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 #3, Jonathan Jay from The Dealmaker’s Academy covers:
- What it takes to sell a £70 million business
- What lenders want to know before they’ll agree to finance your acquisition
- Why a distressed company is an opportunity in disguise
- The next three questions to ask in your first conversation with a business owner
Listen to find out:
- The best time to sell a business
- The mistake sellers often make with timing the sale of the business
- Why persistence paid off for one business broker
- The qualities Kiddicare’s former owner wanted to see in a buyer
- What criteria lenders will use when deciding whether to finance your deal
- Why you don’t need to own your own home to get finance for a business acquisition
- Why keeping the exiting owner or manage team locked into the business will help you to raise finance
- Why you need to show financiers proof of address forms along with the last set of filed and management accounts
- How to speed up the funding process
- Why an insolvency situation is almost always an opportunity
- The two things you won’t get from insolvency practitioners in a distressed sale
- The best time to snap up the assets of an insolvent company
- Why speed is essential to insolvency practitioners
- Why offering deferred consideration will push you down the IP’s list of potential buyers
- Why IPs want cash offers
- Why you should network with insolvency practitioners
- Why IPs prefer buyers who are interested in one or two specific sectors
- What puts IPs offer
- Three more questions you should ask during the first conversation with a business owner
- The words to use in a conversation with a business owner
- How to retain control in your relationship with a business owner
Prefer to Read? Here’s the transcript:
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 Episode 3 of Business Buying Strategies.
Today, we’re going to talk about what it takes to sell a £70 million business.
What do the numbers look like?
We’re also going to talk about what lenders are looking for when you’re looking for finance for an acquisition and also when a distressed acquisition is an opportunity.
We’re also going to cover three more great questions to ask when you’re speaking to a prospective seller on the phone, so let’s get started.
When I met with Neville Wright, who founded Kiddicare, he sold it in a £70 million deal, I asked him, ‘What does it take to sell a £70 million business? What do the numbers look like?’ and this is what he said.
[Transcript of pre-recorded interview]
Could you just give us a snapshot of where Kiddicare was to warrant that price tag? Where was it in terms of size/revenue/profit/number of staff/number of locations?
One location. We’d been down the route before of multiple locations and my wife and I didn’t like that. One of us would be in one shop, one would be in another, and I’d be going round sorting things out, whereas we focussed on one shop. We had, at exit, 130 people working with us and the turnover was 40 million, but everything was geared up for 200 million. The pick and pack, the warehouse, the systems we had, were geared up to go from 40 million to 200, so there was plenty of upside for the buyer.
Do you feel that created part of the value then, that everything was set up for growth?
Always, people say, ‘I’m going to leave the business until it’s at the top, then I’ll sell it,’ but that’s not the time to sell it. The time to sell it is before it gets to that top and so you’ve got plenty in it for the buyer. Then people starting leaving pieces out and they shouldn’t. They should give the buyer more opportunity than they initially think they’re getting.
What was the motivation for selling? Can you pinpoint a moment when you said to your wife, ‘This is the time. I think we’re ready.’
Each sale was a different opportunity and a different reason.
The last one, I’m talking about the last Kiddicare one, the motivation was this guy from Grant Thornton rang me about five years beforehand and I didn’t want to sell.
He said, ‘I’ve got a buyer,’ and I didn’t want to sell because we were just building a new shop and it was too exciting.
You’ve got to be very, very careful when you say, ‘No,’ to somebody because they’re not just going to walk away.
They might buy a competitor and do you out of business.
They might start up against you.
There’s lots of things.
They’re not going to walk away.
I said, ‘No,’ and this was five years before.
Three years before we sold, they were ringing about every three months, ‘Do you want to sell your business?’ I said, ‘No, because it’s going really, really well now and we’re now building the biggest retail nursery business in the UK.’ This was the next one we were building.
We’d outgrown the other one in two years.
He kept ringing and I was very polite and kept saying, ‘No, we don’t want to sell.’
One day, I was feeling ill, I was feeling a bit down, which is so unusual but obviously people get that sometimes, and he rang just when really I ought to be in bed because I was ill. He rang and he said, ‘How’s the family? How’s the business going?
How’s everything going?
Where are you going on holiday?
What are you doing for Christmas, blah-blah-blah?’ and I thought, I’ve had enough of you.
What a load of shit, I thought.
I was going, ‘Yes, I’m fine. Okay.’ He said, ‘Don’t forget I’ve got somebody who wants to buy your business.’ I thought, I don’t want to hear from you again and I said, ‘Well, actually I’ve got a business for sale.’
He’d been asking me for five years. Silence. He said, ‘Am I hearing you right?’ and I go, ‘Yes,’ and in that second I thought, I have got a business for sale.
This will shut him up and I’ll never hear from him again.
He said, ‘I’ll come in tomorrow. We’ll do the paperwork.’ He came in and within just a few weeks he’d got 30 offers, so it was a window of opportunity.
The person who was calling you, they weren’t representing a particular buyer then. They thought there was going to be interest in the market. They were pitching you to represent you.
Yes, there was a buyer.
There was someone?
There was a buyer for five years.
They didn’t get it but they were there bidding the same amount.
I didn’t think the company would survive if we joined them because they were loading their own company up with debt.
To pay us 70 million they would have had to have loaded their company up with more debt, and I didn’t think it was right.
Actually, you cared about the outcome of the business and the survival of the business beyond the sale?
Oh, definitely. Yes, yes, there were certain things we wanted for the business.
We wanted it to be left independently.
We wanted the name, if possible, to be left.
We wanted the staff to have jobs because we had been offered nearly £5 million more than we – no, £9.5 million more, which we turned down, from a company that just wanted to shut it.
That would have meant 130 jobs.
We were asking them to keep all the suppliers, because there were a lot of small suppliers, so that was our wish list and they said, ‘Yes, yes, yes, yes.’ That was after the sale.
When they said, ‘Yes,’ though, was that contractually they were saying, ‘Yes,’ or it was done on an understanding?
Well, it was obviously done on an understanding, but they had a billion pounds in the bank and we thought the chances are that they would honour that, which they did.
Next week, we’ll be meeting Martin Dawes, who sold Coffee Republic in a multi-million pound deal.
It’s a fascinating story and I’ll be asking him how he did it. When you want to finance an acquisition by borrowing money, you sometimes wonder, what are the criteria that lenders use?
Let’s find out from a finance expert exactly what lenders are looking for.
Okay, so we will do new-start businesses but if we’re looking at a new-start business, then we’re looking at the people behind it. We’re looking at the individuals. We’re covered by certain regulations.
We need to do anti-money laundering checks, we need to do what we call ‘know your customer’, so we need to prove and verify that you guys are alive, you’ve got a pulse, you’re not convicted terrorists; this kind of thing.
We have to go through a certain mount of checks.
We would look for security behind you guys in the start of a new business, so we would prefer home owners with equity, but that’s at the very start.
If you’re then buying a business that’s existing, we’ll look to the strength of the business and we’ll look to what you’re bringing to the party.
Now, one particular example we’re looking at at the moment, we’ve got a seven-year-old trading business.
It’s very good business.
It’s not distressed.
It’s run by a family.
They’re looking at it from an entrepreneur point of view, so they’ve built it to the point that they can and they want to sell it.
They’ve got a guy come along who is not a homeowner, so we’re looking at that going, okay, what’s the strength in this?
We’ve got strength in the assets.
We’ve got a really good asset base.
We’ve got a really good set of invoices, a ledger, that we can finance against.
The reason that we’re looking at this is part of the agreement is the existing management company, who are the directors and the shareholders at the moment, are going to become employees and are going to stay on as the management team for the next three years on a deferred payment.
If they don’t…
You don’t realise this, but this ties in very nicely with that we’ve talked about before, which is keeping the exiting owner on a consultancy agreement and keeping them locked into the business in such a way that it, this is an extra benefit, actually allows you to finance off the strength of the management team that has been in place and built the business to where it is.
As funders, we’re here to lend money, so we’ll try and find a way to do it.
The easier you can make our job – so make sure that you’ve got all of the information.
If you’re going go out to the market, make sure that you can prove who you are. We’re always going to ask for a couple of proofs of address.
When you start getting into the financials, make sure that you’ve got management accounts; make sure that you’ve got the last set of filed accounts; make sure you’ve got a business plan as to where you think you’re going to take the business.
All of these things make our life easier because we always go down the path of least resistance, if that makes sense.
Someone comes to you with a pack of – saying, ‘This is the business we’re looking at buying.
This is the assets. This is what’s outstanding.
This is how we’re going to structure it.’ They give it all to you in one go and you can come back with the proposal?
Yes, absolutely, and quite often this does come to us through brokers of one sort or another.
We might be working with an IP practitioner or something like that.
Quite often, in this situation, this comes to us as a fully-packaged deal, but, guys, just pick the phone up and ask me. That’s the simple thing if you’re not sure.
It’s like getting ready for a mortgage application.
If you’ve got everything in place, it makes life a lot easier later on rather than…
The other thing as well, you’ve mentioned we’re looking for speed of sale in this situation, so if you go, ‘Here I am, Neil. This is me. This is my passport. Go and search my home address.’ I’m like, ‘Brilliant. Where’s the accounts, bank statements?’ all the things we ask for.
If it delays out, you’re delaying the deal, so the quicker we have everything the quicker it is for you guys anyway.
It’s just going to be a smoother process.
The seller is going to have a bit more confidence in you guys as well.
We’ll be back with Neil next week with some more questions on financing acquisitions.
Sometimes you see a business for sale that is in a distressed situation and the question to ask yourself is, is this an opportunity or not?
Let’s find out from our resident experts when a distressed business is an opportunity to grab with both hands.
[Transcript of pre-recorded interview]
An insolvency situation is almost always an opportunity.
What you’ve often got is a situation where there is a core business that is valuable but, for lack of management or there may be bad debt, that has caused the company to be in a situation it just can’t reverse out of.
Now, what that leads to an insolvency practitioner doing is effectively managing that business and looking for someone to acquire it.
Now, there isn’t any real mystery about it.
We’re very keen as insolvency practitioners to offload businesses.
We don’t like trading them.
It is about getting the knowledge of those.
We transact as anybody else transacts, except if you’re dealing with an insolvency practitioner we don’t give warranties, we don’t give guarantees, so it’s very much sold as seen.
It’s very important when you’re going in and trying to acquire from an insolvency practitioner that you have appropriate advice. Have you got any comment on that?
Yes, it’s true.
Companies that are facing insolvency are not valueless.
There will be assets within that company that someone in the industry will want to acquire.
Companies which are facing insolvency, usually the directors would be looking to acquire it back first, and we can talk about pre-packs and things like that.
If the insolvency practitioner is faced with having to realise assets by taking them to market, it is an excellent opportunity for people in the industry, particularly who might be competitors and know something of the company going into administration.
The administrator isn’t going to give you any warranties.
He’s going to give you an information pack but you make your own decisions.
If you’re in the industry already you might know a little bit about the problems facing that company, the problems facing the industry generally.
You will get a good deal but you’re taking the risk that what you’re buying is what you think you’re buying.
I think that is very important and speed is of the essence when dealing with insolvency practitioners in these sort of acquisitions.
As I was saying, we don’t like – we’re very costly in terms of operating business, so offloading them very quickly is key and cash is key.
We’re not really particularly interested – I’m not saying we don’t do it but deferred consideration tends to be something that puts you down the list in terms of potential purchasers.
We will ascribe more value as such to cash offers in so far that it gives us some certainty.
In terms of going back to the creditors of the target company, they’ve got certainty as to what they want, what they’re going to see, and that makes my reporting and my agreement to fees far easier, which is a matter close to my heart.
Now, the important thing is becoming aware of these opportunities.
There are approximately 1000 insolvency practices across the country.
How do you get into each of those?
There are, and to Neil, our colleague over at the back, websites now that do provide access to them. They’re doing a lot of the work for you but they are also – other people are looking at those, so it’s very much about getting contacts within the industry that are able to give you the heads up in terms of potential opportunities.
Let me ask a couple of questions here. You said speed is important, so what’s your definition of speed? You’re instructed on a Monday. How quickly do you want to sell that business?
Of course, it is dependent on the type of business.
I’m trading one at the moment that we’ve traded for a number of months, but generally speaking we’re looking at a number of weeks, if not a week.
Now, again, it may be that there are competing bids there and the approach to the insolvency practitioner is about showing how quickly you can move and pushing the insolvency practitioner, boxing him in to a situation, then putting a cash bid forward with a very strict timetable yourselves.
It’s being prepared to move quickly; making your offer with evidence of funding.
We’ll then take you seriously. If we’ve got to keep pushing for further information from you, then we won’t engage with you.
We need people who are serious.
What turns you off? If someone was to phone you and say, ‘I’m a business investor and I’m looking for businesses that you might be appointed on,’ presumably, your first question is going to be, ‘What sector?’
If the answer back is, ‘Any,’ how do you feel about that?
Clearly, it makes it less attractive from our perspective.
We do, for example, keep databases of people who are interested in specific industries, but you’re far more likely to have more focus from us if you are focussed on one or two particular types of industry.
Someone just coming up and saying, ‘We’ve got money,’ well, that does happen a lot and we do see it a lot.
It really is nailing down the IP and saying, ‘Look, I’m into this area,’ and actually pestering them.
I’m not saying you pick up the phone every day, but a phone call every couple of weeks or every month, that certainly doesn’t hurt. It keeps the relationships alive and opportunities will arise that are appropriate.
Then it’s about moving quickly.
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.
This is a very broad question and I think we ask this on the phone conversation but not in the first few minutes:
- ‘What’s the trading situation at the moment?’
Now, I realise that ‘trading’ is a bit of an old-fashioned word, I realise that ‘trading’ feels a little bit dated, but I’m using it as a deliberately vague word to allow them to talk to me.
‘What is the trading position like?’ because it could mean any number of things.
Let’s find out what they think it means.
It might be, ‘Well, it’s been a tough year.’ It’s unlikely that they say, ‘Things are taking off like a rocket.’ That’s unlikely. ‘What’s the trading situation at the moment?’
Again, every time you ask a question, and this is really just good sales practice for those of you who have worked in sales or been trained in sales, you ask the question and you shut up.
‘What’s the trading situation at the moment?’ Shut up and just let them talk.
‘How many staff do you have?’ This is where we are discovering whether it’s a one-man band.
Ideally, what you want is to have a number of staff that means that there is going to be some management in the business.
The management might be the office manager.
Now, remember that the office manager probably knows everything about everything and probably does run the business on a day-to-day basis.
Just because they don’t have the title ‘managing director’ is not a negative.
A managing director might do exactly the same as an office manager but is just on a higher salary.
Finding out how many staff is – where they say, ‘Well, it’s me and a part-timer.’ Well, okay, that looks like a business that really is providing the owner with a job, and the part timer is like the support/admin person usually.
It doesn’t mean you should rule it out if you’re using a strategy of absorbing other people’s clients and contracts into your business.
In fact, you’d be quite happy to see the owner exit; quite happy for the part-timer to come on board, even if it’s for a brief period of time, to assist with the integration.
Just because it’s a one-person or a two-person business, doesn’t rule it out, but when you hear there are 30 staff, you know that there’s some degree of management structure in there.
There’s got to be. You’re not going to have, or we hope we’re not going to have, one person who’s running 30 people.
The general management principle, as many of you know, I’m sure, is that usually six or seven report to one person. If you’re looking at 30 people, you might be looking at a management team of five or six people, which is wonderful because now you’re buying management. Here’s a question that you’re throwing out there and you’re listening very carefully to the answer. ‘If we were to come to an arrangement…’
Now, arrangement is a great word. Not, ‘If I was to buy your business. If I was to give you money. If you were to sell it to me.’
None of those hard words that start to create a little bit of a reaction in people of this is a sales process.
We’re trying to de-sales a sales process. ‘If we were to come to an arrangement, what would you ideal timescale be?’ ‘If we were to come to an arrangement, what would your ideal timescale be?’ and all of these answers that they are giving you, you are writing down.
Do you remember the strategy we discussed last time?
The seller phones you, and I know that we saw this last time, where, yes, that’s right, I’m remembering now, you were caught on the hop, weren’t you? You didn’t have a pen on you. You were caught unawares.
Remember, if someone calls you and you really aren’t in a position to sit down in a quiet room with your pad and your pen, have your laptop open so you can looking at their website while they’re talking to you, you always call them back.
You must maintain control of the situation.
The best way to keep control of the situation is you call them back when they’re unawares, when they’re on the hop, because you get more honest answers that way.
They haven’t prepared for it.
This is all about taking the psychological advantage.
You’re writing down the answers to these questions because when you meet face to face you’ll probably ask exactly the same questions again, but now you can compare the answers.
Let’s say that they’re reasonably savvy.
They’re not going to tell you that their timescale is urgent in that first phone call.
They’re going to say, ‘Oh, we’re in no hurry.’ When they’ve had a coffee with you and they’ve got to know you a little bit better, then the truth will come out and that’s when, ‘We need to do this by Easter.’
The person I was talking to yesterday wants to do the deal by September because it’s a new academic year in September, so this is a nursery.
She’s 70 years old, she wants to retire and she wants to not have to start another year.
I hope you’ve enjoyed this week’s podcast.
There’ll be more next week.
In the meantime, learn more about our courses; how to get yourself onto a seminar; how we can meet up and I can personally teach you how to buy and sell businesses.
See you next time.