From 3Q Digital to Buyback: David Rodnitzky on Agency Exits

Full Transcript

Jason Kirby: All right, welcome back everyone. Totally butchered the intro there, sorry. Welcome back to Fundraising Demystified. Today we have David Radnicki with us, former CEO and founder of 3Q Digital. Welcome to the show.

David Rodnitzky: Yeah.

David Rodnitzky: Jason, thanks for having me.

Jason Kirby: No, David, I'm really excited to have you. You have a really unique background and story of how you built a company, you sold that company, saw an opportunity to buy back that company, and then later sold that company. And so you kind of have this unique transaction history. You managed a ton of money. It was a marketing agency. You managed billions of dollars in ad spend. I've done hundreds of millions of dollars in transactions. I think you're going to have a fascinating story to share, but I'll stop talking and let you. Kind of just speak to, you know, what, what is your story and kind of how did you end up to where you are today?

David Rodnitzky: Yeah, I'll try to give you the two minute elevator pitch. I started out, I was a graduate from law school back in 1999 from University of Iowa, from Iowa originally. Moved to the Bay Area, San Francisco Bay Area, because I didn't want to be a lawyer and I didn't want to be somewhere without mountains. And I happened to have a best friend who was living in the Bay Area. So came out to the Bay Area. It was 1999. It was the first dot com boom. They were people, companies were hiring warm bodies. And there was a company called rentals.com that hired me to be manager of strategy, which meant absolutely nothing. And, I just kind of did a lot of market research for them, you know, competitive strategy. And at some point about six months into the gig, the director of marketing quit and there was no other new marketing. And the company had a $25,000 a month retainer with a brand agency and a $25,000 a month retainer with a PR agency. and I said, I can do this. I had no idea what I was doing, but I took over.

David Rodnitzky: And I got pretty frustrated with both agencies because I didn't see any real ROI from what they were doing. And then I discovered a little company in Pasadena, California called Goto.net, which was the first company to do pay-per-click advertising when you only get charged if someone clicks on your ad. And I basically took all that budget from the $50,000 a month from these agencies and threw it into this Goto.net. And I went from getting no measurable traffic to getting hundreds of thousands of clicks for like three or four cents a click. I just was hooked. I was like, this is really going to be the future of marketing. So the next seven or eight years, I just doubled down on learning everything I could about this world of pay-per-click marketing. Also search engine marketing. Obviously Google then came along. Google adopted this as their standard for how people bought ads on Google. And around 2008, I had been working for a client side seven years and I was just kind of tired of having to be involved in politics and working with other people's businesses as an employee. And I was traveling to India once a quarter for this one company and my wife was pregnant. It's not a good idea to be in India when your wife's pregnant, I guess, unless you live in India. And so I just quit and I didn't know what I wanted to do, but I knew I didn't want to work for another company. And I started an agency, basically.

Jason Kirby: Yeah.

David Rodnitzky: Initially, it was a consulting firm, but people kept asking me for help and I realized I could hire some folks and started out as a Google advertising agency and then gradually expanded it into a much larger agency than that as I realized that I was getting clients who were saying, we want one throat to choke. We want multiple services with one company, not just being really good at Google advertising. I can keep going there or we can... pause, what's the best way to continue, Jason?

Jason Kirby: Well, no, so we kind of hear the story of, you know, the concept of building 3Q, but when did it start to really take off and to what scale did it reach? And when did you decide, I think you sold it in 2015, you know, walk us through that journey, getting to that point of selling it and kind of what the decision process was at that time.

David Rodnitzky: Yeah, I mean, it took a while to scale. You know, 2008, the first year I was in business, I probably did $100,000 of revenue. It was really just me and a coffee shop. You know, 2009, we probably did $500,000 of revenue. And I think I had one or two employees and I moved from a coffee shop to like a WeWork. And then 2010, you know, we're up to about a million dollars of revenue. And I got a 600 square foot office and a lot of remote workers.

David Rodnitzky: So it was growing very sort of organically, I guess, but not super fast. At some point around 2011, 2012, I started to see some sort of breakthrough velocity, started to get much bigger clients. We had a lot of success actually with venture capital firms starting to send us business because we started to build a good reputation in Silicon Valley. And so we had three or four venture firms who basically almost as a matter of course, when they took on a client in a certain vertical that they immediately sent them to us. And we started to really see a lot of traction there. We started to double down on our marketing in the Bay Area. So one of my adages that I really love in marketing is if you can't be number one in a category, create a category you can be number one in. And so for me, I realized I'm not going to be the number one agency in the world, but maybe I can be the number one something. And what I decided was, I think I can be the number one performance marketing agency serving venture-backed clients in the Bay Area. And so we really sort of started to build that reputation. We attended every conference we could in marketing in the Bay Area, we spoke on it. We did billboards on Highway 101, which is a thruway of Silicon Valley. We did ads on NPR's Marketplace. We held a client conference at the Giants Stadium and invited potential clients. And basically got to the point where we really sort of became the de facto choice for companies that were particularly in S&P, SaaS, direct to consumer, and then companies that were doing anything on social media. We were getting all that business. And so in 2014, we acquired a smaller competitor, which I can talk about. It was an all equity transaction, but there was a local agency that was similar to us, but a little bit smaller, that we brought under the fold for all equity. And then in 2015, we started getting a lot of interest from potential acquirers. At that point, we were probably about 15 million top line and maybe not a lot of bottom line. We were really optimizing for growth. So we're probably doing about $2 million of bottom line at that point. And, you know, we had just people calling us all the time saying, Hey, we're looking to fill this need for a performance agency. We weren't really serious about selling, I guess, but we were serious enough that we hired an investment banker and we basically said, let's just, you know, you take all these calls. I shouldn't be spending my time, you know, talking to companies, you take the calls and, he took all the calls and at some point he said, look, there's enough people who are calling that I think you should at least hear them out. And so, we decided to run what I describe as a mini process. So rather than running a full process where you send out, you know, 60 or 70 inquiries to people who have maybe not even reached out to you, but you just think are good fits, we really only just reached out to the six or seven companies that were already banging on our door. And one of my adages is great companies are bought and not sold. So I felt like we had some leverage by saying to all these companies, look, we're not for sale, but if you really want to buy us, give us an offer that we can't refuse. And so we did the mini process in 2015. Want me to continue or where should we go, Jason?

Jason Kirby: Yeah. So like, you know, who ended up buying you in that, and like, what was that process like? So you kind of see, you had some, you're flattered, got some inbound interest, get the, you know, the iBanker involved. And at this point, you know, did you start seeing like tons of offers? Was it difficult to actually get LOIs on the table or term sheets on the table? Kind of, what was that kind of, that interim process before you actually ended up selling?

David Rodnitzky: Yeah, so we reached out to the seven folks that had expressed interest and we ended up getting three IOIs or LOIs—maybe IOIs is the best way to describe them. And they were pretty different offers. There was one that was, I think, a publicly traded agency. There was one that was a privately held agency and there was a third that was a strategic that was publicly traded.

David Rodnitzky: I guess one of the things that was very interesting about this transaction was that, you know, I've always thought about the world of real estate where, you know, if you put your house up for sale and it's raining out and there are six other houses for sale on your block that week, you might get a very bad offer. But if it happens to be super sunny and there's no other houses for sale in 20 miles, you might get an outsized deal. And so I think that often happens with transactions and M&A.

David Rodnitzky: In our case, we got really lucky because one of the companies that was bidding for us, a publicly traded company, had announced to the street that they were going to make an acquisition in Q4 of 2014 in the performance agency space. Q4 came and went and they had a prospect they were trying to close that didn't close. So now they're a quarter behind what they had promised the street and they're starting to feel pressure from investors. We were their next target and they basically came in and bid really aggressively to win the business. It's publicly available information. We were maybe at $2 million EBITDA—with adjusted EBITDA maybe $3 million—and these guys ended up bidding $65 million for the business. I would say the standard for a $3 million adjusted EBITDA business at that time would probably have been in the $35–$40 million range. In fact, the other bids pretty much came into that range, but it's better to be lucky than good sometimes. We had someone who just needed to make a deal for a variety of strategic and market reasons. It was kind of a no brainer for us to accept the terms of that deal. Now there were some aspects of that deal that turned out to be a little precarious, which I can talk about, but from a top line number, it was hard to say no to a deal that was literally 50% greater than any other bid that we had.

Jason Kirby: Yeah, that's tough to say no to for sure. And, you know, obviously an exciting moment when you kind of get that opportunity. But, you know, when it comes down to negotiating, you know, just for our audience, just to have that kind of insight of like, what does it look like when, all right, sure. You get that $65 offer and everyone usually is kind of wowed and dazzled by the top line number. But as you kind of alluded to, it sounded like there might've been some strings attached. So walk us through what that was like—what were some of those strings?

David Rodnitzky: Yeah, so the biggest string that was attached really was that about 55% of the value was in an earnout and that earnout was a three-year lump-sum earnout. So we had to work really hard for three years and then try to get to the end of that and get the full amount. In the negotiation period, we had—as you always do—a lot of contentious back and forths and we were lucky, I think, to have a CEO on the other side who really wanted to get the deal done and was a fair-minded person. That said, there were a couple of times in the deal where he was like, look, David, I'm on your side. Trust me, I will make sure that you're treated well on the other side of the transaction. And I said to him, sort of as a joke, as my rabbi has often told me, trust in Allah, but watch your camels. Which I think is a good rule of transactions: look, I trust you, but you might be gone in six months. And in fact, that's actually what happened. He was under a lot of pressure to turn this business around. About three months after they closed the deal with us, he got fired and a new person came in.

David Rodnitzky: My biggest lesson from a negotiation perspective is what I already said, which is don't leave anything to trust. If it's not in the document, don't do it. But the other issue, the big sticking point in that negotiation was this earnout that was based on three years of performance on our part. That turned out to be very consequential.

David Rodnitzky: We got towards the end of the three-year term for the deal and were approached by the management team of the company that bought us: listen, we'd love to renegotiate this earnout. We were at 100% of the earnout—we essentially had to double the business in three years, which we did.

David Rodnitzky: I should also say one of the other points that I made to the acquirer was, look, if we're going to have a three-year lump-sum earnout that's the majority of our compensation on this deal, we need to have full control until you pay us the earnout. So: we're not merging accounting, we're not merging sales, we keep our name and offices, we have hiring and firing rights, we choose contractual deals with our clients. The moment you pass that three-year earnout, you can do whatever you want—you can change the name, you can fire me, etc.

David Rodnitzky: We got to the end of the earnout and the acquirer said, listen, can we renegotiate, can we have a one-year extension to pay you what we owe you? I wasn't super happy about that, but we negotiated a good interest rate and agreed. About six months after that, they said, can we have another one-year extension? At that point I said, I think we'd rather just have our money and move on. We started to get into more challenging conversations where they were putting pressure on us to consider changing the earnout. At the end of the day, we couldn't come to an agreement. I said, no, I'm not giving you another extension. They said, if you don't give another extension, it could have significantly negative financial consequences for the business, which could hurt you, because we were essentially unsecured creditors—which is another topic we could talk about. So the only way we ended up solving this was deciding to say, listen, you have to put us up for sale. If you put us up for sale, the proceeds will go to pay our earnout and you can be absolved of your obligations.

Jason Kirby: That's unfair deal-making. Clearly there's something going on—maybe they weren't able to get the money to pay you. So it sounds like you handled that negotiation—albeit you're glazing over the intensity, the lawyers, the chaos. You managed the outcome: put it up for sale. And then actually, is it true that you were the one that ends up buying you back? Is that how that worked out?

David Rodnitzky: Yeah, that was not my intention. I actually flew around the country to my biggest competitors and presented them: this is a great deal. I know exactly how much you have to buy us for, and the value of the company would be worth 2x in less than a year because we were turning the ship around in terms of EBITDA. I couldn't get anyone to offer what I thought was a very good deal. So I went back to the parent company and said, we will make an offer to do a management buyout. We raised $10 million from a local bank and pledged the debt they owed us as part of the purchase price, and we were able to buy the company back. It wasn't my intention initially, but that was the best alternative to a lot of bad alternatives.

David Rodnitzky: We did end up buying the company back for about 65 cents on the dollar relative to what we sold it for three years later. We already knew we had a good deal, and the business had doubled from a top-line perspective. By the time we were done buying the company back, EBITDA had probably doubled as well.

Jason Kirby: So, you know, masterclass in deal-making, albeit maybe not the original strategy, but still a good outcome and net positive for you. Their mistake was maybe doing a deal bigger than they could chew; you got to rescue the company. From there you built this great business, but how were you feeling post-acquisition? You had another transaction—brought in other investors and eventually sold again. Cliff notes?

David Rodnitzky: When we took the company back, we were excited to be independent again. We made t-shirts for the staff that said “3Q, an independent agency.” We had immediate success juicing EBITDA and winning big clients. Then the same thing happened as before: inbound inquiries. We ran a mini process—not 60 SIMs, just 7–8 to people who had talked to us. We got a really good offer from two family offices in Chicago that wanted to buy the business and add capital and expertise to scale. We were only private again for about a year, then accepted terms to become part of a family office–led business.

David Rodnitzky: About six months into that journey, the company was already ~500 people doing high eight figures of revenue. I started getting tired—I’d been doing it ~11 years—and felt the business was getting too big for me. I’m more of an early/mid-stage founder than enterprise. I found a guy to become COO and quickly promoted him to CEO. I became a board member and strategic advisor until 2022, when he—who did a fantastic job—tripled EBITDA in ~2.5 years. We sold to a PE-backed holding company called Dept in Holland. As soon as we sold to Dept, I became an advisor, then subsequently left entirely. I still have an equity stake but no daily involvement.

Jason Kirby: That was quite the journey and unique experience—a testament to the deal-making path as a founder. I want to change gears. You're an expert in marketing; you built a sizable company. You wrote a book on how and why to sell a marketing agency. What makes a business in this case sellable? If a founder is running a bootstrapped agency, what makes it attractive to be bought?

David Rodnitzky: There are hard and soft factors. Hard: EBITDA (TTM) is the number one factor, growth rate (of EBITDA and revenue), revenue concentration (generally not good), recurring vs project revenue (recurring is preferred), strength of management team, strength of clients, leadership in your target verticals. At the end of the day, it all comes down to whether the acquirer feels this is a business that will continue to scale profitably.

David Rodnitzky: A lot of agencies get excited about big clients: “Apple is my client.” That's nice, but if EBITDA is $200k, you’re not getting a $100M exit. You’ll be valued on EBITDA. Same for proprietary technology: if people buy you for services, you’ll be valued as services, not software.

Jason Kirby: What do you typically see as a range of multiples? You’re advising agency owners today—what are you seeing in this market?

David Rodnitzky: It varies substantially. One of the biggest factors is size. An agency doing ~$1M EBITDA might get ~2–4x. An agency doing $10M EBITDA could be ~8–12x because it has enterprise scale. At $15–$20M EBITDA, you could get into the 15–20x range. It’s about predictability: the bigger you are, the more likely you’ve figured out scale and reduced the “founder hit-by-a-bus” risk.

Jason Kirby: Easier said than done, but a clear target. When a founder's ready to sell—whether $1M or $10M EBITDA—how are these deals structured? You mentioned your earnout; it created complexity. What structures do you typically recommend?

David Rodnitzky: The two most common structures are cash + earnout or cash + rollover. In a rollover, you reinvest 25–40% of deal value in the business as stock; the rest is cash at closing. In an earnout, usually no equity—cash upfront plus incentives over years to hit financial metrics (usually EBITDA). Earnouts have a higher chance of litigation: sometimes buyers can’t pay; more often it’s the “Hollywood points” problem—profit can be moved around. Rollovers align incentives but as a minority you may have less control. I’ve done both; I probably prefer the rollover because of earnout pitfalls, but there’s no one right answer.

Jason Kirby: Great advice. Acquirers want to de-risk. Unless it’s an all-cash slam dunk, deals can get messy. Earnouts are easy to agree to at the top line, but there are a hundred ways the parent company can load costs and eat away at EBITDA. Your experience is marketing agencies, but do these lessons overlap with other services businesses like staffing agencies or law firms?

David Rodnitzky: Absolutely. Any professional services business is similar—you’re buying human capital, so success depends on keeping people. The biggest fear is founders who are intricately involved in client satisfaction and sales. If the founder leaves, sales and relationships can evaporate. Services are valued on EBITDA multiples, not revenue—there’s no software-like escape velocity. Some services have regulatory ownership constraints (e.g., law, physician practices), which add complexity. Not the case in marketing.

Jason Kirby: You mentioned how you financed the repurchase—wiping the IOU plus raising some debt. In the market now, how are acquirers financing purchases and earnouts?

David Rodnitzky: Many deals are PE-backed. The PE firm has LP capital and uses bank leverage on acquired EBITDA—anywhere from ~1x to 3–4x leverage, depending on aggressiveness. As long as debt service is manageable, it’s more profitable than giving up a big equity chunk. When you have good EBITDA, you unlock financing options and investment capacity.

Jason Kirby: What have you seen blow up deals when things look good and then fall apart?

David Rodnitzky: Two experiences: a hiccup in the business during diligence (lose a big client, miss target) spooks acquirers quickly; and disorganized finances. Another is learning things about the acquirer you don’t like via backchannel references. I was on the half-yard line with a holding company, but references said they only care about revenue and don’t support training. I imagined massive attrition. I pulled back. So those can cause problems.

Jason Kirby: Commendable to do that extra reference checking and care about employee outcomes. I’ve dealt with that—when we sold to Walmart, we pushed to keep key players. It’s important to think about more than money. It’s a living organism with moving pieces.

David Rodnitzky: Timing is everything. Prior to signing an LOI, when you have multiple contenders, you have leverage. Put staff retention, brand, autonomy, accounting treatment in the LOI. After signing the LOI but before closing, you still have some leverage, but less. After you close, your leverage is whatever the contract says. If you didn’t protect those employees and the buyer fires them, it’s done. Make the LOI comprehensive—five or ten pages if needed. Thin, fluffy LOIs (“we’ll pay X, 3-year earnout”) are risky. That’s when you have the most leverage because you have alternatives.

Jason Kirby: Once you sign and go exclusive, you can’t just bring someone else back. And if it falls apart, it looks bad to the market. Great advice. Beyond what we’ve shared today, what advice would you give to founders thinking about selling someday?

David Rodnitzky: Biggest advice: are you sure you want to sell? When someone dangles a seven- or eight-figure offer, you picture the beach house and never worrying about finances. That can be positive, but many post-exit founders deal with anxiety and depression. When you sell your business, sometimes you sell your purpose and identity for cash. If you’ve spent 15 years building this, with a mission and reputation, suddenly you give that up and someone hands you cash and says we don’t need you anymore. That can be challenging—even for billion-dollar exits. Do a pros/cons analysis of what’s important and what you want from the transaction before you just take cash.

Jason Kirby: Incredible feedback. We’re both part of a post-exit founder group; there’s a lot of “now what?” Maybe a sabbatical, but many can’t sit still. Ask: is now the right time, should you sell, and what happens after? People around you may push you to sell because they get a check. Think through life after—while you still have control.

Jason Kirby: You have a book. Tell the audience about it—what can they expect?

David Rodnitzky: The book is called Selling Your Marketing Agency—a straightforward title. I learned a lot on my own dime across three transactions (two sales and one buyback). For you, selling is the biggest financial transaction of your life—and often your first. For the buyer, it’s routine. You’re at a disadvantage. I wrote the book to level the playing field so agency owners (and professional services founders generally) can go into banker, lawyer, accountant, and corp-dev conversations more prepared and avoid common mistakes. It’s available on Amazon.

Jason Kirby: Beyond the book, you’re helping founders navigate this now, right?

David Rodnitzky: Yes. I run a boutique consultancy—now just DavidRodnitzky.com—it’s just me. I help agencies scale—from <50 employees to 50/100/200 is hard—and when founders are ready to sell, I keep bankers honest, review contracts (I have a law degree; not giving legal advice), and share which terms need the most massaging. If an agency founder wants help on scale or sale, I’m happy to help.

Jason Kirby: I imagine you’re an amazing asset at the table. Where can people learn more—website, LinkedIn, X?

David Rodnitzky: LinkedIn is the only network I’m active on. And the website—if you can spell my name: R O D N I T Z K Y (not S): DavidRodnitzky.com. There’s a contact form. Happy to talk with anyone about selling or scaling—or general questions by email.

Jason Kirby: Fantastic. We’ll put those in the show notes. Thanks for being on the show and sharing such valuable insights.

David Rodnitzky: Thanks, Jason. And thanks for doing this—this is a valuable resource for the community.

Jason Kirby: I appreciate it. Thank you for joining us.

David Rodnitzky: Thanks.

Jason Kirby: All right.