but we really start with growth. Growth indicates high. Growth indicates you've got a service and a capability that the market wants. You're bringing clients in much quicker than they're leaving you. You're telegraphing very definitively that you've got a really good story and the market wants what you're offering. We've sold the rule of thumb is under 3 million of EBITDA. Very hard to get any traction in the market. We've sold businesses below those levels primarily because of growth, buyers seeing significant growth characteristics metrics in the company and wanting to get in early and doing it irrespective of size.
13:52
David Rodnitzky
That makes sense. Yeah. I have this mnemonic that I often talk about, which is I say there's three stages to marketing channel evolution, and the first stage is no one cares, no one spends any money. So that's like buying advertisements from the moon right now or something. The next stage is, everyone cares, no one spends any money. And that's maybe the metaverse today where it's very hot, but there's no budget. And the last stage is, no one cares, everyone spends money. Which is like search engine marketing. And I feel like with agencies, to your point about there are some agencies that will sell under 3 million of EBITDA, and there's some that won't.
14:25
David Rodnitzky
If you're in that stage too, where you're in the Hype cycle and people are like, oh, I have to invest in whatever TikTok advertising, you could have a million dollars of EBITDA, and someone might pay you 25 times EBITDA because you're in that hot stage. If you're like me, search engine marketing guy at this point, yeah. Every holding company has ten. Search engine has made ten acquisitions. If you're doing $3 million of EBITDA, then potentially not that interesting.
14:51
Phil Palazzo
Yes.
14:54
David Rodnitzky
One question about founders I'd like to know is, what do you generally see surprises founders about the process of selling their business?
15:04
Phil Palazzo
What I've heard often over the years is really the surprise at the complexity of what's involved in selling your company. For a lot of owners, they think our role is to negotiate deal value, and it goes pretty quick from there when they see the level of due diligence up close when they see what's involved in negotiating a term sheet and then successfully bringing that to contract, and then just all the lawyering around. Purchase agreement, employment agreement, non compete agreements. I'd say almost universally, everybody is astounded at the intricacy the level of detail that's involved in a typical transaction.
15:46
David Rodnitzky
Do you typically recommend that you work with a founder many months in advance of the process to get their ducks in a row?
15:55
Phil Palazzo
We certainly would advocate for discussion well in advance of starting a process. I would say at least six months, even better a year, where the investment bank has an opportunity to weigh in on their review of the company, whether it's the quality of the financials, the quality of the reporting. Just give objective views on what they're seeing, what they believe a buyer will see, and they're just making adjustments accordingly before starting a process.
16:26
David Rodnitzky
Yeah. Are there certain things in the due diligence that are always or often come up as these are the things that the founder didn't anticipate? That's a big stumbling block for the deal.
16:40
Phil Palazzo
We try to do as much prep there, literally starting from day one as we can to identify and eliminate any of those issues. I often tell my clients, I liken the process to imagine selling your home, and one day, six or eight inspectors come by, one inspector for electrical, one for plumbing, one for drywall, and they're going to look at every single inch of your home and generate a report. So the level of D, especially now in this environment, is extremely deep by buyers, and it's really doing everything we can in advance to facilitate a clean, efficient process.
17:21
David Rodnitzky
Yeah. I feel like the two things that kill deal are time and surprises.
17:24
Phil Palazzo
Yeah.
17:26
David Rodnitzky
So when you do have a deal that sort of gets to the loi stage, sometimes deals just don't happen. Even if you get to Loi, what are the reasons that a deal might not end up working out for us?
17:39
Phil Palazzo
I'd say the percentages of deals that close with an Loi in hand has to be over 90% once you have assigned loi. David, is buyers really going to start spending money pretty quickly? They've hired an accounting firm, they're getting into tax. They've got a law firm engaged, so they're going to be spending money quickly, and they're not going to do that unless they're really excited and committed to the transaction. The reason post loi transactions don't close usually is around our client or the seller's business. Loss of a client, big miss on forecast, something coming up in due diligence that wasn't really properly disclosed up front to the buyer, and it's around that identification, and then possibly it's a buyer wanting to redo terms or actually walking away.
18:34
Phil Palazzo
It's usually based on the volatility or a change with the client business not really on the buyer side.
18:40
David Rodnitzky
Yeah. Makes sense. A couple more questions. What has changed in the last couple of years, I think. I feel like in one 2021 there was really a seller's market. And maybe now it feels like a buyer's market. But beyond those sort of headline changes, someone who's looking to go out today, what should they expect that maybe is a little different than what you would have seen 18 months ago?
19:04
Phil Palazzo
2021, there was a tremendous amount of latent demand from COVID and we started seeing heightened level of activity. Third and fourth quarter of 20, and it just accelerated throughout 21 would have been pretty difficult with a quality company not finding a buyer in 21. I'd say today buyers are much more discerning. I would describe it as a buyer's market for quality companies. In market, we're still seeing premium valuations. We're seeing valuations today that we saw two years ago. So I would not say the market has shifted pivoted or anything like that. I would just say that buyers are a lot more discerning. We believe that there'll be fewer transactions in 23 than 22, but the quality companies will have a lot of demand and will go for premium valuations.
20:03
David Rodnitzky
Bill, that's encouraging. Yeah. In any market, quality sells, I think, is the bottom line. So if you were talking to a founder today who is thinking about going to market, what's the one piece of advice that you'd give them to decide whether this is the time to go out or not?
20:20
Phil Palazzo
We never really try to push our views on timing in a meaningful way to a prospective seller. We try to get them to think about it in three ways. One way is thinking about, again, is there a receptive market? And it is our job to help define that. For a client that we're talking to, in addition to is there a receptive market? It's what competitive pressures, if any, is the corporation facing? Do they need an international network? Do they need enhanced business development capabilities? Do they need additional services and capabilities to be competitive? And then the third, and perhaps the most important really is personal. And that's where we in no way can weigh in. I've had 30 year olds that rush to sell their company and 60 year olds telling me it's way too soon, they want to be in it long term.
21:16
Phil Palazzo
So it really varies by individual. It's a function of financial security, personal motivation and aspirations. So when all of that begins to converge, when those circles come together, that's when timing seems to make the most sense.
21:32
David Rodnitzky
So you've had Sir Martin as a client then, who's still in his wants to work for another 30 years.
21:40
Phil Palazzo
I've seen it all. I've seen, again, kids that fight with short term non competes and just want to go off and do something very different. It just really varies by person.
21:51
David Rodnitzky
Yeah, I think one of the most interesting things about selling is, again, I think when someone's selling, often they only see the opportunity. They don't realize some of the potential downsides. But how do you founders do you experience founders really having regrets sometimes about selling? I think most founders are happy at some level, but just personally, I think the second time I sold, I got pretty sad, actually, because I lost meaning for a while about my whole life had been defined. My working life had been defined by this job. How do you deal with founders who are trying to work through that?
22:25
Phil Palazzo
It can be a very difficult emotional time for them. I have memories similar to yours, David. When we sold the first time, I remember going back to my office. It was a very protracted I won't say heated, but it was difficult conversations, and it was extremely emotional at that point when the transaction was complete. So you go through a range of emotion. Gets back to what I said earlier. We really try hard to find that right buyer where after several weeks after the transaction, you feel good about what you did. You feel like you're with the right partner, with the right company. There are some bad stories out there, but I say this sincerely.
23:07
Phil Palazzo
I'd say most of our former clients, we've had really great outcomes, great stories, very happy with what they've done, believing that they did find the right partner, had a successful experience, both financial and non financial. So we work really hard for our clients trying to make that happen for them.
23:26
David Rodnitzky
Yeah, that makes sense. I think the majority of sales are amazing, life changing experiences. And at the same time, I think there's a whole psychology involved with people don't realize that they are building this amazing company. And at the end of the day, in some cases, you are selling meaning. You're giving up your meaning for a big chunk of cash, and you can go and take that cash and build something else great, or there's lots of great outcomes.
23:51
Phil Palazzo
We tell our clients, no matter how good the partner is, things will change. By sheer transfer of ownership, culture begins to change and things change. It's like any balance sheet. You've got assets and liabilities. You want to make sure the assets far outweigh the liabilities. But you have to let clients understand going in that there will be cultural changes, like it or not, that are beyond their control.
24:16
David Rodnitzky
Yeah, and I think control is another element of this. I think to your point, the founder has to do their best to pick someone that they really are aligned with culturally. At the end of the day, though, the moment that deal is closed, assuming you've sold the majority of your business, there's someone else who's going to make the final decision on even cultural issues. And so I think, again, that just goes to why it's so important to pick someone who actually is aligned with you, because there's a lot of people in the M A space who are very friendly during the M A process and then they get to the other side and it's maybe not the same story.
24:50
Phil Palazzo
When I went off to set my company up, the one thing I swore I would never do would be to look at a transaction from my view and not my client's view. I never wanted to have the kind of shop where were running a conveyor belt with transactions on the conveyor belt and the job was to get them off quick. We're focused only from day one to now. We've only been doing five to eight transactions a year. I think when you're doing more, you risk not providing the right level of service. When you're doing less, you don't really understand the market. So we really try hard to every single thing we do, every decision we make, it's as if we're making it for ourselves as partners, as owners, alongside our client.
25:36
David Rodnitzky
Yeah. Act like you're the client. Yeah. I will say that there was one of the deals that we did. I was on the 1 YD line with a company and I was about to sign with them and I called up a friend of mine who had sold to that company and I said, so what's your experience been? I mean, they seem like great guys and said they're nice but if something is not revenue producing, they're not interested in it. So the first thing they did when they acquired us is they cut all of our training. I said my mantra was like there are three groups that matter there's customers, clients and shareholders and if you can't satisfy all three it's going to end up being painful one way or the yep. Yeah. So this is great. I really appreciate you taking the time.
26:20
David Rodnitzky
I think you've built a great investment bank that I know a lot of my friends have worked with you and been very happy and wish you continued success and again, thanks for being on the show.
26:29
Phil Palazzo
Thank you David, appreciate the kind words and this was a lot of fun. Thank you.
26:34
David Rodnitzky
Thanks for listening to the Agenticshift podcast. Make sure to check out our website, agenticshift.com, where you can access exclusive content. If you are considering a sale of your marketing agency, contact us at info@agencies.com.