Merging, Buying & Selling An Agency : The 3Pipe Journey with Jim Hawker

Show Notes

Summary

Jim Hawker, co-founder of 3Pipe, shares his journey of starting and growing the agency over 20 years, including the challenges of mergers, acquisitions, and financial turmoil. He reflects on the evolution of marketing, the importance of strategic growth, and the lessons learned from navigating a significant financial crisis. The conversation culminates in his exit strategy and thoughts on the future of agency growth.

Takeaways

Started 3Pipe in April 2004, the same month as Facebook. The agency evolved from traditional PR to brand performance work. Merging with a paid media agency was a strategic move to enhance digital skills. Acquisitions were driven by the need to fill gaps in service offerings. Navigating financial turmoil was a significant challenge for the agency. The finance director's gambling addiction led to a major crisis. The sale to a technology consulting firm was a strategic decision. The earn-out period was extended due to COVID-19. Reflections on whether to have continued as a traditional PR agency. Understanding new channels kept Jim motivated in his marketing career.

 

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Creators & Guests

Host

Barnaby Cook

What is The Exit Plan: Mergers and Acquisitions for Creative Entrepreneurs?

The Exit Plan is for business owners that are interested in learning more about how to sell their business. Each episode Barnaby Cook interviews someone who has bought or sold a business - either a creative agency, or a production company. The conversation gets under the skin of why they wanted to sell, or were looking to acquire, how the deal was structured, how they agreed upon a valuation and what lessons they learnt along the way.

Cool, so yeah, if you could start by introducing yourself.

How far back do you want me to go?

Well, when did you first start up a business?

20 years ago.

Okay, and what was it?

Are we recording now?

this the thing?

We are.

Can we start by introducing, start by giving you your name?

Okay, my name is Jim Hawker.

I co-founded an agency called 3Pipe, which I exited in April this year.

Okay.

And so you founded that 20 years ago.

Yeah, so we started April 2004.

the same, I think, month that Mark Zuckerberg started Facebook.

Okay, very similar trajectory then.

similar.

But we don't have the stigma around us in the same way that perhaps Meta does.

So we've won on a few counts.

Good.

So how did you get into, how did you decide to start a business?

How did the setting up of that company come about?

Yeah, so I essentially started my career in PR and had worked predominantly agency side,
but also in-house as well.

And I just think I got to the point where Classic felt I could do it better than the
agency I was currently working for.

Plus, a very good friend of mine had started a business himself, not in PR or marketing,
but I'd been very close to that.

And I think it gave me a bit of confidence to actually consider it myself as well.

And I also had a really good business partner at the time and we had very complimentary
skills and we decided to give it a go.

how did you get your first client?

We were very, you know, like most businesses start very disorganized or on a whim.

We actually planned our business ridiculously in depth.

were, you know, probably six months or so planning out what a business could look like.

We actually even wrote a business plan, which is quite unusual.

But also spend a lot of time thinking about the kind of clients we wanted to work with,
who was in our network and who we could persuade to give us a go.

And so, yeah, it was reaching out to friendly faces that were willing to take a risk on us
having worked with us before.

And we're very grateful, been ever grateful ever since.

And, and so, I mean, I guess 20 years is a long time, but can you give me a sort of potted
history of how the company grew?

Sure.

yeah, the business today is very different from the business I started.

So it was originally a very, I guess, a traditional PR agency that started in 2004, got to
about 2012, got it to about, I don't know, 30, 40 people.

And at that point, the business changed quite dramatically because we decided to merge it
with a paid media agency.

to bring in more analytical data skills into the team.

And then we acquired an SEO agency and acquired a creative agency, started building out
various teams internally.

And then we sold it to a technology consulting firm back in 2019, at which point we were
about six million income, 70 odd people, and doing much more, I would say brand

performance work than traditional PR.

Okay, so I'd quite like to take those one at a time because they're all quite, will sound
quite interesting.

So, so the merger came first, it?

How did that come about?

Well, it was around the time, and this is going back some way, that Google started
changing its algorithm and the way that brands were surfacing in search.

So they had things like Panda and Penguin updates, where they were trying to crack down on
bad link building activity.

And essentially, it became quite apparent to me that we as a business

needed to change and evolve in the same way that Google was changing search.

And I felt, always felt that we were always doing great work, winning lots of awards, but
I wanted to really upskill ourselves digitally.

And the way I could really see us doing that was to bring in a different type of person
into the agency.

So we were already working with an agency called Blowfish on two or three other clients by
chance.

And clients were asking us to increasingly work together with the content we were
creating, but they were trying to distribute it in a much more, I guess, more of a

data-led way than we were doing.

So I proactively approached the owner of that agency and we decided to throw it in
together.

So how does that, okay, because this is something that lot of agency founders kind of
think of, I think, and they kind of go, wouldn't it be great if we could merge with

someone else?

in practice, how does that work?

And I guess, starting off with like from a legal perspective, how did you go about kind of
valuing both agencies setting up a holding company and taking equivalent amounts of equity

in that?

Or how did you go about putting the deal together?

Yeah, I mean, I guess it was quite clean in many ways because we were both independently
owned.

We were both founder led and actually we were slightly different sizes, but from a value
perspective, it was very similar enough to make us believe that we could actually just

merge them in and value the businesses at the same valuation essentially.

So I guess it was quite fortuitous in that way.

and made it a lot simpler.

Also, think both of us have got to that stage where we'd both been running our businesses
for seven or eight years.

I've done pretty well, but felt that actually there was more we could be doing.

Market was changing around us and there was a real willingness to, I guess, not rip
everything up and start again, but do things bit differently.

Yeah, so there was a willingness on both sides to make it happen.

We got it done pretty quickly.

And because clients were also positive about it, and we shared some clients, it happened
quite quickly and we quite cleanly as well.

So how many, you said you had a business partner as well.

Did you end up, did the other business have two founders as well?

And how many people sort of ended up in the, in the holding company running?

and the agency we merged with had one founder.

So and the total entity became probably about 55 people or so from what I remember.

So that was back in 2012.

So yeah, it was interesting.

we created a new, we merged into their business essentially.

And yeah, the shareholding structure.

changed it, changed, and the equity positions aligned based on the valuations of the
business.

So essentially I was one of two founders, but then my shareholding reduced.

But my view was always on the long term, that it's better if you have a smaller part of
something bigger than a bigger part of something smaller, and be on a, I guess, bigger

growth trajectory as well.

Okay.

So did all three of you then have kind of equal voting rights or like how did you set up
how the business was going to be managed after the merger had gone through?

Yeah, so we had, when we first started the business, we had a shareholder agreement and
that updated when we merged the two businesses.

So there were all sorts of levers and agreements about how decisions would be made within
that shareholders agreement.

I'm actually advising a business at the moment doesn't have a shareholders agreement,
which is a big problem.

But yeah, we did have one.

So we sort of

thought about every eventuality and how we would make those decisions.

So that made life a bit easier moving forwards.

And how did it work integrating the two cultures and how was it for your employees?

It was hard, I would say, because we were bringing together, I would say, two very
different types of people.

But that's what modern marketing requires.

we were doing this a while ago, but yeah, we learned a huge amount of lessons about how to
integrate agencies.

And we'll probably come on and talk about how we did that another two or three times after
that.

But yeah, it was...

what we were doing is bringing together quite analytical people together with quite
creative people and trying to get them to work together.

And that wasn't always easy and we made a lot of mistakes along the way.

But I think what has been born out over the last 10, 15 years or so is that marketing is
having to bring together, you know,

brand and data together and understand how to best collaborate.

And I think that's what we were trying to do under our own one roof back in 2012.

yeah, I think that's always the juggle and I see agencies still trying to grasp that
nettle as well today.

Well, it's interesting actually.

I'm working on a deal at the moment to buy a digital business, which has developers in it,
which is quite different to the type of employees that I've got in other companies in the

group.

So I'd be interested to know how, what you did, what kind of, have you got any tips for
how you integrate the, you know, those two, you know, I'm sure they're all people at end

of the day, but do you know, yeah, there's the sort of slightly different approaches.

Yeah, I think you could have a whole separate podcast on that one, to be honest.

I think you need really good people in the business that understand the benefits of
aligning.

And I think there are potentially when we first came together, there were people that were
quite suspicious of why we were doing it, what was the purpose of it, because both

agencies were growing quite strongly.

And all of a sudden we were sort of being quite disruptive, I think, in terms of trying to
ask people to work in different ways.

And I think we were too, in hindsight, were too, we were putting too much pressure on
people to work together straight away.

And actually the best, the best advice I'd give was to let things happen organically to
some extent.

And actually the main, the main reason why you're doing it is for, is to, is to bring
better work to the client.

And when the client is accepting and

wants you to integrate, think your team see it as well and figure out how to do it.

And a lot of it was actually just letting people figure out what is the best way of coming
together.

And what you tend to get is sponsors on each side that see the value of it and actually
are really passionate and enthusiastic about it.

And I think that's what kind of happened in the way you got these internal advocates that
saw the value of it and also almost did our job in the way of integrating it organically.

That's interesting.

So tell me a bit about the acquisitions that you then ended up doing.

How come you kind of pursued that as a sort of strategic way of growing the business?

Was it the fact that you'd done this merger and it had gone pretty well?

I think what it revealed was where there were more gaps perhaps in our offer.

And we were working with some bigger brands and marketing can often be quite siloed.

And so we were being asked to work with other agencies where we didn't have those
particular offerings.

And I guess it became a bit in a way sort of filling the gaps really.

So the obvious gap, not necessarily that obvious, but between what we were done with the
previous merger was there was a big gap in SEO.

We were doing a lot of PPC work and so SEO and PPC obviously, well not obviously, but they
do work very strategically together.

We were also doing a lot of content marketing and so having an SEO wrapper around that was
really helpful.

And again, we will...

we identified another agency where we had shared clients, where there was a smaller SEO
agency of about 10, 11 people that again made sense for us to have a conversation about

folding them into what we were doing.

And again, because we're sharing clients, we almost had permission to do that from day
one, from both them and also from the teams, because we were also collaborating.

And we also had a chance to see them up close and understand that actually they were
really good at the work they were doing.

And we would see the commercial benefit from bringing them into the agency.

So yeah, the next acquisition we did was, and again, was from an equity perspective.

So it was mostly time and legal fees, bringing in an SAO agency.

Okay.

And the founders of that agency, like how did you kind of go about approaching them and I
guess giving them the overview of the, you know, the benefits of joining the group and you

know, did they give up a hundred percent of their, their company for equity in the, in the
larger group?

How did that all work?

Yeah, so I think by this time we decided that we were on a buy and build strategy to exit.

That was this overarching plan.

So I remember when I approached the SEO agency, the vision was, talk in with us, you'll
get a higher multiple than if you were to crack on yourselves and you'll get there

quicker.

Yeah, they folded fully into the agency with an equity position based on an evaluation of
what they had at that time.

Was that, how easy was that?

And the reason I ask is I've been going out looking for businesses to buy quite a bit over
the last few years.

And I've found quite a lot of founders are very protective over what they've built.

And even though they can get excited by the opportunities of joining a larger group,
actually, when it comes down to it, it's a big step.

It's a big decision to make to say, I'm going to seed

control on the basis of potential future earnings, which may or may not materialize.

Yeah, I'll say I've got good persuasive skills, perhaps.

But yeah, I can see that.

I think it also depends on the state of the business, the age of the owner, their own
growth cycle, where they are in their lifetime, and also what's going on in the market at

any one time.

I think today would probably be a different conversation from the one we were having.

perhaps in 2014, 2015, whenever it was, because of the tax environment.

People are looking for slightly different exits than perhaps they were seven years ago.

So I think there's multiple reasons why people would and wouldn't consider doing something
like that.

I think because we had gone through a successful piece of &A ourselves, I think it also
gave them a bit of confidence.

and the fact we were quite aligned in terms of client portfolio and the kind of work we
were doing, they could also see the advantages of us working more strategically together.

It wasn't a cold relationship.

And at that point, was there a plan for an exit for the larger group?

And how well-defined was that?

It was pretty defined.

think this was a big motivation for making all this happen and going through the pain of
making it happen as well.

And I think we were pretty upfront and honest about that.

We also went on to acquire another agency as well.

And it was a similar sort of sales pitch, really.

And, you know, again, it was someone we were already working with.

We'd identified a gap.

in our, well, we were doing, we actually were then wanting to acquire a creative agency.

But we were working with a number of joint clients again.

And maybe we just got lucky, I guess, in terms of having a lineup of agencies that we were
sort of collaborating with quite closely, all led by entrepreneurial founders that could

see the value in coming together.

OK, so.

Was I gonna, I had a question, it's gone now.

Sorry.

Yes, so in terms of the sort of equity of the larger group then, you ended up with quite a
few different shareholders, I guess, all of these former founders.

Yeah, yeah, the equity positions changed every time we did a piece of &A.

One of the founders that I originally started my agency with had left the business by this
point.

So some of the equity that was returned was used to acquire one of the actually the SEO
agency.

But yeah, our holdings changed as we did the &A.

But again, it was always with the view that we were building something bigger and that it
would be worth it in the end.

And how did you go about combining sort of back office functions with all of these
businesses?

Like which bits were you able to consolidate?

Yeah, mean, so we, everyone moved into the same offices.

So there was some shared sort of overhead there or stripping out some overhead from the
other businesses.

And yeah, we put a centralized team of, know, PA and front of office, back office
together.

And obviously, yeah, there were cost savings involved in that.

There were no cost savings in terms of, you know, redundancies, you know, because everyone
was doing complementary services.

So every agency had its own clients as well as shared clients.

So they came with revenue from day one.

So the whole point of it was not a sort of cost saving exercise.

It was actually an income growth exercise with clients from day one.

So there weren't a huge amount of efficiencies to strip out.

They were all being run fairly well.

There wasn't a lot of fat in the businesses.

So it was more about, this is a strategic operation we're going through to drive more
growth and we've got the right people in the business to do it.

And you had a story about your finance director and the finance function.

Can you tell me a bit about that?

Yeah, so I guess, yeah, this, I haven't really spoken much about it before, but yeah, we
were, you know, when we were actually talking to someone about potentially selling to

another company and they started doing some due diligence, it was revealed that we did
have a bit of a black hole in our business.

And I think what happened when we

When we went through a lot of change as an agency, the business kind of outgrew some of
the back ends that we had in terms of the support.

And the finance team was one of those things.

And we ended up in a situation where our existing finance director turned out to have a
gambling addiction.

And it was revealed that a lot of money was being siphoned off.

So it was a tough time for everybody.

The first that I realized we had an issue was when I was sat in a cafe and I had a flood
of emails into my inbox offering to represent me in the High Court against HMRC.

And I got the first one, I thought it was some sort of, you know, bit of spam or
something.

And then after the third or fourth, I realized potentially there's a problem here.

And it turned out we hadn't paid HMRC bill, even though we'd been told we had.

And then so, RFD turned out to be a problem.

And the business, it was apparent, was just weeks away from going under through

goodness.

cashflow challenges.

So our bank accounts were frozen.

We couldn't pay anything out.

We could only pay in.

The founders at that time had to remortgage our homes to keep the business afloat, to pay
staff salaries.

So the business we'd been running for 12 years at that time was about to be stripped away.

And then we spent...

probably a year, 18 months building up the business again from scratch.

We made no redundancies, unbelievably, and then went on a huge growth boom and built up
enough cash reserves to actually get the business back into the state it needed to be in.

But we had to invoice factor our way out of a big problem.

We were about to do a

deal to sell the business which we had to pull back from at that time and it was a huge
amount of stress.

The finance director sued us for constructive dismissal at that time.

Excuse me?

Yeah, until we figured out what the hell was going on and went to the police.

Yeah.

We went to the police, handed it all over to the police.

And after a lot of not guilty pleas, it went all the way to the high court, the Crown
Court, sorry.

And then went through a trial.

And by this time, we'd built the business up and had grown it to

decent level and the company that acquired us were actually waiting on whether it was a
guilty or not guilty verdict in the court before signing all the paperwork.

So it was an incredibly stressful time.

He was found guilty and got seven years.

seven years.

Wow.

I mean, we, at my previous production company, we had a similar story, but on a smaller
scale, we had a producer that was using company credit cards to do all sorts of things,

essentially furnish her flat and book nice trips away for her and her partner.

And yeah, I racked up about £50,000 worth of

unauthorized expenses.

And yeah, by the point where that we found out the sort of amount was so much that same
thing we had to have to go to the police.

She did actually plead guilty just before just before it went to trial.

So didn't actually actually have to appear in court.

And she got suspended sentence.

But yes, it sounds like the the the quantity the levels the levels of embezzlement and the
amount of stress

was quite something.

Yeah, it was horrific.

Yeah, it was also very sad as well because I'd considered him a friend.

And so there was all that emotional turmoil sort of to deal with.

But yeah, I mean...

the motivation as well, isn't it?

why?

Why?

Well, you know, I've learned a lot more about addiction, obviously, since then.

And, you know, it's quite common, unfortunately.

You know, you do see, I'm probably more alert to it now when I see it in the media.

But, you know, unfortunately, gambling is an addiction and it can ruin lives as well as
ruin businesses.

We were very fortunate that we had

I guess we had a really good management team that were able to pick ourselves up and go
again and with minimal disruption to the clients, to the business, to the staff.

And we hid a lot of it from people and we were just able to work our way out of it again
and get to a good place where we could have the right people in the business running the

business and get to a size where

you know, we could get it clean and exit in a good way.

But yeah, it was, it tested all our reserves, I think, in terms of entrepreneurial flair,
in like, how would you bounce back from something like that and not get drowned in it.

Yeah.

And presumably it dragged on for quite a long time as well.

I mean, if it was going through various, various courts and then to a trial must have been
a couple of years.

Yeah, it did.

took a couple of years.

And it was stressful, stressful on the family, stressful on relationships.

But we didn't lose faith in the business itself.

The business was a good business.

We just had a person that tried to ruin it.

But I didn't celebrate the guilty verdict.

It wasn't something to be happy about.

It was just all very sad, really.

I, you know, I, as I said, this person was a friend and, you know, it is, it is an illness
and, you know, so, you know, you have to be positive and look forward.

But yeah, we were a somehow able to keep going and, and flourish despite.

having a massive curve ball thrown at us.

Yeah.

So how did the, who was the eventual buyer?

How did that come about?

Did you, how did you find, did you go to market or did they approach you?

Yeah, so we decided to go to market.

We appointed a broker.

It was pretty organized process.

We'd always had interest, but decided to sort of formalize the process.

And in the end, we ended up selling to a company we'd actually hadn't heard of before.

And I think that's probably the reason why you do go to a broker, because you should never
sell to the first person that comes along and wants to buy you.

someone in your network, there's always going to be a strategic need from someone in the
world, why they might want to acquire your agency and your services.

So yeah, we ended up selling to a company called Reply, great business, great people, good
fit for us.

And we did that deal in 2019, six months before lockdown.

It was meant to be a three year earn out.

a traditional earn-out kind of model.

We ended up resetting after the first year because of COVID, which at the time we were
very grateful for because in that first year we kind of broke even and it probably would

have ruined our earn-out.

So at that time we were very grateful to have sold to what was a technology consulting
firm, which actually those kinds of firms did pretty well in the pandemic, whereas the

marketing services firms, which would have been a more traditional acquirer.

of our kind of agency, we were in all sorts of problems.

so strategically, we were very happy to have sold to a more of consult technology
consulting firm.

Well, you're the I've had quite a few people on this podcast to have had their earnouts
ruined by that COVID period, and did not have understanding by us who were willing to

renegotiate or push it back a year.

So I'm glad that they made a sort of a practical and sensible decision there.

Yeah, I I remember feeling very grateful we hadn't sold to an Omnicom or a WPP or, you
know, we were, because they were doing very well.

They were almost like a safe harbor for us at that time.

And actually we did well to break even in that first year really.

Cause we were exposed to a lot of retail clients.

In fact, our client base going into the earn out was almost completely different from the
one when we came out just because of

the way we had to pivot to new sectors and how we organically picked up clients or lost
clients because of the changing retail landscape or consumer spends.

What was the revenue at the point where you sold and how did you sort go about valuing the
group?

So we were doing about six million income when we sold.

So the valuation was a sort of typical sort of multiple on an average net profit.

There was quite a complex formula dreamt up in terms of the earn out, which was a mix of
top line and bottom line with different

levers at different income levels.

So it was quite hard to track actually how we were doing based on the performance.

yeah, think it ended up being a four year earn out because of COVID.

And it probably took us a year to get ready for selling the business anyway.

When you look at the stretch, it's quite a long stretch in terms of that traditional kind
of earn out model where you're talking, in our case, probably five years really in terms

of prepping and then going through it and then finishing up as well.

So people might think, it's just a three year earn out, but actually ends up being like
five by the time you end up going through it properly.

it's quite interesting now with, you

Most conversations I have with other agency owners is all about EOTs, which is relatively
quick, right?

You can do that within sort of six months to a year, which I think for a lot of people is
more appealing.

I think especially for smaller businesses as well, there aren't necessarily, where there
isn't necessarily of a scale where it's kind of stable enough to be of interest to other

buyers.

But also that EOT thing is very tax efficient for founders, isn't it?

Yeah.

How did the, how did the integration go with, with Reply?

It was, you know, they were a very big company.

I think when we sold to them, they were like 8,000 people.

you know, I think by the end, because they're very acquisition hungry themselves, I think
by the time we left, they were like 15,000 people.

And so for us, it was quite a big change.

You know, I think, you know, I think you have to adjust from, you know, personally, I
think my ego took a bashing from being like, you know,

considered myself quite important to all of a sudden becoming not that important when you
look at a business of that sort of scale and how you fit in and the kind of time you're

given.

I guess like anything, the success of the integration was dependent on your relationship
with people internally and how much you were willing to really integrate.

Because actually,

you know, and between the, with the management team that we had, we ended up dividing and
conquering really.

So I spent most of my time more outwardly focused on trying to grow ourselves.

And one person in particular on our management team spent more time internally mining the
opportunities.

So I think we did pretty well really.

But we were very much focused on taking control ourselves externally.

as well as integrating internally.

And I think in the end, that was the best thing to do.

And have you now you finished your run out?

you now left the business?

Yeah, so of the four founders, two have remained and two have, I've left and one is
leaving.

So I exited in April this year and the business is now still being run by two of the
original founders today within the bigger business.

But yeah, I left.

April this year.

and what have you been doing since?

So I pretty much realized quite quickly that I can only work with founders, let's say,
founder-led businesses.

So I'm doing a mix of agency advisory work, mostly around growth, planning.

Though what I've realized is that I'm fast becoming a therapist for other founders.

But yeah, I'm working with a creative agency, an e-comm agency.

just a few different types of agency.

And then I'm working directly with a number of brands.

I'm working more as a sort of fractional CMO for a couple of founder led brands directly.

interesting.

So looking back on your time, I you've been on both sides of the &A table.

Is there anything you would have done differently?

Yeah, I've often looked back and, you know, our strategy for growth was through &A, which
was, you know, quite disruptive in many ways and hard to integrate people and different

services.

And I often wonder, would I have been better off just carrying on doing what I was doing
and actually just growing what was a quite traditional PR agency without adding lots of

more performance channels?

to the business.

That's something I'll never know.

But for me, I personally feel my professional development would never have been the same
if I just carried on doing what I was doing.

And so I don't regret doing what I was doing because I've upskilled myself massively.

And it's enabled me today to be a more rounded marketeer.

and working with the kind of brands I'm working with and the relationships I have and
understanding of different channels.

But I'll never know whether I could have got there quicker just by carrying on doing what
I was doing, but in growing the PR agency because, but personally, I probably wouldn't

have found it as motivating or as interesting.

Despite all the challenges we've spoken about, they've all been professionally.

A good thing for me to do and I personally have been motivated and it's kept me interested
in marketing by understanding new channels and new people and new ways of doing stuff.

But would I have got there quicker just by doing what I was doing?

That's always the thing.

I think about when I'm in the shower.

No.

And on that note, what a place to wind it up.

Well, yeah, thank you very much.

Thanks for your time for coming on telling us your story.

And yeah, good luck with the next chapter.

Cheers.