Welcome to the podcast where you find all the very best information on how to buy and sell businesses and become a dealmaker. In Business Buying Strategies podcast #2, Jonathan Jay from The Dealmaker’s Academy covers:
- The lessons the founder of Kiddicare learnt from the £70 million saleof his company
- How to arrange finance in a hurry
- How to cherry-pick deals to ensure you’re not stuck with a lemon
- How to buy the right assets when you’re buying a business
- The next three questions to ask in your first conversation with a business owner
Listen to find out:
- Why in retrospect Kiddicare’s founder would sell or license the company’s operating system rather than its shops
- The importance of advisers in a multi-million-pound sale
- How having advisers stopped Kiddicare’s owner for selling the company for a lot less
- How finance can be arrangedin a week or less
- What financiers will take into consideration before providing asset finance or a refinance deal
- The obligations of insolvency practitioners and why it matters to you
- When IPs will doa break-up asset sale
- Why buyers cherry-pick assets
- What kind of assets get cherry-picked and why
- When buyers might be liable for TUPE
- When you’ll need to hire an HR professional
- The difference between a share sale and an asset sale
- Buying a business as a going concern versus buying individual assets
- The benefits of buying shares
- The benefits of buying assets only
- When to put a company through an insolvency process
- The next three questions you should ask a business owner in your first conversation
- How to determine how complex the deal might be
- Why you should ask for the name of the limited company
- What you can discover at Companies House
- The research you should conduct at Companies House
- Why you should ask if the owner has other businesses
- Why the words ‘disposing of’ are better than ‘selling’
- Why you should ask if the owner has family members in the business
- The YouTube videos you should watch to understand family-run businesses
- How family dynamics can turn a good business bad
Prefer to read? Read the transcript below:
Hello, and welcome. This is Jonathan Jay from the Dealmakers Academy, and 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 deal maker.
Welcome to episode two. Let me tell you what we’re going to be covering today; we’re going to be talking again to the founder of Kiddicare, who sold Kiddicare in an amazing £70 million cash deal. We’re going to be asking him what he would do differently, knowing what he knows now.
We’re then going to talk to our finance expert on how quickly finance can be arranged, and, also today, we’re going to be talking to our lawyer and our insolvency practitioner about cherry-picking in deals. How to buy the right assets when you’re buying a business, and we’re also going to be covering three more questions that you must ask when you speak to a seller on the phone, so, let’s get started.
Last week we met Neville Wright, who founded Kiddicare, that he sold in an amazing £70 million cash deal. This week I asked him what would he do differently, knowing what he knows now?
[Transcript of recorded interview]
Knowing what you know now, with the benefit of hindsight, would you have done the deal differently?
Yes, oh, yes.
Would you? In what way?
Well, Morrisons said they wanted our site. They didn’t want the shop, they wanted the operating system. That’s basically what they wanted. On hindsight, I should have sold them the operating system. As it was, they never used it, and they went to Ocado, and they rented an old system which was far…
This is the online ordering, e-commerce element of the business?
Yes. They wanted to get into e-commerce. They’d spent £500 million in the previous three years trying to get online, when I’m thinking, I could get online in a day, what’s wrong with them in that way? Three years later, and £176 million loss, they decided to rent Ocado for £217 million. I was thinking, why didn’t we keep the shop and sell them the operating system?
Or licence it to them?
Or licence it to them, and they didn’t use it, which was far superior to anything else. We was on our fourth-generation website, and we had our own platform.
How important were your advisers? Did you feel you had a good team around you?
Yes, I couldn’t have done without them, because I never spoke to anybody who was wanting to buy the business. I didn’t have a single conversation. They did it, and they did it through the management that we’d got. Three years beforehand, I hired somebody to, as financial officer, so, I hired them and they were very good with big businesses. They’d been used to working in, I think, Asda, so, what with him, and our managers, general manager, and what-have-you, they dealt with it all. I was out the scene.
Did that frustrate you, or were you happy with that? Did you want to know what was going on every five minutes?
No. Frustrating, yes, but I was out. I was basically out of the equation. I was out of the team. They said, ‘You keep out of it.’
After the sale…?
I’d have done the deal at £40 million! I’d have felt sorry for somebody, and I’d have gone, ‘Here, take it, take it.’
That’s what we talk about here! You actually did the opposite, so, if the buyer was trying to take you out for a coffee, and build a rapport with you, that was never going to happen, because you were shielded by your advisers?
They said, ‘Let us deal with the mathematics and the finances. You just carry on running the business’?
Yes. I’d been in the business, this is the one that we sold to Westfield last year, and I’d been on the board for six years on that, and, I believe we could have got a lot more money. A minimum of £8 million more, if we’d have given it to an agent, and I was overruled.
There are brokers, and there are brokers, aren’t there?
I mean, there are different…
Oh, I can imagine, but, from my experience with that one person, so, I was happy.
I think you got a good one there.
Isn’t if fascinating stuff?
Next week we’ll be hearing more from Neville.
A question people always ask about financing a deal is, ‘How quickly can finance be arranged?’, so let’s find out from our resident expert.
[Transcript of recorded interview]
Subject to the size of the deal, and the amount of work we need to put in, so, to give you an example, again, we’ve turned around a business purchase within about a week.
I think we raised somewhere in the region of about half-a-million for that.
That was from it first coming across our desk, to the assets being valued, and to the guys on the invoice financing doing their verification, to money out the door, we managed to do that.
We’ve had bigger deals where we’re into a couple of million, where we’ve had to do valuations of trucks that are out on the road during the week, so we have to do the valuations at the weekend, but they’re not always all there at the weekend, so that might have taken us a little bit longer.
In general, it’s a fairly fast turnaround, because, the valuations, if we’ve got the equipment, we’ve got a team of independent valuers that know this equipment, that can turn it around for me within a few hours. That then gives me the basis of what I might be able to lend on.
We then put that with all the analysis that we do on the financials, and we can turnaround a straight asset finance, or refinance deal, subject to valuation, or sight of the equipment, we can turn around and get an offer out within three or four hours.
Funds are always available, if the valuation and the numbers stack up, but I need to look at the numbers first to establish whether they stack up?
Could you give us an example…?
There’s been a number this year.
Like I said, we did one back end of last year which was, we needed to raise somewhere in the region of about £2 million.
This was a straight purchase.
There was no deferred payments, or anything, they just wanted the money upfront, and there was a massive broker fee in this particular deal.
It took us about two-and-a-half months, because the broker was changing the parameters of what we needed, but we raised £678,000, I think it was, against a fleet of trucks.
As I say, this took us a long time to get the values, because we’d turn up on a Saturday and the truck would actually be down in Norfolk, or something like that, but then we have the ledger.
Now, the trucks are relatively easy, because you can go, ‘It’s a DAF F40, and it’s this much money, it’s got this many miles on it’, and we can value that.
The ledger changes on a regular basis because they’re going to raise some invoices Sunday, and they’re going to get paid some more, so it varies.
When it came to the actual day of the deal, they hadn’t raised any invoices for about five days, so, the day of the ledger, they had it at the maximum they could, so we could lend against that to a certain value, but it was still – I was talking about this yesterday – I forget the figure.
It was about £18,000 short of what we needed to raise, the full £2 million, and we asked the broker, ‘Will you reduce your fee for 30 days, so we can finish the…
What was the fee?
It was about £140,000, so this is one of those corporate finance brokers we’re talking about.
‘Can we reduce the fee to be able to complete on the deal today, so that everybody can move forward, and then you take a deferred payment in 30 days, of the final balance?’, and they flatly refused to do it.
Absolutely flatly refused to do it, so, what actually happened in that case was, there was another invoice appeared on the ledger, basically!
How convenient. Funny that!
We’ll be back with Neil next week with some more questions on financing acquisitions.
When you’re buying a business, you have a choice between buying the shares and busying the assets, and when you buy the assets, you can select which assets you want to acquire, so let’s find out the technicalities of cherry-picking in deals.
[Transcript of recorded interview]
When you hear about, like Peter Jones buying Jessops, and buying these 50 stores, but not these 50 over here, talk about cherry-picking the best parts of a business, how does that work?
The IP’s starting position, and obligation, is to realise the assets for the creditors, the best interest to the creditors.
Generally speaking, I think it’s fair to say that the starting point is to try and sell the whole business as a going concern, if possible, because that will get the greatest realisation, but, if we’re doing a liquidation, the business is actually shut, or there are no bidders for a going concern, then the next best thing is to sell the assets on a break-up basis.
With the business sale as a going concern, there are VAT benefits for you, but, if we’re talking about that not being an option, then you might find that, maybe, I don’t know, the plant and equipment is what you want, but you don’t want to pay for what would otherwise have been the goodwill.
You might want, in particular in digital marketing, you might want the database, but you don’t want the whole business, so you can cherry-pick.
In a situation where the administrator, or the liquidator, is looking to sell whatever he can, you can cherry-pick the best bits and put bids in for those.
Equally, you can cherry-pick for different sites, so, if you are just concentrating on the north of England, you can make a bid for those, but, it depends very much upon where the liquidator, or the administrator, has got to in his process.
I think, in the very, very early days of the insolvency, the administrator, or the liquidator, will be looking to sell off the whole thing as a going concern.
Because it’s easier?
It’s an easier thing for you just to say, ‘Look, let’s just find someone who’ll buy the whole thing’?
It’s because you get the best return.
There is an issue here.
It’s also, from our perspective, it’s mitigating the liabilities as well, so, say, you’re doing a business sale, and I’ll leave Michael to talk more about this side of it, but you’ve got TUPE in terms of staff, so, from my perspective looking at the return to creditors, and the overall deficit position, actually, by offloading the staff in a sale as going concern, then I’m offloading, sort of, future liabilities, in terms of redundancy, pay in lieu of notice, so they transfer off, so, it is always my interest to do it on that basis, but that doesn’t always work, and, as Michael says, then you look at a break-up, and what could be most cost-effective there.
What one must speak of is, if you buy the whole business, pretty much, but if you try and cherry-pick, but you’ve got most of it, then you could be liable for TUPE anyway, so, again, it’s one to be very conscious of.
We’ll come to the whole TUPE thing in a… and for those of you who don’t have staff, or haven’t had staff in the past, that’s about transferring the staff from one entity to your existing, or to a new entity.
The rights follow.
The rights follow, yes, but I don’t think it’s a big deal.
You’ve just got to follow a process and have an HR professional who does it for you.
If you try and do it yourself, that’s when it goes wrong.
If you try and do your own paperwork with something like that, you’ll be using an out-of-date template off the internet.
You want an up-to-date, like Kelly, who just says, ‘Okay, right, I’ll take care of the whole thing. This is how much it’s going to cost.’
You don’t have to think about it again.
Let’s move on to the difference between a share sale and an asset sale, and buying a business as a going concern, versus buying individual assets.
Yes, so, we’ve talked a little bit of this already.
In any sale, distressed, or otherwise, broadly, you can buy the shares of the target company, or you can buy the assets of the target company, and in the story that Jonathan talked about earlier, it shows you the benefits of, in certain cases, just buying the assets as a going concern.
If you buy the shares, you’re stepping into the shoes of what went before. I’m mixing my metaphors, but you’re getting all of the skeletons in the closet that might potentially be in that company that you’re buying.
There are tax benefits in buying shares, entrepreneurs’ relief, et cetera, which Geoff will talk about later, that’s not my bag, but, if you do buy the shares, you’re buying everything that goes with it, warts and all.
If you’re buying the assets only, then you are buying those assets, you’re not necessarily buying any problems that go with it.
Secured creditors, et cetera, are exceptions, but, broadly speaking, that is the difference.
If you’re looking at a company which might have financial problems, it isn’t yet in insolvency, you might want to put the company through an insolvency process, just to make sure that you don’t end up picking up all of those problems that might already be the skeletons in the closet.
I think that’s right. Another reason you may look at a share purchase, and, again, understanding of those liabilities is important, but, it’s where you have contracts or registrations that are peculiar to the company itself, because, sometimes these aren’t necessarily easily transferrable, and they may look – I’ve done one recently where we had an EU grant, along with some intellectual property – now, in that sense, whilst I went in as administrator, I was selling the shares as a subsidiary, because, actually moving the EU grant would have been too complicated. It does happen from our side, but, generally, it’s few and far between on insolvency terms to do share sales, and, again, I’d say that’s probably for the later speaker to look at the tax implications of that.
We’ll be hearing more from Michael and Mark next week.
Last week we covered three of the questions that you should be asking a seller of a business on the phone the first time you speak to them.
Let’s find out three more questions that you need to have in your script when you speak to someone on the phone for the very first time.
[Transcript of recorded interview]
Let’s say there is more than one shareholder, so there’s more than one decision maker.
Is it possible that we get everyone together at the same time?
This is quite often where you discover that one’s based in Dubai, one’s based in South Africa, and it’s going to be difficult.
Now, it still might worth be pursuing but, compared to one owner, one coffee with one person, it’s a lot more complicated, so, at this stage, what we’re trying to evaluate is how complex is this all going to be, or is it going to flow smoother because there’s only one person involved?
A good question to ask right up-front, because, it’s an easy question to forget to ask in the excitement of the phone call is, ‘What is the name of the limited company?’, because maybe they’ve just told you the trading name.
Why do you want the name of the limited company?
So you can go to Companies House and you can find out who the owners are, you can find out who’s in control.
You used to be able to see the precise shareholding, you can’t do that now with the new confirmation statements, but you can get an idea of charges over the company, so, if you go to the tabs on Companies House for a company, you can see who has a charge over the business.
A latter conversation would be, ‘Explain to me why Barclays has a charge.’ You can also see if they are invoice discounting, or factoring in some way, because that company will have a charge over the business, so, finding out the name of the limited company, you find out all the information that’s now available at Companies House.
Some people have a trading name that’s very different to the company name, and they might just be in the habit of using that trading name because the company name is XYZ Limited, and just sits in the background, so, you might come off the phone thinking that you’re talking to ABC, when in actual fact it’s XYZ, so, finding out the name of the limited company is a really good piece of research to find out in that first phone call.
‘Do you own any other businesses?’, and this is where you discover that the company that they’re talking about is one of six.
Now, the opportunities are, ‘Is this the only business that you’re thinking of disposing of?’ By the way, disposing is a very good word to use, rather than selling.
Selling equals pound signs, disposing means shoving my problems over from me to you! I think selling presupposes that there is going to be a lot of money changing hands.
It feels like a big transaction. Disposing is, ‘So, how long have you been thinking of disposing of the business?’
That type of question is very good.
All of these language points really add up, and I think they separate, definitely from what I’ve seen in the Facebook group, they separate the amateurs from the professionals, and they separate the people who are just a bit of a car crash-type scenario, from the people who are handling it elegantly and professionally.
Here’s a good question to ask; Now, this is different to the shareholding question, ‘Are there any family members involved?’, and you’re hoping the answer is ‘No’, because the ‘Yes’ is, ‘Right, now we’ve got to persuade the brother-in-law’, and, ‘Yes, the office manager is my cousin’, and you’ve suddenly got all these family dynamics.
It’s worth going on YouTube to watch a series, I think it was only about six episodes, with the person who used to run Granada, whose name, for some reason, always escapes me. White hair, very softly-spoken, and he did a series on family businesses.
[Someone speaks in the background] Gerry Robinson, thank you! It’s a name that always escapes me, but the Gerry Robinson – Gerry with a G – Gerry Robinson series, and the Gerry Robinson book, are worth reading.
Now, just watch one episode on YouTube, and you will see how family dynamics in a business can mess it up.
Now, there is an advantage for you; it could be a perfectly good business, but the family all want to go their separate ways, or one wants out, and, ‘If that person leaves, I’m going to leave’, and, ‘I’m married to this person, so if they leave I’m going to be put under pressure to leave as well.’
Family dynamics can turn a good business bad, it creates hassle, because you’re not really a business negotiator any more, you’re a counsellor, so you’re counselling them through the process, but you might discover a rather good business as a result. So, are there any family members involved?
I hope you’ve enjoyed this week’s podcast. There’ll be more next week. In the meantime, go to HYPERLINK “https://www.thedealmakersacademy.com” 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.
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