Put Your Chin Strap On: Interview with David Tobin

Elizabeth Shea chats with David Tobin, Managing Partner of TobinLeff LLC, about how founders can best prepare themselves and their businesses for a successful exit. Drawing on his experience as both a former agency owner and longtime M&A advisor, David explains what buyers are prioritizing in today’s market, including sustainable growth, strong margins, leadership continuity, recurring revenue, and reduced founder dependency. The discussion dives into the realities of adjusted EBITDA, client concentration risk, due diligence, and how AI readiness is increasingly becoming part of buyer evaluations. David also breaks down the differences between strategic and private equity buyers, including platform acquisitions, rollover equity, and earnout structures, while emphasizing why deal terms often matter just as much as valuation. Throughout the episode, he offers practical insight into creating competitive buyer dynamics, choosing the right advisor, and navigating the intensity of the M&A process. 

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Hello and welcome to Branching Out, a Tree Fork Strategies podcast. I'm Elizabeth Shea, the founder and CEO, and I created this show to help business owners navigate the ins and outs of an exit event. So each episode, I sit down with seasoned founders and CEOs who have successfully sold their companies through a strategic or financial transaction. Together we discuss what went into their decision to sell, what worked, what they would do differently, and the valuable lessons that they would like to pass along to founders with a sale on the horizon. Our goal is simple to provide a playbook that you can use as you approach your own sale with confidence and clarity, knowing that you're not alone in the process. This is Branching Out. Thank you for joining me. Hello, everybody, and welcome to the latest episode of Branching Out. I am so excited to have a very dear friend and actually former advisor in our studio today, David Tobin. How are you today? I'm well, Elizabeth. Thank you for having me. I'm delighted to hear your story and hear more about your services and the kind of work that you're doing because we work together. David comes to us as the managing partner for the Tobin Left Group, which is a investment banking and MA advisory firm. So we're going to hear a little bit more about his story and talk talk through what types of things that you might be looking for if you're looking to sell your business and how you might be able to help us. So why don't we just start from the beginning and maybe give us a little bit of your background? How do you get in this business and how did you go on to found the organization? Sure. Thank you for allowing me to share that. Just for your audience, what's exciting for me, Elizabeth, you and I were just talking, we date back almost 10 years. I met you a couple years prior to when you were ready to sell. We stayed in touch and we were thankful that you selected us to be your investment banking firm when you sold your firm in 2019 already. Yes, I know. Time flies. Yeah, so that was how we met and the relationship we developed. My background, some similarities to you. I've come from a marketing and advertising background. I had founded and owned two agencies. My last agency, our client base, was primarily financial services companies and services financial agencies. They had the desire to put their financial advisors in front of business owners on a favorable basis. We came up with the idea that the best way to do that would be to position financial advisors as specialists in exit planning and succession planning. And it worked. You're shaking your head, yes, because you being a former business owner can appreciate those are topics that are on the mind of owners. Exit planning, succession planning, MA. Because that was our client base, I tried to study, gravitate to information around exit planning MA, and I just took to it. So I sold my farm in 2004. I was away from the industry for a few years, but I would meet an owner and I'd say to them, Elizabeth, what is your exit plan? And they wanted to talk about that. So we got started doing exit planning, consulting, and it really just grew from there. I'm thankful that 16 years later, I now have seven partners. We are very mission-driven to help owners maximize and monetize what they've built. Yes. So you worked with us for a long time, as you mentioned, as you indicated, for maybe five, six, seven years. Can you talk a little bit about why you think that's important and why is it important for someone, if they're looking to exit a business, to at least start having those conversations with someone like you? Oh, for sure. I mean, that it's the obvious to state it, but we all only get to sell every company we own or found it one time. And there's just the stakes are so high. So anything you can do leading up to the desired date to monetize or the liquidity event, there are steps you can take. Certainly if you have a couple years prior, you can make some structural changes. If you want to try to have an event more in the foreseeable future, there's still similar to getting a house ready. You can stage a business, you can do certain things that will hopefully increase your multiple and selling price and provide more favorable terms. And that's why in your case, you and I, you know, we stayed in touch. I know you worked a little bit with one of my partners just for a couple years prior to have your company position to go through the MA process. Yes, I will say you were very helpful and instrumental in having us realize what was going to be important to an acquirer and then make sure that we we moved towards that, towards that avenue and drive towards success. So, as far as Tobin Left is concerned, what kind of companies do you tend to work with? What type of companies do you seek out as your specialty? Our domain expertise is around service-related companies, marketing services, marketing communications, technology services, professional services, the economy driven by talent, more so than hard assets. Um, primarily working with middle market companies. But we're busy-driven. We um we want to try to help owners in that space. Certainly we help companies that have large enterprises, but we also have teams that work with smaller agencies. That's terrific. That's good to know. I think having that domain expertise is really important just because you understand who the buyers are, and that's one of the biggest pieces of value that I think you can bring to the table. So what are what are some of the trends that you're seeing today because the market changes every year and it's continues to change. So, what are some of the trends are you that you're seeing out there from buyers? They're being more cautious than a couple years ago. You'll hear from so many people in my industry related, there there's plenty of capital. I mean, everybody's hearing how much quote dry powder is there. So there's no shortage of capital. Deploying it's another challenge because I would say today it's a little bit more of a buyer's market than a seller's market. It shifts. If somebody's a quality company, and we're gonna, I know we'll get to that in a moment, what the value drivers are in terms of growth and profitability. There's plenty of places to look for interested buyers or investors. But due diligence is more challenging because they're capital providers, they're lenders. The due diligence, it's just you really have to be buckled up today. And you have to go wider and deeper to be able to track multiple offers. Today, you just you have to be prepared. Every MA discussion, a buyer's gonna say, what's your point of view on AI? And you can't just say we're using it as a tool. You have to be able to demonstrate that it's not gonna impact your business, or you're truly able to leverage it. So I mean that that is a factor that people have to get in front of that messaging, or more so the messaging, if you get in front of the solutions. Right. Right. I mean, first of all, it's one thing to say, just another thing to actually do it and live it. And and and sure, you know, A AI is sort of table stakes in today's environment. So, you know, how are you actively putting it into your environment in a successful way? So you de-risk the the opportunity. Exactly to a certain extent. Well, so talk about some of those value drivers. You mentioned um a couple of them earlier. What are some of the things that companies can be doing or should be doing to try to obtain the best possible valuation? Um, I mean, the valuation is is just one component to it, but enterprise value, what drives that, in your opinion? There's from our experience being with buyers, investors, I mean, weekly, monthly, certainly growth, both historic growth and having a vision for growth and enhanced value. If somebody's gonna buy your company for five, six, seven, eight, tenx of EBITDA, they're doing that with after tax dollars. You're only gonna get a good return on capital if there's growth or synergy. So, I mean, historic and division. As important would be margins, net income or EBITDA, adjusted EBITDA as a percentage of fee income, of adjusted gross income. So important. It's there's sometimes a line drawn. There's those companies that can operate consistently at a margin north of 20%. If you're in the single digits or 10%, you it's just hard to command good terms because there's not enough margin, again, to get a return on capital. So growth margin, the dependency on the sellers is so important. It's if that founder's name is still on the door and he or she is driving new business, there's so much risk for the buyer because what happens day one post-close if the seller's on to something else? So reducing the dependency on the seller or sellers, both especially on the new business side. And that relates to another driver hand in hand, they're engine for new business, they're engine for marketing. Very consistently seeing new opportunities. And then, of course, I mean, your your listeners, many are all nervous, they they've been buyers or sellers, they know client concentration risk is a red flag. Turn rate becomes very important. After looking at financials and adjusted EBA, the buyers are gonna, if it's not in the SIM, the marketing materials, they're gonna immediately request, let me see a client list per year for the last three years. Now they don't, they're not looking for the names of the clients. You can redact those. What they're looking for is the churn rate. How many clients from 2024 are on the docket in 2026? So important. Because buyers, we like to try to simplify it. They're looking for companies that are sustainable, transferable, and scalable. So you can remember it, but that's great. And and recurring revenue has also been an important driver for organizations. Are there pieces of advice that you could give somebody if you don't think that they're ready? Or would you tell them point blank you may not be ready because the growth trajectory hasn't been there? Or, you know, how do you deal with those circumstances where someone might come to you and is interested, but just doesn't have all the right pieces for the right kind of evaluation? Well, we absolutely believe one of the best things we can do for clients or prospective clients is to truly share with them how we see it, good or bad. If they have a good value proposition, we get behind it, we would champion it. If not, they still may have a sellable company. They just have to realize what the market most likely will bring. And if people still, it's they'll still decide that they want to go through the process. Maybe it's time for them they've built up enough. There, there is, I mean, we talked about the value drivers. Well, first, to try to really get your arms around what is my company worth. And I would recommend talk to multiple types of advisors. I'm in this industry, I'm you know, we're investment bankers, but you have to be careful just hearing valuations unless groups have really dug deep. Right. Because it's easier to throw out multiples. And then they you also have to be careful because sometimes owners of circus firms you know they tend to gravitate to other business owners. Well, other owners might say, I sold my company for 8x, 10x. Well, they're a technology company or a SaaS company. You really getting as educated as you can on how a firm like the one you own would be valued, talk to multiple players, get very clear on your free cash flow, adjusted EBITDA, and very clear on adjustments that buyers will most likely accept. That's a very important point. So you mentioned adjusted EBITDA a couple of times, and um I know how important that is to the process and to the valuation. Can you just quickly describe what might what might influence an adjusted EBITDA number, either take backs or or add add backs? Sure. So so certainly EBITDA, you you have the core of interest depreciation taxes. That that's the easy part. The adjustments are in almost every situation you have to adjust to normalize the owner or owner's compensation. Trevor Burrus, Jr. Up or down. So you the adjustment that buyers will make, you look at everything that's been expensed to benefit the owners through the PL, and you compare that to what would be a fair market compensation package for that position. And then the adjustment. So if they were paying themselves below market, then the net income's overstated. And it's fine. You you don't have to worry about changing how, if you're an owner, how you pay yourselves, because you might do that for tax reasons. You just have to appreciate if you're only paying yourself at the Social Security wage base of like 160, and fair market for a company like yours is 300, the buyer's going to adjust your net income down. Correct. Yep. There's always going to be an adjustment to normalized comp. But the other adjustments truly one-off expenses that are not part of normal operations. I mean, the obvious ones are we moved our office or we had a 50th anniversary or 30th anniversary party. But I mean, the one-offs are easy. We have to be careful. Just yesterday, one of my partners who does our evaluation work and I, we were on with a prospective client. Their net income was almost break-even, and the owner wanted to put forth adjustments taking it north of a million dollars, unproductive employees, they said, advertising that didn't work. Those are not adjustments that buyers will accept. I think that's a very important point because it doesn't matter what you might perceive or think. Um, it's going to be from the ends from the lens of a buyer. You know, what do they see and what are they going to be accepting? Yeah. And you also have to appreciate uh if there's going to be synergies that can benefit the buyer, whether it's cross-selling or they have some expense, they they could consolidate the back office, that's part of the reason they'll pay a good multiple. They're not going to pay a good multiple and then give the seller credit for all those synergies that the buyer brings to the table. Right. So talk a little bit about, you know, we've mentioned valuations and what goes into a deal or a prospective deal. You know, we always like to say that it's not just about the price. There are oftentimes terms. So can you share what you've seen, what's been current in the industry today for those other invariables? Aaron Powell Yeah, I don't know for sure. If I may, I just want to talk about what we're seeing in terms of offers and deal terms for two different types of buyers, one strategic and the other financial. So in the middle market, marketing communications, technology services, there's been such an influx of capital from private equity groups, family offices. And it's really been a big win for our clients and us, because like eight or nine of our last 14 transactions have either gone to private equity groups or strategics owned by private equity. So the deal terms with financial sponsors, they tend to be two primary elements, cash and close and then roll over equity. And the cash and close tends to be in the 60 to 70% of the initial valuation. And then the rollover equity is equity in either a platform that was formed or an existing platform. And the sponsors, if you can create the right type of competitive situation, you would have different PE groups, ceiling offices bidding for the opportunity. You'll look at their track record on how successful they've been getting a multiple of invested capital. So their equity, a dollar rollover equity, what does that become in the future? And usually the benchmark is they're trying to get two and a half or three times on every dollar. So the financial buyers, and then I'm going to come back to your question on what to look out for. With the strategic buyers, if they're buying a service firm, it tends to be driven by cash at close, of course, and then an earnout formula. And I know your listeners are all saying, I don't want anything to do with an earnout. We've all heard stories, but it's hard to get over some safeguards for buyers when it's driven by talent. And then so the key around the earnouts are will the seller control the PL statement if it's an EBITDA-based earnout post-closing? There's always that concern. Will I be able to control my scorecard? Right. So, I mean, certainly it's better to track the top line as opposed to the bottom line in most situations, the length of the earnout. Do you get credit for cross-selling opportunities the buyer brings? Sometimes buyers will put a cap on the earnout because they feel at a certain level if the earnings are that much higher than the benchmark coming in was because what the buyer brings to table. So what we've experienced, well, it's usually more energy negotiating the terms than just the multiple. Totally agree. Totally agree. Which is ironic. But you know, there's such a focus on the enterprise value, but the reality is what are the terms that the owner is going to need to live with for, you know, for the unforeseeable future? So you've defined some of the differences between private equity and strategics. And strategics are typically looking for uh the value of your services or the people, as you mentioned. Do you find that there are more private equity buyers out there now than in the past, or or is it pretty even, or what what does it look like in the in the in the future, as far as you can tell? It's much higher and it continues. So we've had the firm now 16 years, Tobin Left. Five or six years ago, just the percentage of our deals were going to private equity groups. I mentioned the percentage current thing. It used to be your EBITDA had to be at a certain level, 5 million or more. This was years ago. And because the supply and demand, private equity was flowing into other sectors that were generating greater returns than maybe marketing communications. Well, supply and demand is such that a lot of those deals got done during that 10 to 12 year period where interest rates were so low, the MA market was booming. So financial sponsors had this success, their investors got good returns, they went back out and raised more money. Now they have to find quality operating companies to continue the streak. And they had to look to other sectors. And then there's some really good success stories in the Marcom space, which cause more dollars to flow. So just as an example, I mean our database is really extensive of PE groups active in this. I am contacted probably three to five times a week from different sponsors saying, think of us for your clients. Here's our acquisition criteria. And the interesting part, too, it's that it's private equity. You know, people perceive it as real buttoned up big firms, New York. Certainly there's many of those, but there's a lot of investment groups. They call themselves private equity. They're not really. They don't have a fund sitting there. They have relationships with investors or they call them limited partners. We've had good successes. With smaller firms who found that we helped them find these smaller investment groups in really good terms. Like a couple years, and there even is maybe $2 million, and there's still a platform. That wasn't the case a few years ago. Right, right. It's definitely changed. There's just so much money out there that needs to be put to use, right? Yeah. And then it some of these smaller groups, they bring a lot of value because they could really focus on, you know, just a few investments that they've made and they care about. Now they may not know the seller's business that well, but they're really there to support them and they bring capital and they help with add-on acquisitions. What pieces of advice would you give to a seller who just wants this to go as smoothly as possible? Like, are there any kind of gotchas out there that you see that perhaps people haven't thought through? But it you went through it, Elizabeth. I mean, when you sold your company, we went through the process. We, you know, brought multiple offers. You found the one that fit for you. It truly is a process. We can touch on what you can do to prepare, leading up to it, getting your house in order and you and your team ready. It it can be exhausting, overwhelming. So this might sound like a pitch for Tobin Left, but one of the key steps would be really take your time to interview multiple intermediaries, range from business brokers on one end to MA advisors in the middle to investment banking groups, and the lines blur. Correct. So really to take your time, interview multiple groups, because you're going to spend six to twelve months with that team. You really have to find out who will be representing you. And so one is take your time to pick, plan on doing what you can, the advisor that you bring, creating a competitive situation in most situations will benefit. I'm not talking about like this full-blown, real-wide auction. There's a place for that. And we do that with some transactions, but being able to truly assess hopefully three, four, five legitimate offers for qualified buyers where you have options. I mean, everybody knows that will put themselves in a better position than having a fallback position. We call it a plan B. But you can approach the process from a position of strength. If your plan B may be you have a solid management team, you've explored what it might look like if they could line up partial financing for an internal transaction. At least be able to compare that option in economics towards when you're assessing offers. So creating an environment where you can and and then also take pride to really, when appropriate, go wide. Not just the obvious strategic buyers. There might be consulting firms, there might be ad tech or market companies. There's certain types, and we're thinking about going wider. We've had some really nice sh surprises, pleasant experiences from different types of buyers for different strategic reasons. So go wide, try to create a competitive situation, plan on the front end, and then put your chin strap on because it's gonna be Right, exactly. Well, I mean, I think in most cases, most people are looking for a competitive to drive a competitive process, but it's surprising how many people don't. And so that is a message that I continue to to reiterate that you know, look to bring on an advisor that's really gonna be working for you and take the time to get to know them and know in and of yourself what you personally want for you and your business, because that's gonna be ultimately what makes the decision. Well, you touch on such a key point. Really try to get clear what you want. Everybody, most people want higher purchase price, more money up front, those are givens. But then going beyond that, you know, opportunities for employees, what kind of commitment is required from the seller, the experience and track record that the buyers had, paying earnouts, funding, or being able to close. Because what can be so deflating, demoralizing is if you sign a letter of intent, you go through all of that, your due diligence, and the deal falls apart. It's just And it happens. It does. It happens. Trying to avo, I mean, of course, everybody's gonna try to minimize that situation. But it happens, and it's worth knowing that so that you just like I said, put your tin strap on and keep it, keep it moving. So any fun success stories that you'd want to share? Any recent transactions that were pleasant surprises? Yeah, thank you for allowing me to share a couple. I'm very proud of the work we've done with most of our clients. Uh, you asked a couple case studies. I can point to situations where we were brought in and a client had a certain view, what his or her company was worth one in particular, really solid company, thought he was going to sell to a strategic, would have gotten respectable terms from a strategic. And the more we learned about his business, the more we loved it. And we said, there's a story here to tell, not just the strategics, but we think you could be a platform for a private equity group because of what you have in place. We helped with a growth plan. Now, they created a solid business, valuable business, before we walked in their door. But it was the work we did helping with the growth plan. And then taking that plan with passion because we really took the time to get to know the business, the nuances, and take it to the MA marketplace. It got we got multiple offers, and it turned out it was a platform opportunity with the PE group. And the economics were at least two times more than the client thought he was going to get before he met us. The lesson we learned, it's take your time to really get to know the client's value proposition, try to expand everyone's view of possibilities, theirs and ours, and then tell that story with passion. I would love it if you could describe what a platform company means, because a lot of our listeners may not understand the nuance of being a platformer than a private equity group and the notoriety or or advantages that that might bring. Yeah. Thank you for having me clarify that. The the platform refers to like the hub, the foundation, the initial company that the private equity group or the family office invests in. And it's typically that core company that they call a platform that has this vision for enhanced value. In pretty high percentage, part of the growth plan includes acquisitions. They call them add-ons or bolt-ons. So so the the original hub company is the platform. And that's the original entity. There's an entity form, but the assets of that original company becomes the first investment. Yes. Or the stock of that first company becomes the first investment. And then they build from there. Yeah. What what we've seen is that those are for folks who might not be done and want to hang up their case and go home, but want to actually make investments in additional companies to bring into the fold, into the into the community to build greater, and then get another bite at the apple. That's a lot of many times the advantage of having a private equity acquirer, is it's a little bit potentially richer of a of a of an outcome. It it it is. And what's what we have found very interesting. So what you describe does fit the profile for many owners. They feel that they want to take it to another level with capital behind it, two bites at the apple. I mean, that's a profile. Many owners have the energy desire to do that. Well we also found, though, we have owners that they didn't necessarily want to sign up for those two tours of duty, meaning sell it now, build it, and then have a second bite at the apple, second liquidity event. But they still chose private equity type buyer with the understanding going in that a new CEO had to come in. And they were only going to be involved for a couple years, and or they had a really strong leadership team in place. The reason why those deals still went down that pathway is the economics were better than the strategic offers who were getting more money up front. But it's it's so important that the seller and potential buyers really understand what kind of commitment the seller's willing to make. Right. Right. And that's where the strength of another value driver, the strength of the leadership team, management team is so important in a situation like that. Correct, correct. So it's a lot of great information that you've shared today. Thank you so much, David. How might people seek out resources to educate themselves? Because there's a lot to learn in this process. It's a different world. They probably know their business and their industry really well. But um, can you direct them to a couple of places where people might be able to get more information? Well, today, now there's so many experts with Claude and You can say children left, of course. I know you have webinars and programs. So I mean, there's just so much information out there and really good information. I mean, you could almost you do have to be a little careful because up from all these AI searches will come potential deal terms and multiples and potential. I mean, any seller is going to be all over all the AI tools. I just I I will, if I may, just go back to what we touched on a few minutes ago. I think it's so important to talk to multiple advisors. Yes. Yep. The stakes are high and AI is great. I mean, we use multiple AI tools to build prospect lists, but you just it's like anything else, you just have to make sure you can get to the source of all this information. It's hard though, because there's just so much stuff being thrown on out there. And then if you set expectations around that, it it it can it can be rough. It can be disheartening, right? Yes. Because the deal's not done until the deal is done. So true. Yes. Well, excellent. Thank you so much, David. This has been great. How how can people get in touch with you if they'd like to? Well, thank you for having me. Thank you for asking. I think we get in touch. Tobin left, t-o-b-in-l-e-w-f dot com. If seven partners, any one of us would love to just have conversations with owners who just want to talk about their businesses in the MA market. And we'd love to get to know people the way you did got to know you prior to your transactions. Right. And you were very patient with me as I went through my journey. So I appreciate that. All right. Well, thank you very much. Have a great day. Okay. Bye bye.