What is The Marketing Group? And is it a better bet than the big holding companies for small agencies looking to scale?

TMGThere has been a bit of noise in the market about a Singapore-based “agglomerate” called The Marketing Group. The firm has been hoovering up small agencies and promising an alternative to the holding company model co-founder Callum Laing says usually means ruin for the dreams of entrepreneurs.

TMG, which now has 19 companies in the group, floated in June. But there are murmurs in the market. Who are these companies it is acquiring? How come the valuation is so high? Why did the company float in Sweden? Who are the group’s founders? And does TMG offer business owners a genuinely better deal than the likes of WPP, Publicis Groupe or Omnicom? Mumbrella Asia’s editor Robin Hicks interviewed Laing at his office in Singapore.

Callum, there has been some skepticism in the market about The Marketing Group. What do you make of this?

I would be nervous of any company who came to us who wasn’t skeptical. We’re talking about entrepreneurs who’ve poured blood, sweat and years into their business.

The other reason for skepticism is that the history of M&A for small business is entrepreneurs getting shafted. You’d be hard pressed to find a single entrepreneur who doesn’t have someone in their network who’s sold a business and not been disappointed with the outcome, to the point that it’s almost accepted as normal.

You build a business. You sell it to a big company. They offer you X but you don’t get Y, because they’ve got no intention of paying you.

We’re battling against decades of abuse of entrepreneurs. Which is why we set this model up. Right at the DNA of what we do is for entrepreneurs to keep control.

The Marketing Group

A lot of the companies we talk to are run by ex-agency staff. Often they find the environments of the big networks to be pretty toxic. The big networks tend not to be about creativity, or helping the client. They tend to be all about the numbers.

If you’re a 20-person agency and no one will give you the funds to expand, how do you do that? If the only outcome is to get swallowed up by another faceless organisation, that’s a pretty unappealing outcome.

We offer a viable alternative [by bringing together lots of small agencies, who swap equity for a share in the company. As a whole, The Marketing Group offers clients a “360-degree solution” in a number of markets including New Zealand, Australia, Singapore, the UK and US].

You’ve said that the company offers a better alternative to holding companies for small agencies looking to get bigger, and can offer 360-degree solutions. How?

I’m nervous of using the term 360 as it’s a much abused term. What you find with small businesses already is that most of them have a network of trusted partners that they refer business to anyway.

In small businesses more than big businesses, relationships are really important with clients. So having those trusted partners who you can refer business to happens organically anyway. What we’re trying to do with The Marketing Group is to have those resources in different geographies so we can offer reliable services across the board.

Tell us about the process companies go through to join The Marketing Group. How does it work?

Increasingly, the process is that companies we’re introduced to are introduced by existing companies within the group. That’s because the criteria for joining TMG are that companies have to be debt free and profitable, doing at least S$500,000 (US$360,200) in profit.

Typically these companies are run by industry leaders who have been in the business for 15-20 years. One of the reasons we do that is a) they would have been through good and bad times, so have plenty of experience, and b) they know other people in the industry – who to trust, and who not to trust. So when they refer companies to us, it’s normally people they’ve known for a while, and have shared business contacts with. It’s like half of our due diligence is done. They’re not going to recommend a company into the group – their group – unless they trust them.

In terms of the process, we have preliminary discussions to find out more about them, to make sure they match the criteria and get a good sense of what their ambition is. We’re not positioning this as an exit for people who want to retire. This is a growth strategy. We’re looking for companies that are ambitious, and want to grow.

If they’re keen to get involved and see the opportunity, we have a due diligence team who meet with them. We try to make it as painless as possible, as we’d much rather they were running their company than ticking boxes. But we’re a Nasdaq listed company so we have to ensure they’re compliant. They also need approval from other members of the group – the founders can yay or nay a new entrant company.

Yourself and your partner Jeremy Harbour have been in this game of building businesses for some time. You’re both published authors and public speakers too. Why did you go into the marketing world?

Part of the reason that we created TMG is because we’ve both been through starting and building a business. We know very, very well the challenges that come with that. I think this model was designed first and foremost with entrepreneurs in mind; how do we help them level the playing field with the big companies and scale to the next level.

Jeremy Harbour

Image: Jeremyharbour.com

Then we had to design it from the top down to protect the value of shares, and make sure the shares grew as a group.

Image: CallumLaing.com

Image: CallumLaing.com

The Marketing Group floated in June. How has the stock been performing?

We’re up 300% since we listed on 8 June 2016 [TMG actually began trading a day later, on 9 June, due to a technical glitch; the company’s shares were mistakenly registered in Swedish kronor rather than Euros in the Nasdaq trading system]. We started trading at one Euro per share, and now we’re trading at just over three Euros. And in that time, we’re grown from four to 19 companies.

The Marketing Group's stock price from June 2016 to 1 November

The Marketing Group’s stock price from June to November 2016

When myself and Jeremy [Harbour] met with the original founding four back in May we were just pre-listing. Some wondered whether we’d deliver what we were promising. Others loved the idea but wanted to wait until we’d listed before they joined.

Now, as word spreads, we’re getting more and more companies that like the fact that they can keep control and get to be part of this bigger group.

At The Marketing Group IPO, the founders rang the bell so enthusiastically the rope broke.

Is the idea to get as many firms to join as possible?

It’s not necessarily quantity for the sake of quantity. We want quality companies. We want to work with good founding entrepreneurs that are doing interesting work. But yes, certainly every time we add a new company to the group it opens up an exponential new channel of opportunities for all the other companies.

With respect to those companies, they are hardly household names (see a list of them here). Why would joining them be an attractive proposition for other independents?

Singapore-based Black Marketing is part of TMG

Singapore-based Black Marketing is part of TMG

By definition, small independent agencies are not likely to be household names. All of the companies in the group are debt free, profitable and run by industry leaders in their field. Clients across the group include the biggest companies and brands in the world.

However, because the model is completely decentralised it doesn’t matter whether the companies in TMG are well known to the wider public or not (I would argue they are all well known in the niches they occupy). The model offers independents the chance to swap their private stock for public stock giving them immediate liquidity. It allows them to pitch for much bigger contracts because they are part of a $100m+ PLC not a small independent.

If they want to use that liquid stock to attract more senior staff or go on their own acquisition path to grow, they can. If they want to work with other companies in the group to joint pitch they can. But at the heart of the model is that each founder keeps full control and independence of their own business.

Why did The Marketing Group choose Sweden to float?

Liquidity. One of the biggest challenges business owners have is there is just no liquidity in a small business. One of the advantages that big businesses have is they have full liquidity of their stock; they can use stock to incentive senior staff to work for them, or to acquire new companies or talent. Liquidity was a primary driver for us, and the European Nasdaq, which is based in Stockholm, is one of the most liquid small markets in the world. We’ve seen huge trading volumes around our stock.

How do you assess the value of the companies you’ve acquired? A few businesses that have been contacted by your group have raised questions about the valuations placed on TMG companies.

We do it on a case by case basis. We work with a company called BizEquity [an online valuation firm], which has the largest data pool of company sales worldwide. We try and look for comparators within that data. When we go through the due diligence, we look at balance sheet, staffing levels, receivables, and make sure they are in fact debt free.

All of the founders need to be on market rate salaries. Once a company is in the group they continually need to earn shares every year based on the profit that they contribute. One way you could skew that is to do a Steve Jobs, pay yourself a dollar and show much bigger profit. Our founders can’t do that. They have to prove that they’re on market comparable salaries.

We’re never going to get into a battle with a company like WPP around valuations for a company, because they aren’t selling their businesses to us. They’re doing a share swap, and they keep full control over their company. We think that we offer a good valuation on day one. But more importantly we offer the opportunity to keep earning shares over and again in perpetuity, so they keep the asset that keeps generating profit for them.

One observer of The Marketing Group noted that at one point the company’s stock had shot up by 900%, trading at 92 times net profit. They said to Mumbrella, “why would anyone invest in something so obviously overvalued?” What’s your response to this? 

Part of that comment comes from not understanding the financials. The biggest we ever traded was 32 times net profit, certainly not over 90 times. The one thing we can’t control, and would never claim to, is the share price. What we can control is the fundamentals. We will continue to keep adding in good, debt-free profitable companies. The stock price will go up, as long as the fundamentals keep going up.

All the founders are in this for the longer term. The stock price is just one of the advantages of joining us. Even if the stock price had stayed exactly the same as it was on day one it would still offer each of the partner companies a lot of the advantages; they would still get the liquidity, partner companies, etc.

One of the rules of joining The Marketing Group is that companies cannot sell their shares for 12 months. How come?

They swap 100% of their private shares for public shares. The founder is locked up in those shares for 12 months, so they can’t sell their shares for that period. We are trying to attract founders and companies that buy in to the long term vision. We’re not looking for people who just want to exit.

Isn’t it difficult for The Marketing Group to operate like a true 360-degree marketing network like Interpublic, Havas or WPP when there’s no central team to pull it all together?

There is no central team very deliberately. Invariably what you find with the centralised model is that companies are acquired and try and force through the synergies, and you consolidate finance and sales, etc. And you end up with an accountant trying to tell entrepreneurs how to run their business.

To be fair, Martin Sorrell is an accountant who’s done very well with that model. But what happens with small businesses is that the entrepreneurs leave pretty quickly. Entrepreneurs make terrible employees. They’ve built this baby up, they care about their staff, they care about their clients, and they suddenly go into an environment where they’ve got an accountant in a different country telling them what their staffing contracts should look like. And they end up taking a fraction of the value of the deal.

We have a very different approach. Our view is that in small businesses most of the value lies with the founder and their senior team. We give them full control over their business. It’s still their salaries, their brand, their hiring and firing decisions.

While we don’t have that centralised function, we have a group of smart entrepreneurs. We’re not betting on startups. They’re people who’ve built debt-free multi-million dollar businesses.

And they work together. Try and stop entrepreneurs from working together when they’ve got a vested interest to do so.

Any other central services that you plan to introduce for the member companies, such as training?

We would never do it as a centralised function. One of the nice things about the model is because we don’t have that head office, entrepreneurs manage their offices very leanly, most have bootstrapped their companies, so they don’t spend money unnecessarily. Consequently as a group, our profit margins are 23%, which is very high, compared to the industry average of 5-8%. With a centralised model, you hire an expensive CFO. The expensive CFO wants an expensive PA. The expensive PA wants someone in HR to talk to. And suddenly you’ve got all of this cost.

Entrepreneurs would never spend a six-figure salary on someone who can’t return the value. This means something like training would never be a centralised function, but it would probably exist within each individual company. Decentralisation is probably better overall at delivering value to everyone.

What are your projections for the business in the near term?

There’s a limit to what I can say as a public limited company. But the public knowledge is that we’re aiming for 30 companies in the group by Christmas. And there’s no shortage of really, really good small companies that are best in breed at what they do.


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