Episode Transcript

Peter Lang, CEO of Uhuru Network joins us to share his team's acquisition strategy. We talk about his process for sourcing potential acquisitions, the indicators to look for from potential sellers, how he validates fit, and when he decides to walk away. And for those acquisitions that do close, we talk about team integration and the people, processes, and tools he has put into place to make them go as seamless as possible. You're listening to Agency Unfiltered.

KD: Well, hello, Peter. Welcome to remote Agency Unfiltered. Thanks for joining us.

PL: Thank you for having me, Kevin.

KD: Where are we dialing in from today?

PL: Austin, Texas, isolated, social distancing.

KD: Yep, that checks out. Now, we've talked about this, but candidly, I don't know when we're going to have this aired, so this might be out of date at this point, but thank you again. We have a bachelor party in Austin, Texas. And you have-- well, I don't know if I'm spilling the beans here, but you have the definitive restaurant list for Austin, Texas. Is that fair to say?

PL: You really shouldn't have opened that up. Now we'll get emails.

KD: Yeah, right.

PL: Google doesn't suffice. Terrible, Kevin. But you're going have a good time. And then when you are asked where did you get this wonderful list, you will graciously forget that I gave it to you.

KD: But we're not here necessarily to talk about Austin, Texas. We're here to talk about mergers and acquisitions. And I think you and your team have a very informed approach and opinion to the topic at hand, so I'm excited to dig right in. Maybe the very best place for us to start is, Peter, why don't you just tell us what your team's acquisition strategy looks like? How do you source potential acquisitions? How do you validate fit? Maybe that's a good place to start.

PL: Fantastic. So the first thing to make sure is clear, since we don't know when someone's listening to this, is we are in December 2020. No vaccine yet for this COVID situation. And it's created a very interesting dynamic in the dealmaking world. So to set an expectation, whatever you listen to today, it might change depending on what's happening with COVID. They're called COVID deals, doing deals during COVID—and everything's happening through Zoom, minimal travel. It's a completely wonderful experience that if you haven't been involved in, you've been under a rock. So first, to kind of outline on a macro level our acquisition strategy, so as an agency doing deals, so doing M&A, and we spend a considerable amount of time doing it, you typically approach it, and we do as well, as a roll-up. You're looking for top-line revenue, skills, capabilities, and resources that you currently have gaps in. And you're trying to aggregate skill sets and resources that you incrementally have difficulty hiring, right? If you're going to scale one at a time, it's a lot easier to get five, 10, 20 at a time. So when we started the acquisition efforts, it came from, all right, what are we missing? What do we need? And it came from relationships.

So our strategy was very simple. We were looking for resources. We openly discussed being interested in deals. And our first deal came from our accountant, who made an introduction. And it was very informal. Well, we did a few deals, and then COVID hit. And like the world, our strategy changed. And we turned up our acquisition efforts. And that also gave us new parameters on the criteria. And so our strategies started to evolve once we spoke to-- and this was during the COVID first 90 days-- over 150 agency sellers, non-broker, so going direct. And we prefer to go direct. When you're doing M&A in your core business, it's a strategic acquisition. When you start getting into adjacency businesses or agency acquisitions, you start needing industry experts who contribute, and therefore you bring on brokers and different experts.

So now we learned, and our strategy went as simple as this. Reach out to people. We have an outbound team. We have an acquisition team, a deal team, an integration team, and ask them, how's their business with COVID? Has it evolved? Has it changed? Where are they in the business lifecycle? Have they thought about selling, joining a larger company, or maybe even exiting and becoming a subsidiary separate from us? And we learned a lot, Kevin. We learned a tremendous amount. And so now the strategy is this. We have two classifications that we're looking at, subsidiaries of our core business, so Uhuru, and roll-ins. And roll-ins or roll-ups, however you want to use the label for it, means we're looking at resources usually between $500,000 to $2 million in top-line revenue, usually floating around 10% to 20% margins. And we're trying to identify how much growth can be realized with additional resources at the tailwind at the back of that company of that asset. And if ours can do it, it's a great opportunity. We go through due diligence. It makes sense.

KD: That's great. Besides checking off those boxes and, hey, have you considered selling-- obviously the yes's are the affirmative to those questions. Are there any other indicators or signals you're looking for? You mentioned those early conversations could be a little bit informal. What are you looking for in those conversations? And what do they look like? What do they sound like?

PL: So we have a general philosophy in our company. So Uhuru is Swahili for freedom, so Freedom Network. And we have a statement, leave people better than you found them. Our belief in doing deals is you're going to know each other, the person you do a deal with, until you die, or until they die, someone dies. And so the first call is not around napkin math, whether or not they've thought about selling, whether or not they have a confidential information memorandum prepared by some M&A consultant, if they're actively seeking a transaction in 60 days. It's: "Do I like you? Do you like me?" Simple. We have a documented culture bible with principles. We share that with them and say, this is us. Let's get to know you. And if there's fit personality wise, if there's fit narrative wise, Warren Buffett has a great statement, which is if he can't tell a story behind a deal, there is no deal. So you have to know the players in the narrative in the story for it to even formalize into some level of transaction.  So our first ones are always getting to know each other. Informal—how many hats do they wear? What are they responsible for? Do they have kids? How long they've been doing it. What have they seen in the marketplace? What are the wins and what are the lows? And if those align, we go into a business deep dive call. It's usually a second call where we say, all right, let's look at the napkin math. Before we share our financials and go deep, let's kind of see if, at a very surface level, there's potential. And from there, we usually understand, all right, there's something here. We're going to have to dig. We're going to have to do due diligence, commercial, financial, and legal due diligence. But we have a team and a process around that. Let's invest in this company, invest in this owner now.

KD: So culture comes first. culture match, culture fit obviously comes first before the napkin math and some of the numbers get swirling around. Let's just say-- well, because if there isn't a culture match, OK, then we'll assume that folks walk away. But let's just say there is a culture fit and we've checked the box on that stage of the process. When or where else in the process or why don't all deals go through at that point? So when you get into scratch math and some of the other steps, when and how and why don't these conversations always lead to an acquisition or to a sale?

PL: It's helpful to note that it's been stated through research 80% or 90% of the businesses that list on broker websites are actively looking to sell. They're on broker sites. They're listing their business. They never do a transaction. So you have a high failure rate anyway. And so it is always a numbers game. So the assumption is there's not going to be a deal here, always. You're really trying to analyze the opportunity and see if there's a deal here. How are we going to make a deal here work? So I think it's important to preface it with, you have higher probability of it not going through than going through. And so what distinguishes the things that go through and don't, it's a motivated seller. It means the individual has reconciled as a person a stronger motivation to leave or join another company. The financial side-- most deals are not liquidity lotto ticket events. Most deals are seller financed or seller equity, depending on how you want to reference it. And most of it is carried by 80% or more.

So that's a lot of the buyouts, a lot of the type of deal structures, versus the large we were acquired by Spotify, and now we're going to be a part of the IPO kind of world, especially in the agency world. So the things that really cause them to fall through is a disconnect of readiness. Because everyone, if you ask someone, do you want to sell your business, get money for it? Yeah, that's pretty much everyone. It's, do you want to go on a trip to Europe? Yeah! But if there's COVID and they don't allow you, you get rejected, people start changing their answer and enthusiasm for it. So I would say a misalignment of expectations and understanding of what their business is actually worth, how much their involvement is a critical function of its growth. They sometimes disconnect. They think just having one to two years of managers operating a business is enough.

But if you take the owner—I've gone on sabbatical for over eight months. I've left companies. I've left the agency world. So therefore I've seen how much vision and growth is necessary to replace when you leave the company and you have that kind of presence. That's not always the case, especially with agency. We call them brilliant bottlenecks. And often these brilliant bottlenecks think they have standardized their business enough, or they've realized enough growth, or enough margins in the business, when they really just don't have the historical performance to rationalize it yet.

KD: You mentioned valuation there for a moment. I would imagine that most sellers are going to be inflating or thinking that the business is worth more than it is. Do you run into that quite a bit or no?

PL: I don't have children. I always like to say our companies are our children at this stage of life. You always think your child is usually smarter than everyone else's. Because it's brilliant relative to-- especially if it's your first child. And I think of businesses and valuations very much the same. There's an interesting structure. The vast majority of agency owners, close to probably around 80% of agency owners, have some level of marketing and creative background. And they didn't have business backgrounds and marketing creative backgrounds. So they didn't come from finance. They didn't come from international business. They came from the creative side. And then there's a small percentage that is sales oriented. And then a very, very small percent, like 1%-- and this is based off of our research anecdotally from our outreach-- that are businesspeople. The businesspeople look at a business as an asset generating return in return for their time. The people who think their companies are worth more usually have them in the company, their ego, their emotions. You usually hear this: I'm the dad or the mom of the company. They're my children, my employees. When you hear things like that, there's going to be an emotional gap between practical evaluation of the financials, and what it's worth, and what the future is worth, and what it's worth today, and how much they can sell it for. And that's really the more common imperative that is difficult for them to reconcile.

KD: I want to pivot away from the conversations that lead to the sale to talk about when the acquisition, at least financially, seems to be ready to go. What does team integration look like? I can imagine that it's a messy process. I'm sure it provides friction for a handful of folks. What does it normally look like, and how do you try and make it as frictionless or efficient as possible?

PL: Well, if you look at printed publications, do research, you'll see a lot of reference to 70% to 80% of deals fail. And what that means, usually, post-deal integration fails. So the companies that do the deal don't receive the expected returns off of it because the integration was unsuccessful. So there's a few ways to do it. One is you're not ever going to be good at integration unless you do a lot of integrations. Integration is taking a mess and another mess and putting them together. Marie Kondo-- there's a level of this being how good are you at organizing messes and tidying things up and then optimizing and making it more productive and efficient.

Well, how we were able to circumvent is we built a 30, 60, 90-day integration plan. First 30 days, you observe. You don't touch it. You simply watch the company. You watch the team, the operations. We usually have to take some resources and put them in place to monitor those components. You have to build some level of just loose, general status quo. That's really good for the team members that are located in the target company. That's really good for your integration team because they aren't coming in and asserting themselves, and they're not disrupting normal business operations within the company. So in a professional service industry, like an agency, if you lose a key employee, you lose the clients that were tied to the key employee. Services and individuals are tied together. Same thing goes with the deal. 30 through 60 days, you've got to document standard operating procedures to see for alignment and modifications, depending on which systems are being integrated. You usually set some level of direct report, cadence of integration meetings. You do points of contact for each organization or each team that's being integrated.

And then through 60 to 90 days, you're setting new KPIs. You're setting up the governance system or extending the governance system that you have operating within your company if you're in EOS, traction, and those types. And then you're setting KPIs on performance. And so, Kevin, you might be asking the question, well, didn't you set KPIs to do the deal? Because hopefully you did a deal with an expectation of return. Well, yes, but usually the entire team or company wasn't involved in doing that. It was just the owner who was doing the deal. So we have to recalibrate and set, what are the goals for the year? What is the vision? What is the mission, if it's not directly aligned with our vision? Which ours is the world's largest distributed agency. We're very proud of the remote work culture, the global team, and the ability to run productivities systems across those teams.

So that fits for us. And then we do missions. So then you have to give a mission to that new team that's being integrated so they can be connected to the company vision. And if you do that between the 60 to 90-day window and you set KPIs, a governance, a meeting cadence, rituals, the stand-ups, the huddles, and things like that, that's what we do. Then you have a really firm direction where everybody, basically 90 days in, are now rowing the boat in the same direction. And those do tie to however the deal was constructed. It's just now getting buy-in and contribution of the mechanics of it, how it's going to be fulfilled.

KD: Peter, who owns the rollout of the 30-, 60-day program? So all of the milestones of that entire process, who owns that?

PL: So in our company, it's the head of integrations. So Erin on our team is head of integrations. She had been a head of an agency, kind of ran an agency from an operations perspective. She was in sales as well in our company doing agency sales. And when we started doing deals, she became one of the best evangelists for understanding not just the mechanics, because the integration person is the one that they go to for answers, or go to with their questions and they find the answers. So you need someone who has a great perspective and may not know everything but knows where to go for that information. And they shepherd, and they're responsible. They're held to a KPI. And we have a dashboard that tracks integrations, and that's how we know this role's being successful. And they become the critical part of a successful post-deal integration team. And we have more than just the head of integration, but that's the key part.

KD: During integration, do you ever find—I don't know what the right term is—maybe not inefficiencies or anything, but I guess maybe a better way to ask the question that I'm thinking here is, what happens to the employees of the selling agency, and are they always, as a full team, fully integrated in? I don't want to assume if that's a yes or a no, but hopefully you kind of know where I'm going with this.

PL: Yeah, and you're skirting it gracefully. It all really depends on the condition of the asset that's being acquired, first of all. So you typically are approaching a deal with a few mindsets. One, is it a consolidation? Is it a full integration? Or is it a standalone? And those are some basic frameworks when viewing post-deal activities. If it's a standalone, you're probably not going to touch any of the team members, the employees. They're going to come in, and they're going to do the job that they were doing in the asset, but just under the umbrella. So you typically don't have a lot of disruption. Well, part of that is going to tie back to the motivation of the seller. So if the seller has less than 10% profit margins, there's going to need to be some level of consolidation, especially when it's a strategic acquisition, because you'll have duplicate resources that you can apply within the business. You won't have the need for everyone to stay as well.

Also, at the end of the day, they did the deal, but they didn't consult all their team members. And some people want to leave. So I think if I were to give advice to team members who are a part of a company that's being acquired, get very clear about the strengths, weaknesses, opportunities, and threats that exist-- your strengths, your weaknesses, your opportunities, your threats. And then see how you can hyper-communicate during the integration process to assert yourself. And that increases your probability of staying. And you might then be deemed more valuable than someone who's present in the company that did the acquisition.

KD: I think being communicative and really advocating for yourself ensures or strengthens the opportunity to find a pivotal role in this new acquiring agency versus the role you played in an agency that's now selling. You can find yourself. You're advocating for yourself to find a place in this new org chart.

PL: Yeah, you have more opportunity. There's a lot of negativity around, oh, our company was acquired, and they laid off a bunch of people. They cut this department. Well, they cut it because it was at risk anyway. So that's an important thing. And the second part of this is, you are getting a short window of opportunity to assert yourself into a larger company. So if you're in a small agency of less than 12 people and you're being approached by a 40-person agency like us-- well, at the time of this recording, 40-person agency like us, you might be able to transition into another team, another role. And so showing your enthusiasm for it can actually give you a career bump in the process. And another important part is a lot of agencies have team members who were junior and who are being raised by the owners. It's very common, especially when you're starting to staff in the early five to six agency person range. They weren't able to afford to bring on someone of six-figure caliber and above to contribute to the bottom line faster. So they raised juniors up into those roles. Those juniors are going to leave them anyway. So in our career, in our industry, and with remote, and with COVID, marketer agencies that are efficient, marketers who are young, they're not staying around as long anymore. So for them, it's all about how the narrative has been constructed around the deal. But there's more opportunities.

So I would just say, you always have to be very sensitive. The deal was constructed for a reason, and you weren't privy to that reason. But it is still an opportunity for you if you want to take it.

KD: That's great. That's helpful context. Peter, I always like to try and put a spotlight on past experiences where folks may have fudged up an aspect. Has there ever been an integration or a part of an integration or something that didn't go as smoothly as you would have liked to see it? Are there any lessons learned on that front?

PL: First of all, integrations never go smoothly.

KD: It's always fudged up. Yeah, that checks out.

PL: So the first thing, doing deals is very easy. Dating is very easy. Marrying someone, committing to them, and working through the ups and downs is not. It's for serious players and for serious people. So if you go into it with an adverse reaction to negative pieces within integration, that's just irresponsibility and negligence by the acquiring company. Because it is going to be that way all the time, so you shouldn't have an opinion one way or another. You just need to make sure you have the teams and you're organized when it does happen to address it. But I'll tell you from an example where it's not fudge. It's more of just the confidence. You're dealing with-- especially in small businesses and entrepreneurs, their job is to be optimistic. Their job is to work extremely hard to make something that does not exist exist. And they had exponential growth from zero to whatever they got to, $500,000 to a million for a period of time. And then that geometric growth plateaued, and they've been at the same usually for a while, the ones who are looking for exits, or they've optimized it for that. When they go into a company, again, oftentimes their optimism for what they'll be able to do is sometimes misaligned.

You have to have what we call an adult in the room. And "adult" just means someone with the maturity and experience to say, this is common, and let's work through it rather than reacting negatively to it for it to be successful. So I would say it's not so much things that were misrepresented or negligent. It comes down to you're just dealing with a lot of optimism. And when you're getting into the pragmatic assessment of a business and its functions, there's going to be some reality checks. There's going to be things that-- we did deals in 2019. We didn't anticipate COVID. Now, we turned up our acquisitions. We turned up growth, and we've been growing through it. But we wouldn't say, oh, all those hiccups and those things that weren't as easy during the integrations because of COVID are things that we would react to adversely to or negatively to.

KD: No, that's a really helpful perspective. That's a really great point. Peter, I think this may be my final question for you. So we try and wrap every episode with this question. So the question is, what is the weirdest part or strangest part of agency life?

PL: I'll frame it under the acquisition side. There's a lot of brilliant snowflake agency owners. And until you start co-mingling and going out and being around a lot of other agency owners, it's sometimes hard-- and this was my position on it-- you thought you were very unique and special, and then you realize all these other agency owners are very much like you. The people who have decided to start agencies and run a marketing service, a marketing, digital marketing, inbound marketing company, are very, very similar. And so the strangest thing for me was not feeling so alone when you started realizing that they are actually the people who you enjoy spending most of your time with, more than clients, even more than your team members. There's something about-- and this was the thing I enjoy about it-- there's something about being-- even though I'm more on the business side, the corporate finance side, the M&A side, I'm still-- I own agencies now, and we have subsidiaries of agencies. The thing for me is I love being around agency owners. And so when it came into why we started doing deals, I get to be around people who are just like me and do deals with people just like me, who are also crazy to go and do this marketing thing and be unique and creative and try to help other companies grow and succeed. So I'd say the weirdest thing is the owners are so alike.

KD: And you're not as alone as it would appear you are.

PL: Yes. And the ones who feel alone are probably only focusing on their employees, their own team members. They're probably siloing themselves too much. I'm talking about hundreds of people. Have hundreds of conversations a year with other agency owners, and you have a very different perspective on them as people. And it shines a light back on you to say, wow, there's a reason why I'm as weird as I am and as strange as I am. And they're just like me too. So if you have a choice, I would always recommend people to leverage what HubSpot's created. The partner community has been a real asset to agency life. What you're doing, Kevin, is fantastic. And if you want to be weird like the rest of us or potentially join-- like, Kevin, the other thing is if anyone's interested in finding more information about this, we have our holding company, Lang Acquisitions, they can research. We have Uhuru talks about our investments. We have a head of M&A strategy, which is Tony Atkins. They can reach out, head of integrations, Erin. You can reach out to these people, Kevin, and see how weird we are and see how interesting this potential opportunity is. So that's a long-winded answer, Kevin, to say brilliant people who are strange and spending time together.

KD: We got there. No, that was a great answer. I appreciate that. And Peter, honestly, thanks again for dialing in and for joining us for this episode, man. This has been very helpful, very insightful.

PL: It's been fun, Kevin. Thank you.

KD: Awesome. All right, well, that wraps another episode of Agency Unfiltered. Thanks again.