🔥 This Week’s Agency Insight

From Jordan Ross @ 8 Figure Agency

February, 11th 2024

I can make the average entrepreneur into a millionaire or decamillionaire

They just have to follow my proven system that helps business owners sell their company for top dollar rather than trying to figure things out on their own

Fortunately, I’m spelling the system out for you today

How to Sell for $10,000,000

Context:

Last week I sat down with a portfolio owner who is acquiring an agency right now

We were reviewing the deal he is currently (attempting) to invest in

The deal is a good one with massive upside but also has a slim margin for failure

Here is everything you need to know on how we (investors) look at businesses to assess if we should invest:

Weekly Insight

1- Service, profit, numbers

When I began asking the investor about his investment, I asked a series of high-level questions to understand if this is a good business or not

These questions will be asked of your business too

Here are all the (first round of) questions I asked that you MUST have answers to if you want to max your exit valuation

What is this company doing in:

• Revenue/mo?

• Profit/mo?

• Sales/mo?

• Avg sale price?

• Clients they lose/mo?

• Churn %?

Here is what my answers were about this business:

• Revenue/mo: $416k

• Profit/mo: $166k

• Profit margin:40%

• Sales/mo: 15-20 new sales/mo

• Avg sale price: $2500

• Churn/mo: 5 clients

• Churn %: 3.9% (this is best in class)

Initially, looking at these numbers, this looks like a VERY good business to acquire

After the initial round of questions, if you pique an investor, they will go deeper

Here is why this is looking like a good business deal from a high level (before I go deeper)

1.  Churn

   This churn is best in class

   Doing anything at or less than 5%/mo in churn is elite

2. Margins

   This business has HEALTHY margins, meaning good long-term ROI for an investor 

3. Sales

   This business is consistently bringing in 3x-4x more closed business/mo than it churns

2 Diving Deeper- Learning about the story

Once an investor piques their interest, they are going to want to know the story of the company

They want to understand how these numbers are the way they are and why they make sense

Here is what I asked next:

• What service do they offer?

• What industry do they sell to?

• Why is churn best in class?

• Who does the sales?

Here is what I learned:

• Lead generation & google ads

• Local businesses that need Google for leads

• The founder built a best-in-class system- it's a black box that clients can't even look into

• They sign up, stop talking to the founder, and then get leads within 30 days

• The founder does about 13-18 sales/month currently and one sales rep does about 2 deals per month

My reactions:

• Their fulfillment systems are dope

• I love their offer due to it being value-based

• I don't love that the founder is doing all the sales- this is a big risk for acquiring this company 

From here, I began running numbers and math on a napkin

My napkin analysis led to many more questions 

Before I dive in, I want to reiterate, that this is exactly what an investor will do for your business

Questions, analysis, more questions

3 Analysis & Insights

I run the MRR capacity formula to extrapolate the risks and upside of this business

This basically shows me what the ceiling of achievement is for a company and where the amount of new business per month will equal the churn per month

The formula is as follows:

(Sales/mo * avg price points)/Churn= MRR Cap

Here are their initial numbers:

(15*2500)/.039= $961,538.462—> On an annual basis, this means the company’s ceiling, if nothing changes, is $11.5M/Year

This means, that if this investor acquires the company and does NOTHING but maintain the trajectory, they will double the business

This immediately made me think: WINNING INVESTMENT

Now, I began extrapolating some numbers to identify risks in the company

Remember, the founder does all the sales, what happens if sales go down and churn goes up when he leaves?

Let's see

(10*2500)/.039=$641,025.641 * 12= $7.6M annually 

(5*2500)/.039=$320,512.821* 12= $3.8M annually

Ok, new insight

The sales can drop a bit, down to 10 per month and the company will still grow

So that means as an investor, there is wiggle room for error

But if sales tank because we don’t solve for bringing in a new closer, we’re pretty fucked pretty quick

Insight and important note: we need to build a plan to ensure sales is good

Offer to founder: can build in an incentive offer for the founder to stick around and get a killer sales pro up and running before he leaves

More analysis

What if sales churn and churn increases?

(10*2500)/.05=$500,000 * 12= 6M/year

(5*2500)/.05=$250,000 * 12= 3M/year

Ok, so sales can drop a bit, but man, there is a SLIM margin of error for churn

If we move churn up 1.1%, the business can really be in a shitty scenario

Once the investor runs their analysis, they’ll have an understanding of where they need to focus on, potential upside, and potential risks with their business

Remember, your business is just a numbers game for them

It is not a passion project

If it's not a clear ROI move, they won't be in

So, a gentle reminder, remove all the passion, energy, blood, and sweat you put into your business

That doesn’t matter for valuation

4 More Questions

At this point, I was optimistic this would be a very good investment if churn could be maintained

Here is what I asked next

• Is the founder involved in fulfillment?

• Who runs fulfillment/ops?

• Do they have any form of incentives?

• What's your commission structure & plan?

• What is LTV per account (I ran a calculation)?

Answer:

• The founder is not involved in fulfillment (big win)

• There is a head of ops that has run fulfillment for the last few years

• He doesn't have any incentives, but the investors will provide him with some

• The investors were still working commission structure & plan out

• LTV by my calculations= 64k, the investor believed LTV= 50K

Here is what I began thinking of for the next stages of this business:

5- Strategy

At this point, as an investor, they are looking for easy wins for easy ROI on the company

When you’re going to sell, if you know these, you can even have these ready for the investment team and show them a path to how they can grow the business and get insane ROI, making your company investment very appealing

Here was my logic:

Run the math on one-time earning commission sales structure

15 deals/mo * $2500 commission (this is 5% of total LTV)= $37,500/mo in commission= $450k annual earnings

WOAH

We can attract the world's best sales pros

If this number increases, a sales rep can 600k/year

Ok, we’ll definitely be able to win at sales because we can afford to bring in the world's best sales professionals because financial incentives are there

Provide an incentive for the head of ops to stay with the business long-term

This won't be hard

The company earns 3M/year in profits

Increase price

I think it would be worth testing a price increase for this company

There were two types of businesses this company was working with

Lawyers

Contractors

We can definitely try increasing the price for the law firm niche and if successful, we could increase the business by 2M annually

Seems like a logical test that can yield some serious upside

Increase price marginally for every account

The business had close to 200 active accounts

If we go in and increase prices by 10%, adding $250/account, this company would make an extra 500k annually

That 1 move would definitely pay for the loan from the bank at a bare minimum

Something to keep in our back pocket

6- Assessment

This business was a rare find

The upside is epic

The churn seems very stable with the CEO not actually working on any accounts

The moves we can make to grow this are epic

Here are my takeaways I would encourage you to think about for your company when you’re ready to sell

1. Maximize your exit valuation by removing yourself from everything

   Ops, sales, marketing

   This founder could have earned 1.5 more potentially on his offer if he was removed from everything

   This is the biggest reason founders receive 2x annual profits vs 4x or 5x when an offer is made

2. Know the napkin math

   An investor will be running the numbers for your business

   Don't make them, give it to them

   Most entrepreneurs have their heads so far up their ass, it's sad but true

   As an investor, it is highly appealing to work with someone who is a sophisticated business owner and knows their number

   Think of the types of companies Mark Cuban invests in on shark tank

   The same logic goes in investor life in the real world too

3. Have an insane fulfillment machine and team

   The biggest reason this company was appealing was because of its churn numbers and its talent that can run the founders' systems

   I talk about it a lot, but fulfillment truly is the most important part of your business

   If that is shit, no one will invest

4. Come prepared to share what the low-hanging fruit and upside of the company are for an investor

   If you know it, you can make it an easy item for them to tackle

   If you know it too and aren’t pursuing it, they’ll need an explanation

Thanks for reading. 

P.S Want to build an hands off, no stress profit generating agency? 

Harness the power of processes, and systems to build a profit generating team that function with or without you. Click here to schedule a meeting

The 8F team will be ready to give you a free consultation.

Killer Content (My favorite pieces of content from last week):

• Podcast: Ultimate: How Asa Burroughas Added $20,000 MRR to His Product Design Agency

• Long Form Youtube: How To Calculate Your MRR Capacity (The Most Important Equation In Your Business)

• Short Form Youtube: The Power of Strategic Outreach

Stay Happy

Stay Hungry,

Jordan Ross

CEO & Founder @ 8 Figure Agency

Let's Stay in Touch!