The Acquisition That Made Us Fall In Love With Agencies

The Acquisition That Made Us Fall In Love With Agencies

Ok so I’ve been harping on about agencies for a while now, and today I wanted to talk more about why.

I used to be in the “Eh..agencies are kind of meh” camp like many people.

But about a year ago at a leadership meeting, Onfolio COO Adam Trainor showed that out of the top 5 performing assets in our portfolio, 3 of them were agencies.

“Ah interesting, we better buy more.”

Not only did we decide to buy more, but we also leaned more into things like understanding how to grow them even more (see last week’s newsletter about that topic).

But let’s take a step back a bit about talk about one of the first agencies we acquired, Outreachmama.com.

This was our first agency acquisition, and also our first $1m+ acquisition.

(Sidenote: We have managed and operated Outreachmama since the acquisition, but it was bought with investor money)

We acquired it in late 2020, which means we have a solid amount of data.

Having good results for a few months is great, but having a 4 year period to evaluate is even better.

Plus, if you invest in our Agency SPV, you want to know that we’ve done this before…

Let’s talk some high level numbers then jump in with the details:

As you can see, for this one, the asset value hasn’t increased significantly, but the cash on cash annualized returns are 26%, which is a great achievement, especially over a long period.

What’s more, the asset has paid for itself already.

It’s easy to get 26% over a 12 month period, but we wanted to demonstrate that over a longer period it is still possible.

On top of that, OM had a rough 2022 but a strong 2023 (around 29.5% cash on cash returns) so we are expecting the cashflow and returns to increase be higher in 2024.

So what did we do with the business?

As you can guess, we initially just focused on a smooth transition between the seller and our team.

This kept us busy for most of 2021, because the back end ops were a mess (they often are for agencies).

There were two teams. One was pretty good, the other was not.

One team was sometimes deceiving clients by paying for links they told clients they earned organically. We had to cut that behaviour out and re-build the team.

The SEO industry has a bit of a reputation as being a cesspit.

We cleaned up the reputation and landed some venture-backed clients who have spent money with us almost every month since.

In the short term, it harmed the margins of the business because we had to improve the quality of links we were selling to clients.

In the longterm, it stabilized revenues, reduced client churn, increased word of mouth referrals, and lead to a more reliable business.

These days, Outreachmama throws off cash regardless of whether it’s having a great month or a poor month. I can’t think of a month where it produced less than $10k in profit, and most months it is above $20k.

Over time, we’ve also improved the team’s efficiency and as a result the margins.

A couple of weeks ago the CEO of Getmelinks (another portfolio company) was on a call with the CEO of Outreachmama, and found out how efficient and how cheaply Outreachmama’s team can acquire links for clients.

The GML CEO is now sending his team to Outreachmama to learn the processes, and we hope GML starts to enjoy better margins too.

(This is a tactic we will replicate in our agency SPV).

With this kind of reliability and efficiency, Outreachmama is now at a place where it can start putting more focus on marketing and sales, something it hasn’t maximised until now.

This should in turn produce even better financial results.

As I mentioned in my previous newsletter, we originally only focused on growing agencies by improving the operations, whereas now we also focus on improving the margins and creating economics that support a marketing budget.

Not A Straight Line

Now, it wasn’t all rosey with Outreachmama. We had staff leave, we promoted someone internally and it didn’t work out, we had some months where it felt like revenue was going backwards…

..but through all that, the investors never needed to put more cash into the businesses, there was no existential threat or fear, and the businesses and its team just kept on generating consistent cashflows, as evidenced by the numbers in the box above.

And this is why we like agencies.

They’re not all perfect and perhaps they can’t hit the same scale as a software business, but that’s not our strategy anyway.

Dom

P.S Later this week I’ll share some highlights about our most recent acquisition Revenuezen, which is currently enjoying some fantastic growth. Stay tuned for that one.