Transcript – 10 X Earnings By Future Proofing Your Buyer
To listen to the episode, click here.
For your Value Builder Score, click here.
John Warrillow: This episode of Built to Sell radio is brought to you by the value builder system. So you’re an entrepreneur and you’ve got somewhere between a million and 10 million in annual revenue and you’re trying to figure out what’s next. Maybe you want to scale up, maybe you want to sell, maybe you want to bring in a manager and delegate some of the day to day stuff. Bring in the next generation of leaders. Maybe you want to pass it down to your family. All of those options, the one prerequisite is that it’s built to sell that it’s actually something that you could pass on to another generation without you and that’s really what we try to evaluate using the value builder score. It takes about 15 minutes to complete the questionnaire and then you’re going to get a readout of how your business would be viewed by an acquire across eight unique dimensions that acquires care about. It takes only about 15 minutes. You could do it free at valuebuilder.com.
John Warrillow: So how do you feel about earnouts? You know the deal where you accept some money in payment for your business up front and then there’s a future payment if and when you meet certain targets in the future. Usually earnouts are tied to EBITDA or top line revenue growth or retention of a specific customer. And usually I spent a lot of time crapping all over earnouts, but my next guest actually had a good experience. His name is David Trewern and you’re about to meet David and his advisor, Geoff Green. David is the founder of a company called DT, which went on to be acquired by STW group, which in turn got acquired by WP group, one of the world’s largest advertising agencies. And David’s experience again with an earnout was really interesting.
John Warrillow: It turned out that his original payment for his business amounted to less that actually he got downstream from his earnout because he did such a great job of growing the business after he was acquired. So again, sometimes it works out. You’ll also hear from Jeff Green on this call. Geoff is David’s advisor and also the author of the book, The Smart Business Exit. If you haven’t picked up this book, it’s certainly worth a read. You can check it out on Amazon. Geoff’s actually based in Melbourne, Australia, but it’s available obviously in North America and is a great read. And one of the things that Geoff really encouraged David to do is think about his business through the eyes and lens of an acquirer. And I think that’s in part how David was able to get a premium multiple for his business and ultimately why the earnout worked out so well for David. To tell you the rest of the story, Here’s David Trewern and Geoff Green. David Trewern, Geoff Green, welcome to Built to Sell radio.
David Trewern: Hi, great to be here.
Geoff Green: Yeah, great to be on the program John.
John Warrillow: So this represents a unique little spin here, Geoff and if it works well, it’s all my idea and if it totally bombs, it’s your idea buddy.
Geoff Green: Thanks John.
John Warrillow: This was proposed, we talked about this over email, this idea of doing sort of a three-way interview because Geoff, you’re one of our certified value builders and David, you’re one of Geoff’s clients and so this may go horribly wrong or it may be a great new formula that we’re going to do from now on. So we’ll find out in about half an hour. David, tell us about your business. You guys were in the digital marketing space?
David Trewern: That’s right. Yeah. Well, look, I’ve now sold three businesses, but yeah, the business we’re talking about today is a business called DT. I started it when I was 23. It was started at being a web design business back in 1996 and it grew into a full scale sort of digital agency. So yeah, my wife and I worked in the business and we grow it for about 15 years before we sold it. So it sort of feels like our first child. So it was a long time coming, selling the business.
John Warrillow: Your subsequent exits have been in what areas and at what time frame?
David Trewern: The subsequent in the other businesses or the other?
John Warrillow: Yeah, you mentioned you had three. Yeah.
David Trewern: I also started a brand design business that was running concurrently with DT and I sold that shortly after DT and then I got involved in a private college with some other partners and I sold out of that two years ago.
John Warrillow: Interesting. So we’ll focus on DT, but I’d love to explore some of those other exits at another time. So digital agency, which that world has evolved enormously in 15 years. You started out making websites and I’m sure you got into all sorts of stuff by the end.
David Trewern: Yeah, definitely. The business was a different business every year for, the business is about 20 years old. I sold it completely out after 15 and I was the non executive chairman until kind of last month. So it’s now 20 years old, and the business just kept on evolving and changing and growing as the Internet evolved so it was a business that was very dynamic and always different.
John Warrillow: And when did you first get the idea to potentially sell it?
David Trewern: Well, I think, again, I started in 1996. Around 2000 we had this whole .com boom and bust. And even though I only had five or six employees and it was a pretty small business at that point, I had people contacting me wanting to buy the business because there was just this crazy time where anybody that had any skill in that area that had any clients or any revenue was being approached. Leading up to this acquisition, there were a number of potential exits that I discussed, and Geoff was involved with all the way through. He was one of my first clients so we were [inaudible 00:06:06] each other and at one stage I was approached by a larger group that wanted to put together a group of 30 or 40 companies and do a roll up and do an IPO. And I got heavily involved in that for a couple of years and then that sort of bombed. But once I had gone through that exercise, I was committed to selling the business and then went and found the right buyer.
John Warrillow: Got it. And so what sorts of revenue did you have or a number of employees where you’re at when you actually started your transaction with STW?
David Trewern: Yeah, sure. So look again, I started the business with my credit card and it was just me and the business grew and I think we’re probably about 10 to 15 people when they bought the first, I think they brought 33% for me and then I sold them another 40% then I sold another eight percent to another earnout which are both three year earnouts. And at the start of my last earnout we’re about 25 people and then when the final earnout finished in 2010 it was, we tripled through the final earnout to probably about 80 people.
John Warrillow: Got it. Okay. And roughly what time frame was this when you first sold the first tranche?
David Trewern: So I sold the first tranche in, it would have been 2002, something like that. And there maybe 2005 I sold another smaller tranche and then the final earnout went from 2007 to 2010 and by the end of 2010 year we had about $10 million revenue. And obviously when I’d started the business back in ’96, we had zero revenue. So it was kind of a very gradual, probably 25% compound annual growth almost every year for that sort of 15 year period.
John Warrillow: Got it. And so David, I’m used to seeing a sale agreement where there’s a purchase sale of shares, there may be an earnout over three, five, seven years but it’s all one transaction. Is it correct to say these were three separate transactions?
David Trewern: Yeah, there were three separate transactions. STW typically at the time took this approach of, they wanted to buy, invest in businesses where they left the founder to run the business. It was there [inaudible 00:08:23] people are into businesses. Well they’ve got 70 or 80 businesses that they own in Australia, [inaudible 00:08:32] WPP. And that would typically buy between 35 and and say 70% of the business and sort of leave it at that. So the first tranche, I didn’t want to sell majority stakes so I sold them 40%. That was really how it started. They actually sold it.
John Warrillow: Go ahead.
David Trewern: Sorry. I sold a share to another chap who was a bit of a mentor and he was putting the other roll up so he actually sold out at the same time. So yeah, I sold the first 40%, went to a three year earnout. There was no promise or put call or anything, they were going to buy any more equity. And then for a while there I really thought I was stuck and I was never going to be able to sell the rest because I had this buyer who bought a big chunk and I couldn’t really sell the rest to anybody else. A real need came up for them where they really needed the business, and that’s what really opened the door to selling the final 51%, because at the time the business was actually called Diamond Sherwin design. So it was all built around me and there wasn’t a whole lot of incentive for them to buy the remainder of the business until they realized how much value it could add to their core business.
John Warrillow: That’s fascinating. So, Geoff at this point in the game, what has your advice been at this point up until now to David. Are you involved in advising him on the first sale of the first tranche?
Geoff Green: Yeah. It’s been an interesting journey John because as David said, our relationship started with me actually be a client of David’s. I was at the time spearheading setting up Bendigo stock exchange as a alternative market in Australia. We were looking for a website developer and and chose David. So our relationship started in that way and then over time I assisted David virtually every step of the way. So from the time David was exploring potential roll ups and so on and then then advising David on each of the successive transactions that led to his ultimate exit.
John Warrillow: So what were your views on STW’s offered to buy 40%.
Geoff Green: We’d gone through a period I guess in the early internet boom of exploring a whole lot of different options. And the opportunity with STW really arose from the initial Angel investor in David’s business Michael Ball who introduced David to STW. And there were pros and cons in that deal because you had a player that had 40% of David’s company but with no promise to buy the rest out. So it was a matter of looking at the pros and cons of that. But the thing STW I think has had done pretty well over the years was buy stakes in companies and then have them really incentivized to keep growing their business. So the model overall worked and David could have gone off and sold to somebody else and exercise his rights under the shareholders agreement to do that. But in practical terms, probably a tougher transaction to do. Having said that, STW enabled David to take DT to a completely different level than probably he could have that quickly on his own.
John Warrillow: Got it. So it’s just interesting because in a way, let’s take it out of the agency world to a world where people would understand. Let’s say you got a shoe making company, you make running shoes and Nike buys 40% of your business. Well Adidas isn’t going to want to be in bed with Nike. So doesn’t it in a way reduce your overall landscape of potential buyers dramatically if you’ve got this big sort of kind of appendage to your company, meaning a 40% stake holder in a marketing agency.
David Trewern: From my point of view, John, being realistic about it. Again, when they first bought the 40%, it was a probably 12 person business that was really built around me with my name on the front door. And I think the chances that the time of, even though we’ve been to these .com buyers, realistic chances of selling the whole business for a good price at that point were realistically fairly limited. And I didn’t really want to sell the whole business at that point. That wasn’t really my goal. My goal was to take the money off the table, pay off part of my house or my house. I can’t remember at the time what was going on, and really have a partner that could help me continue to grow the business. And that was really my objective and overselling the whole business. And funnily enough at a later stage, one of the things that actually triggered the final 51% was a competitor of STW actually contacted me and asked me if I could buy my shares back to sell them to them. And that’s what initially started the conversation around selling the final 51% to STW.
John Warrillow: Interesting. So let’s talk about that first transaction. So you’re a relatively small business at the time. They buy 40%. Do you remember ballpark what they paid for that?
David Trewern: Yeah. Look, I think I’d sold 11% to Michael Ball, who was this angel investor for about 150,000. At that point, which was actually a pretty good valuation at the time because we weren’t making a whole lot of money. And then I sold another 30% to STW and they bought 41 in title because they bought Michael share and they bought my share and I think it was maybe 350 or 400,000. So the first 40% [inaudible 00:14:24], maybe 500,000 or something like that. That was a huge amount of money to me at the time and it was a small business and I still have a long way to go.
John Warrillow: Got it. And so how did Michael feel about that exit?
David Trewern: He introduced me to STW. He was a guy behind this big roll up in list, an IPO listing. And when that sort of failed, he was keen to cash in his investment and make a return. I made sure that he got a good return from his share. So he got dividends along the way and then, within a year or two I think he sold, his 10% he ended up getting, I can’t remember exactly what it was but it was a couple, it was 250,000 or something like that.
John Warrillow: So he was [crosstalk 00:15:17]?
David Trewern: Yeah, definitely. And there was a bit of a point there where STW was really pushing for him to take a lower amount of money because they didn’t want him to get the full benefit of the earnout because he wasn’t doing the earnout. And I’d dug my heels in and said, look, if he doesn’t get, I effectively negotiated for him to get the full potential of my earnout effectively upfront which they didn’t like and I said, well, if you’re not doing that then I’m not going to do the deal because I really felt obligated to make sure that he as a shareholder was rewarded for his investment and his support. The components of the deal was making sure that he got a fair payment for his equity as well.
John Warrillow: Got it. And the 500K that you got for that first tranche, was that upfront the cash component and then there was some backend earnout piece to that or was that including the earnout?
David Trewern: It probably grew from there. So I’m trying to think of exactly the numbers, I don’t actually have them at hand but if Michael had got about 200 back, I think the initial deal was I got 70% of, what would happen is I’d value the business on a multiple of profit and it might’ve been six times profit before tax, something like that. And then what they’ll do is [inaudible 00:16:32] I will give you a 70% of that now as a deposit. And then in three years time we’ll take the average of the three years. So you’re in that period and we’ll apply that by the multiple again and we’ll pay and then we’ll top you up so that so that your ultimate all amount that you get ends up being, well the multiple times, the three year earnout period. And so you get a top up, so there’s really no cap on, on what you can do. I think that that first three years that grew and perhaps it started out as being $450,000 deposit that turned into six or 700 something like that.
John Warrillow: Got it. Okay. So then you mentioned there was the second transaction in 2005 for eight percent. What was the backstory on that?
David Trewern: Well, I think I was building a beach house or something. Quite seriously I bought some land, I was doing this project and I literally just thought, well, hang on a minute, this is a bit weird. I’ve sold 41%. There’s another eight percent I can sell and I’ll still have 51, and it’s just a way of raising some capital. So I spoke to them and said, how do you feel about buying another eight percent and I said, yeah, it’s a great business. And that was all done very, very, very quickly. We already had established the multiple from the first transaction and they knew the finances. There was no due diligence acquired, all the rest of it. So it was all kind of done. I had a check a couple of weeks later so it was just a very simple transaction to write some more cash for me.
Geoff Green: It’s like a bank machine.
John Warrillow: That’s really interesting. Was there something magic for you about maintaining, at least controlling interest 50.1% that they were?
David Trewern: Definitely. Again, my name was on the door, it was my baby. The other thing is one of the reasons why I sold to STW as opposed to a whole lot of other groups, and I’m really glad I did sell to STW because they were a great partner and the business has grown and flourished and part of their offer at the time was we want you to keep doing what you’re doing. We’ve got 80 companies, we’ve got a small head office team of six or seven people. We don’t want to get involved in running your business. We want to support you. We want to help you grow, give you whatever you need so that you can be successful and let you do it the way that you want.
David Trewern: And even to the point where if you don’t want to work with our finance team and you want to work with your own accountant, that’s fine, we’ll support you on that if there’s a good reason for it. They really did offer a huge amount of autonomy which was very appealing. Like a lot of business owners, I think I was probably a bit of a control freak at the time and that really appealed to me that I could go to them for support but still do things my way. So that was definitely appealing and keeping the 51 was important at the time.
John Warrillow: And Geoff, you knew the shareholders agreement that David had with STW. I’m assuming as a 40% shareholder, they had specific rights that they were entitled to. Was David’s desire to have controlling interest. Was that rational? Did it give him any benefits over not being a 50% shareholder?
Geoff Green: Look [inaudible 00:20:08] covered that issue from that slightly different perspective. One of the key things I think David had always wanted to do with DT was build a great company. And there are probably two possible ways of doing that. One was to try and do it on his own and to have total control all the way through. The other one was to effectively work with a big brother to get him there and that’s effectively the route did he ended up taking with STW. So I think the issue of control was really around how much autonomy David wanted at particular times running the business. So certainly in the early days it was I think very important for David to sort of feel like I’ve got full control, I have 51% and so on.
Geoff Green: So in terms of the shareholders agreement, it was a fairly standard shareholders agreement where there were a range of things that both parties need to agree on, there were their normal dispute resolution clauses and so on. And there was certainly the option David could have exercise rights and gone and sold his business to somebody else. But I think the relationship was very good with STW over a long period of time. And David’s view was he just kept working with STW, that would be the best way to turn DT into a great company. And that’s effectively what happened.
John Warrillow: STW sounds like either a very philanthropic buyer or somewhat naive in a sense. Again, I might be all wet on this, but weren’t they taking a huge gamble about becoming a minority shareholder in a business they didn’t control and not papering it or legally giving them some way to sort of impact their investment beyond just what we think David’s a good guy.
Geoff Green: Yeah, go on David.
David Trewern: I was just going to say, their model at the time was very much about creating an ecosystem where multiple businesses, small businesses that were really driven by their founders could cooperate, work together, refer clients to each other and so forth with them having a stake. And they did have rights and the ability to take different courses of action, and over time, looking back they have taken more great a stake in companies, they’ve sold businesses back to the founders. At the end of the day it was all about, look if we’re all getting along and we’re all working well together then everyone wins. And the bigger the earnout check we can give you, the happier way out because we’re a publicly traded company and our multiple is greater than yours sort of thing.
David Trewern: So that was really part of their model was to really empower these 80 founders or management teams to really drive this organization and find synergies and if there were ever issues that sort of looked to resolve them in fairly straightforward ways. The sort of businesses and the scale that we’re talking about, as soon as it came to a contract [inaudible 00:23:21] dispute, then there’s a bigger problem which is probably not going to be solved. So that’s how I saw it both from as the buyer and also as a buyer when I was working at STW and also as the seller, there was a lot of trust involved and it was all about being part of a community where everybody would win if we’re all working together.
Geoff Green: Yeah, I agree with that David. It was very much a partnership style approach, because John I would have worked on a lot of transactions with shareholder agreements similar to the one David had with larger businesses that were just nightmares to deal with under very similar terms. But STW had very much a partnership type approach. And I think that in most cases worked out really well with the companies I invested in.
John Warrillow: I’ll just give you a very personal experience. We’re negotiating a new office space and we’re looking at the third floor of a building. And on the first and second floors of the building are a major bank, big bank. And so in the lease agreement that bank has with the owner of that property, they have the right to veto anyone who is going to go into third floor. So if a spa or tattoo parlor or whatever wants to go into the third floor, that bank can veto it. That’s the degree of control they’ve papered into a lease. They’re not buying the building, that’s a lease. They are litigious to a crazy point. I just find it fascinating that STW would sort of buy without control. But you know what, we probably [inaudible 00:24:56]. Let’s move on. I noticed that you started out as David Trewern design I think you said David.
David Trewern: That’s right.
John Warrillow: And then over time, it evolved to DT. Maybe talk about that evolution because there’s a lot of people listening to this right now whose names are on the door of their company, who can’t get a meeting without showing up, they can’t sell a product without them being the face of the company. So how do you evolve from, this is David and a few friends to a business that can get acquired?
David Trewern: Yeah, sure. So look again, initially it was me and my computer and a trestle table in a rented space and $5,000 on my credit card. And then I was a freelancer that was designing and building websites on my own at a young age. And I hired some stuff and we were fortunate because I was so early in the piece. I got the opportunity to create the first Mercedes Benz website in Australia which was a great first client. So then I had to hire some people to help me. It wasn’t just about the branding. The business changed from being David show and design to DT design to DT digital to DT. I think I had about six different business cards through that period, and the business kept on evolving.
David Trewern: And it wasn’t just about the brand, it was about the way that I interacted with the staff. And initially it was really all about me and that’s what we’re selling. We’re selling me being supported by some staff and I had to work really hard to switch that around and really to make myself redundant, and a funny story I’ve got a good friend who was a top sort of celebrity chef if you like in Australia. And he told me this great story about he would go off and create a new menu, and then he would teach the kitchen to cook the menu better than him. So you’re cooking the carrots, you’re cooking the steak, you’re doing the fish. And this is all you’re doing and you’ve got to be able to do it better than me.
David Trewern: And when they could actually cook the menu better than him, he’d start having a few nights off from the kitchen and going to the gym and go on some holidays and he’d come back and get inspired and create a new menu and start the process again. So it was it sort of process of making yourself redundant so that you can then add value to the business in different ways. So I got my head around that and really worked hard to kind of mentor the staff, let them make mistakes from time to time and learn and put them forward. And I decided particularly with the staff that were looking after clients, I want the client to call you because you’re going to be more responsive than me. If I’m going to get back to the [inaudible 00:27:35] faster than you, they’re always going to call me.
David Trewern: So I’ve going to work out themselves for that they’re going to get a better result by calling you because you’re going to do a better job at servicing than me. I had to shift my role to being a support case and who was then supporting my team as opposed to them supporting me. So that was the sort of big headspace change that I needed to make that then allowed me to change the brand, step back from the business and progressively keep stepping back to the point now where as of last month I was still the, well not executive chairman, but really working one day a month in the business, really just mentoring the CEO.
John Warrillow: So Geoff, from your perspective, how did you see David’s business evolve on this point?
Geoff Green: I guess I always saw David wanting to build a great business and a big business. So he was always really interested in scaling it. And right from the very early days, we talked about this concept of working on the business, not in the business. And I think that’s a concept David got his head around really early. He was also really good at getting other people around him to put a lot of the structure in place. And David’s wife Bethwyn I think played a huge role in the business early on to put in a lot of the systems, processes, procedures, and also a lot of the culture about the organization that helped it grow and scale. And I think the fact that David was always looking at, as he said, effectively making himself redundant was a really powerful element in the success of DT over many years. And that started very early on. And David and I discussed that a lot in a whole range of ways over many, many years.
John Warrillow: It’s unique for the creative business. I remember giving a speech to a group of graphic designers, there’s probably 100 graphic designers in the room, and I was up there saying, it was all about built to sell and how do you kind of make your business less dependent on you? And you’ve got to get systems in place, you got to make sure that it’s not dependent on you, you’ve got to get your name off the doorbell. And the color is draining of the eyes of the audience as they hear me say you’ve got to make your business like McDonald’s. And it was like anathema to who they are as creative people, right? They’re like, no, no, no, we’re all about creative, we’re all about design, we’re all about making things unique and everything’s custom. And I’m like, yeah, well you can be a designer or you can own a business that someone would want to buy. You pick.
David Trewern: Yeah, exactly.
John Warrillow: David in your case, where did that come from because for a lot of people in the creative business, that’s not natural for people.
David Trewern: Yeah. Look, it wasn’t natural for a lot of my contemporaries and my friends. I was a graphic designer to start with and I don’t know, I think I really enjoyed the process of designing a business and there’s actually, on a travel scholarship before I started the business in the states and there’s a guy that I met called [inaudible 00:30:34] Mark who started this business called studio architecture. He actually wrote a book called designing business. And it sort of really clicked to me that, okay, this is like a design project actually making this business so that it has the right structure, it’s sustainable, it can grow. It’s not dependent upon me. That’s actually a design project in it’s own right. So I suppose I sort of took that mindset and that became the focus of my, and a lot of it’s about taking your ego out of it I suppose.
David Trewern: There’s a lot of graphic designers who they become addicted to having their name on all the awards and it’s all about them. And like you say, you can’t have it both ways. You either build a structure that you’re supporting or it is all about you. But I think for me, I always got the most satisfaction from walking past the meeting room, seeing a group of my team in there with a client, solving problems, making things happen without me being in the room. And I would get such a kick out of that. It’s like, I’ve created this and this is happening now without me, which is actually for me an even greater achievement than me being the one in the room solving the problems. So that became the thing that fed my ego in a way was seeing this thing continue to grow without me needing to be the one growing it.
John Warrillow: Love it. And I think that’s a very interesting kind of pivot to how you get your ego gratification that we all need but in a different sort of way. Let’s jump fast forward to the, I guess it’s the third transaction with STW. 2007, I guess it started, it sounds like it was actually triggered by somebody, a competitor that wanted to buy the other half of the business or buy I guess the whole thing. Tell us about that.
David Trewern: Yeah, that’s right. Well I think what had happened was the market had sort of picked up a bit. 2007 we had another bit of a boom before the GFC came about. And there were a couple of other companies that had managed to float and list and now we’re talking out digital services and so forth. So there was a group that had just floated and they contacted me and said, you’re one of the top businesses in the country and what’s the equity structure? And do you think you could buy your equity back and sell it to us? And it made me sort of really thinking, well actually I don’t mind the idea of [inaudible 00:32:59]. I wonder what I could get and it’s been a long time now, I’m getting a bit burnt out.
David Trewern: And I went back and looked at our revenue and our growth and I realized that that a lot of, while STW being part of the group had definitely helped, had given us huge credibility and helped us grow, when I look at the actual revenue split, it was only probably five percent of our revenue was actually coming from the group. We were still generating all the new leads and styles through our own profile and through our own means so I called up the CEO of [inaudible 00:33:30], and I said, look, I just realized we’re not getting a huge amount of liberties from the group. We’ve kind of been blocked here and block there and different companies in the group are saying they don’t want to work with us because we are part of the group.
David Trewern: They liked the idea of working with people outside the group because it sounds a bit more interesting to their clients. And I’ve been offered this opportunity to buy the equity back and sell it. What are we going to do? And that started a conversation that said, well, you’re right, we do need to work out how to get more leverage out of this. We’ve just had two agencies merge so the CEO said to me, look we just had two of our biggest agencies in Melbourne are merging, they’re moving into a space together and they don’t really have any digital capability. So you could potentially move in with them, and if you did that then we might potentially look to buy more equity. And that’s how I sort of started the conversation.
John Warrillow: What was the other group offering in terms of a multiple of pretax profit?
David Trewern: I don’t think it even got to that point. They were literally just exploring and saying, could you do it? And I think I looked up and seen what they’d done in terms of what that offered other businesses because some of that was public information because they’re a public company. And it was interesting but look at the end of the day, that company ended up failing and a whole lot of companies that sold that business ended up in a whole world of pain. And STW was always the premium business to sell to and still is in Australia.
Geoff Green: John there’s perhaps another interesting perspective to add to this as well. If you go back to 2007, this was sort of the time when a lot of traditional advertising agencies were really started to struggle with their business model and you had all these new digital agencies like DT coming along, and a lot of the traditional agencies were having trouble working out how to get digital properly into their product mix and service mix and so on. And I think a really important part of STW taking out DT was them coming to the realization that digital really was the future and they really needed to ramp up their digital capacity very, very quickly. And David, you probably recall we spent probably a good six months or so on that strategy with STW and it was was really when the penny dropped at their end so they’re going, we really do need to do this and we actually have a great agency city here already, let’s buy the rest of it.
David Trewern: Definitely. That really unlocked a better multiple for me in the final transaction as well and much good in terms because the more we talked about it, the more that I realized, now we’re effectively putting together two very large agencies to create the largest ad agency in Melbourne. And it had really a five person digital team out of the 200 person agency. And we were chipping away and stealing revenue from companies like this every week. And that’s how we were growing. And I really switched into, I’m going to solve this problem for you guys. I remember doing a presentation back to the CEO at the time of STW and the company, they owned Ogilvy in Australia. Very big famous advertising agency right there in North America and Europe, and that’s effectively who we moved in with. The front screen on my slide presentation was, this is how we’re going to future proof Ogilvy.
David Trewern: So that was really what we were offering was we are going to future proof this agency that you’ve got, which is your prized asset by bringing all of these digital smarts and our kind of nimble, agile, high growth approach, we’re going to bring that to your key assets. So it’s not so much about buying our business for our profits, it’s about helping to strengthen your key assets. We’re talking with Jeff, I got that very early on and I was just they’re going, how can we make this great for Ogilvy? And so Jeff talks a lot in his book about thinking like a buyer and that’s really what we were doing was really completely focused on solving their problem.
Geoff Green: And I think the interesting thing about that David is, you were actually thinking beyond where they were in terms of what they [crosstalk 00:37:57].
David Trewern: Totally. I saw it very clearly that this agency that you’ve just paid a lot of money for different components of it, put it all together and I had a very bullish view that it’s going to be half its size in five years and we’re going to be three times our size and you need to do this. I don’t think they fully appreciated it to the level that I saw it, and has actually unfolded over the next few years. But they wanted to kind of hedge their bets and they started getting head around the fact that yeah, we really need to do this. So what was interesting was, it started off with me wanting to sell them a little bit more, like maybe another 20%. They came back and said, we want to buy the whole lot. If we’re going to do this, DT is going to become a key component of Ogilvy which is our core assets. So we actually will only do this if we can buy the whole lot.
David Trewern: We want to buy the full 51% which was unusual because they kind of had a rule of not buying companies out completely, you know? So in effect, I created my own complete exit plan by thinking like a buyer and solving their problem. Otherwise their preference would have been to keep me with 20% and keep me on differently. So that was the thing that really unlocked, and I had a lot of other people in the group since that have said to me, how did you do that? I want to sell my final 21%, how do I do that? And my advice to them is always, you’ve got to work out how to solve a really big problem for them, and then at the same time solve his succession problem because [inaudible 00:39:41] becoming part of Ogilvy at the time, that also solves the succession problem because there was a CEO of Ogilvy that could ultimately take over DT if I was ever going to leave.
John Warrillow: So when you say think like a buyer and solving this big problem, the big problem was they were jamming together two agencies in Melbourne to this tune of a couple hundred employees. So roughly what, 30 million in revenue?
David Trewern: Yeah, exactly.
John Warrillow: Okay. So they got a $30 million bet on this business in Melbourne, and sort of five people on digital. So a complete disaster relative to where the market was going. So you represented a way for them to basically ensure that $30 million investment?
David Trewern: Yeah, that’s right. And then this year DT will turn over 35 million, and the agency that we moved in will be turning over much, much less. So that really did hedge their bet and help solve that problem.
John Warrillow: So STW comes to you and say, okay, we want the whole thing. I sense that you sniffed out leverage and were able to get better terms. So they bought the first 50% for six times EBITDA, 70% upfront, 30% on the com. What did they offer you for the second tranche, the 50%?
David Trewern: I’m just trying to remember all the metrics, but I think the multiple increased by 25%. That wasn’t even anything that I pushed because I was sort of stuck in my head that, well the multiple is the multiple, and I think when they realized the potential of this, one of the exec let slip in one of the meetings that we’re buying digital businesses in Asia for 10 times impact. And then I think it ended up being nine times the impact. That sort of became the new multiple.
Geoff Green: Yeah. It was high single digits and the earnout was pretty favorable terms.
David Trewern: The earnout became on much more favorable terms than the previous transactions in the fact that the deposit increased. They pretty much said, look, we’re going to give you the whole deposit up front and you’ve got the unit in place as well. But I think looking back, I don’t think I fully realized the extent of the value that we could have created. The thing was to the DTs growth [inaudible 00:42:19] the store at that point. So I was also getting a bit nervous that while the future is digital, we kind of struggled for 12 months to keep growing, we’d sort of having some growing pains at that point. At one point I was happy just not David having to run an ad, I was happy to take the money because I was a bit burnt out and I just couldn’t really see how the business was going to keep growing even though I knew that it had a lot more potential than the agency sort of things that are there.
John Warrillow: You used an acronym that I’m not familiar with. You said NPAT. I don’t know what that is.
David Trewern: Sorry. I meant NPAT, Net Profit After Tax.
John Warrillow: Net Profit After Tax. Okay.
David Trewern: Which is closer to your sort of traditional company earnings for a public company.
John Warrillow: Public company. And what were they trading at at the time out of interest.
David Trewern: At one time they were trading in the 20s and I think at that point they’d come back to the probably 12 or 13, something like that. There was much less of a gap between what that were paying and what they were trading at. However what they were paying me was an earn out which is based upon an average of the next three years. So what that meant was if we kept on growing over the three years, I’d ended up with a business which would be worth on their books, let’s say it’s their multiple times our final year of profit where they had paid me for an average over the three. So there are always going to be in front on that respect if we grow.
John Warrillow: Right.
David Trewern: And then kept growing obviously after I exited as well.
John Warrillow: That’s called being a creative guy. So let me just talk directly to my listeners. When your buyer is trading at a higher multiple than they paying for you, it’s a creative meaning the moment they make the transaction, it increases their value as a company more than the price they paid for you being a creative. And another good way to get them to pay more, right Geoff?
Geoff Green: Absolutely.
John Warrillow: Were you going to add something else on that Geoff?
Geoff Green: No. I think it’s worth probably talking a little bit about how the earnout actually worked in practice, because I think one thing David did that was really important was he had a guy, Brian Vela, who’s been managing director of DT for a long time now, who David had worked up in that position for a long time. So once he sold the remaining part of DT, Brian was already in the MD role which really freed David up to play a very different role going forward and he wasn’t as responsible for the direct performance of DT the way a lot of sellers are when they actually do an earnout and I think it’s worth exploring that a little bit.
John Warrillow: Well, it sure is. And I’d also like to understand what proportion of your take was in the earnout. So let’s just do the number. So if you’re selling 50% of the business for nine to 10 times something in that neighborhood, net profit after tax, and so what proportion of that were they offering up front versus contingent on you hitting future goals?
David Trewern: Well, I was in the fortunate situation again because we were really solving this problem. Typically that will always pay a deposit and leave a bit off. So at that particular time they said, look, we can see this is going to work because I pushed back and said I want all the money up front. I don’t want to leave. I don’t want to wait three years to get some of the money. So then what they said was, okay, we’re going to give you 100% so we’re going to apply them multiple times this year’s profit or last year’s profit, I can’t remember what it was and we’re going to give you 100% of that as the deposit. So I was basically getting paid for the business as it was performing then and there upfront in 2007. And I think that was something like 2.5 million or something like that. And then what we’re going to do is we’re going to then top that up in the three years at the average from 2007 to 2010 times the multiple again minus the deposit.
David Trewern: I went into this thinking I’m happy I’ve got my two and a half million, that’s great. And not really hoping or expecting for a whole lot more. And then as things started to continue, we realized that we could actually unlock all this value from is Ogilvy partnership and from the group. And again, we tripled over that period. And so we went from I think three million dollars revenue to 10. So my final payment ended up being bigger than my first payment. The earnout payment ended up being about three million which is fantastic. So it was really a win win for everybody because at that point they had a much more valuable business, I got an in and out that I wasn’t really expecting. And most of the value in the wholesaling of the business came in that final burnout that was really kind of a bonus as far as I saw it at the time.
John Warrillow: Were you tempted at all to leave in 2007 after the $2.5 million check cleared?
David Trewern: No. I wasn’t ready to leave. I wanted to give it a good crack. I wanted to integrate the business. I wanted to take on this challenge of dealing with this merger. There are five or six people that I talked about that would be with the digital team within the agency. The other component which made it a bit complicated was that I effectively took those people over so they became tired of my team. Their P&L folded into my P&L and all this kind of leveraged to their performance as part of my unit as well. So I really wanted to make all that work. I was really enjoying myself at that time as well. I was a little bit burnt out and I was kind of focused on, great, in three years I’m going to have a big holiday and have a break and the pressure will be off. I was looking forward to that period at the start of that three years.
John Warrillow: Geoff from a legal perspective, did STW have any recourse if David had taken the check and run so to speak?
Geoff Green: He probably could have gone in if he wanted to. Probably the main leverage they would’ve had at that time was he was tied up with all the usual sort of restraints and so on, and they were gone for long periods of time. Yeah, noncompete. So David would have in practical terms, effectively been locked out of the industry for several years so that would’ve been a [inaudible 00:49:01]. But I think the thing that was really interesting about this, John is, as we all know most people have bad experiences through earnout processes. That’s the normal scenario. Because David had this quite interesting new role with STW and he got involved in a lot of their acquisitions, it was the opportunity to kind of reinvent himself working with a really interesting public company. So for him it was an ability to partially move onto something quite different. And I think David learned a huge amount working with STW over that period of time. So it’s quite unusual compared to most earnouts.
John Warrillow: So tell us about that process because David, you effectively became STWs in house corporate development person. You were on the hunt to buy agencies on behalf of STW, is that right?
David Trewern: Yeah, that’s right. My big motivation for selling which sounds funny, was I wanted three months off, and so when I got to the end of that 2010 in that period, I said to Brian who was the MD, okay, you are now in charge, I’m going on a three months around the world holiday with the family. When I come back, if things aren’t going well, I’ll have my job back and if things are going well, I’ll find something else to do and get out of the way and let you continue to grow and run the business. So I came back, that had a kind of terrible mark and they got things back on check. Things were going okay. So I then went to two days a week working for DT as the chairman and two days a week working for STW, and I became their first chief digital officer. So I had to then develop their digital growth strategy and that involved training the 3000 odd people across the group in digital and also bolstering the digital capability by doing acquisitions in a number of key areas, mobile, social media, search, et cetera.
David Trewern: I was working with the CIO, the CEO and the CFO and that became a really interesting period where I learned a lot. I was doing the road show and doing the results presentations and talking about the percentage of digital revenue in the group and the growth ratios of that and the acquisitions that I was doing. So it became very easy for me to find good acquisitions and to execute them because I was able to sit down with some of the best digital companies in the country that hadn’t yet been acquired and say, well, look, here’s my experience. It went really well. This is a great group and to really come of those conversations from both sides and I educate them on some of these things that I’ve learned and say look, if you really focus on bringing value to the group, you’ll be rewarded. I don’t come in this sort of defensive headspace of I’ve got to screw them down and get everything I can. It was really about make it work for them and it’ll work for you the way that these deals are structured.
John Warrillow: What did you look for in an acquisition?
David Trewern: What do I look for in an acquisition? We used to talk at STW which I really believed in as well about the, we had this criteria of four things. The first thing is the people. We’ve got to be able to work well with the people. This is a partnership. We’ve got to be able to all get along, go and have a beer, resolve issues, communicate well. So that was a number one priority. The second thing was we’ve got to be able to add value to the business that we’re acquiring. If they’re not going to become instantly more valuable by being part of the group then it doesn’t make sense to actually do the acquisition. So we’ve got to be able to add value to them. They’ve got to be able to add value to the group as well by bringing something new that we don’t currently have.
David Trewern: And the fourth criteria was the people again. Yeah, that’s got to be the right fit with the people. So a lot of it was around finding like minded and people who knew what they were getting themselves into who wasn’t just all about the highest dollar. We would often approach acquisitions and there are a couple of situations that I thought pretty hard on where companies are actually being offered a higher up front dollar value than we were prepared to offer but what I offering them was look, over the course of the next three years there’s more potential for you to earn more money with us because of this endowed structure.
David Trewern: If the other two criteria are true, if we can add value to your business more than the other potential acquires then you can add value to the group then the earnout structure will mean you get more dollars in the end, you know? So that was really what we were looking for was a good fit with the group and good people.
John Warrillow: What was the deal killer? What would an entrepreneur say in a meeting or in an email that would immediately turn you off?
David Trewern: I think it was any sense at all of, look the big risk for STW is succession. They’ll buy a business that’s Joe Blogs design and the day Joe Blogs gets his check, he walks out the door and all the staff follow him and that investment’s just going down the toilet. So I think it was any sense that that person didn’t see the big picture, wasn’t a team player and wasn’t motivated to see the business go on and succeed, following the transaction and following their earnout. We were looking for people that wanted to create something that continue to go on and grow and could see that by working together they could transition out but leave STW in a great position with a great company at the end of it. So that’s what we were looking for and any sign against that would have been the deal killer.
John Warrillow: And what was your role at this point Geoff as David moved into this new role?
Geoff Green: I guess my role was David’s being an advisor in a general sense in most of what he’s done in his business world. Depending on what David was doing in a particular point in time, we’d be connecting a lot or just touching base. So for me it was always how David was going and what he’s doing and then the next time he moved on to going into a business or leaving a business or building a business then we’d work with each other as we needed to build as much value as possible and make sure David was well looked after all the way through.
John Warrillow: What a fantastic story and clearly you guys have built a great partnership. David, is there any ask you have of our audience. Do you want them to go to a website, to download a white paper? What can people do to learn about you?
David Trewern: No, not at all. They can go check out dt.com.au. That’s my previous business, but look right now I’m living on the beach with my family and again I’ve been through another exit which was probably a bigger exit but in a different space that was compressed all in a two year period and now I’m sort of getting involved in a few different projects and investing in some different businesses over here and enjoying myself and the adventure continues. But no, there’s nothing. I’ve got nothing to sell.
John Warrillow: Well it makes your contribution to the community even greater. And Geoff to you, thank you for doing this. Thank you for suggesting David and adding your value. I know David read and referenced throughout your book, the Smart Business Exit so where can people get that Geoff if people are interested.
Geoff Green: Probably for your listeners, I’d suggest they go to Amazon, probably the easiest place.
John Warrillow: Okay, amazon.com.
Geoff Green: And it’s available.
John Warrillow: Yeah. The book is the Smart Business Exit and the author is Geoff Green, with a G. Geoff, G-E-O-F-F. Geoff, David, thank you so much for joining us.
Geoff Green: Pleasure.
David Trewern: Pleasure.