FlexJet CEO Doesn't Believe In M&A, Should You?

Growth Newsletter: https://levelingup.beehiiv.com/subscribe Need marketing help? Visit: https://www.singlegrain.com/ and https://npdigital.com/Want to recruit great marketers? Find them here: https://marketingschool.io/hire Eric shares a clip of FlexJet's CEO, Kenn Ricci, saying he does not believe in M&A, and Neil pushes back with lessons from the companies he has bought. They agree on culture, look at big companies that grew through acquisitions, and Eric argues M&A is a tool, not a rule. They cover why buying a small business often comes with big, hairy problems. Then sales: Eric explains why reps should listen at least 60% of the time on a call, and shares how daily AI performance reviews feed his quarterly reviews. They discuss Gokul Rajaram's take on short and long work, and the risk of pay-for-performance deals for agencies. Judge every deal on its own numbers. Key takeaways◾M&A is a tool to use case by case, not a belief◾In sales calls, listen more than you talk◾Pay-for-performance deals carry real risk for agencies Chapters00:00 Sales talk ratio, then FlexJet's CEO on M&A02:02 Neil Patel defends M&A04:55 Big companies built on M&A07:12 M&A is a tool, not a rule10:08 FlexJet's own acquisitions11:50 Why small acquisitions bring big problems12:43 Sales calls: listen 60, talk 4015:07 Daily AI performance reviews17:20 Gokul Rajaram on short vs long work20:28 Pay-for-performance risk21:57 Should agencies take performance deals?

• 0:00Speaker 00

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• 0:45Speaker 00

  In fact, I'm just gonna ask my AI right now, with one of our salespeople, what percentage of the time he spends time talking? And maybe I'll get an answer towards the end of this podcast, but you know, I want to share something. I want to get a reaction from you here. So let me first ask this.

• 1:01Speaker 00

  Okay, check this out, Neil. So this is from the, um, this is from the Founder's Podcast. And uh, it's from the, he's interviewing the CEO of Flexjet. You know Flexjet?

• 1:13Speaker 01

  Mm-hmm.

• 1:14Speaker 00

  Okay, here we go. Ready, Neil?

• 1:16Speaker 01

  Yeah.

• 1:19Speaker 01

  I can't hear.

• 1:20Speaker 00

  Sorry, let me, let me turn the volume on. Okay, here we go.

• 1:24Speaker 00

  So let me redo this again. So he's talking about mergers and acquisitions here. So he says he hates them here.

• 1:31Speaker 02

  For me, I think they're a sign of weakness because you can't build your business on your own. You can't, whatever this company is offering you in terms of, let's say it's market share. Let's say they have a part of the market, you have a part of the market, and you say, gosh, we'll capture the market. Well, do you really need to spend 12, 10 times cash flow to gab the market? Would you invest that money yourself and get grab the market share? Or do you not have a good enough product to do it? So I think we don't analyze enough what it costs. For whatever your logic is for bringing that in, give me the logic for why you're doing that. And I would tell you 90% of the time, you could probably do this yourself without the acquisition.

• 2:11Speaker 02

  Now, once you do the acquisition culturally, if you have a business built on culture, which is essential for me, it's essential for us, it's impossible. You can integrate a culture if 10% of the workforce is being added. Adding 30%, 40% culturally impossible. And then you're going to destroy your culture. So you probably had, you probably overpaid. I don't know if your business, if the business be, you need to sound, and you really put your culture at risk. So that's why I don't like them.

• 2:37Speaker 00

  All right, Neil, go ahead.

• 2:39Speaker 01

  Yeah, so example of what he's talking about, because he's saying majority of the time he doesn't like M&A, especially because of culture and you're overpaying. I'll give you a prime example of this. Facebook overpaid for scale 14.3-ish billion dollars. It made their stock price pop eventually over $200 billion. You may not say that's worth it, but I think that's a pretty good ROI. I assume Eric would agree too. You may say that people don't like the culture of, I don't know the scale founder's name. You know it.

• 3:07Speaker 00

  Alex Underwing?

• 3:08Speaker 01

  Uh-huh. People may not like the culture. And you know what? He went in there and cleaned up the whole house when it comes to AI and all the engineers and changed the culture to whatever he want. And you know what? If I own the company, 13 or 14 billion dollars to 200 billion dollars, I'll take that win any single day. And you can change whatever culture.

• 3:29Speaker 00

  Also, at the same time though, you should share your experience too, because you've done a handful of acquisitions, right? So I just want to hear your reaction to it, then I'll give my reaction to it.

• 3:39Speaker 01

  He is spot on on culture. Um, we've bought companies, like we bought one in Southeast Asia. And we bought it because they had the customer logos we wanted. They were in business for a very long time and well-known in the space, and they were getting RFPs from brands that we wanted to get RFPs from within that region, and we weren't being included. We knew they had a team problem and a culture problem. We went in there and in day one, started adjusting the culture. I walked into the office, I remember the first time, this was a while after we bought it. And people like, check out our office. We got gaming here, ping pong there. And people wanted to play all these games and do all this fun stuff instead of actually work.

• 4:24Speaker 01

  The second thing is, we had a conference in the office space where we invited a lot of clients. And a lot of the people at the time who were working for the company, I say at the time, because they're not really working anymore, decided instead of hanging out with customers, they wanted to play ping pong and mess around instead of actually doing what's best for the clients. And you know what? I was okay with this and we knew there was culture issues before we wrote the check. We still signed, we wrote the check, and we went and then cleaned up the culture and changed it to the way we wanted. It's not easy. It is very painful. Do I recommend it? No. Would I have preferred buying a company that fit all the boxes where I didn't have to change that? Yes, it would have been easier. I couldn't find one though.

• 5:08Speaker 01

  At least I couldn't find one in the price that I was willing to pay either at the time. But sometimes the things you want aren't going to be easy. And you got to figure out if it's worth it for you to do them or not. I also believe if you look at a lot of the largest companies in the world, Microsoft, Google, Amazon,

• 5:29Speaker 01

  you know, Nvidia, the list goes on and on, have done tons of M&A. I think M&A is a great way to grow. You just got to pick the right ones. Private equity is known for this. They always say one plus one equals three. I understand from a mathematical formula, one plus one equals two. But when they say one plus one equals three, they're saying, I'm going to give an example here. This is not a true example, but let's just imagine. Let's say Eric owned an SEO agency named Single Grain. Right? And Single Grain only does SEO. I know he does more than that, but again, I'm going hypothetical. And I, Neil, own an ad agency called NP Digital. And let's say I only do pay-per-click advertising on Google and, you know, Facebook.

• 6:14Speaker 01

  And I only do that. I know my agency does more than that, but again, go with this hypothetical. If Eric bought me, or I bought Eric, or we merge, I could in theory sell all of his customers on paid advertising, because now it's a service he can offer that he didn't before. And I can sell all of my customers in theory on SEO, because I didn't offer it before. And now I can say I offer it. I'm not going to sell every one of my customers on SEO. You're not going to get 100% take rate. He's not going to be able to sell all his customers on paid advertising. You're not going to get 100% take rate. But what you have is, when you combine the companies, it's not my revenue combined with his revenue. It's my revenue combined with his revenue, but a fraction of our customers, maybe 20%, maybe 30%,

• 6:57Speaker 01

  over time, we're able to get multiple services. So the revenue actually increases. In addition to that, when a customer pays you for multiple services, they're more reliant on you. And you find that your revenue may not grow as much as you thought, or you would have liked. But you'll find that because people pay you for more services, they're more reliant on you, they stay with you longer. So you're also growing your revenue, not necessarily from making more money, but from reduction of churn. And that's how you get one plus one equals three in this example.

• 7:28Speaker 00

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• 8:10Speaker 00

  then check out singlegrain.com. That is my ad agency, again, www singlegrain.com. Check it out. And if it seems like a fit, we'll get in touch and help you with a free marketing plan. So here's what I'll say. When it comes to, to, to M&A, I understand where the Flexjet CEO is coming from here. But I also don't think it's helpful to think in absolutes when it comes to most things in life in general, right? So I'm like, okay, yeah, you don't, you don't, you don't want to mess up your culture. Like, I agree, okay. You don't, maybe if you have 10% of people added to your workforce, it's not going to disrupt the culture much, 30% more. And I've seen that, right? When I've added 30%, well, you know, through, through, through a transaction before, that was not good for our culture, right? And that's, that's a harder thing to, to change.

• 8:52Speaker 00

  Now, that being said, I think about the founder-led companies run today. Nvidia, okay, Jensen Huang, been running that longest-running CEO, public, public CEO, right? For 30-plus years or so. You have Mark Zuckerberg in there as well, right? Those two in the game. They've done a lot of mergers and acquisitions, and they've figured out how to maintain their culture while doing it. And they've, they've certainly made their mistakes along the way. Not everything has been perfect, right? And so I would say you, you kind of have to...

• 9:22Speaker 00

  Just like anything, it's a tool. Mergers and acquisitions is, in my point, from my perspective is a, it's a tool in your tool belt, right? There's no perfect solution to any of this stuff. There's gonna be trade-offs to everything. And Neil's done his, his, his, uh, his share of, uh, of acquisitions and there's certainly trade-offs, right? Again, yes, your culture does get disrupted, but if you do it the right way, I think about Brad Jacobs, for example, who's done, I think he's had, he's, he's, he's built seven different multi-billion dollar companies. And his entire playbook is built off of M and A, right? And so I don't think it's perfect, but I don't, I also don't think it's a good or a bad thing, right? I think it just is, and then you can utilize that tool if you want to use it. It's just like, you know, if, uh, if you're cooking in the kitchen, right?

• 10:07Speaker 00

  You can choose if you want to use a blender or not. That's just how I see it.

• 10:10Speaker 01

  Yeah, and I, I just did a quick Google search, uh, and using their AI overview to compare Flexjet, which I believe is his company, that's what it's called, right?

• 10:18Speaker 00

  Yeah.

• 10:19Speaker 01

  Compared to NetJets. NetJets does around three times the amount of flight hours per year, so roughly they're around three times the size. Um, NetJets is owned by Berkshire Hathaway. And NetJets grew to be the number one player in the space and they have amazing reputation. They grew through NetJets, but also acquiring Marquee Jets, uh, Executive Jet Management, and Seren, Seren Tani Aviation Group, they bought those in 2018. And that helped them grow quite a bit, like, there's nothing wrong with M and A. But I'm, I'm not trying to talk trash on the Flexjet guy, and he makes a lot of valid points.

• 11:00Speaker 01

  And if you look at him and he, if he's not big in M and A, um, you know, has, actually, let's type this in, has Flexjets done any acquisitions? I'm actually curious on this. Um, but either way, he's grown.

• 11:17Speaker 00

  I mean, his initial business was an acquisition. He bought the company for $27,000.

• 11:22Speaker 01

  Oh, look at this. Yes, Flexjet has pursued an aggressive acquisition strategy, particularly under the umbrella of its parent company, Directional Aviation, led by Ken Ritchie, is that, Ken Ritchie was on there?

• 11:34Speaker 00

  No idea.

• 11:35Speaker 01

  Okay, they bought Constant Aviation, they bought Flying Colors Corp, um, brokerage, they bought the jet business. So, uh, they've bought Associated Aircraft Group, they bought Halo Aviation.

• 11:51Speaker 01

  It looks like here it's saying Sentinate Jet and Flight Operations, uh, Flarejet and Private Flight. Yeah, they've done tons of acquisitions.

• 12:00Speaker 00

  Yep. Well, there you have it. I think that, that's our reaction to that. You want to say something else? Your mouth is open.

• 12:06Speaker 01

  Yeah, and they, and then LVMH acquired a stake in them for $800 million.

• 12:12Speaker 00

  Yeah. Look, I, I don't think there's any perfect solution to this, guys. There's just, there's trade-offs to everything.

• 12:18Speaker 01

  I, I, I don't know too many, I, I can't actually think of any trillion dollar company or massive organization that hasn't done M and A. Even at a small scale, like, people end up buying others. Sometimes you just buy companies because of the talent. Like, dude, I met up with a company when I was here in Italy. They specialize in TikTok shop marketing. I won't say the name of the company, but it was too small, right? And I was like, ah, do I, do I try to buy this? Maybe as an aqua hire? And, but the revenue was only 400 million, uh, uh, sorry, not 400 mil, $400,000 a year. $400,000 is a good amount of money.

• 12:57Speaker 01

  But the issue is, and Eric knows this, for me, Eric, would you buy something that's doing $400,000?

• 13:05Speaker 00

  Nope.

• 13:06Speaker 01

  Why?

• 13:08Speaker 00

  Cause it comes with big hairy problems.

• 13:11Speaker 01

  Uh huh, and eventually Eric would have said it would, it's just a distraction, just focus on the, the, the core business. Now, if they're doing like 10 million, 15, 20 million, sure, all right, good tuck in, it can help us grow. But you, you gotta make sure what you're doing can move the needle. If I bought something that was $400,000 in revenue, even if I ran it internally, we have legal in-house, we have accounting, if we just did it as much as possible in-house, I probably would have spent $300,000 just in fees internally buying a company. So I have to make sure that it's worth it to spend that much money internally on just buying something.

• 13:51Speaker 00

  Yep. By the way, I asked, um, so the, I, I got the answer back a little earlier. So, uh, it looks like when we talk to customers on discovery calls, it's, um, about 50/50, which I would prefer to be 60/40. Um, but when it comes to a proposal call, it's more 60, 60/40, um, where we talk a little more, obviously, because we're presenting. So food for thought, I would prefer it with 60/40 that we're listening more on discovery calls, and Neil's the same way, I'm sure.

• 14:18Speaker 01

  Eric, we, yeah, we track it. We're, we're well above 50% on listening. But he's right, when you're doing the pitch or proposal and you're going over it, you're gonna end up spending half the time, if not more time, talking than the other party, because you're the one presenting. People will talk because they have questions. If you're talking the whole time and no one has questions and you're presenting a proposal, that's a really bad sign as well.

• 14:44Speaker 00

  Yep. This is great, though, like, because I just get the metrics and then I just, I just ask, and this is in a public channel, right? And I just ask the salespeople, hey, what do you think about this? What do you think it should be? And then everyone learns in public, right? So there's, there's, there's nothing hidden here.

• 14:58Speaker 01

  Yeah, so we don't need to know names or anything, but what do people respond to? Because you just asked them. I know you. You're just like, hey, guys, this is high, do you think it should be 60/40? I'm guessing you put something out there, uh, and you probably asked them, what do they think about it being 50/50 and what the ratios are and what could be improved?

• 15:14Speaker 00

  I, I, the question I just posed was, hey, what do you think the number should be, right? And I'll just let him tease it out, and then he can work with the AI in, in public. But the reason why I like this in public is because one question that he spawns might spawn other people to ask questions, and then they follow up and everyone gets more ideas, and the more ideas you get, some, most ideas are gonna suck, but some ideas are gonna be good and people will take action on those, so.

• 15:33Speaker 01

  Yeah, and, and to be clear, very crystal clear, this is learning in public. Eric is not belittling in public or criticizing in public. He's just asking, as a company, what do you think the number should be? And then they're having a discussion and they're all trying to figure out together, they're not pinpointing, hey, you are at 60% talking, uh, instead of being 40%, this person's at 50, he's not doing any of that. He's just saying, hey, guys, what can we learn from this? What do you guys think it should be? Um, and how do we go for it?

• 16:04Speaker 00

  Yeah, but I'm looking at the channel, I'm like, I'm looking at the questions they're asking. I'm actually proud of the questions that they're asking. Hey, you know, because yesterday there was like a four hour meeting hosted where someone was talking through, um, like, uh, just processes internally, right? And there's 11 people talking there. Hey, give me the, give me the, the, the flow chart of how that meeting went, give me the state chart related to this, um, I want to learn. Other people started chiming in with questions in there, so that's great. And by the way, Neil, you want an example of an unreasonable thing I've started to ask AI to do? So, um, instead of, Neil, let me just ask you, when you, when, you've never done a performance review, because you've never worked for anybody, you've probably never, ever hosted a performance review either, right? But when your company does performance reviews, how often do they do them? Um, just give me a number.

• 16:45Speaker 01

  I don't know, but I know it's at least once a year, if not more than that, but at least once a year.

• 16:50Speaker 00

  Okay, so that was the, um, that's like what we're used to, right, as humans? And so I'm like, huh, what's something unreasonable we can do? Well, now that we have this, I'm like, we can just ask, okay, so Neil, let's say, let's say, uh, let's say I work for you, okay? And, uh, you know, you're just, there's like a daily stand-up, hey, Eric, what's the, the highest leverage thing you got done today? And what's the highest leverage thing you got done yesterday? And what are you, uh, what are you blocked on, right? Just very simple questions. But over the course of 365 days, you should be able to see if I'm bullshitting you or not through these, correct? Yes or no?

• 17:22Speaker 01

  Yes, I agree with that.

• 17:23Speaker 00

  Very quickly, right? But you wouldn't have the time to identify and look through every day. Well, is that high leverage? Is that not? Is he blocked on this? Because you're too busy with, you have STDs, shit to do, it's right? So, so, so anyway, I say that in jest, guys, but my point is, Neil wouldn't have time to look through each and every one of these. I wouldn't have time either. But when you have something like a Jev that can classify something as high leverage or incremental leverage, or perhaps unacceptable, then you can figure out who needs to be coached. But this is performance management, you're, you're getting a performance review every single day, right? And then that can, that can fold into your quarterly review or your, your one-year review, but that, you're, guess what, Neil, let me ask you this. Your A players, do they appreciate feedback or do they not like feedback?

• 18:07Speaker 01

  They appreciate feedback and they want it when something is off or they should know how to improve. They don't want it on a quarterly basis or annual basis, they want it when they can improve, they don't want to wait for it.

• 18:18Speaker 00

  I want it now, just like, I want it now so I can get better now. I don't want to wait quarter for that, right? So these are unreasonable things, you can ask these things to do, right? And so, uh, that's all I got to say about that. So Neil, let me, let me show you something real quick. I'm, I'm curious to get your thoughts. Um, there's this, uh, Gokul Rajaram, and I'm gonna let you pronounce this, you're, you're, this is, uh, this is in your wheelhouse, not mine, Neil.

• 18:40Speaker 01

  I'll still be terrible pronouncing their name. I can't say it.

• 18:43Speaker 00

  Right here?

• 18:44Speaker 01

  Gokul Rajaram.

• 18:47Speaker 00

  See, Rajaram, you, you got it, Rajaram. So, so, um, so these people are both investors, so, you know, Gokul, look at this, I have so many buddies on, on, on, on X, but, so he's an investor and Signal here, who's a popular investor as well, I think. So I think it's a she, or maybe it's a he, but, I am short companies whose margins depend on the cost of performing verifiable work. I am long companies whose margins depend on owning very, very consequential outcomes. This applies to both public and private markets. Let me explain that real quick, then we can react to this. So, short means you're, you're, you don't believe in the long-term viability of these companies, right? Where that, that company's margins depend on the cost of performing verifiable work, such as, uh, writing code, okay?

• 19:31Speaker 00

  Writing code is very verifiable work, math is very verifiable work, right? Are you following so far, Neil?

• 19:36Speaker 01

  Yeah.

• 19:37Speaker 00

  Okay, great, I just want to make sure this, this is a, I'm explaining myself out, okay? So, I am long company, so long-term investor in companies whose margins depend on owning very, very consequential outcomes. So if you deliver a customer, if you deliver a lead, for example, right? And so what Gokul says here, I don't know if I'm pronouncing that correctly, um, but he says, however, verifiable versus consequential might not be the true axis. Some consequential work is verifiable, such as tax filing, which is, it's definitely very verifiable, right? But it's not as, uh, you know, it's, well, it can be high value depending on who you're working with, okay? So a sharper delineation might be who bears the risk when it is wrong. So companies that absorb risk, keep margin, companies that hand risk back to the buyer get commoditized.

• 20:20Speaker 00

  So Neil, when I think about your business, when I think about our business as well, we are absorbing, um, we are absorbing some risk here when we're, because we're running marketing, a lot of stuff's not gonna work, right? But when there's not as much risk, you get commoditized, such as coding, or in some cases, math. I saw Lex Friedman do like a interview with these math scientists, and they feel like maybe they're losing significance, um, in their careers, because a lot of their work is verifiable.

• 20:46Speaker 01

  Yeah, um, your connection is unstable. Move closer to your router and switch. Hopefully you can still see me.

• 20:52Speaker 00

  You're fine, you're fine.

• 20:54Speaker 01

  I'm not going to reload that. Um, but yeah, no, I, I, I agree with you in which, or I agree with Gokul and what he's saying. Yeah, like when I look at tax stuff, um, it is essential and it is verifiable, but it is essential. And depending on the person you use, it could cost you a lot more money or save you a lot more money.

• 21:18Speaker 00

  Yeah, but what do you think about just, they both have, they both share the same investment thesis, right? So they're short on the verifiable, um, work companies, but they're long on the companies that are doing consequential work that where there's like risk, right? And I'll, I'll put it on a, on a, on a.

• 21:32Speaker 01

  Harder work. Yes. It's, it's the people that are trying to solve real problems and do challenging stuff.

• 21:37Speaker 00

  Yeah. And Neil, I would say probably the furthest on the risk curve for our type of business is if your peer pay for performance. Where you take on all the risk before the customer pays. Would you agree with that?

• 21:49Speaker 01

  I would agree with that. That is the most riskiest and I know people who have those kind of businesses. Um, like one of the guys I know, his name is Gajan. He has a CRO agency called Spiralize. They'll do performance based stuff. It's in his contract. He's doing free work. Now imagine when he starts performing, and I know this because I've talked to him many times, and starts increasing the conversion rates drastically more than people expected and they got to pay on performance. Some of those people get really pissed and don't want to pay on performance anymore. And they're like, but you signed a contract and this is what you agreed to. They're like, oh, I didn't think you were going to double up my revenue, but I did, and I did it in a very profitable way. And then sometimes people just don't want to pay and then you fight them and you have to deal with it.

• 22:32Speaker 00

  Yeah. Customer size matters in that case. And here's the thing, right? If, if you work with enterprises, they won't want to sign that deal, but they're the most reliable payers, right? So.

• 22:41Speaker 01

  Dude, I get this question all the time when I deal with marketers. Okay. I get this, uh, there's this guy, I'm not going to repeat his last name. Uh, he sends me a lot of messages. I believe his name is, uh, Richard or something like that. Okay. It, it is actually Richard. And he'll send me pictures of his daughter and stuff and how my sales process and my forms are all off and how we can improve and how we can make us a lot more money. And he's like, dude, you should do performance based stuff. I can make you a lot more money. He's trying to partner and work together. And, uh, what hasn't clicked for Richard yet, and I've told him this, I'm like, we're mainly enterprise. So like when they're trying to use the sales taxes, like dude, I can take your business.

• 23:23Speaker 01

  I can add in extra 20, 30 million in revenue. I can do X, Y, and Z and upsell here and that. And I'm like, majority of our clients are enterprise. They're not going to agree with these strategies like we grew your traffic 20%. So you owe us a kicker, right? The enterprise businesses want flat fees that are very predictable because they have quarterly earnings and they're publicly traded. They need to know how much something costs and they're paying you to get a certain result. If you get more than that, that's their advantage. If you get less than that, you're probably going to be replaced over time because you're not helping them meet, uh, meet numbers. And they told you in advance what numbers you're looking for.

• 24:01Speaker 00

  Also they have budgets, right? They don't want to go above a certain percentage in many cases.

• 24:06Speaker 01

  Yes. And in a few cases, dude, I've worked with publicly traded companies where they have kickers. If you hit certain incentives and the kickers are capped, and I'm telling you, dude, nine out of 10 times when we hit the kickers, most of them don't want to pay and they do pay, but they renegotiate and they're like, hey, let's just change it to this. And you don't have a choice because if someone's a big customer and they know they're paying you a lot of money, you're going to accept it because if you don't, they're not going to renew the contract and you're going to lose them as a customer.

• 24:33Speaker 00

  Yeah. And by the way, this, this is what I'll say. I think that's why the, I think the, the happy medium for agencies is you collect a managed service fee still. And then maybe you negotiate some kickers, maybe some bonuses here and there, and that's icing on the cake. But you want to make sure you cover your nut first and you make your margin and then, you know, maybe only a very small percentage, you can decide to do performance. But, um, I, like, I, I did, I think it's just two different beasts. So.

• 24:59Speaker 01

  Yeah. And you need the performance capped so that way the customer isn't upset.

• 25:03Speaker 00

  That is it for today. Please don't forget to rate, review, subscribe and we'll see you tomorrow.