EVAN KRAUT

Evan Kraut: From Mr. Youth to Mr. Innovation

In this episode of Trunk Talks, we talk to the Managing Director of Grey Adventures, Evan Kraut, about his digital agency acquisition experience. Evan began his career on Wall Street at UBS before moving to MRY (f/ka Mr. Youth) to lead the business development team. During his tenure at MRY, Evan played a key role in landing marquee clients such as, Coca-Cola, Sony, L’Oreal and dozens of Fortune 100 clients. Evan currently spearheads Grey Adventures - a new unit within Grey Group - one of the world's largest global creative agencies under WPP - where he is responsible for client innovation, development of new intellectual property, and partnering with early stage companies

Discover in this episode

  • When to hire a CFO into the business
  • How owning intellectual property can affect the valuation of an agency
  • Understanding the dynamics of an earnout

Benefits of hiring a CFO

At the end of 2008, a private equity firm made an initial investment in MRY. The first order of business was the installation of a CFO. Up until this point, there was no one on the MRY Executive team with a strong financial background.

Evan notes that the hiring of the CFO immediately gave them the skills needed to institutionalize their business. With the CFO in place, the company began to forge more strategic relationships with their most valuable partners and pivoted away from a pay-per-project model. MRY immediately reduced the number of freelancers on staff - replacing these positions with permanent hires, who were more cost-effective and reliable. The CFO also provided guidance around appropriately allocating funds to various key growth initiatives. In short, the hiring of a CFO allowed MRY to scale their business efficiently, effectively, and profitably. 

While the nuances of when to hire a CFO are debatable, the benefits of having a true financial professional in your agency are undeniable.

Software vs Service

MRY along with many other agencies have developed custom software tools that they use to help service their clients. Many agencies believe this makes them more of a technology business rather than a services business. 

Evan discusses the software tool MRY created and how creating an internal software tool did not make them a technology company. The only way this technology adds to the valuation of the agency is if the tool has been productized and can be purchased and leveraged independent of the agency. Although Evan did concede that MRY’s internal software tool did add to their valuation.

If an agency does have valuable intellectual property such as a tool they have productized, then an agency can receive a higher valuation. This is done by using a sum of the parts valuation, were the services and technology businesses are valued independently then added together for a total valuation. 

These are important distinctions between a product and a tool for agency owners to keep in mind as they look to sell their business

The Long Haul of an Earnout

Evan discusses multiple items an agency owner should be aware of going into a sale. While a deal process can take anywhere from 6 to 12 months, once the deal’s signed, that’s when the hard work begins. A typical sale usually consists of an upfront payment and a 3 to 5 year earnout based on the earnings and growth of an agency. This means that a substantial portion of the value is staggered over multiple years.

It can be a long haul out of a 3 to 5 year earnout, and agency owners need to be thinking long-term. In order to recognize the full value of the deal, owners need to be focused on driving efficiencies and earning as well as growing revenue. This can be a tough decision as investing and fueling the growth of the business no longer take precedence. 

It is also important to align the incentives of the executive team, as the entire team needs to carry the company across the finish line. Sharing the wealth will help maximize the earnout for everyone. A greedy founder can take the whole upfront payment, but will have a really hard time getting the team on board to hit the earnout milestones over the next several years.

Lessons from Trunk

  • Most investors want their investment going towards the growth of business (very few investors want founders and owners to take money off the table).
  • Having a financial professional (more than a bookkeeper) within your organization will allow the business to grow and scale more efficiently and profitably. 
  • Buyers looking to acquire agencies care about both earnings and the growth of business (not just the amount of revenue).

 

This episode is sponsored by Julius, your influencer marketing software.

Julius is an influencer marketing platform that provides marketers with the data & campaign management tools required to organize a successful influencer marketing strategy

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