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Welcome to the podcast where you find all the very best information on how to buy and sell businesses and become a dealmaker. In this inaugural Business Buying Strategies podcast, Jonathan Jay from The Dealmaker’s Academy covers:
- Three of the 14 questions you should ask a business seller in your first conversation
- How one UK business owner sold his business for £70 million cash
- How to choose the right professional advisors
- How to use Asset Finance to buy a business.
Listen to find out:
- How to get any business seller to open up within minutes
- Why you need to encourage a business owner to talk about their business
- The psychology behind asking open-ended questions
- How to save yourself from making countless journeys to visit business owners
- How to discover any business owner’s motivation for selling
- How to elicit more information from a business owner
- Why you need to ask who owns the company
- What qualification process you should use when dealing with business owners
- How to uncover any business owner’s ideal selling scenario
- Why the founder of Kiddicare rejected an initial private equity offer
- Why you need an insolvency lawyer if you’re dealing with insolvency practitioners
- Why hiring an insolvency lawyer will save you money
- How to ensure an insolvency practitioner’s fee is covered by an asset fund
- Why you need an insolvency valuer to value assets in distressed companies
- How to make your bid attractive to an insolvency practitioner
- How to finance your purchase using asset-based finance
- How to acquire equipment that will generate money for your business
- Why lenders will err on the side of caution with asset finance
- Why having a professional valuation will help you in negotiations with a seller
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Prefer to read? Read the transcript below:
Hello and welcome.
This is Jonathan Jay from The Dealmaker’s Academy.
Welcome to Business Buying Strategies, the podcast where you find all the very best information on how to buy and sell businesses and become a dealmaker.
Welcome to our first podcast, and on this first episode we’ll be covering several very exciting topics.
We’ll be talking about what to say on the phone when you are speaking to the seller of a business.
What do you say the very first time you make contact with them?
We’re going to be interviewing the founder of a business who sold his company for £70 million in cash. We’re going to be talking about choosing the right professional advisers, and we’re going to be learning about asset finance and how to use that to buy a business.
Let’s get started.
When someone contacts you about selling their business, sometimes people struggle with what to say on the phone, and I’ve got 14 top questions that I always ask. In this week’s podcast episode, we’ll cover the first three.
I explained these recently at a live seminar, so let’s go to that seminar and listen in on what I told the audience.
[Transcript of extract from seminar]
The very first question, after the pleasantries and the introductions, the very first thing that you want to be asking is, quite simply:
‘Tell me about your business’
It’s a very open question.
It’s a very obvious question, and it’s a good starter for ten in that you are allowing them to do the talking.
Now, this question has a lot of branches to it, so if they aren’t particularly forthcoming, aren’t particularly chatty, then you can just dig a little bit deeper.
You can help them out with the answer, if you like.
So, when did you start?
When did you start the business?
What was the motivation for starting the business?
Tell me a little bit about your background.
You’re listening very carefully, you’re asking open-ended questions, and you want them to do most of the talking at the front.
You want them to feel comfortable talking about their business, because if you think about the entire process that we’re about to embark on, it’s all about their business, and the more we can find out at the beginning, the better.
We don’t want you to leave your living room or leave your office until you know that there’s a level of interest in it for you that makes it worth pursuing. ‘Tell me about your business’ is the opener.
Then this question starts to elicit their motivations and starts to allow you to understand what’s going through their head.
‘Just out of curiosity, what prompted you to call me today?’
If you want to fix an image in your mind, think of Columbo, the TV detective, where you’re very non-threatening, but you’re listening to the answers and you’re evaluating the information.
‘What prompted you to call me today?’ Then you just sit back, and you listen.
Now, this is where they start to divulge their motivations.
It could be, ‘My wife told me to call.’ ‘Oh, right! Why was that?!’
‘Well, she’s been saying for years I need to retire and I spend too much time at the office, and really it got to the point where I agreed that, yes, I do spend too much time at the office and I need to do something about it.’
‘That’s very interesting, so this is a conversation that’s been happening for some time, is it?’
‘Well, yes, it is.’ ‘It’s got to the point where you need to do something about it?’
‘Yes, absolutely.’
You’re really repeating back to them what they have said to you, but you are ascertaining the motivation for the phone call.
Sometimes people say, ‘It’s serendipity!’
I was thinking about selling the business or leaving the business, and your letter arrived that morning.’
That’s something you’ll encounter – have you heard that already? [Several voices from the audience murmur agreement]
Yes, it’s interesting, because clearly it is a genuine coincidence, but people read into it far more, depending on people’s belief systems.
Sometimes they see it as a message.
They see it as a sign.
That’s fine, if that’s the way it’s perceived, that’s absolutely fine.
You see, the truth of the matter is – and this may not be the case in your situation – but you may have had half a dozen of those letters over the years but just ignored them because that’s not where your head was.
When you are thinking that way and the letter arrives, it feels like a coincidence that you cannot ignore.
‘Who owns the company and in what percentages?’
Why do you want to know this?
Who’s in control?
Who are you talking to?
You might discover you’re not even talking to the owner, so this is a qualification process.
Anyone who’s ever worked in sales of any description – the people who work in property, you know this.
You’ve got to qualify the person that you’re speaking to, which is really what the brokers are doing to you when they’re asking for proof of funding.
They’re doing it in reverse back to you.
You want to qualify that the person that you’re speaking to has the authority to have this type of conversation. ‘Do your partners know we are speaking?’
If you’re speaking to a 20 per cent shareholder and their partners don’t know that you’re having the conversation, then there’s something kind of wrong here. The ideal scenario is one owner.
The ideal scenario is one owner because you’ve got one person to talk to, one person makes the decisions, and you don’t have any shareholder tension where one person is more keen to exit than others.
Those were the first three questions.
On next week’s podcast, we’ll cover the next three and this will be a regular feature for the next few podcasts, so you can build up a library of questions to ask when you speak to a seller on the phone.
I always find it very interesting meeting people who’ve been successful in business, especially people who’ve been successful at building and selling a business.
Recently I was fortunate enough to interview Neville Wright, who founded a company called Kiddicare and sold it a few years ago in a cash deal, £70 million.
When I met with Neville, I asked him how the deal was done.
[Transcript of extract from recorded interview]
We did the due diligence on ourselves so that people could look at it, examine it and they wouldn’t have to do it themselves, so it cut a lot of time out.
It seemed to be expensive at the time because we was investing in something that actually we didn’t know whether we’d get any bids for.
We had 11 companies who wanted to buy us, these buyout companies – I don’t know what they’re called – but 11 people we dismissed straight away.
These were private equity firms?
Private equity, that’s it.
You weren’t interested in selling to them?
No, because we had two years previous, somebody wanted to buy it. They wanted to pick it up, basically, for nothing. They valued part of it at £40 million. They wanted to give us £15 million cash. They wanted us to keep £25 million in, but when it came to the crunch, they wanted to put a debt on the business of £15 million to give us it. I thought, well, I can do that myself. Also, they said, ‘This business is going to be sold in three years’ time for £120 million.’ I go, ‘How are you going to do that?’ They said, ‘We’re not. You are.’ I thought fuck off! [Laughter from audience] I might as well do it myself. So anyway, they were out.
They want to incentivise you to build the business on their behalf, you working for them, and then you make more money on the secondary buyout three years in the future.
Yes, I didn’t want that. No, I didn’t want that. So those 11 had gone. Then it came to there was three people thought, well, we’ll pick it up for a steal, and so they’re gone. Then there were some people who said £40 million to £50 million, and they’d gone. This was over a period of time.
Did Grant Thornton guide you on the value?
At the time, yes, they did.
They steered you. How accurate were they, from the very first number that they said to the number that you ended up with?
Well, we thought we was going to pay them commission on £40 million to £50 million.
Actually, they got a better value for you than what they estimated.
How they was ratcheting after £40 million, we thought that’s a lot of money but we won’t be paying it anyway because we won’t get it. They’re very cute at what they do but very good as well, because when it went to £50 million and then £60 million, and there was eight people left in the bidding…
At this stage, how many people are – you’ve got eight – so there’s an auction process that they’re running?
Auction, yes, it was an auction basically, and they could see the value of the business. You’ve got to remember it’s 2011, so we was in the recession. Now, we’d already made up our mind we was going to go to £200 million. Now, do we go to £200 million organically how we was doing it, or do we buy something to bolt on to us? Now, the whole of the high street was in turmoil. They was falling like a pack of cards, the high street was, so there’s desperation. Now, do we become a hunter and hunt for acquisitions to get it up to £200 million, because profit margins were going down? One day I thought this is too much. We’ve been in it 34 years. We’d got another business running alongside of it for that time, and I thought retail is getting harder, so why not become the hunted? Everybody else was hunting for bolt-on acquisitions for keep their business alive, so that’s what we did. That’s really the reason why we put it on the market because I have to go one way or the other and that was the easiest thing and the most profitable thing to do for us.
You’ve got Grant Thornton running an auction process. You’ve got eight or nine…
Eight.
Eight bidders, and the price is going up and people start dropping out, and it gets hard…
No, it wasn’t dropping out.
Really?
No, that’s what the strange thing was. It was obviously the right price because I think, at the end of the day, there was seven. I think they presented seven bids, and they was basically all the same.
Then you chose who to go with based upon…
Ten minutes, it took ten minutes…
…ability to complete the deal?
Yes.
Not putting debt into the company because that was important to you, and retaining the staff and the branding and the…
Yes, 39 per cent was our own brands. We was developing our own different type, different names, different brands, so yes. That was it. Now, there’s seven people there, all bidding, but they wanted it for different things, different reasons, and…
Did the motivation, then, of the buyer make a difference to you?
I felt sorry for some because it was rumoured that they was all spending about £2 million on the due diligence and everything else.
At this point there was no exclusivity, so they’d already done due diligence?
They let those seven into the data room. They didn’t let anybody else in before that. They didn’t let the 23 in.
Really it was a race to put forward the best offer and then complete.
Yes.
If you’re looking at the timescale from those seven people, those seven companies having access to the data room to completing, what would you say the timescale was?
It was about a month for the data room and then that was January 29th we decided on who we was going to sell it to, and it was completed on 14th February, so it was very quick.
Isn’t it fascinating stuff? Next week we’ll be hearing more from Neville but, in the meantime, if you would like to download the entire interview, go to our website: www.thedealmakersacademy.com/podcast to find the full interview. One of the questions I get all the time is, ‘How do you find the right advisers? How do you build a fantastic deal team around you?’ Now, I’m very fortunate to work with an exceptionally experienced deal team, which means that buying and selling businesses is a lot easier. Let’s listen in on an interview that I did with two of my advisers, [?Michael 0:15:22.9] and [?Mark 0:15:23.7], and listen to what they think is critically important about choosing the right advisers.
[Transcript of extract from recorded interview]
You need to have a good insolvency lawyer. If you’re dealing with insolvency practitioners, you have to have an insolvency lawyer. I’m not saying other lawyers can’t do it, but you end up spending so much time in dealing with them. Again, from an insolvency practitioner’s point of view, you’re dealing with people that you have to effectively teach if they don’t understand the law. Generally, the approaches would be led by the insolvency solicitor back to us, but sometimes an insolvency practitioner themselves are engaged. That would tend to be where you’ve got a lot of complexities and you want someone to go down on the floor and get their hands dirty and get as far as you can in due diligence terms, to get the nuts and bolts of where your exposure might be. It’s very much a solicitor-driven process from the other side and, as I say, you would need insolvency credentials to make it work. Otherwise you’ll be paying more as well because you’re paying for people to learn what they should be doing.
Which actually brings us quite nicely to building the costs of the process into the price.
Obviously, it depends, yes, from an insolvency practitioner’s point of view. If I’m engaged to assist in acquiring, then you may look at percentile basis fees in terms of the acquisition. Legal fees, equally, will depend on the solicitors you’re engaging with as to how they will seek to be remunerated. Often these can be driven alongside success, but that would be what you would have to consider as part and parcel of the cost of acquisition. You get the benefits of the cheap deal, but you need to understand what you’re buying in these circumstances. That means you need to have the right people to tell you, with the right PI to cover you in case it goes wrong.
What I would say is that the first time you do something like this, it feels like everything is unknown because there’s nothing to relate it to in your regular business experience. Actually, having the team to support you and to guide you with the very best intentions at the heart of everything that they’re doing is absolutely critical.
It’s a community as well.
That’s a good point.
The practitioners from all disciplines, they all know each other within the circle, so you can have some very sensible and open conversations with IPs that you’ve worked with before. What I particularly had in mind with this point, if you do a liquidation, you do an administration, obviously IP is going to charge a fee. That would come either from the cash bank at the company or from the proceeds of realisation or from the pocket of the directors if there’s no other avenue. If you are lining up a deal, say, a £50,000 sale, the IP will know that that’s going to come in and so you’re not going to have to prepay the IP (which is hard to say!) He will know that the money’s coming in and that his fee will come out of, in my scenario, the £50,000. You’re not going to have to pay him £5,000, £10,000, £15,000 up front and then pay him all over again. That’s what I had in mind with that point.
You’re making sure that the IP’s fee is covered by…
Money you’re going to pay anyway.
Does that make sense? You’re not paying the IP and you’re not paying for the assets. You pay for the assets, but the IP gets paid out of that asset fund.
The other person that you may or may not need as part of this process is a good insolvency valuer. We both know people, but…
We have one coming in the next couple of months.
Yes, we will. Valuing insolvent assets is a whole specialism of its own. I don’t quite know how they do it sometimes! You don’t just go to your high-street valuer and say, ‘I’ve got an insolvent company.’ You go to somebody who knows how to value assets in distress.
Is it fair to say that they are a little bit like property valuers in that they are very prudent on their valuation?
You tend to get a range, so low to high. Now, from an acquirer’s point of view, you’re going to get a lower valuation than you will get if you went to a normal valuer, so it’s advantageous to use an insolvency valuer anyway. They will give us a range from an in-situ valuation – so if you’re buying it, staying in the same site – to an ex-situ valuation, which would be the lower end, what we used to call a forced sale, but we’re not allowed to any more. Yes, it’s in-situ and ex-situ valuations, but…
You’ve got your range, and you’ve got someone who is willing to move quickly, then you probably move towards the bottom end of that range. If that person says, ‘Look, we can do the deal by Friday, but we can’t go to the top of the range. We can go here, but we’re ready to go. We’re ready to sign.’
That’s right.
You provide the contracts, don’t you?
The contracts will initially be drafted by us, by the solicitors acting for the administrators, but then you need a solicitor on your side to also look at those, if only to tell you that you’re not getting any warranties or guarantees or anything. [Over speaking and unclear words, very softly spoken 0:20:56.4] There is, there is, but these don’t tend to be War and Peace in terms of contracts. Just touching back on the point about approaching the insolvency practitioner, if you’ve got the right advice at the start, we can be forced into a position. If you go in and say, ‘Right, I’m going to put £50,000; here’s my proof of funding; it’s with my lawyers who are instructed, once we’ve signed the deal, to send it over to you. The offer’s open for 24 hours, and here’s the valuation.’
That’s really important to know.
If I’ve got cash under my nose and that’s also going to pay my fees and my legal fees, then that’s very attractive, particularly if I’ve only got some other people who are messing around saying, ‘Well, we might be interested,’ and they’re not advised. Then it’s going to make it far more likely that I’m going to go for a discounted amount where I’ve got certainty.
I’ve had Michael phone an IP on my behalf because he’ll have a more professional conversation and used the right terminology.
This is the thing I was just going to say, because you’ll come across most situations where the company is probably going to be transferred back to the previous owners in some way, shape or form. Your IP may well be quite keen to see that through because that’s the basis on which he’s been approached in the first place. He wants to keep faith with the people who came to see him originally. You might find that if you ring up the IP and say, ‘I see you’ve got such-and-such a business for sale. Please call me back; I’m a very interested buyer,’ you never get a call back because the IP doesn’t want to hear from you. He’s morally bound to the people who’ve given him the job in the first place to get it back.
That post-it note with the message might conveniently get lost.
They blow away. [Laughter from audience] The way to deal with that, and what we’ve done for you on that occasion you’re talking about, is we get in front of someone in the firm of the IPs. We make it absolutely clear that we have cash in a certain amount to do a deal now at a value which is going to be, well, equal to or better than the likely realisation. Then we make it clear that if he doesn’t talk to us, he’s going to be in breach of his obligations to get the best value that he can for the creditors because we can provide more cash than the people he might already be talking to. Suddenly they call you back.
We’ll be hearing more from Michael and Mark next week. One of the questions people often ask is, ‘How do I finance an acquisition?’ Well, I have got a great finance guy, and I want you to meet [?Neil 00:23:49.4]. Neil’s talking now about asset-based finance and how you can use the assets of a business to finance the acquisition.
[Transcript of extract from recorded interview]
Very simply, if you was a business owner and wanted to go and buy a car or a truck or a piece of machinery, you might do it via a lease or via HP. That’s what I would do. I would have a look at the equipment that you’re buying, come to some sort of agreement with you. We do the due diligence; we do the credit checks and the background; we analyse your accounts et cetera, and we come back and we say, ‘Yes, we’ll lend this money to you at 90 per cent loan to value, so you need to give us a ten per cent deposit plus the VAT.’ You then pay for it over a period of time, at the end of which you own it. If it’s a lease, it’s just a rental. There’s whys and wherefores as to why you would do one or the other but, essentially, it’s a way of acquiring equipment that is going to generate money for your business.
What about existing equipment in the business?
The follow-on from that is that you may choose to raise money in your existing business or the business that you’re about to purchase. Have a look at the assets that are in the business, and these are physical assets I’m talking about. If it’s got a wheel on it, if it runs on some kind of diesel oil, so it might be machinery in a factory et cetera, there’s a value to it. Can we see a value in that equipment, see that it’s unencumbered or there’s enough equity in it that we can pay off any debt? We would raise money from those assets in the form of, again, an HP or a lease, or we buy the equipment from the company. That raises cash; that cash goes back to you, and you pay us the debt on a fixed-term basis.
Let’s look at it from a very practical perspective because we did this with that coach and bus company. You’re going to look at, in this case it was vehicles, and you’re going to put a value estimate on those and what you would lend against those.
Yes, I think in that instance, without going into too many details, it was a coach company. I think there was 25, 26 vehicles, give or take. We’d got certain information, so we’d got the registration of the vehicle, so I could track it and make sure that it was HPI’d okay. We’d got the mileage of it and the age, and from that I can take a valuation. I think the valuation in that case was approximately £2 million, something like that, and we said, basically, we could probably lend to about 80 per cent of that value because we liked the assets. The reason we go to 80 per cent is that it still leaves a little bit of skin in the game for us so that if things don’t go right, we’re asset secure. If we have to sell the assets quickly, we’re covered; we can get our debt back, and that makes it easier for you guys as well.
May I just introduce a point here? Your valuation of those assets, which you’re going to put into writing as a proposal, is going to be erring on the side of caution and is going to be prudent.
Yes, absolutely, again, we talk about our security. We are in the risk business. We’re here to lend, but we do it sensibly. Again, let’s go to the coach company. If you’ve got a vehicle, it’s a 56-seater coach, it’s a couple of years old, and you as a coach operator go, ‘Well, that coach is worth £150,000.’
We may value that at £120,000, and these are just rough figures, and the reason for that is yes, it might be worth £150,000 if we want to sit on it for 90 days to sell it, but if we need to sell it quickly to recover our debt, then essentially, it’s a fire sale.
That’s how we may value certain pieces of kit, say, ‘How long is it going to take us to get rid of it, therefore what’s the value we can put against it?’ The seller might be sitting there going, ‘I’ve got £2 million worth of coaches, and we might be sitting there going, ‘Well, we’ll lend you £1.3 million, £1.4 million.’
Can I just see this from a buyer’s perspective? The seller’s saying, ‘I think the value is £2 million,’ and you say, ‘Well, I’ve had a professional valuation done, and actually it’s £1.7 million. Here it is.’ It actually means that the negotiating is done for you. Someone else is saying, ‘This is the value,’ rather than you arguing over the value.
That was asset-based finance. Next week we’ll be again delving into the world of finance to find out how to finance our acquisitions. I hope you’ve enjoyed this week’s podcast. There’ll be more next week. In the meantime, go to www.thedealmakersacademy.com to find out more information about our courses, how to get yourself on to a seminar, how we can meet up and I can personally teach you how to buy and sell businesses. See you next time.
