Elizabeth Shea (00:43)

Hello everybody and welcome to the latest episode of Branching Out. I am so excited to have a very dear friend and former advisor in our studio today, David Tobin. How are you today?

David Tobin (00:54)

I'm well, Elizabeth. Thank you for having me.

Elizabeth Shea (00:57)

I'm delighted to hear your story and hear more about your services and the kind of work that you're doing because we worked together! David comes to us as the Managing Partner for the Tobin Leff Group, which is an investment banking and M&A advisory firm. So, we're going to hear a little bit more about his story and talk through what types of things that you might be looking for if you're looking to sell your business.

So, why don't we just start from the beginning and maybe give us a little bit of your background. How did you get into this business and how did you go on to found the organization?

David Tobin (01:28)

Sure. Thank you for allowing me to share that. Just for your audience . . . what's exciting for me, Elizabeth, you and I were just talking . . . we date back almost 10 years. I met you a couple years prior to when you were ready to sell. We stayed in touch and we were thankful that you selected us to be your investment banking firm when you sold your firm in 2019.

Elizabeth Shea (01:40)

Yes, time flies!

David Tobin (01:58)

That was how we met and the relationship we developed. My background — some similarities to you — I come from a marketing and advertising background. I founded and owned two agencies. My last agency, our client base, was primarily financial services companies and financial agencies. They had the desire to put their financial advisors in front of business owners on a favorable basis. We came up with the idea that the best way to do that would be to position financial advisors as specialists in exit planning and succession planning.

And it worked — you're shaking your head yes — because you, being a former business owner, can appreciate that those are topics on the mind of owners. Exit planning, succession planning, M&A. And because that was our client base, I tried to study and gravitate to information around exit planning and M&A, and I just took to it. So, I sold my firm in 2004. I was away from the industry for a few years, but I would meet an owner, and I'd say to them, “Elizabeth, what is your exit plan?” And they wanted to talk about that. So, we got started doing exit planning, consulting, and it really just grew from there. I'm thankful that 16 years later, I now have seven partners. We are very mission driven to help owners maximize and monetize what they've built.

Elizabeth Shea (03:29)

Yes. So, you worked with us for a long time, as you mentioned, for maybe five, six, seven years. Can you talk a little bit about why you think that's important. Why is it important for someone if they're looking to exit the business to at least start having those conversations with someone like you?

David Tobin (03:48)

For sure. It's obvious to state it, but we all only get to sell every company we own or founded one time. And the stakes are so high, so anything you can do leading up to the desired date to monetize or the liquidity event . . . there are steps you can take. Certainly, if you have a couple years prior, you can make some structural changes. If you want to try to have an event more in the foreseeable future, they're still similar to getting a house ready. You can stage a business. You can do certain things that will hopefully increase your multiple and selling price and provide more favorable terms. And that's why in your case, you and I, we stayed in touch. I know you worked a little bit with one of my partners just for a couple years prior to have your company positioned to go through the M&A process.

Elizabeth Shea (04:51)

Yes, I will say you were very helpful and instrumental in having us realize what was going to be important to an acquirer and then make sure that we moved towards that avenue and drive towards success. So as far as Tobin Leff is concerned, what kind of companies do you tend to work with? What type of companies do you seek out as your specialty?

David Tobin (05:12)

Our domain expertise is around service-related companies, marketing services, marketing communications, technology services, professional services . . . an economy driven by talent, more so than hard assets. Primarily working with middle market companies, but we're people driven. We want to try to help owners in that space. Certainly, we help companies that have large enterprises, but we also have teams that work with smaller agencies.

Elizabeth Shea (05:45)

That's terrific. That's good to know. I think having that domain expertise is really important just because you understand who the buyers are and that's one of the biggest pieces of value that I think you can bring to the table. So, what are some of the trends that you're seeing today because the market changes every year and it continues to change. What are some of the trends that you're seeing out there from buyers?

David Tobin (06:08)

They're being more cautious than a couple years ago. You'll hear from so many people in my industry or related . . . there's plenty of capital. Everybody's hearing how much “dry powder” is there. So, there's no shortage of capital. Deploying it's another challenge because . . . I would say today it's a little bit more of a buyer's market than a seller's market. It shifts. If somebody has a quality company — I know we'll get to that in a moment, what the value drivers are in terms of growth and profitability — there's plenty of places to look for interested buyers or investors.

But due diligence is more challenging because they're capital providers, they're lenders. The due diligence, it's just you really have to be buckled up today. And you have to go wider and deeper to be able to track multiple offers. Today, you have to be prepared. Every M&A discussion, a buyer's going to say, “what's your point of view on AI?” And you can't just say “we're using it as a tool.” You have to be able to demonstrate that it's not going to impact your business or you're truly able to leverage it. So, that is a factor that people have to get in front of that messaging, or more so the messaging, if you get in front of the solutions.

Elizabeth Shea (07:42)

Right, right. First of all, it's one thing to say but it's another thing to actually do it and live it. AI is table stakes in today's environment. So, how are you actively putting it into your environment in a successful way so you de-risk the opportunity to a certain extent?

Talk about some of those value drivers. You mentioned a couple of them earlier. What are some of the things that companies can be doing or should be doing to try to obtain the best possible valuation? The valuation is just one component to it . . . but enterprise value, what drives that, in your opinion?

David Tobin (08:23)

From our experience being with buyers and investors weekly or monthly . . . certainly growth. Both historic growth and having a vision for growth and enhanced value. If somebody's going to buy your company for five, six, seven, eight, 10X of EBITDA, they're doing that with after-tax dollars. You're only going to get a good return on capital if there's growth or synergy. Historic and division. As important would be margins. Net income or EBITDA, adjusted EBITDA as a percentage of fee income, of adjusted gross income. So important. There's sometimes a line drawn. There are those companies that can operate consistently at a margin north of 20%.

If you're in the single digits or 10%, it's just hard to command good terms because there's not enough margin to get a return on capital. So, growth margin. The dependency on the sellers is so important. If that founder's name is still on the door and he or she is driving new business, there's so much risk for the buyer because, what happens day one post-close if the sellers onto something else? So, reducing the dependency on the seller or sellers, especially on the new business side. And that relates to another driver hand in hand, their engine for new business, their engine for marketing. Are they consistently seeing new opportunities?

And then of course, your listeners, many are owners, they've been buyers or sellers. They know client concentration risk is a red flag. Churn rate becomes very important. After looking at financials and adjusted EBITDA, buyers are going to — if it's not in the CIM, the marketing materials — they're going to immediately request to see a client list per year for the last three years. Now they're not looking for the names of the clients. You can redact those. What they're looking for is the churn rate. How many clients from 2024 are on the docket in 2026? Because buyers — we like to try to simplify it — they're looking for companies that are sustainable, transferable, and scalable. Kind of rhymes, so you can remember it.

Elizabeth Shea (11:10)

Right! That's great. And recurring revenue has also been an important driver for organizations. Are there pieces of advice that you could give somebody if you don't think that they're ready? Or would you tell them point blank, “you may not be ready” because the growth trajectory hasn't been there? How do you deal with those circumstances where someone might come to you and is interested but just doesn't have all the right pieces for the right kind of a valuation.

David Tobin (11:41)

Well, we believe that one of the best things we can do for clients or prospective clients is to truly share with them how we see it, good or bad. If they have a good value proposition, we get behind it, we champion it. If not, they still may have a sellable company. They just have to realize what the market most likely will bring.

And some people will still decide that they want to go through the process. Maybe it's time for them, they've built up enough. We talked about the value drivers. Well, first, to try to really get your arms around what is my company worth? And I would recommend talking to multiple types of advisors. I'm in this industry; I’ve worked with investment bankers — you have to be careful just hearing valuations unless groups have really dug deep. Because it's easy to throw out multiples. And then you also have to be careful because sometimes owners of service firms tend to gravitate to other business owners.

Well, other owners might say “I sold my company for 8x, 10x …” Well, they're a technology company or a SaaS company. Get as educated as you can on how a firm like the one you own would be valued, talk to multiple players, get very clear on your free cash flow, adjusted EBITDA, and very clear on adjustments that buyers will most likely accept.

Elizabeth Shea (13:26)

That's a very important point. So, you've mentioned adjusted EBITDA a couple of times, and I know how important that is to the process and to the valuation. Can you just quickly describe what might influence an adjusted EBITDA number, either take backs add backs?

David Tobin (13:43)

Sure. So certainly EBITDA, you have the core of it, interest depreciation taxes, that's the easy part. The adjustments are . . . in almost every situation, you have to adjust to normalize the owner or owner's compensation up or down. So, the adjustment that buyers will make . . . you look at everything that's been expensed, to benefit the owners through the P&L and you compare that to what would be a fair market compensation package for that position and then the adjustment. If they were paying themselves below market, then the net income is overstated. And it's fine. You don't have to worry about changing how you pay yourselves because you might do that for tax reasons. You just have to appreciate if you're only paying yourself at the social security wage base of like 160 and fair market for a company like yours is 300, the buyer is going to adjust your net income down.

Elizabeth Shea (14:46)

Correct. Yep. Yep.

David Tobin (14:47)

There's always going to be an adjustment to normalize comp. But the other adjustments are truly one-off expenses that are not part of normal operations. The obvious ones are we moved our office or we had a 50th anniversary, 30th anniversary party. The one-offs are easy, but we have to be careful. Just yesterday, one of my partners who does our valuation work and I were on with the prospective client. Their net income was almost break even and the owner wanted to put forth adjustments taken at north of a million dollars for unproductive employees, advertising that didn't work. Those are not adjustments that buyers will accept.

Elizabeth Shea (15:40)

I think that's a very important point because it doesn't matter what you might perceive or think. It's going to be from the lens of a buyer. What do they see and what are they going to be accepting?

David Tobin (15:53)

Yeah, and you also have to appreciate that if there's going to be synergies that can benefit the buyer, whether it's cross-selling or they have some expense, they could consolidate the back office. . . That's part of the reason they'll pay a good multiple. They're not going to pay a good multiple and then give the seller credit for all those synergies that the buyer brings to the table.

Elizabeth Shea (16:20)

Right. So, talk a little bit about . . . we've mentioned valuations and what goes into a deal or prospective deal. We always like to say that it's not just about the price. There are oftentimes terms. Can you share what you've seen, what's been current in the industry today for those other variables?

David Tobin (16:41)

Yeah, for sure. If I may, I just want to talk about what we're seeing in terms of offers and deal terms for two different types of buyers. One is strategic and the other is financial. So, in the middle market — marketing, communications, technology services — there's been such an influx of capital from private equity groups, family offices. And it's really been a big win for our clients and us because like eight or nine of our last fourteen transactions have either gone to private equity groups or strategic zone by private equity. So, the deal terms with financial sponsors tend to be two primary elements: cash at close and then rollover equity. The cash at close tends to be in the 60 to 70 % of the initial valuation and then the roll over equity is equity in either a platform that was formed or an existing platform. And the sponsors, if you can create the right type of competitive situation, you would have different PE groups and family offices bidding for the opportunity. You'll look at their track record on how successful they've been getting a multiple of invested capital.

So, their equity, a dollar roll over equity, what does that become in the future? And usually, the benchmark is they're trying to get two and a half or three times on every dollar. I'm going to come back to your question on what to look out for. With the strategic buyers, if they're buying a service firm, it tends to be driven by cash at close, of course, and then an earn-out formula. And I know your listeners are all saying, “I don't want anything to do with an earn-out. We've all heard stories.” But it's hard to get around some safeguards for buyers when it's driven by talent. So the key around the earn-outs is, will the seller control the P&L statement if it's an EBITDA based earn out post-closing? There's always that concern. Will I be able to control my scorecard? So, certainly it's better to track the top line as opposed to the bottom line in most situations. The length of the earn out. Do you get credit for cross selling opportunities the buyer brings? Sometimes buyers will put a cap on the earn out because they feel at a certain level if the earnings are that much higher than the benchmark coming in was because of what the buyer brings to table. What we've experienced is that it's usually more energy negotiating the terms than just the multiple.

Elizabeth Shea (19:38)

Totally agree, totally agree. Which is ironic, but there's such a focus on enterprise value, but the reality is what are the terms that the owner is going to need to live with for the foreseeable future. So, you've defined some of the differences between private equity and strategics. And strategics are typically looking for the value of your services or the people, as you mentioned. Do you find that there are more private equity buyers out there now than in the past? Or is it pretty even? What does it look like in the future, as far as you can tell?

David Tobin (20:13)

It's much higher and it continues. We've had the firm now 16 years, Tobin Leff. Five or six years ago, just a percentage of our deals were going to private equity groups. I mentioned the percentage currently. It used to be...

You're even that had to be at a certain level, five billion or more. This was years ago. and because the supply and demand, private equity was flowing into other sectors that were generating greater returns than maybe marketing communications. Well, supply and demand is such that a lot of those deals got done during that 10 to 12 year period where interest rates were so low. The M&A market was booming. So financial sponsors had this success, their investors got good returns, they went back out and raised more money. Now they have to find quality operating companies to continue that streak. And they had to look to other sectors. And then there's some really good success stories in the mark home space, which caused more dollars to flow. just as an example, our database is really extensive of PE groups active in this.

I am contacted probably three to five times a week from different sponsors saying, think of us for your clients. Here's our acquisition criteria. And the interesting part too, it's private equity. People perceive these real buttoned up big firms, New York, certainly

There's many of those, but there's a lot of investment groups, they call themselves private equity, they're not really, they don't have a fund sitting there. They have relationships with investors, or they call them limited partners. We've had good successes, even with smaller firms, who found that we helped them find these smaller investment groups.

And what are the terms? Like a couple years under EBITDA's maybe two million dollars and there's still a platform. That wasn't the case a few years ago.

Elizabeth Shea (22:12)

⁓ huh.

Right, right. It's definitely changed. There's just so much money out there that needs to be put to use, right?

David Tobin (22:28)

Yeah,

and then some of these smaller groups, they bring a lot of value because they can really focus on just a few investments that they've made and they care about. Now, they may not know the seller's business that well, but they're really there to support them and they bring capital and they help with add-on acquisitions.

Elizabeth Shea (22:49)

what pieces of advice would you give to a seller who just wants this to go as smoothly as possible? Like are there any kind of gotchas out there that you see that perhaps people haven't thought through?

David Tobin (23:03)

you went through it, Elizabeth. mean, when you sold your company, we went through the process. We brought multiple offers. You found the one that fit for you. It truly is a process. we can touch on what you can do to prepare, leading up to it, getting your house in order and you and your team ready, it can be exhausting, overwhelming.

So this might sound like a pitch for Tobin left, but one of the key steps would be really take your time to interview multiple intermediaries. range from business brokers on one end to &A advisors in the middle to investment banking groups. And the lines blur. So really to take your time, interview multiple because you're going to spend six to 12 months with that team. You really have to find out who will be representing you. So one is take your time to pick.

Plan on doing what you can, the advisor that you bring. Creating a competitive situation in most situations will benefit. I'm not talking about like this full blown, real wide auction. There's a place for that and we do that with some transactions. being able to truly assess, hopefully three, four, five,

legitimate offers from qualified buyers where you have options. mean, everybody knows that will put themselves in a better position than having a fallback.

Position we call it a plan B But you can approach the process from a position of strength if your plan B Maybe you have a solid management team you've explored what it might look like They could line up partial financing for an internal transaction at least be able to compare that Option in economics towards when you're assessing offers so

creating an environment where you can, and then also take pride to really when appropriate go wide, not just the obvious strategic buyers. There might be consulting firms, there might be ad tech or mart tech companies. There are certain types, mean thinking about going wider. We've had some really nice surprises, pleasant experiences from different types of buyers.

for different strategic reasons. So go wide, try to create a competitive situation, plan on the front end, and then put your chin strap on, because it's going to be...

Elizabeth Shea (25:39)

Right. Exactly.

Well, I mean, I think in most cases, most people are looking for a competitive to drive a competitive process, but it's surprising how many people don't. And so that is a message that I continue to, to reiterate that you look to bring on an advisor that's really going to be working for you and take the time to get to know them and know in and of yourself what you personally want for you and your business, because that's going to be ultimately what makes the decision.

David Tobin (26:05)

When you touch on such a key point, really try to get clear what you want. mean, everybody, most people want higher purchase price, more money up front. Those are givens. But then going beyond that, opportunities for employees, what kind of commitment is required from the seller, the experience and track record that the buyers have.

paying earn-outs, funding, or being able to close. Because what can be so deflating, demoralizing, is if you sign a letter of intent, you go through all of that, you're in due diligence, and the deal falls apart. It's just, it does. so trying to, I mean, of course, everybody's going to try to minimize that situation.

Elizabeth Shea (26:44)

It happens. I mean, it happens.

But it happens and it's worth knowing that so that you just, like I said, put your chin strap on and keep it, keep it moving. So any fun success stories that you'd want to share? Any recent transactions that were pleasant surprises?

David Tobin (27:09)

Yeah, thank you for allowing me to share a couple. I'm very proud of the work we've done with.

most of our clients. You asked a couple case studies. I can point to situations where we were brought in and a client had a certain view what his or her company was worth. One in particular, really solid company, thought he was going to sell to a strategic, would have gotten respectable terms from a strategic. And the more we learned about his business, the more we loved it. And we said, there's a story here to tell, not just

strategics but we think you could be a platform for a private equity group because of what you have in place. We helped with a growth plan. Now they created a solid business, valuable business, before we walked in their door. But it was the work we did helping with the growth plan and then taking that plan

with passion because we really took the time to get to know the business, the nuances, and take it to the M&A marketplace. We got multiple offers and it turned out it was a platform opportunity with a PE group. And the economics were at least two times more than the client thought he was going to get before he met us.

The lesson

we learned is take your time to really get to know the client's value proposition. Try to expand everyone's view of possibilities, theirs and ours, and then tell that story with passion.

Elizabeth Shea (28:35)

you

I would love it if you could describe what a platform company means because a lot of our listeners may not understand the nuance of being a platform within a private equity group and the notoriety or advantages that that might bring.

David Tobin (28:58)

Yeah, thank you for having me clarify that. The platform refers to like the hub, the foundation, the initial company that the private equity group or the family office invests in. And it's typically that core company that they call platform that has this vision for enhanced value. in pretty high percentage,

Part of the growth plan includes acquisitions. They call them add-ons or bolt-ons. So the original hub company is the platform. And that's the original entity. There's an entity form, but the assets of that original company becomes the first investment or the stock of that first company becomes the first investment. And then they build from there.

Elizabeth Shea (29:54)

Yeah, what we've seen is that those are for folks who might not be done and want to hang up their skates and go home, but want to actually make investments in additional companies to bring into the fold, into the community to build greater and then get another bite at the apple. That's a lot of many times the advantage of having a private equity acquirer is it's potentially richer ⁓ of an outcome.

David Tobin (30:17)

It is and what we have found very interesting so what you described Does fit the profile for many owners they feel? That they want to take it to another level with capital behind it two bites of the apple I mean that's a Profile many owners have the energy desire to do that. Well, we also found though we have owners that

They didn't necessarily want to sign up for those two tours of duty, meaning sell it now, build it, and then have a second, but at the Apple Second Liquidity Event. But they still chose a private equity type buyer with the understanding going in that a new CEO had to come in and they were only going to be involved for a couple years. And or they had a really strong leadership team in place. the reason why those deals still went down that pathway is the economics were better than the strategic offers. They were getting more money up front. But it's so important that the seller and potential buyers really understand what kind of commitment the seller's willing to make.

And that's where the strength of another value driver, the strength of the leadership team, management team is so important in a situation like that.

Elizabeth Shea (31:42)

Correct, correct. So it's a lot of great information that you've shared today. Thank you so much, David. How might people seek out resources to educate themselves? Because there's a lot to learn in this process. It's a different world. They probably know their business and their industry really well. But can you direct them to a couple of places where people might be able to get more information?

David Tobin (32:03)

Well, today, now there's so many experts with Claude and... I mean, there's just so much information out there and really good information.

Elizabeth Shea (32:08)

That's fair. And you can say Tobin Leff, of course. I know you have webinars and programs, so.

David Tobin (32:21)

You do have to be a little careful because up from all these AI searches will come potential deal terms and multiples and potential. I mean, any seller is going to be all over all the AI tools. ⁓ just, I will, if I may just go back to what we touched on a few minutes ago. I think it's so important to talk to multiple advisors.

The stakes are high and AI is great. I mean, we use multiple AI tools to build prospect lists, but you just, it's like anything else. You just have to make sure you can get to the source of all the information. It's hard though, because there's just so much stuff being thrown on out there. And then if you set expectations around that, it can be rough. Yes.

Elizabeth Shea (33:00)

Right. Excellent.

can be disheartening, right? Because

the deal's not done till the deal is done. Yes. Well, excellent. Thank you so much, David. This has been great. How can people get in touch with you if they'd like to?

David Tobin (33:20)

That is true.

Well, thank you for having me and thank you for asking. think you get in touch Tobin left. T O B I N L E double F dot com. I have seven partners. Any one of us would love to just have conversations with owners who just want to talk about their businesses and the M and a market. And we'd love to get to know people the way you got to know you prior to your change of action.

Elizabeth Shea (33:48)

Right.

Right. And you were very patient with me as I went through my journey. So I appreciate that. All right. Well, thank you very much. Have a great day. OK.

David Tobin (33:56)

Thank you for having me.