Episode #163 – Dan Fagella On How To Structure A Business So One Day You Can Cash Out On Your Terms.

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David Allan: Hey, everybody it’s another edition of The podcast. I’m David Allan and we have a guy who was on the show recently you can go back and listen to this was number sixty two. His name is Dan Fagella. I hope I’m pronouncing that correctly and that is a very interesting individual when I went back in the past podcast went try to learn about that and a little bit. He’s into some really diverse things, really interesting things. You’ll go back and listen to the martial arts business he built up but eventually sold he used email marketing a very clever way. And today we’re going to talk about primarily two things we’re going to talk about how you build up a company so that it’s saleable. Build it up with direct response. We’re going to get into some AI and sort of you know how tech in our world is sort of you know becoming overwhelmed with tech and where’s where’s that going and where marketing and tech meet and dance and you know a lot about that so we’re going to just jump right in. Dan how are you doing.

Dan Fagella: Great. Glad to be here man.

David Allan: Yeah it’s exciting because we don’t get to delve into some of these weirder topics and sort of you know on a daily basis so I was going to say I can mention artificial intelligence and learning is not exactly the regular par for the course but there is a lot of overlap with marketing so that will be fun.

Dan Fagella: Awesome.

David Allan: Well maybe start off with like where we left off because I kind of feel like it’s like a Star Wars sequel or something kind of is I guess.

Dan Fagella: Was it 2014 when John had me. I think so. OK. So then that was I think by that point maybe we were doing like 40 or 60 grand a month selling kind of martial arts and Brazilian Jiu Jitsu educational programs online and a lot of know marketing. And what we ended up doing was broadening that business day out to the general kind of self-defense self-protection market which is much larger than let’s say the martial arts crowd which is kind of a singularly small niche the number of people that actively trained martial arts versus the number of folks with a general interest in self-protection

right is vastly different. The martial arts folks are a lot more engaged pound for pound. But there’s just not enough of them to build a multi-million dollar company. So in order to get to I think at the end of last year was like 2.2 or 2.3 million bucks at the end of 2016 in terms of total topline revenue. In order to get there. We have to broaden out to our self-defense self-projection ended up selling a lot of physical products so on DVD sets folding knives things like that and then just sold the company in in February for a hair over a million bucks. Nice.

And how many partners did you have a partner.

No no nothing new with the sole the sole owner I had one full time employee one part time wake up a contractor so I definitely made sure that some of my right hand men who were there with me from the from the early days were were kind of given their fair award for sticking with you know crazy. Through all our you know three or four years of so-but. So I made it worth their while for sure because I had a great team. I was really proud of it and there were no partners. It was really just me as the owner and luckily we were able to get a deal with 90 percent cash down to facilitate kind of the Silicon Valley venture and fund that up so I can move some nice Yalof.

We just had in fact that just got released this morning of this recording actually by the name of Justin Gough and it was a was a supplement on a result from the business part on a supplement business and he talked a lot about you know people can go and listen to what but he talked about how you know he could scale it up to a certain level with that sort of what you’re talking about with that certain small number of employees. And that’s why he ended up bringing out partners was to facilitate really the structure infrastructure and so forth. He was good the copy of the marketing and all the other books but it was the rest of the stuff he wasn’t good at managing people and so forth and so they ended up scaling you up from like one and a half billion to like 23 million

before he sold it in like two weeks ago.

That’s excellent so got the office. He’s he’s out now.

He is unemployed and unemployable as you said.

Fantastic work. That’s excellent. I feel the same way a lot of the time.

Yeah. Do you do you. So did you sort of encounter that like once you got to a certain level. Did you feel like it would take a massive sort of shift to get to the next level or honey to help them.

You know I mean I actually feel fine about managing people. And that was my second business and it was the second business I’ve sold. So I in that business. To be clear was started four years ago explicitly for the purpose of funding what I’m doing now which is market research and media and the artificial intelligence base so I build that company to be kind of a sacrificial lamb of more cash for a much larger endeavor that I was planning so I never planned on science. Still to be honest Abe I thought I would get a a million bucks top line sell it and move on.

But as it turns out the SBA and the banks that are going to get these deals closed and you know send a 900 grand wire transfer your bank account as it turns out those banks they want to see three years tax returns so mad that I had to cut to spend half my time doing artificial intelligence TED talks and writing and media and all that and then the other half my time selling stuff on the Internet. But so long as I was running it I decided we might as well kind of keep doubling it. So I would have had no issues personally expanding that team and continuing to grow that if it was my life purpose. But as it turns out my life purpose is not kind of artificial intelligence policy and technology stuff. So

yeah yeah. But yeah you’re right I mean you can. You can’t stay super clean for eternity. You can say Superleague for a certain amount of time and then and then you really do have to staff up.

Right. So when you made this decision to build a company to be the sacrificial lamb as you put it what sort of decisions went into that like. Now obviously it turned out to me to just hang on to a little bit longer than originally thought was but it sounds like one of the things you learn along the way that sort of made it easier or harder to turn it into what you want it for sure.

Well I mean you know we’re talking to a direct response crowd for this show I think Dave so I’ll speak to direct response kind of perspective here.

One of the really interesting facets and I didn’t know this going in but one of the really interesting facets about direct response businesses is that generally they don’t sell. So you can sell stuff and make money but you generally can’t get a substantial exit. Now even our exit you know if you look at the multiple net it wasn’t substantial. I mean it was definitely an outlier in terms of cash down and I decided to be that way and it was an outlier in terms of you know I haven’t had to lift a finger since I sold it because the agreement was you know you don’t really need me anymore. Here’s the proof. And if you buy it then you know I’m out of here. So is an

outlier in terms of hands off this cash now in terms of like a multiple It wasn’t what you get for a software company. These are things I didn’t really know. I’m going in the reasons for that date and these are really important for your market if they ever plan on cashing out. That is to say serve just fully right at the core collect your coins and just like drink on Burlet drink umbrella drinks or whatever you want to do. Right right. Like I know for me unfortunately it’s not umbrella drinks it’s paying exorbitant San Francisco rent and doing another large company. But you know if you want to drink umbrella drinks you know good. So if you do want to do that. The important considerations are that there’s a few things that keep these businesses from south and you see this

over and over in direct response. One of them is is that they are personality dependent personality dependent that is to say they’re tied around a guru or a person a person. So you know Billy Stephens the fitness guru creates an Internet marketing web site doesn’t really matter if Billy Stephen gets to get to two million dollars if every e-mail comes from Billy Stevens every video involves Billy Stevens every instagram post is from Billy Steven’s cell phone. Then Woodard. How are you going to sell like if you’re if your child gets some kind of crazy disease and you need hundreds of thousands of dollars right away. There is no exit plug for those businesses right. Like you just don’t

have an exit plan like you just kind of let it die. So a business that’s entirely predicated around an individual is a big problem. Now a lot of guys in the internet marketing business are square this circle is they come up with fake characters. So they come up with you know Jake O’Malley who becomes like the quote unquote guy that all the e-mails are coming from that can solve the problem a little bit. He gets into a second issue as to why these businesses often don’t sell. And the second issue is that there’s a lot of skeary stuff selling things on the Internet. And in the direct response world sleaziness is actually somewhat common.

So when I say squeamishness I mean like. Kind of overly exorbitant claims smarm you know completely fabricated stories for the sake of selling something or you know small print that’s so small that no one would ever find it. If they like to build that lake ends up killing people for things they didn’t sign up for and stuff like that. So those are facets. Right in addition to the fake guy like in the selling to the self-protection world you know three quarters of the people selling that space are sending from a character you know a guy by the name of like I’m Jeff Bridges and I you know they have like a

voice actor and they said look there’s nothing wrong with that. I’m not I’m not saying like you’re morally wrong I’m just saying if your audience doesn’t really know that that’s the case. Look I mean you can make money doing it. But what happens Dave is you take a business like that to market and a lot of people who look under the hood are going to be like I’m not going to run. You know what I mean like I’m I’m just not like a I’m not going to sit behind these cranks and turn them because like this makes me uncountable nobody can read that I’m not going to sell it. That’s not a real person. I’m not going to send is that guy. That’s not a real promise. I can’t do that. So in Internet marketing you can make a lot of money by

making really over the top claims. But what happens is if you ever try to sell that as soon as a prospective buyer looks under the hood they realize that your dollars are based entirely predicated on Tharp’s Dave. Right. So they’re predicated on. I use those words very very deliberately so on predicate it the business model is predicated on farce.

And so that’s another reason direct response businesses often don’t sell last reason I’ll give you Dave is that there really aren’t any strategic buyers or let me put it this way. It’s very rare for there to be strategic buyers. If you if you sell day for example I’m here in the San Francisco Bay Area and this is next.

This is a building to be quite different from the kind of recurring revenue business that I built to fund it. But if you if you build like let’s say on an El B2B file transfer software for you like some kind of niche type of file like on a 3-D CAD type model thing and you build some proprietary way of like condensing those files for life. We need to be transfer like within a tweet company or something. I’m just coming up with a random mix that shook act like you might be making. I don’t know a hundred grand profit per year but if there’s some huge company that makes you know 200 million $400 million per year in revenue and they deal

with a lot of those kind of files they may buy you for some exorbitant amount of money that doesn’t really reflect your profit because there’s that in your eyes your yield to them.

Dave is not just the money you’re going to bring into them. Your yield is the financial rewards that will be the result of merging with that other entity. Right so your value is bigger than your bottom line. In direct response it’s super unusual and super unlikely for there to be strategic acquirers on the even less likely than like really boring businesses like pizza chains like even pizza chains like it can be like that’s real estate that’s you know a differentiator OK arigato so on you know you’re building something that’s not that hard to replicate.

There’s no strategic buyers. A lot of it is predicated on a lot of it’s tied on personality. So basically in the process of selling what I had to do was kind of be the opposite of all those things. I guess if it’s helpful if you want I can talk about like you know a few of the Holy crap I needed to make sure to do this every day or does any of that. Got it. So. So one one of those aspects. David around the personality aspect was sort of twofold. Number one really not making myself critical to the marketing the messaging the content etc. but also doubly important. I’m not

making myself critical to the operations of the business. So one of the most important things that I did early on is whenever we determined kind of a particular distinct class of responsibilities in the business a process for the business let’s say customer service let’s say. Email internal email promotion management lets say external marketing spend our outside spend whether it be Facebook or email or whatever when we determine a process we would determine that the KPI is for that process that correlate most closely to profit and to growth. So we would say okay

of of this area would say its internal email promotions What are the numbers here that ultimately tie most to to profit into growth for the business if we can sort of put them in a nutshell try to come up with a handful. And what we ended up doing was distilling all the major business processes into a fistful of numbers that we could look at every single Monday. As team we would go soup to nuts read out a guy in India that would fill in all the data. Then on Monday we would go over all the numbers and the whole team would be able to kind of align their priorities calibrate their actions know what was working what was working. Take those corrective measures and sort of avoid big catastrophes

of customer service big catastrophes of delivery big catastrophes of marketing because we could see it was going well or not well right away so that that got to the point where I could be gone for a week. And we can make the same amount of money as to when I was actually there. So being able to get a pulse across the business is a big part of that. Does this depend on you as a person. QUESTION The answer to that question Dave has to be No. If you want to sell. Yes. So the dashboard is kind of one aspect happy to go into whatever else you think will be helpful.

No I think its a good place to start because that is what you’re saying is true. You look around at direct response companies and so that you just kind of I off I supposed to be sold because I don’t get acquired. Yeah because it’s just it’s completely different and maybe not little people have gone to lengths you have to sort of figure out how to either reverse that or or or begin to set things up.

What did you make that you know a realization sort of partway into it and sort of say oh wait a second or break because you started with the idea and so you sort of made sure all along.

It’s definitely definitely a combination of both. So good question I think I definitely began with the end in mind so I told myself I want to be lean I want to have high margins. I want to have consistent growth like I want to grow 100 percent plus every year I want to and I want to have recurring revenue. Right so I determined a whole bunch of things I knew I would need in order to get as good of a as good of a kind of exit as I could that I knew a lot of that going in. But there were a lot of things that I did have to learn the hard way about kind of management process systems.

You know what gets a buyer excited what doesn’t get a buyer excited all those different sort of sub facets and factors. I think when you mention how internet marketing business is kind of die away I mean I’ve actually talked to a lot of guys in this space who who have outright said stuff like yeah this isn’t really something we could ever sell like them. And these are guys making tech wake tens of millions of dollars right. So take tens of millions so I’m just going to like this particular case now. Naming Names like I don’t know 30 million. When we were actually having the conversation as asked isn’t the thing we’re going to sell. And that’s because of a full blown recognition of the dependence on personality and a full

blown recognition of like the grimy ness of the marketing material. Right right. Like full blown recognition like nobody’s going to touch us with a ten foot pole. We’re just going to make money while we can make it. And to me that’s that’s kind of like I get it I guess. Yeah but it’s a bit of a shame right I think it’s a reflection of kind of the short termism that often comes along with direct response.

And I think if people sort of if your goal is at some point unplug and then do what you want with your family your life etc. then I think I think you start off in the early days avoiding the things that I mentioned with which kind of will make you want saleable maybe speak to some things that get the buyers excited or cool them.

Obviously that’s one thing that gets buyers turned off.

Yeah yeah. So we talk about a lot of things that kind of you know harsh realities of of of the online marketing direct marketing kind of world on things that I think play to your favor in this particular regard. We talked about one being kind of metrics like really owning your metrics very clean data very consistent data that the entire team understands and looks over every week so that your head of marketing your customer service guy your merchant account guy all your different people know how well they’re doing they know who they need to help. They know what’s going how well and if you have a historical record of that for years. Dave that’s way more than

90 percent of businesses that sell people just don’t have good records. Another thing that’s super important and I think in any in the online marketing world. I think this is sort of less commonly the philosophy but for me I think it was critical for us getting a substantial exit is that although you might be cool and handy with your email marketing software although you might be cool and handy with your Google Analytics Although you might be cool and handy with you know some kind of video marketing platform or something you should be coolest and handiest with quick books

because at the end of the day in terms of getting a buyer excited so having a good broker helps a ton. By the way Dave I should mention that what you want if you want a broker who you you can get legit evidence that this person has sold many companies at your size potentially in a similar need share space if possible. So if you can find a broker who’s done that that’s going to help you and I did find it a great broker who had closed a lot of other seven figure deals and so he had kind of the confidence to do a deal a little bit over a million bucks and kind of get get the get everything wrapped up. But the the the fact that I think both is if when

you’re talking to buyers what’s going to happen is they’re going to be looking at the balance sheets are going to be looking at a piano else and they’re going to be saying hey what’s this. What happened here. What happened during these months. What does this represent Why do you spend less on advertising. You know what happened with payroll during this period. What happened here what happened there.

And if you don’t know that stuff. There’s two things that happen. Number one they get a little scared because anything that they don’t get a good answer to they start to feel is like a dark like evil element of the business that’s going to kind of lurk up and creep in and of like destroy them run.

And no. Number two they realize that you don’t have a legitimate ongoing pulse of money right and they’re buying you for money and they’re buying you to consistently make money. So the ability to to really own and understand your Quick Books look at your PNL understand your patterns. One thing that we had that I had to do Dave was I had a bookkeeping firm like a remote bookkeeping firm. They would update all the data every single week they would do it every Friday. And on Tuesday on Tuesday morning we would have a conversation for like 20 minutes to 40 minutes and I would just grill him with questions about all the patterns I was seeing.

And after a couple months of doing that it got to a point where I had I was not an accountant I am not an accountant but I had an accountant level kind of drain perspective on the constant ongoings of cash flow. I started getting deeper and deeper understanding of how to categorize different expenses to really tease out our opportunities for savings to tease out the difference between a profitable and unprofitable month to tease out the effects of marketing spend on other elements of the business just by consistently having those conversations and being able to speak with financial fluency to a buyer is extremely impressive because they want to know all

those leverages that are going to make money. They don’t care about your marketing metrics. If the bank account is getting smaller. So financial fluency just owning it for your own sake because it helps you sleep at night. Also again clean clean financial records so few businesses have been a major barrier to selling and financial fluidity about your own business make the buyer feel like me and this kid knows his stuff. And if we take his advice we’re going to bring in the stuff. The bottom line and printing out the bucks and maybe this is a good deal.

So having those skills locked in place is a very very very kind of conducive facet to a company and it’s going to actually sell.

Now when you sold your company and you seem to have said previously that you predicated on the fact that you were basically like your ego. I’m done. See you later. Was that a barrier to getting little.

Yes so definitely like we were not asking for a profit multiple That was you know completely out of this world. Like I forget what our total media was like 3x profit was like the sales price which is not an insane sales price.

It was not asking too much. It was definitely not a low sales price but. It was also not an exorbitantly high one. So we went kind of run of the mill for the price. But the two elements of the business of the transaction that were kind of a little bit tougher was that a you know I’m I’m not keeping a salary and sticking around and doing a lot of stuff.

And B you know we’re going to need 90 percent of this in cash in our bank wire. And those two things are kind of tough to stomach for a buyer. But what we did is we the broker did a really good job basically promoting the business as a high growth business with a lot of potential so we went from zero to well over 2 million bucks in about four years I think we should be on the INC 500 for 2016 numbers. And so we were able to kind of say hey look you know this is you know a little bit of a rocket ship for us for a small business year. We’ve got a lean team we’re doing really well. We’ve got great margins. We’ve got consistent growth. But you’re not even going to pay

you know a sky high margin for this thing. Here’s are a regular old fashioned sales price. But here’s the terms we’re going to need to get this regular old fashioned sales price for a business it’s actually pretty exciting. So we played up all the good stuff and then said You know we’re not going to ask you to pay a lot but we are going to need terms that allow the buyer or allow a seller that’s meet Andrew Jella to move right on and do his Silicon Valley thing so we’re going to need the dough upfront. One thing that was really important there they’ve got to drive this home for the night is that for the three months before the business was sold. My work hours were under 20 hours per week consistently. So I was

working of less than a part time person would work. I was there for far less than half the company meetings even even important planning meetings and metrics meetings and I of started to really seriously step away. So the buyers were under the impression hey this thing’s growing like a weed. It’s making money. And this guy is basically out in Silicon Valley interviewing you know AIG executives at Facebook while his company is over here making money we could probably step in and get this done. So kind of the context was we go a lot of good things going for us including I’m not very involved and those were the things that let the buyers say well under those terms.

OK. We’ll get you the money up front. So that kind of help push him over the edge.

Now was that a strategic idea or were you just busy doing what you wanted to do and that was a side benefit.

Toat totally both. I mean to be honest I mean I wish I was I wish I had been working on a full time this last four years instead of sort of part time. But I like kind of had to straddle both worlds because I didn’t want to give away half my company for you know a theory or whatever. So. So I kind of had to you know do a little bit of both so I really didn’t want to be moving on and doing the other stuff and that really was consuming a lot of my time but at the same time I also knew that my broker story would be all the more better and better and better. If I’m sitting here as a part time kind of director and we’re still doing 200 something grand a month in revenue that’s going to look good for the sale so it was a little bit for both

receipts.

So if people want to get in touch with you and they want to keep abreast of your upcoming project and where are you taking all this we’re coming get in touch.

Yeah man I think we’ll do that too. Sites are a place where I actually write about what we talked about today on the marketing side Dave is CLV boost dot.com is just basically my marketing blog I still send out an email every week blog where I actually I have one article in particular about kind of building systems to make up to make the business saleable that I think will be relevant I’ll email that to you. And then tech emergents is the market research firm in the AI space. As I mentioned before as well Dave we just finished up some pretty substantial kind of forward looking work as to where is I going to make marketing different in the next five years. How is marketing it changes the landscape. Who’s going to benefit who’s going

to flop. There’s way more insight than we were able to catch up on but that’s all tech emergents dotcom and I can I can find that link for as well. Those are probably relevant starting points if people want to hit me just you know ping me on Twitter or something and say what’s up tell me you heard about me through to the mic method here and we’ll we’ll just kind of rock n roll.

Oh that’s great. I think you’ve given a lot of good information today especially for people who are maybe in the throes.

Like my friend I mentioned earlier of starting a business and could really you know help them down the road because I know people are going to let you know serial entrepreneurs I know he’ll get sick a lot eventually so I you want to get out. It can be a good way to set it up from somebody can you make it. Yes. It makes it so jail time.

Yeah. I seriously hope that’s helpful for folks again keeping the stuff in mind earlier rather than later is a way better way to do it.

Yeah absolutely especially when guards to the financial records. Yeah totally big. Well thanks for coming on the show Dad. It’s just flown by. I mean you’ve given a lot of information for everyone else. Hopefully we’ll get someone as exciting as dad in the show next week because I think there’s a big world ahead of us and maybe lots of exciting things coming down the pipeline. So we’ll see him next week.