Michael: Let's talk about how to grow the people business, how to start one, what challenges you can expect. One of my latest episodes was with Tom Libelt. He runs the SEO agency out of New York. While we were discussing the topic of building service/consulting business, Tom's argument was that it is a low margin, high churn venture, which basically brings only sweat and pain to every CEO and founder running the business.
And considering that you've been running Skaled Consulting for the past seven years, I think that basically the first question that I wanted to bounce off you, is it really a true statement that building an agency brings all this sweat and pain for those who are in business?
Jake: That's a good one too. Yeah, we can get into that for sure. So I mean, yeah, it is, but I mean, look, what's the alternative, right? The alternative is you're working somewhere where... which I think a lot of people should work somewhere.
So just because you hear something like that doesn't mean that you shouldn't, that it's not for you. I mean, maybe you like it, maybe that'll make you happier in your day to day or in the long game. So yeah, especially as you start to figure out how to scale revenue outside of yourself. I think once the non-referral-based engines even start to work, life gets way better.
So my advice is if you're going to start a business... and by the way, we're still not there yet. We've got the beginning kernels of it and it's been seven years, and the amount of false starts we've had and times I thought we had it, etcetera. So you don't know how long it's going to take.
So don't give up too soon either. So yeah, I think that that's a quasi-accurate statement, but you also need to include the flip side, which is that you probably built an agency around something that you love. You're giving people jobs, you're making a difference in your world. So I think all of those things to me far outweigh it.
Michael: Do you guys herself or maybe you know of some agencies that are out there that have high margins, high growth, and they tackled through the challenge that you had of high churn and so on and so forth. Do you have an example?
Jake: Yeah, I mean I think that that's one of the most difficult parts about running a consulting firm is the nature of it. Nature is very project-based and I think we've done a really good job over the last two years of basically doubling our kind of average contract length. And I think you're surprised. I think most people are nervous, like what if we went to a six-month contract or an annual contract? Or what if we went to a month to month? What would churn look like?
So I think you got to kind of play with the model early on. I think a lot a lot of people are very, very surprised at how many people are willing to go to a longer commitment once you actually have the moxie to go and ask them to do it. And then the other thing is just being smart about creating products that can be reoccurring. So our digital presence group for example, so we have really in our group think of what we do is we work with companies to help with their people, their processes and their technology.
So on the people side, that's everything from compensation, hiring, how do you build and scale with the people side of it, and then we actually do some hiring as well too. On the process side, there's demand generation and that's where our digital presence products come in, which is how do you generate more interest with clients, whether that's email, calls, LinkedIn.
And so we've developed some reoccurring products around that, where it makes sense for us to continue to work with your team over time and forever because we're taking work off their plate. We're showing results. The rest of the work we do is on the sales process side where that has been less repeatable. Right? So think about consulting with someone around demand gen. They always want more and more and more leads. There are always more things to optimize.
Well, once we come in and write your new sales playbook or implement a new sales methodology, you kind of need to like just do it, and then by nature, we kind of go away and then maybe we come back in a year and do some other stuff.
And then the third piece is sales operations, which again has been another reoccurring business for us, which is you have a small sales operations team or marketing ops team. You need someone who can implement all your technology, optimize that technology stack. You don't really have a strong ops team. You want to keep us on from a retainer standpoint to continue to do that. So I bring that up because we've got a mix right now, more project-based work and retainer-based work.
And I think that that's the goal for any kind of company is how do you create a people business that has monthly reoccurring revenue to some extent. If I was starting Skaled over and I have some of our digital presence, I am laser-focused on only repeatable revenue type projects. I already know the big other projects we can sell like a LinkedIn and digital presence playbook, where a big company might pay hundreds of thousands, and small companies might pay 10, 20.
That I know we can do all day long as a one-off, but I'm focused on what's the value that we can bring this sales organization or marketing to where they will never get rid of us. And I think that is a really tough product to find in a people business in particular.
Michael: So let me quickly sum this up. So one of the main challenges for people business is the cash flow, how do you make money every month? And what you're saying is that you first need to figure out the best business model that includes the recurring revenue.
So if you can make money on a continuous basis every month per client, then you can grow more. And then for you to get to the point where you can get the recurring revenue from clients, you need to, instead of offering project-based work, you need to kind of package your services in a product and offer it as a kind of product?
Jake: That's right, and you bundle it in a way that people are used to buying. So on our digital presence, we work with marketing organizations and it's much more like an agency where we're supporting them. But we like to think of ourselves as a strategy and a lot more than that. And on the sales side, they're used to buying per rep, per seat for technology. So if we can sell something that's per rep, it's how they're familiar buying it.
And so if it's $50 a month or $100 or $200 a month, they can then compare it mentally to something else. The more that you can think like that, what are the other products that people are buying and how can I package the services we do into something that looks like that, which makes it easier for them to say yes.
But the other thing that just around cash flow that I think is important is getting a line of credit. You're not taking on debt; a line of credit you pay off almost immediately. You're going to have to take chances from time to time, and the entrepreneurs that I see struggle and struggle and struggle and struggle are the entrepreneurs that don't understand that to grow your business. Go look at Apple. Apple to me is the most ideal, perfect example. Do you know how much cash Apple has on hand? Do you have any clue? I'm going to give you a hint. It's a lot of fucking money. But let me do this. Let me look. I'm just going to Google this so I can give it to you in real-time.
Apple debt? Debt to equity ratio. Apple's debt to equity ratio, Apple values companies worth 1.2 Jumped from 50% to 112% so that's their debt is 112% debt to equity ratio. 1 to 1.5 and I think as a small business owner, that's kind of terrifying. Oh my God, we have debt? Well, that's okay. Almost everyone you know. How highly leveraged is Amazon?
Amazon is considered to have since equity is smaller, Amazon is considered to have high leverage, most commons, and large-cap, because debt can often be a less expensive alternative to equity. So going back long story short here because we're doing this on the fly, but you have to be okay with that. If you're trying to grow a business, you're going to have to deal with that stress too.
What's it going to look like when you got $400,000 or half a million dollars in debt? Oh my God? And there's some metrics and ratios you can look at to know if that's good or bad, but you have to be able to roll with that. And there's a lot of things that come up as you grow and scale and we don't use debt to finance stupid things, but again, it's cheaper than giving equity and it's cheaper than a lot of other forms of cash. So those are the things that you learn over time.
Michael: What should be a healthy margin for the recurring month to month revenue and for project-based work in people business?
Jake: Yeah. And I'm going to give you gross margin, not like after the office and all that stuff like that. That brings it down quite a bit. And I can tell you our target profitability there too. That's fine. We try to target 60 to 75%. Our reoccurring revenue products usually have a higher margin, but on our projects, we target around 60% margins. That's our goal.
Michael: So the project margins are lower and the recurring money that you're making have higher margins?
Jake: I think it's important to bucket the projected revenue because there are different types of projects. Training for us, and I get to keep my sales consulting and more sales and marketing consulting. Training, the margins are ridiculous. So if we're doing a training project, the margins are stupid. But if it's more of a playbook or something like that, it depends on man.
The good part about services businesses, it's whatever the market will bear. So you can do it at like ... I was talking to the team yesterday and we're trying to create a new bundle for our digital presence clients for after they kind of go through our phase one and we're like, well what about this? And I'm like, guys, just fuck it. Just ask. You can just go in and the market will tell you guys, this is ridiculously expensive. And if everyone is saying yes, you're not charging enough. So you got to kind of triangulate to what your market will bear and then kind of push the envelope from time to time too.
Michael: Although the challenge of the recurring, let's say 70% margin program is that you always need new people to maintain the growth Because if you have an agent that is making, let's say you are $50,000 or $100,000 dollars per agent and you're spending let's say $30,000 per agent. So you're making 70 grand, let's say. So if you want to make an additional 70 grand, you need another agent. So you always need to scale. Is that a true statement? Disagree?
Jake: Not as much. Not as much as some of the reoccurring stuff. Again, your business really depends on it. So I'd say it's a good question. Now here's the thing on the consulting piece. It scales like that. A person only has 40 hours to work. I can only bill them for 90 at 90% of that or 80% of that. I can't physically make any more money off of that so my margins are fixed. But on the services on a reoccurring, it's more of like you can have up to X hours for Y, or you can have up to whatever and so one person can take on more because the work varies.
Or you can make your services more tech-enabled. So like PWC, a massive consulting firm, KPMG, two members of the Big 4 consulting firms, they have made a massive push over the last few years to start to white label other technologies. And we're doing that similar to the social media data product around LinkedIn.
We feel this is unique in the market because again, selling software has good margins and they're free occurring. So you're even seeing big consulting firms add in a technology layer and we have a handful of technology partners as well too, that we can bolt on a managed service component. So that is always good business and those types of businesses have been around for a long time.
Michael: So that gives you that additional margin level per person or per for the recurring revenue. There are basically two types of companies. Those that are pushing for increasing their equity or their total turnover or basically just pushing the growth and then those that want to make more money per person.
So do think that in consulting or service business you need to maximize your profits and take money out of the business and just re-invest or you basically take money out of the business and invest somewhere. However, we need always to focus on the revenue that you were making per person and maximizing that revenue if that makes sense.
Jake: I think the last part is the most important part of what you said. If you focus on that revenue per head, it's tough to really get out too far over your ski. It's tough to really like mess it up too bad. The rest of it, it's a choice, man. You could run a really cool 5-person agency and have that thing spit out a million dollars in free cash flow. It may not scale like that, but you've got three or four people that have been with you for a long time and you just make a ton of money off it. Or if you want to grow, then yeah, you need to decide on if you're going to reinvest that money or if you're going to take it out and just spend it on a new car or a house or a yacht or whatever the hell it is.
Right. And for me, I've never taken that. I'm playing a long game here. I'm trying to build this organization up to a point where we either have the right selection of tech partners to where I feel like I can have a clear path to build a fifty to a hundred million dollar business, or I feel like we've got the right mix to find the right partner who's much bigger than us. And I've not wanted to build a company, but I think you've got to be very intentional about that very early on. What is this going to be? Is this to spit off free cash flow for you and do something that you really enjoy? Amazing. Don't listen to some of the things I talked about around debt, etcetera. If it's the alternative, then it's just a different choice. Neither is right or wrong.
Michael: When you talk about basically building the business for the sake of making profits and taking the cash out of the company and that's great. You just make some cash and you enjoy your life. From the hiring perspective though, how can you communicate that with your team, with your employees?
Basically that we are making money here. How is their motivation, how their salary structure should look to kind of justify and motivate them to work extra hours, put some work, get result-oriented? Can you give us some insights into the structure that you guys have?
Jake: I can't, man, because that's not my jam. That's not how we roll. I don't do that. Right. So for me, I can't give you advice on how to keep people motivated or set a vision when they know that they're literally working for you... probably, well I guess all of them kind of know that a little bit. You know that I'm the owner of the company, but I think the more that they see you invested, leading from the front, then that's probably the only chance that you have.
But if they see you constantly doing all this stuff and you're not working, that's it. If you're in there busting your ass 50, 60 hours a week and people see that you're motivated, you're bought in, etcetera. You have a vision for the business, the mission you want to accomplish, you have got to focus on those things. If instead, you start to become absentee or in there 10 hours a week, then you're going to have churn and people resigning.
Michael: Should you also connect their salaries or KPIs to the bonus system? Like if you get those targets, you can make that bonus or that bonus per quarter or per year?
Jake: Or if you're okay to give away equity, even like a small part of it. Most services businesses are structured in a way where the equity is only worth something when the company sells or goes public, so if they're bought in etcetera, and you give them a certain amount of equity, then they're invested in the long term success as well too.
So I think it's either a cash bonus or equity. Those are kinds of levers that I have as an owner. I can give people a bigger bonus or I could go to someone, say, Hey, it's a $50,000 bonus or whatever. Do you want X shares or equity, so those are levers that you have as a leader too.
Michael: So once you figure out the cash flow question, in my opinion, there are two more challenges, the hiring, and the scalability. So the hiring - it's people business so you always need to find the best people that are out there.
So let me put that in a different perspective. While building the business for the last seven years, going back in time to whenever you started, what mistakes you wouldn't do in hiring that you see that which lead to some problems that you have in seven years?
Jake: I'll start with marketing. Marketing I think has been like the bane for a long time. I think we're in an amazing spot now. We've been really fortunate over the last eight months. We've got some really good people in, but it's taken a long time, and it's not even their fault. What happens with a growing company, you tend to push too much responsibility on people who aren't ready for it. And so you got to just be honest with yourself. You might want it more if this person for them to grow, etcetera.
I think a lot of times when you hire people and you're growing, you'd be kind of put too much responsibility on them and you have to be smart about that. And so I think that's a mistake I've made in marketing, in particular, is hiring people and putting them into roles they've never been in before, and they're not always set up for success, but I think we've finally fixed that. So that's big.
I think that that's candidly probably one of the biggest things is just meeting people with where they're at talent-wise and getting them a path, and you as the owner, you feel the stress of payroll and those things, but you got to meet people where they're at and grow with them and help them to grow and give them the opportunities.
But don't expect them to not drop balls or do this stuff if they've never been a VP of marketing. Shit. It's just what's going to happen. Those are a lot, and then we're pretty good at this, dude. You have to be ruthless in the interview process. It's going to be really easy to see, oh God, he's so great. If we hired Michael, then we don't have to worry about this or that. But dude, the amount of time you invest in people who don't work out, there's no comparison.
Michael: You are the only stakeholder in the company, right? So you started the company, just herself. Who were the first people that you hired?
You were wearing many hats from the start, so you were doing marketing, sales, working with clients, building the products. At what point of time did you say, I need to delegate this, or did you start delegating from the beginning?
Jake: That's a really good one too. The right answer is anytime something is somewhat repeatable. Once you get a part of your business to where it's okay or serviceable, then that's a good time because then someone's coming into a system.
The other thing is the areas where you have no idea. Let me give you a perfect example of this. We've for the first time hired a part-time CFO - we had had kind of a few people here and there - in January, and the peace of mind that I have now in a month and a half is so much worth it from an investment standpoint. And I think there are things that you just don't know what you don't know. I think finance and operations for a lot of people are those things and so you just have to be honest with yourself. Do you know what you're doing there? So I think those are the things that I think I've learned for sure.
Michael: Did you delegate the marketing from the beginning or...?
Jake: Yeah, I don't think you can. I mean, in particular, when you start a company, whether it's a technology company or services company, candidly, it doesn't matter. You need to know what the customers are reacting with. You need to know what a customer says on a sales call, or a current customer says about your product or what you're doing.
So I don't think that a founder for a while can divorce themselves from sales or marketing. You need to, or unless you have a co-founder, who's strong and that's their jam because that's all about the product. It's like product impact. What are the four Ps of marketing? Product, packaging, pricing. Oh man, there's another P. I don't remember what it is, but you have to get in there and know that. What are people saying about your product? Is it working? If I wasn't in the trenches with my team as we launched this new group, they'd be at a deficit for sure.
Michael: So you started the company. You take care of marketing, you take care of sales, you hire a part time CFO or someone to take care of the finances and legal stuff, and then you bring the first client. You start working with that client to hire someone to take care of some of the days to day, like to deliver the service or something.
For example, if you're running a marketing agency and you are doing an SEO service or advertising or PPC or something, you have someone on the advertising side, but then you still continue working with the client. Then you have two clients, so at some point ...
Jake: Yeah, you got to get out of it. The key is ...so I'll tell you what it is. You hire people who have already done the job. So you're hiring an SEO like you're a marketing agency. Don't promote a marketing manager with two years of experience. Go pay the extra 10 ... that would be another thing. Pay the extra 20 grand. Just pay for it.
Your 3 years from now self and your 6 months from now self will thank you. I think sometimes we get dollar wise and pound foolish or penny wise, pound foolish and I feel like a lot of people don't take the time to really do that. They don't take the time to be smart about that. That really you hire cheap and serviceable versus good and slightly more expensive. And I think that is a lesson I've probably learned too many times the hard way.
Michael: So you need to put an extra dollar while hiring an experienced person plus put some options on the table or something.
Jake: Yeah. You don't have to do the option. I wouldn't worry about the option. People have got to be there for a while. I wouldn't worry as much about the options. If you have to use it as a lever, then do it right. It's just another lever that you have that you can use if you need it.
Michael:Then you will start making money. You are making let's say $100,000 or $50,000. What is the expense structure? So how much money should go to the salaries? How much money should go to marketing? I'm in this business and I'm struggling.
Should I optimize the expenses on salaries? Should I kind of push more into growing the monthly cost of services, cost of goods, and then adding some additional expenses for marketing? What do you think is the most realistic ratio between salaries, cost of sales, cost of marketing, additional expenses not to go under water?
Jake: So let's say you're able to maintain 50% margins on your business. 50% after all your consulting. Then let's say you have the overhead of support staff, marketing, operations. Let's say that's another 25%. Let's say it's another 15% of just head count. Then you've got marketing spend. Marketing I would say you're probably going to need to spend 10% 10 to 15.
That could be everything from your website to whatever it is. So I'd say then you're at 20% margin. Dude, if you're at a services business and you're doing a 20% drop to your bottom line, you're crushing. If you're at 10%, you're not dead but it's tough. It can be more difficult. So I think you want to try to get between, if you can get to 12 to 15, you're in a good spot after all that. After sales, marketing, rent, all that, our target is 15%, that's what we're aiming for.
Michael: Is it 15% before paying yourself or after?
Jake: Well, it depends on what you mean by pay yourself.
Michael: Do you have a salary in the company that you pay yourself?
Jake: You have to. Yeah, you have to pay yourself a salary, but no, you get to take draws, which means there's some tax benefit to that for sure. But I have probably in my company right now, and I would say that this is true for the last three years plus. I have at least one, two, three, four people that make more money every year than I do. I don't give a shit man. I own most of the business.
So there's a lot of other things that go into it. So I think for a lot of people you can't also expect anyone to care about that. I don't expect anyone to care about that. It's a choice. If I wanted to make more money, I'd make more money and just not hire somebody or fire somebody and just take their salary.
Michael: You made a decision, right? You made the call.
Jake: I want to make more money tomorrow than I did. There comes a point though. I think we're kind of at it. We'll do over. I don't know where we'll end up. This year, hopefully, we'll be closer to 6 to 8 million, somewhere in there, but again, it has taken a long time to get here and now we're kind of at that point where we're not dealing with a lot of the stresses, but it just takes time. And the smarter you are and more deliberate you are early on, I think we could have probably got here in four years instead of seven.
But I got distracted early on with this line of business and this line of business and Oh, we can do a little of that, and I still am constantly questioning myself and asking myself like, okay, are we spread too thin? Are we not focused enough right now? We've got these three businesses. Shit. Am I doing it? Well, they're all profitable or on a clear path to profitability. So I'm like, okay. Then it's like, okay Jake, don't go dream up some other shit. Don't distract your people.
That would be my other big piece of advice. Don't be like, ooh well I bet Johnny's got some excess capacity. Here you go. That's the other thing I think that really demotivates people. They don't mind being a Jack of all trades for the first six months. They might like it. But after a while I had a lot of churn of people who stayed just at a year - either right over or right under - early on. And I had them doing like seven different things, man. They're working on this type of client and this type of client and that, and some of the feedback I got from the exit interviews was I was just running like a chicken with my head cut off. I was doing too many things. So that would be my take on that too.
Michael: To sum up, when you hire someone, you need to clearly identify the job of the person within their organization and make sure that that person develops their own skills in that job through the entire time in the company without burning ass basically right in the company and doing all this crazy shit.
Jake: Yeah. You need to plug a hole here or there. So if I'm like, Hey, Courtney, I need you to go to this event. That's not a big deal. But if you do that every week to people, they'll get burnout. If every week you're like, Hey, I need you to do something that's completely out of your job scope, people will eventually burn out.
And it doesn't mean that they're bad people and that they can't hack it or whatever, it means that's not how people want to operate. I enjoy it-ish. There are certain things I hate. I can do it. I have an MBA. I can build spreadsheets, I can do cash flow and IR. I can do all kinds of shit, but I hate it - really.
Michael: Do you personally interview every person joining your company right now?
Jake: Not anymore, no. Not anymore. No. I've got people in different leadership roles. There's a few ... I mean I still probably interview 90% of people.
Michael: 90% of them.
Jake: Probably 90%. It was probably a hundred percent a year ago. Now we've got a person who's doing a really great job and I never interviewed him. I think he was probably one of the first people. So I'd say yeah, it's very recent that I've come down to 90%
Michael: The reason I'm asked I was wondering, are there any clear patterns into hiring a person in the people business that you clearly see they wouldn't fit, or that they fit and you know when I talk to them I know that they fit. So what are they?
Jake: They came from a big company. If your only work experience is Salesforce or your only work experience is Oracle, there is a very high likelihood you're not going to just understand this pace. You're not going to understand the building of things versus the executing of things. So I look for people who have been builders. They built something. They started their own company. They went and worked a start-up before Oracle and they liked it, but now they learned some structure working at Oracle or whatever. So I think if they don't have a track record before you of ever building something, I don't think you can hire them, in the early days in particular. And now when the processes are built out, then you can hire an executor. So you just have to be smart about where your business is at.
Michael: Anything else?
Jake: Definite no hire. Don't get too hung up on the culture. I mean some companies are. We have a very diverse group. We're a sales consulting agency and I think our rate, I think we're like 55, 60% women to men. And I would say too many people early on look for people just like them, as opposed to people with different backgrounds, different thought processes who have done similar roles, but maybe they're not the same as you. And so I think that helps to have like a more diverse kind of group of people. So don't over index on just what made you successful in that role. Think about what anybody would need to be successful independent of you and then focus on those things. So that would be maybe one other piece of advice.
Michael: Beautiful. Beautiful. And then the last comment or question for this particular item about hiring. When you hire someone and they start to work with you, do you guys have an on-boarding process or mentorship process and how would that look to make sure that the person can get up to speed, can perform and you can basically generate the revenue or put that person into action? What is the shortest time that you can do that?
Jake: Again, it depends on what the role is? Senior consulting is going to take longer than managing someone's LinkedIn, for example. So for us yes, we are big believers in a very regimented on-boarding process. We used to have a process that was so regimented where your first two weeks you walked out of the scale with your head spinning.
We were so thorough that you were just like, Whoa. And then what we found is that people are then having to go back and ask the same questions to people that had already walked them through training or whatever it is, and we realized that was too much. So what we do is we have literally usually the first, always the first week, if not the first and second week, a hundred percent scripted from an hour standpoint.
But what we don't do in there is trying to make sure that you've met every single group. You've met every single whatever. It could just be that your time is spent really getting to know your job and your current team in those two weeks. And then over the course of the next two months, we have these what we call the "scale different" sessions and the scale difference is basically introductions to different parts of our business and what they do.
And so any new hire just signs up for that month or that every six weeks scale difference session. So that's kind of what we do there, and we found that this, at least so far ... let's see, one, two. We've got maybe a handful of people that we've either put through it or are putting through it.
Michael: What is the onboarding period there? Is it three months? Is it six months? What's the time that you need to wrap up a person?
Jake: It depends on the job. We hire people with experience, so I'm not hiring someone who has never talked to someone about sales before or led a sales team. So what we try to do very early on is put people in positions they can win fast. So I would expect one of our consultants can start to take on smaller engagements in the first month.
Now toward the end of it or working as the number two and then hopefully after 6 to 12 months, they can start to lead projects. That's kind of the time frame that we look at. Then we'll pair them up with a more senior person where they can do a lot of behind the scenes work for 6 to 12 months and then they're usually ready. There are some people who are again... but we're also a meritocracy. If you're good, you're good. You can start leading projects in the first month, so it's just where you're at from a skill standpoint.
Michael: Beautiful. Okay. So we figured out the cash flow, the hiring...
Jake: We figured out everything, man.
Michael: Everything. Last but not least in my top three challenges is scalability. What are the health numbers that we need to keep in mind? What are the targets to make sure that the business is not stagnating?
So you said that you are going to be making between 6 to 6 million this year and it's your seventh year. So what were your trends and how do you see these trends can be different? What is the healthy trend for the usage of growth?
Jake: Here's what I would say. Assuming you haven't raised a bunch of outside money and it's your money, let the business tell you when it's ready to grow. Again, you figure out a repeatable process for generating new meetings. Okay, cool. Now you can hire someone to do that. Now you know between your work and that person's work, you're going to have X percent more so you can do XYZ.
What we stopped doing this year, well we stopped doing last year was putting goals in place that were guesses. Yeah, we did 3 million this year. We're going to do 8 million next year. We all know candidly I don't think we really even figured that out until maybe nine to 12 months ago. So I just think don't let ego get in the way. Don't let go in to talk to your friends and how many employees you have get in the way.
I think those are the things that I see hurt people more than anything is they try to scale too quickly. We did it too. I mean, I definitely made some mistakes on hiring too many people from time to time, or not waiting until the business caught up to go start something like an extension of what we're doing. My advice is let the business tell you when you're ready to scale. Don't feel like you have to run your business like a software company or like anybody else's business. You're not that business. So choose the type of growth you want. If you can kill yourself, you're like, man, I'm going to kill myself and we're going to try to grow whatever and you only grow 20%, okay. Cool. Just grow 20% again next year. You don't have to have 300.
Again, I'm not venture-backed. If I don't grow 200% year over year, the only thing that takes a hit to my ego. I don't get fired or replaced or whatever. As long as things are afloat, everyone's paid on time, everyone's happy, everyone's doing their job. Everyone's excited, then I can choose not to grow. If you said, Jake, let's take a parallel year. If you said, look, Jake, instead, you're going to do the same amount of revenue did last year, but all the right people are in place. All the right systems are in place. You've got marketing, everything's humming. I would say okay, not ideal, but I'm good with it. I'm not like, God, we didn't grow. I can't go tell Mom and Dad I hired Pete. I think honestly that's what I see sink more people than anything,
Michael:So you can get to the point where you are healthy as a business and you don't need to grow. At the same time, you don't have that extra hustle that you're doing just to keep the business floating. So you can be in the same place.
Jake: You can do whatever you want. You don't have to want to hustle. I don't care. That's why you start a people business. You start it so you can have control, you can do something that you really enjoy. And if you really enjoy sitting on a beach, then cool. If you really enjoy taking trips, cool. If you instead want to grow, fine.
I really don't care what people want to do. There are ways that you can scale that it's more difficult in a people business. A lot of your business comes from referrals. So it's impossible to scale until you figure out how to scale referrals or new business. It's impossible. So until you figure those things out, all your scaling and your new targets are just based on the bullshit and guesses, or your organic continues to grow incrementally. I now know after a couple of years I can count on this, then you control your own destiny.
Michael:It's been great. I think that I have two more things that I wanted to bounce off you. First is do you need to get external investment? Do you need to raise money for the agency? Who are investing in agencies? As you mentioned, do you need to have a credit line and that's it? Can you take a debt on the company or should we have someone like a VC - well, not necessarily VC - like an angel or someone else to invest in your company? And then the second question, if you can answer both is what is the perfect exit strategy? I mean not perfect, but you've been in business for seven-plus years in this space. So what are the typical exit strategies in place there for agencies like yourself?
Jake: Okay, well there are a few questions in there. I'll try to give you my best on some of this stuff. No, you don't need to take outside money. Not at all.
Do you want to give up control? Do you want to do that? These are all very personal decisions. Like I said before, no, you don't need to take on outside money. When to take it on? You want to mitigate some of your growth and you're okay to give up some equity. You want to mitigate some of the gear at cost or expenditure and you want to mitigate some of that, right? So if you don't want to, you don't have to. You can use the proceeds from the business to fuel growth. That's fine. And then I think your choices are to sell to a smaller competitor regionally, and really all they're going to buy is your book of business or your IP.
And so here's the thing to understand., You don't have a book of business that's stable or you are such a dynamo that people would pay a premium for you. But if you don't have a book of business that's stable or you don't have proprietary IP either, your company is not actually worth a ton. Even if you are doing a few million bucks a year or 10 million bucks you can be doing, if you're doing $20 million a year, but it's a hundred percent project base and those clients aren't reoccurring and it's not proprietary and your people don't have a proprietary set of skills, then your company is not actually worth that much. So you got to think about what are the things that you're doing.
For us, we're creating kind of a sales methodology. We're creating these reoccurring revenue products. Not that I'm positioning to sell, but I know that that's what we need for healthy business too. And so you have to decide what you want to do. If you're just going to continue to go from project to project with no reoccurring clients, then your business isn't going to be worth much. And that's just something I think would be a lot of people need to keep in mind.
Michael: To sum up, you need to have a business book of reoccurring businesses that pay you.
Jake: Or super proprietary tech
Michael: Or super proprietary super tech.
Jake: Sorry...not tech. Or IP, intellectual property. For us, we're building out our own Skaled methodology. So if you're a company now and we have this thing. You're buying that if you ever bought Skaled
Michael:And then you need to make profits. So if have a 2 million in gross revenue and you are making let's say 20% of that. The next year you have like 5 and you making like 20, 25%. The next year, you have seven and you are making also 20% so your profits are growing. So it makes sense for someone to buy your business because they know then in the next few years they will kind of have a return on the investment like quadruple or double their return. So it makes sense for them to buy what you are worth in three years. Right. There can be some kind of multiplier there.
Jake: Yeah. Well, here's what I'd say. You're not going to get that on a services business unless you have those things. If you have those things then there's a chance, maybe you'll get some type of multiple. Normal service business, you're getting 1x top line, maybe 3-4x EBITDA. Let's say this isn't tech.
You aren’t getting 10x here. Unless you have those things that look proprietary like a tech, then you're stuck at probably 1-2x max. If you can convince them or then maybe you're going to get to three or four of your current revenue, not some future, whatever it is. Nobody's looking at a people business based on the future because guess what? It's all project-based. So you've got to go recreate that future. If it's, if you've got a consistent base of customers that I know going into year two, I'll have that then that's why I pay you a premium.
Michael: And then the most common kind of exit strategy, is it the merging or acquisition?
Jake: Being acquired is probably by far in the services business. The agency that's right up the food chain from you acquires you. So for us, we've got all in maybe what? 25, 30 people. So for us, it would be a consulting firm that has a few hundred, like 150 people and is looking to add-in.
Maybe it's a marketing consulting firm that is looking to add in sales consulting or something like that. Then we would be an attractive target to them. So that's more often than not. Until you scale to become a few hundred employees, that's when the big people start to pay attention.
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