About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called Growth and Exit Planning that helps in exit planning, value building and financial management.
About the Guest
Karim Marucchi is the Founder and Chairman of the VeloMedia Group, the parent company of boutique professional service organizations with offices in Los Angeles, Denver, Bucharest, Las Vegas, New York and Rome. Over the last twenty years he’s run startups, taken companies public, managed mergers and acquisitions, and led professional service organizations across the globe.
Today he’s the CEO of Crowd Favorite, the first premiere WordPress agency for the Fortune 500, where clients such as Microsoft, National Geographic, DirectTV, Lexus, Facebook and major entertainment studios count among the company’s client roster.
If you listen, you will learn:
- Karim’s background in business.
- What are professional services?
- How digital services are similar to the restaurant industry.
- The 2 types of sales that digital founders do most often.
- The real value of a business.
- How to build a profitable reputation.
- How to overcome the hurdles in the digital business model.
- What successful business owners do in their business.
- Finding your strengths and building your digital business with them.
- How to build an effective communication system within the company.
- The way business culture evolves organically.
- How to find the right business partner.
- How to avoid burn-out.
- How to identify your musts in a sale process.
- The reasons owners sell their companies.
- The right reasons to sell a business.
- How to negotiate a smart earn-out agreement.
Announcer: 00:04 Welcome to Life After Business, the podcast where your host, Ryan Tansom, brings you all the information you need to exit your company and explore what life can be like on the other side.
Ryan Tansom: 00:14 Welcome back to the Life After Business podcast. This is episode 86. You've probably heard from other entrepreneurs or advisors or potentially even other people that we've interviewed on this show that professional services firms are very difficult to sell because it's all about the people and there's not a lot of assets. Well, today's guest's name is Karim Marucchi and Karim has been in the digital agency and professional services space for decades and has a lot of exits underneath his belt. He's successfully sold a couple companies. He's the current CEO and owner of Crowd Favorite, which is a WordPress agency for fortune 500 companies such as Microsoft and National Geographic. Karim comes on the show today to have a conversation with me about what are the things that these digital agencies and professional services firms are doing that create value and create a sustainable operational machine within their company and how through their people and establishing a niche, they're able to explore different exit and partnership opportunities that allow them to harvest and reap the rewards of the value that they've created, but then also align the vision that they have for their business and their people with a potential partner or buyer so they can be happy, but also get the rate of return on their hard work that they deserve. So without further ado, I really hope you enjoy this episode with Karim.
Announcer: 01:34 This episode of Life After Business is brought to you by Solidity Financial's growth and exit planning. Their proven process gives you clarity on all of your exit options and how those options impacts your financial success, timing and future happiness. Sell your company on your timeframe to the right buyer at the price you want.
Ryan Tansom: 01:34 Karim, how you doing?
Karim Marucchi: 01:57 I'm doing great today, Ryan. How are you?
Ryan Tansom: 01:59 Good. I'm glad you and I met, um, it was over a couple of cocktails at a distillery over, uh, the holidays, and you and I got chatting and it was one of those that it was difficult to pry myself away from the conversation because you've got such an interesting background and I had other people to talk to you. But you know, for listeners that have not heard of you yet, I think maybe we'll take, take us back to when and how you got exposed to the entrepreneurship a world and dynamics because I think you were very, very deep into an from an early age. So why don't you give our listeners a little bit of the backdrop?
Karim Marucchi: 02:34 Yeah. So I was relatively lucky in the 1970s my dad started doing something that would seem crazy and harebrained. He had an idea of how to get large construction infrastructure projects financed in the third world. So he literally would jump on a plane, go to name your third world country here and show up at the best five-star hotel of the capital and hang out. And by networking, within a few days, he'd usually find somebody somewhere who had something to do or knew the Ministry of the Interior. One thing led to another and uh, amazingly enough he would put together these projects where he wouldn't negotiate between international banks, large construction companies, government agencies to do the performance bonds of other countries and just pull together a, a building, a, um, a hydroelectric dam or dredging a port out of nothing. Like, there was no project before. And watching him negotiate this as I grew up, uh, in the, in the 1980s was just amazing.
Karim Marucchi: 03:56 A lot of travel, a lot of different cultures. Learning how to deal with, you know, not only the different national cultures but the different cultures that we bring as we, you know, nature nurture of growing up is just an amazing ideal of seeing how he did this. And after you had that few, few successful projects, he started doing something where he was quite literally merging together different architecture engineering firms and different construction firms to do larger projects. And that's where I had my first taste of if you merge the two groups together, you can actually get more than the sum of their parts.
Ryan Tansom: 04:36 And you were actually involved in some of those projects too, at an early age, weren't you?
Karim Marucchi: 04:43 Yeah. Growing up quite literally traveling, a little bit of homeschooling, a lot of apprenticeship. So I started at a drafting table at the age of 12 and uh, by the, by the time I was 16 and 17 was working on actual projects that were being built.
Ryan Tansom: 05:02 So really seeing the intricacies of a lot of the inner workings of how the companies were merging, getting the projects executed. And it's interesting from knowing some of the backdrop of your story. How did you go from construction and architecture and then all of a sudden into digital marketing? And there's a very interesting spot that that happened. You want to give the listeners, you know what literally, what phone call changed the trajectory of where you were going?
Karim Marucchi: 05:31 Under the hashtag "You never know where it's gonna come from". I was always passionate about technology and computers growing up when the first personal pcs were coming. And, um, I started, I started doing what's called macro or lisp routine programming for autocad back when autocad was on DOS where you typed coordinates rather than using a mouse more often than not. We were looking for ways to really make it faster and to work faster to do drafting. I wrote a few lisp routines and they ended up being published in a magazine for cad. One thing led to another and my last semester in university I received a letter asking me to, uh, to go work at autodesk, at the company that made autocad. And um, while that wasn't a good fit very long, I loved the technology and I had a, I had a mentor and a manager who said, you know, what, you'd be really good at helping regular people understand the technology the way you are. So why don't we move you from programming to marketing and you can go work with the, uh, with wishlist team explaining to our clients what's going to be in the next version. So I went from architecture to a brief stint in trying to program to, uh, try and explain technology to folks who really didn't, didn't want to understand the depth, they just needed it to work.
Ryan Tansom: 07:08 Is that what happened when... That makes a lot more sense now as I think about your switching into the digital marketing world and you ended up becoming an entrepreneur because you've been through multiple exits. Um, so where did you pull the trigger to actually start doing this for yourself?
Karim Marucchi: 07:25 Um, yeah, another sort of unforeseen circumstance. Uh, I was visiting a friend in Los Angeles who was starting an Isp and uh, in that Isp they were, uh, installing racks and modems and servers and things, uh, and I was just sort of hanging. Out one day the phone rang and uh, as, as they're back, they're like, hey, Karim, Joseph, pick-up, the phone. I pick up the phone. And it ended up being a very famous PR agency that I didn't realize at the time, asking if, uh, the company did- wrote websites. Being more of a smart ass than somebody who answers questions without knowing their context. I asked who the client is, um, before answering and they said, oh, well, our client is Nissan. Yeah, we build websites. I thought I was doing my friends a favor. I hang up the phone and say, hey guys, in a couple of days you guys have somebody coming down to talk to you about building a website. And they look at me like I'm crazy and we have no idea how to do that. And this was 1994. So they're like, yeah, you're going to take this meeting with us. And one thing led to another and we literally started a web shop, one of Los Angeles' first web shops in the same space with this ISP.
Ryan Tansom: 08:54 That's awesome. As you expect as you go down that journey and the path little bit, you've gone through how many successful exits at this point?
Karim Marucchi: 09:06 Um, let's see. I've gone through five exits, four of them were successful monetarily, but I'll five were successful period.
Ryan Tansom: 09:16 The purpose of your presentation or presence on the podcast I should say is, is because you've got some crazy insights on the professional services world and the inner workings of really managing people as assets and maybe because we're not going to be going diving into all those different exits, but you know, kind of give us a little bit of the, the, the order and some of the major milestones along those. Cause I know you picked up some crazy bits of wisdom as you went through those and then even throw from the exit that didn't work. What were some of the main trends and pieces of information that you're gathering as you, you're going through those.
Karim Marucchi: 09:55 So it's interesting because folks automatically assume when they talk about exits of service agencies that there, that there is no way to get out or it's going to be very complicated and it doesn't have to be. Um, it's true that we don't have a lot of hard assets when we talk about professional services and let's define professional services for a second. When we talk about professional services, we could be talking about a web shop and we could be talking about a law firm, an accountant, an accountancy, anybody who is actually doing any consulting and you're selling either hours or services as projects, it doesn't matter, right? So folks figure that, you know, what, how can I sell it if it doesn't have any assets? And when we're in the business of selling services day-to-day, a lot of people use the analogy of the restaurant style. The customer is always right and it's about customer service. And I think the analogy about restaurants actually plays through when you're talking about buying and selling restaurants. When you think about the most successful restaurants and the ones that are, that are of the highest value, you're not thinking, what kind of stove do they have in their kitchen? Or how much did they pay for those chairs or tables? You're thinking, what's the reputation of that chef? What's the reputation of that restaurant? Right?
Ryan Tansom: 11:24 Yeah. No, I think, I mean that's huge because there is the, you know, they call it the goodwill or whatever that is the brand and it's the people and as the reputation as longevity of them being in business and being consistent with what they're providing.
Karim Marucchi: 11:38 Right. So you hit the core of, of my conversation I like to have with entrepreneurs who does services. Everybody who does M&A is very familiar with the term goodwill and you'll have a lot of technocrats and M&A say goodwill is one of those things you just can't, you really can't put a number on. I like to call bullshit on that.
Ryan Tansom: 11:59 I would agree with that. So where in these, you know, exits that you've had. Did you learn that the hard way? How did you come to that realization? What did, what were some of the, you know, big cornerstones along the journey that really got you the, uh, the, the passion with the statement and the opinion that you have.
Karim Marucchi: 12:19 Well, so what ends up happening is that you end up having a lot of people telling you that the business is only as worth as much as its contracts or as much as you have going on at the moment, and you have to take a look at is nobody's going to buy a service company for the sort of just the, the financial value, unless there's a motivation behind it that makes sense to the buyer. So in, in my experience, there's only two types of successful transactions and professional services. There's the pure financial ones. I actually worked for a large international conglomerate that buys up and swallows agencies and uh, they only do it based on contract value period is just financial. You can have the best art director in the world, you can have the best clients in the world. They don't care. It's just a spreadsheet and a math position. If you're looking to just get out of your professional services firm, then it's just about filling out that spreadsheet and a deal is a deal. On the other hand, there is an entire genre of entrepreneurs out there like a good restaurant tours who are looking for professional services firms that are looking to expand a brand or reputation, a service line with happy clients because they know that by being the best of the best that they can actually charge more.
Karim Marucchi: 13:58 There's lots of really great, um, family restaurants on, on the corners of any, any city. But what everybody really wants to do is they want to go to that, you know, that, that Michelin Star, that five star restaurant and have that incredible meal. That's what people want, even if they can't afford it. Um, so if you can find a way to really pull off that quality, then you have something where, you know, it's, it's a buyer's market in the sense of coming to a final, final deal. But you can actually throw away the conversation of multiples and how multiples only apply to things that have intellectual property or physical value. And say, this is what my business is worth and I'm going to find the right buyer.
Ryan Tansom: 14:46 That is hugely powerful because I, you know, people have heard me say your business is worth what someone's willing to pay for it and because there's all these financial models and all these different things, but it's really worth what it's worth the both parties, which is what you're, what you're describing, you're putting the control into, you know, you knowing what that is. So maybe we Karim we should, maybe take this in a couple of different chunks. One, one being like, how do we build that type of firm to make sure that we're doing the right things to be able to get that kind of control. And then the second being, let's, uh, talk about the deal structure and how you go about actually, you know, forgetting about the multiples and accomplishing that. And then also maybe the third being the, the last part of the journey, which is what is the ongoing relationship look like once you've done something like that. So maybe starting off with the first one, you know, what is it, what are the things that you're doing to make yourself that brand and that reputation because you're dealing with people. And it's like one of the hardest things of being a business owner is dealing with people and that is the sole bread and butter of what you've been doing. So what are some of the things that you've done and what are the things that people do to make sure that they're building that brand that they need?
Karim Marucchi: 15:53 Well, the first thing I'd say is the most successful brands and the most successful service agencies that I've seen - again, it doesn't matter the genre - are the ones who can really pull together a customer segment and verticalize. Nobody wants to go eat at a restaurant that does all cuisines. And I keep using that analogy because it's very powerful. If you can really hone the fact that you're not only a specialist in Italian food, but you're the place to go for fresh pasta that's handmade, that people like, oh, well, I got to try that. Right? If you say, you know what, with my service company, I do this and I do this one thing better than anybody else. It doesn't mean that you only have one service. It means that's what you're hanging your hat on to attract all the other things. You can still have second, third, fourth. In my current agency, we have a, we have 21 services, but we are really well known for three of them. But by, by revenue division, those three bring in most of the leads, but by service offering of what actually gets signed, I'd say it's spread across about 50 percent of it.
Ryan Tansom: 17:16 You know, I think one of the biggest, you know, opinions, which I think obviously you would probably disagree with and I think I would too, is that there's a will or maybe a lot of people would agree that you know, everybody needs to have to find a niche and to, to, to verticalize and segment their customers. But they're terrified to do it, you know, because they say a lot of people say yes to everything. So how do you, how do you overcome that, that huge hurdle in your head or in your operations?
Karim Marucchi: 17:45 I'd love to tell you, it's just guts. It's not just guts, it's suffering because there are going to be times where you're going to have to say no even though you're hungry, because the cost of opportunity of saying yes to something just because you're hungry is gonna take you away from focusing on what you can do well.
Ryan Tansom: 18:07 How did you go about finding exactly what the the segments were that you wanted to focus on? Is there certain things that you've seen people do well as you've gone through some of your businesses and working with your customers that they figure out how to actually dive in and doubled down on that specific thing?
Karim Marucchi: 18:24 So I've worked with quite a few different professional service agencies and I'll tell you the ones that are most successful, whether it's because... whether it's a single leader or a leadership team, they focus on what they're naturally good at. So if you have somebody who is a really good engineer, if they lead their vertical in towards that engineering or they're a really good artist and they lead their service towards that, that design, or if it's a type of law or type of accountancy, you will see that they are very successful. And for the things they don't do well, don't even try it. Partner. I actually gave a talk at a, at an event in Europe that was specifically about partnership and you shouldn't try and do everything yourself because you will get a lot further by trying to partner and you will get a lot more business out of that. And that's something that not only my practice but I try to consult with the folks that I talk to you to tell them that that's the best thing they should be doing.
Ryan Tansom: 19:37 Can you give us a couple examples of things that people try to do, but they should have actually partnered with?
Karim Marucchi: 19:43 I'll, I'll, I'll stick to digital agencies right now, are marketing agencies, marketing agencies right now that are trying to do everything. They're trying to give you a brand that they're trying to tell you what your sales strategy should be. They're trying to come up with a logo. They're trying to build your website. They want to shoot a video. They want to sell your media. They want to help you with SEO. Not to mention content, right? To have the depth of that expertise, you have to have thousands of employees. Not only do you have to have thousands of employees, but the communication between the different departments so that you can communicate well with that one client has to be flawless. What are the odds, right folks that I work with is work towards your, your strengths, partner for your weaknesses, and it's something that for me personally, the minute I got over my own ego of, you know, hey, you know what, not a good writer. I need help.
Ryan Tansom: 19:43 True that!
Karim Marucchi: 20:56 Once I got over my own ego, I was like, oh crap. So I figured out a way how to partner with a writer and I figured out how to, how to get my thoughts across to that writer and you know, some of the articles even lately, last week I published an article, has got some really good reviews from my community I'm a part of and like, wow, you're a great writer. No, no. I just, I just got my ideas out and I had a writer help me.
Ryan Tansom: 21:29 So, is there... as you niche in with your... cause I mean, I think you hit on a couple of huge points here because when you have people in your building, you're managing people managing projects and customer expectations, how does that change your internal operations when you're finding someone and how do you manage the people of this, because again, it's building that, that brand and the reputation, how do you backfill those kinds of people and is there a certain systems that you use to manage those people and to get everybody thinking the same way and on that vision of the niche or the, the, the vertical. I mean, what, were there certain things that you did to get everybody marching in the same direction?
Karim Marucchi: 22:03 I'm going to put a pin for later, come back to, to the clients. Um, and, and how you do that, how the customer is always right. But let me answer your question right now about building that team. You know, we, we both know a Sherry Walling, Dr. Sherry Walling, and I've had the pleasure of helping her out sometimes with some of, some of the stuff that she's doing. One of the exercises she took my executive team was, uh, the strength finder. And by coincidence (not) or by planning, it turns out that the, the six people who lead my agency aren't almost... they literally fill every niche. They make a complete segment and they don't really overlap. That's important, especially if you're going to scale, which we haven't gotten to, but if you really want to scale past one or two people, you really have to take a look at making sure that you're using those, those types of qualities that come through the strengths finder and say, OK, I'm really good at this. You're really good at that, and give each other the space to do that.
Ryan Tansom: 23:24 What are some of the examples because I think a lot of people are familiar with strength finders and how, what are those different skill sets that you're, that you're feeling and how do they translate into the operational or actual execution roles.
Karim Marucchi: 23:35 So the, the most, the most prevalent that is, see when it comes down to brass tax and business is folks who are more strategic thinkers or sometimes they're quick starts and people who are, um, more operational or they're shippers, they deliver. If you, you just want to break it down by simply that as a starting point, that's the beginning of the beginnings of it, but you can read about that in the strength finder, some of the strength finder stuff. It's just very important to really find a good juxtaposition is really the bottom line here.
Ryan Tansom: 24:14 So how does that actually impact your ability to scale? Because I think you, I mean it's getting the right people in the right spots is a crucial, crucial thing for every business owner to actually have a machine, even if it's full of all these people, that's humming know what or a how did that, how does that impact your ability to scale and to deliver large quantities or high volumes?
Karim Marucchi: 24:38 Yeah, that that touches a little bit on. You were talking about some of my successes and failures. I learned the hard way. Then a professional services firm. I have not seen a successful way to take outside money. The only way to scale fast through the first 20 years of working that I did was taking external money and by taking external money you're sort of creating that artificial exit that need to exit because people need their multiples back out with a certain schedule. And what I've learned in trying to step back - I did it backwards. Most people start by bootstrapping the business and then you know, they'd come in and they get investors later. I did it backwards. I started a bunch of businesses with investors, had some good exits, and then I backed into, hey, you know what? I'm going to bootstrap this thing and if and if you're going to bootstrap it, the number one thing I'm going to tell you is you have to be able to figure out how to scale your skills quickly and to scale the skills quickly. It's about bringing in those people who they might not think like you do and that might be frustrating, but that's sort of why you need them.
Ryan Tansom: 25:56 Can you give us an example of a dynamic like that?
Karim Marucchi: 26:02 Yeah. One of the guys on my current team, I'm so very proud of him. He has a, a military background and he has a way of thinking through things where it's very by the numbers, what's the SOP? What's the process? How do I apply these steps? And where do we get to next? And coming into it. I would when I first got to know him, get a little bit frustrated because I'm like, I'm the sky zone. I think of myself as a strategist. I'm always like three steps ahead. Right? So I'm trying to explain step number three after saying two words on step number one, and he's like, hold on a minute, come back and talk to me about step number two and I would just get frustrated. But what it learned, working more and more and more with him was first of all, bringing me back to forcing me to talk about step number two.
Karim Marucchi: 27:01 Uh, I had skipped a bunch of things that could potentially cause problems. Number two, by skipping ahead to number three, what I'd done was I had not given him a moment. Let him think it through. I was rushing and I would find out later that in him taking the time to do that, he would come up with directions that I hadn't even thought of, so I just had to get over my impatience. And then thirdly I would rub off on him to where he would take everything that I've done and when somebody came to him and said, hey, I have an idea, and they were about to go through the three steps. Some of the things that I brought to the table, he'd go, Oh yeah, no, I see where you're going to be on number three, but let's talk about number two real quick and he'd be able to apply some of the things that I brought on. And then vice versa. As I've just explained to you how I see the value of him backing up to number two, it's changed the way I do things. So it's amazing the opportunity to bring by not hiring people who you know too well, we're already are best friends or hey, you know, I think I could spend a lot of time with this person, therefore I'm going to hire them because I like them.
Ryan Tansom: 28:17 Been there, done that and made the mistakes. You know, when you think of a, you know, a professional services firm, there's a lot of different ways and you'd talked about from strategy to shipping and delivery and how you're essentially making an org chart of roles and responsibilities are how are you building the system internally of communication and delivery of the cause of the services to the client. Because I think, you know, there's huge from the, you know, day one that here's what we're doing and again, whether it's digital marketing or if it's, you know, any other professional services, but you're, you're layering on these projects with these different people in different skill sets. Is there certain tools or systems or methodologies that you use to get everybody working together like that now that you've got all these different skill sets on the team?
Karim Marucchi: 29:05 So we could go down a rabbit hole for an hour just on this. This is incredible. We're in a great moment in time in history right now because for the last eighty years it's been about get everybody in the same room and give them the culture. Hand them the culture. And the smart people, even eighty years back were saying, no, let the culture develop on its own. In the last 10 years, we've really seen the emergence of the virtual company, the distributed company, the company that isn't necessarily in one office, forget satellites, but you don't... You can't have the physical water cooler time and that's created this vacuum where you don't have a choice as an entrepreneur. If you have a virtual company or distributed company, the culture is going to be made by itself. You can try and affect it, but it's going to be an independent organism of it's own and the tools you have to use today are growing and they're getting more complex and those relationships are getting more complex. So it's. It's amazing to see how this is changing today and how we have an opportunity to create companies that have very healthy cultures or unhealthy cultures depending on how we interact with each other.
Ryan Tansom: 30:33 And it's a combination of the project management tools to video, to video conferencing, to help employees engage. All that kind of stuff isn't? And it's emotion. It's a mesh of all that stuff. And how people interact with each other.
Karim Marucchi: 30:46 Oh yeah. Oh yeah. From, from the monthly company meetings where the managers are quite literally showing the embodiment of how calling out employees, how they embodied what, um, what our mission goals were and what our core values were to quite literally, at our company, we have a director of operations who will take a new employee and put them on a 15 minute, get to know you video call with literally a random set of people and you just, you show up on a video call, you've never met this person before. And you just start talking about the fact that you both work for the same company and you live in, in Oregon. Oh, that's awesome. That's cool. And you know, Oh, you have a vegetable garden and you just sort of get to know each other in a different way than it used to be, bumping into people in the hall and places. So it's a different way because it's very cool. It's very different. And um, if done right, it can be just as healthy and it can be a, you can still get that same dynamic of loyalty that people would only get by working in the trenches, elbow-to-elbow
Ryan Tansom: 32:06 As you take this, uh, like how you called it, the organism, the culture because it is a girl who was in it and it kind of evolves on its own as all these people interact and are delivering in the same fashion to the customers that they all are seeing in the same light. How is it now as we kind of shift into the second part of the, the big question of how was it that you look at that and then figure out who that could be a potential of a strategic partner or someone that you could sell to because you got this potentially distributed team or whether it's in person or not. I mean you had all these people and this internal culture of communication and delivery. How is it that you figure out who the best person is to sell it to? And then how do you go about valuing it? And like you said, a lot of the times there's a lot of earnouts because of the riskiness of that culture dissipating afterwards. So I mean, I know you've got a ton of thoughts on this, but you know, where do you start?
Karim Marucchi: 32:06 Where do I start with which one of those questions. I've got a separate answer for each of them, so...
Ryan Tansom: 33:09 And I've got so many questions about it because I think you're, you're, you're debunking the norm of the challenges with this, this problem. So let's maybe just start out with, let's say you've got a healthy organization and you've kind of built this, this organism that you've talked about. How do you know where to start looking, whether it is a financial or a strategic partner?
Karim Marucchi: 33:30 Perfect. So let's say you have a healthy organism and let's say you have taken a, a corner. You have created yourself a vertical. Well, for every vertical, there's cousin verticals. Rather than thinking to yourself, how do I expand to yourself who's already doing this and doing it well? And let's say you come up with 10 companies. Out of those companies, look up their reputation and if you have access to have access to ex-employees of theirs no see what's been written on. I'm never use any of those websites that are just for disgruntled employees. I'm trying to find out a little bit about them and then you know, that'll you down to five. Once you have five, find out who the principals are of those companies, get on a plane, get in a car, get on the train, get on a boat, go and meet them. Meet them without an agenda.
Karim Marucchi: 34:33 Go and talk to these people and see what kind of entrepreneurs are they, see how they're leading their companies. See if you get along with them. The three strongest partners I have in my business today, I did not have a thought that I was going to go find that one person, talk to that one person, and go sell them on being a partner. They were at an event. They were one of many that I was talking to me because I thought of their particular niche and just something clicked. They the aligned with my core values. They aligned with my meaning. They aligned with the way I wanted to conduct business. That'll bring you from five to one very quickly.
Ryan Tansom: 35:18 It's a lot like dating, isn't it? I mean, it's literally like a partnership that's, you're finding partnerships more than just someone to write you a check to cash out. It's a very different thing.
Karim Marucchi: 35:25 It absolutely has to do it right. Then baby steps, right. Whether it's, whether it's dating or business, uh, you know, just take one step at a time, see how you get along. Nothing will really show the true colors of an organization as doing a pitch together.
Ryan Tansom: 35:25 Right... a pitch to a client.
Karim Marucchi: 35:47 Yeah. You pitch to a client together and even in the preparation for that pitch, you know, I've, I've started to pitch with, with an agency that I had all the best, the best indications from and we were pulling together a presentation and halfway through pulling together slides, they pull up a slide and they're like, well, we want to use this slide. I'm like, so tell me about the slide. And they started going off for 25 minutes on how horrible that client was, but they use it to get new work. It's OK to say, you know what, that wasn't the best experience, but they spent 25 minutes of my life telling me what a negative experience they had with a customer. [Ryan interjects: That says a lot.] That's everything I needed to know. When you're selling services, you know, I've, I've had to part ways with clients before, differences of opinion, but you don't go around saying I'm the only thing that forgives that is if somebody doesn't pay a bill.
Ryan Tansom: 36:53 Right, and you're selling your reputation too, which is about people and how you conduct your behavior. Right? [Karim interjects: That's right.] Well, I think an interesting thing here, Karim, because the, the partnership and you going into ventures together, you know, I have. You seen it in because I have is were people want out and they're too burnt out. So that sounds like a lot of work and you're trying to get married when instead you want to go away. So I think probably going into this with a good mindset that you're, you know, kind of evolving your business and your situation and it's not just going to be able to be walking away because that's not kind of the arrangement that you're looking at.
Karim Marucchi: 37:33 I'm sorry, I'm not, I don't think I felt that question.
Ryan Tansom: 37:35 Like if you're burnt out you don't want to go down this route necessarily because of the work it's going to be of building a relationship. Building relationships takes time.
Karim Marucchi: 37:43 So I'm going to answer your question by quoting our common friend again, Dr Sherry Walling with her work with Zen Founder and saying if you're burnt out, deal with that first. [Ryan interjects: Right? No, I think that's huge.] Because if you're burnt out, you're not going to be able to sell your company. You have to get over that moment first because you're not going to get your value out of it.
Ryan Tansom: 38:07 So let's say you're not burnt out and your- Yeah, because I couldn't say it better myself. If you're not burnt out, you're going down this route, you know, how do you then certainly if you've got the synergies and you've got the magic flowing between the two organizations, you know, how do you structure something like this to make it work for everybody and to make sure that you're getting the highest value and you're not just looking at the chairs and the assets in the restaurant like you're talking about?
Karim Marucchi: 38:34 And that's where I've had a little bit of success in, in dealing with some of the. Some of the acquisitions and mergers that I've seen is there are so many ways to do things that people just... People just ignore because they're thinking, OK, performance wise, the company is worth this. I'm going to have this type of check and I want this type of deposit and I want this type of earn-out and these, these types of restrictions or options, and they walk into it just very black and white. The best thing somebody can do is say, you know what? This is what I'm looking for. Everything else, let's have a conversation about. Because the most successful deals that I've seen aren't necessarily just the ones that the big multinationals do. Again, whether you're talking about just any type of consultancy, not just marketing, that the standard, um, it's going to be a certain amount based on your contracts and it's going to be a certain amount upfront with a certain amount of payout, clawback or this or that or the other. Sure you can talk about this all day long. At the end of that transaction, nobody's going to be happy. I guarantee it. It's a war of attrition. The more successful projects are the ones where the entrepreneur who is selling is very honest with themselves about what they want. Even if that's just money and nothing else, nothing else, and they really decide what's important to them and they go, all right, everything else besides what's really important to me, let's take a look at that. Because when you walk in and you say, here's my musts and there's a list of 15 things, you're going to get the same thing on the other side. And that's where we talked about at the beginning of negotiations, right?
Ryan Tansom: 40:27 What are some of the musts that you see? You know, everybody knows the money one, but what are, you know, I think like you said, most people don't know how many different variations or are behind this and how creative you can actually be on these structures. What are some of the musts that you see that people go in and then also what are the different kinds of things that people aren't thinking of that they should be?
Karim Marucchi: 40:48 So I'm going to stay away from the typical cliches of that financial transaction. I'm going to say some of the things that I've seen that are just awesome is I've seen entrepreneurs who actually wanted to build a long-term company so they walked in with one of their musts in, I want this brand or I want this company to continue. And you dig in further and they're like, because we do good work and we have happy clients. Or you have somebody say, you know what? I've come to a point where I have to retire. One of, one of the, one of the agencies that I actually bought at the time started out being one where they came to me with really good one, which is a lot of professional service firms are started by people who are experts in one area. They grow and then they realize, hey, I'm a really good expert and now I'm actually just managing business and payroll and contracts and I want to go back to being my expert, my subject matter expert.
Karim Marucchi: 41:52 So they would come and they'd say, I want to go back to being a department head and let somebody else run the business. Right? I've reached a glass ceiling where I'm not going to have the wild success, um, of my friend Wil Reynolds that automatically, um, did so well that you got a professional executive team that gets paid a lot of money and you can actually go do rnd on his own. But if you hit a glass ceiling, you can say, you know what? I don't need to be the c-blank-o, um, I can actually go be a department head and be happy. Those are some of the smartest entrepreneurs I know because they can walk up to a larger firm and say, what's important to me is I want to be a subject matter expert. I want to have a certain amount of autonomy as long as it's profitable and you know, creating this type of product or this type of service or this type of something, and people who are looking to, to grow professional services firms like myself will say yes to that all day long.
Karim Marucchi: 42:55 If you're passionate about getting back to doing what you do, that's the best thing in the world. Right? Um, but then what we're starting started the story was even in this one situation, that's where they started the conversation. And then unfortunately this entrepreneur's health, took a turn for the worst. I'd gotten to know him by now. His name was Alex King is one of the founders of the WordPress community. One of the first people to work on the project. Awesome individual. People looked up to him as a technologist. And after we came up with a deal where he wanted to go back and really focus on being an engineer and get out of running the day-to-day business, he was diagnosed with cancer and he said, I've got to take a step back. I can't do this, but the most important thing to me is let's change the nature of the deal. It's no longer what's my buyout, but how do I take care of the business that I've built? I don't take care of the people that are in it. Please, let's do a deal where you're not going to do the standard M&A thing that, you know, three months in, you're going to get rid of eighty percent of the staff.
Ryan Tansom: 44:03 So it's really just knowing what's important and how, you know, how are you seeing, how are you seeing people balance the money plus their musts? Cause, you know, I think one of the challenges that some professional services firms get into is that, you know, they, they've got potentially both, whether they've really addressed the musts or not. But you know, a lot of earnouts, you know, in this industry too, and so how do you, the need for the money and the need to be reassured that you're gonna be fine and not be taken advantage of, of who you're selling to, but then also hitting your musts?
Karim Marucchi: 44:41 So on the subject of earn-outs specifically, it's really important to create earnouts that you believe in, if everybody's being honest on when they're actually negotiating the earnouts and not saying, you know what, these last three earnouts, I'm never going to last that long anyway. So what do I care? If you're honest about it, you can come up with something that's gonna work for everybody. It just has to be profitable. That's the bottom line. It's about execution at that point. Um, but people think that it's only going to be about the money. So they don't think about negotiating the autonomy about negotiating the what if. OK, let's have, let's talk about an earnout where you say you have to generate a million dollars worth of product by the end of the year. OK, what happens if you don't? It can't be black and white because as part of the selling of your business, you're giving up the control of affecting the marketing budget, of affecting your hiring plan. Right? So your earn outs can't be that simple. They have to be a little bit more complex and if you take some of these things into consideration, you really can have a healthy earnout and you can have something that has longevity to it. I know a lot of entrepreneurs who did not make it through their earn out because they wanted to keep their sanity and a lot of it would have been salvageable on both ends if they had bothered to take the time to think about the what ifs on earnouts.
Ryan Tansom: 46:26 I think you hit on an amazing point here and yeah, I was, I can't remember who I was talking to about this, but it's about these contracts are like all in all it is, is you're describing and planning for all of the scenarios. So earnouts have lots of, um, lots of bad rap. But I mean, all you're saying is that in that contract, plan all the different things that can be out and then you're just protect you're writing your own narrative, aren't ya?
Karim Marucchi: 46:53 You are, you are. And you can't. You can't imagine any possible thing that will happen. You can sit here and say, I'm going to come up with a spreadsheet with any possible eventuality might happen. So no matter how well you plan it, there's going to be something that happens that you didn't plan for. But if you've spent the time talking about the what ifs, it'll be close enough that you'll be able to deal with it in good faith with your negotiating partner.
Ryan Tansom: 47:25 Well, and I think, I mean that's the, that's the far end of the planning spectrum where a lot of stories that we've heard on the show or other shows is that they don't ask any of the what ifs in this earn-out. And they don't realize that these people are not intending. And I hear, I've heard stories where, you know, it's, it's tied to margin instead of top line and all of a sudden they rewrite. You get to laugh and because all of a sudden, oh, sure, yeah, we've always had 20 percent profitability and I literally heard this story where, you know, all of a sudden a big capital expenditure of a new truck gets thrown in, you know, at the end of Q2 and they don't get their huge bonus and they're like, oh, wait a second, I was not in charge that margin. And then there's this huge dispute.
Karim Marucchi: 48:05 A few years back I gave a talk at a, at a European conference as well, another one, where I started the talk for the first 15 minutes telling three stories of how when I worked for the multinational, I screwed three different, um, entrepreneurs out of their businesses because they were so full of themselves. They weren't thinking through these, these processes. And that's exactly right. We have somebody who walks up to the table and goes, I'm worth this blank multiple because I always have 20 percent margin. Like, OK, so let's write that down. You're going to get your earn out and your extra 100 percent bonus as long as you hit that 20 percent. What they didn't negotiate was quite literally cap on capital expenditures or the capital expenditures being deducted from that or any number of things that the business can choose to, uh, to screw you on later. It happens all the time, all the time.
Ryan Tansom: 49:11 Right. And I think, you know, it, it, it really has... that kind of goes into like the third kind of category that we're talking about, which you know, because there's an earn out your, you're kind of switching into the life with the next business partner. And how is it that, you know, what are some of the things that business owners can do that you've experienced or that you would give advice to on how to figure out what your musts are?
Karim Marucchi: 49:35 You know, obviously we have to get past money, right? First must is always going to be some level of money. Whatever that is. If you can get past that, you really have to ask yourself what you want to do next because it is an exit, right? One of the things that you and I have talked about at length is folks need to decide to exit for the right reasons and if just to check is that reason, you have to be upfront about that because then it is going to be a little bit more transactional. If your other reason is - I dealt with a company recently where the three partners who, who owns the company really wanted to join a larger entity or they can learn from their relatively young and relatively new to the entrepreneurial circles. They said, if we're going to join this mega corporation, we want the opportunity to learn from people who have better experience than we do or a longer experience than we do. That's actually valuable to me in doing this deal and that's important, right? I'm going to have three years where I have to do an earnout. What am I going to get besides a check Invaluable business experience.
Ryan Tansom: 50:57 What are the... What are the, you know, rough ratios you see between like the, the, the length of her notes and how much is upfront versus over time. Because I think that just to give some people a little bit of perspective and knowing how important it is to partner up with that person that they do have these, these musts that are getting taken care of.
Karim Marucchi: 51:17 Yeah, so don't ever be in a rush, but I'll tell you some of the. Some of the successful deals that I've seen, some of them had zero money upfront. It was all on earnout or all performance based and that's because you had a selling entrepreneur who was so convinced of their value and so convinced of their elbow grease that they could actually apply work to continue to make a difference if they found the right buyer who would let them have that autonomy and trust them back, so that way you have a huge... you've created a situation where you are dependent on each other for hard work and trust yesterday have little ways to make sure that you know you're not letting the other person fall on their laurels, but there is all sorts of ways to create a deal where it's not just about the money upfront. You can actually get more than you ever imagined, money-wise by creating a deal that is back-loaded. People always assume it's about that deposit check.
Ryan Tansom: 52:29 So what are some of the ways that you... You maybe expand on the back loaded in the different ways that people have actually realize that value?
Karim Marucchi: 52:36 Yeah, so the, the, the sort of. The question I ask folks when they want to talk about this is, OK, great. You want a million dollar check upront? I'm just picking a number of scenarios. You want a million dollar check up front? Awesome. What are you going to do with your business that is selling the business? If I just gave you that million dollars to put into your business to make your business more successful, what would you do? Alright. Now at the end, let's say you spend that money, it came out well. How much more is your business worth now? Five X, six X?
Karim Marucchi: 53:19 Right? So now it's worth more than that million dollar check that was going to go into your pocket. If you're that convinced on business that you feel like you could do more and you're not trying to exit necessarily just yet, but you feel you could do more. As a professional service company or a consultancy, don't look for external money. Look for somebody who wants to come in with you and instead of taking that million dollars to exit, take that million dollars and build a business that's worth five, six, seven x much more quickly. That's how you scale a professional service agency and you come up with a contract that says on the back end, 36 months from now, 48 months from now, if we hit these goals and these things happen, then this is the type of payout I'm going to see.
Ryan Tansom: 54:05 That's beautiful.
Karim Marucchi: 54:08 It's a little bit more complex than that, but that's the umbrella overview.
Ryan Tansom: 54:12 Well, I think it's huge because you know there's some main things that I, you know that I've really honed in on which is making sure that you're still loving the business. You've still got them. You understand your muscle and you'll understand your partner to be able to leverage each other's skill sets. Because you're leveraging each other, I mean it's just like that team you were talking about for your executive team with the strength finders, but you're doing it with other businesses.
Karim Marucchi: 54:36 Exactly. Exactly. And you know what? You find some of those businesses you never really have to merge. There is a situation where I did business with another business for close to five years and every time we saw each other we talked about hey, someday we should merge. Someday we should do this. And we just didn't. But we kept continually making each other money. Nothing wrong with that.
Ryan Tansom: 55:00 Right? Right. I think it's, I think it's fantastic because the challenge of people and skill sets is everybody's got different skill sets and you have to be able to find a cohesive team that leverage each others, which you and I talked plenty about. Um, so as we're going to wrap it up, Karim, you know, with the, with all the different exposure you've had in the professional services and all the things we've talked about, is there, you know, going back, is there one thing you want to highlight to make sure that, uh, it's got some light shone on it or is there something that you want to make sure that we haven't, that you want to leave our listeners with?
Karim Marucchi: 55:34 I do. Um, if you're talking about professional services, that old adage from the, from the restaurants about the customer always being right. You have to lead with that. We all have customers who we wish would act a little bit different way, but if you can provide the best service with a smile on your face, no matter what, and every decision the organization makes isn't for the best outcome towards your client, get out of professional services. It's a hundred percent on delivery and reputation.
Ryan Tansom: 56:10 Yep. Well said because it's people, it's all about what are they going to talk about after you leave. What is the best way for our listeners to get in touch with you?
Karim Marucchi: 56:21 Please come by and see either my murky.com. I'm sure we'll be in the show notes and or take a take a look at crowd favorite, the agency.
Ryan Tansom: 56:35 I loved it. Thank you so much for coming on the show Karim.
Karim Marucchi: 56:35 Thank you, Ryan, it was a pleasure.
Ryan Tansom: 56:43 Thanks for sticking in there. I hope you enjoyed the interview with Karim. If I were to, you know, nail down a couple of things that I really enjoyed that I took away from the interview with Karim is one is the analogy he gave between the services industry and then also the restaurant industry because there's a ton of validity to that for a company that has a bunch of amazing people that work well together that have consistently delivered services to specific clients is worth a lot of money and how that is structured is a different topic, but I think it's really important to understand that the reputation and the customer is always right and constantly delivering top-notch service is worth something to a potential buyer because of how hard that is to recreate.
And the second thing that dovetails right off of that is how creative you can be in aligning with a potential partner where you can both reap the rewards of doing your services, potentially cross-sell and then have more of an upside as the businesses continue to integrate more together because you're able to leverage each other's skill sets in each other's staff.
And the last one I think that is, uh, is extremely important is planning for all the what ifs in a contract and in an earnout. An earnout can be extremely beneficial if you have it ironclad and you're able to think about all the what ifs that could potentially come across, but aligning it with your motivations and your desires with this potential partner and then being able to be rewarded financially for it and for your hard work and integrating the different cultures, it's possible and you can actually get the reward of having a great professional services team and company that is providing amazing services to clients. So I really hope you enjoyed it. I think it was an interesting take on the professional services world and Karim's. Got a ton of great information. Check out his website if you get the chance, and if you enjoyed the episode, go onto itunes and give it a rating. So until next week.