Welcome to the business buying podcast where you find all the very best information on how to buy and sell businesses and become a dealmaker. In Business Buying Strategiespodcast #4, Jonathan Jay from The Dealmaker’s Academy covers:
- How Martyn Dawes, Coffee Nation’s founder, sold the business in a multi-million-pound deal
- Three more questions to ask in your first conversation with a business owner
- The difference between liquidation and administration and which offers the best opportunity
- An interview with Helen Moore, Operations Manager at Business Data which publishes the Business Sales Report about the number of businesses up for sale in the UK
Listen to find out:
- What’s involved in a multi-million-pound sale
- When Martyn Dawes, founder of Coffee Nation, first considered selling his business and why
- How Martyn raised £4 million of private equity funding
- Why exiting was always on the cards for Martyn
- How creating a new market category can make it challenging to attract funding or buyers
- How Martyn changed his mind about staying with Coffee Nation
- How to discover if a seller has hired a broker and what to do next
- How to find motivated sellers
- Why you should see companies in administration as opportunities
- How long a moratorium against legal processes can last
- Why it may be best to avoid businesses with winding-up orders
- The difference between administration and liquidation
- Why owners take their businesses off the market then relist them
- Why you should talk to owners who remove then relist their businesses
- One of the main reasons businesses don’t attract buyers
- How to approach the owner of a relisted business
- Why business performance often falls after the owner decides to sell
- Why you have more flexibility when it comes to deals with owners who can’t find other buyers
- Why establishing rapport with a seller is so critical to your success
- The number of businesses up for sale at any one time
- Two of the strongest motivations owners have for wanting to sell their businesses
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Hello and welcome.
This is Jonathan Jay from the Dealmaker’s 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 dealmaker.
Welcome to episode 4 of the podcast.
This week, I’ll be talking to the founder of Coffee Nation, Martyn Dawes, and find out how he’s sold his business in a multi-million pound deal.
We’ll be looking at the difference between liquidation and administration and which represents a better opportunity to investors.
We’ll be reviewing more questions that you should ask the seller of a business when you speak to them on the phone for the first time.
We’ll be talking to Helen Moore, Operations Manager at Business Data, the publisher of the Business Sale Report, which lists companies for sale throughout the UK. So let’s get started.
At last month’s mastermind meeting, I was lucky enough to meet Martyn Dawes, the founder of Coffee Nation which you probably remember as the company that served fresh bean-to-cup takeaway coffee from machines in garages, motorway services, newsagents and supermarkets.
The company has since been sold to Whitbread and is now called Costa Express but I was interested to learn from Martyn that the company was not a success for the first three years of trading and that his machines originally delivered a very basic instant coffee.
It was only after he improved the product that the business took off, the numbers improved and Martyn was motivated to sell.
I asked him when he first started to consider selling the business. Here’s what he had to say.
I think to answer that, I think, again, need to go back to the funding story.
This was a business that I could get its – it was my seed capital or my wife’s seed capital, whichever you want to look at it, and then it was some business angel funding, so kind of equivalent to crowdfunding today.
That had got it so far but that proved it to be a successful test market, a successful micro business.
It then needed a lot of money because these machines were expensive.
If we were going to scale up and build a big business and move quickly, it needs a lot of money.
We raised £4 million of private equity funding in June 2000 and now private equity, of course, is synonymous with big and mature businesses.
So it was, effectively, venture capital, if you like, development capital but there were no VCs really at the time that were funding that, you know, putting that kind of money in.
Also, interesting at the time, the dot-com boom, this was late ’90s, was in full swing, so anything that was real and generating revenue was terribly unfashionable.
We were fortunate, we met a private equity firm and they agreed that in each of their funds, they would make an early-stage investment, so we were ‘it’ for their number one fund.
They put in £4 million, so right from the get-go, the expectation was that there would be an exit.
It wasn’t a case of me deciding or me having my head turned, at some point, this was always part of the game plan.
I asked Martyn if, by accepting this investment, it meant that the exit would be controlled by the investors.
Yes, I think ‘control’ is probably a heavy word.
We were the penultimate investment in their number one fund and it was a ten-year fund, as they normally are, and I think it had got about seven years on the clock to go.
I think our revenues, we had four trial machines and revenues of about £10,000 a month [laughs].
To go from there to achieve PE-style returns in that timescale is phenomenal, you know, you’ve got to go some.
But nothing in life and business is perfect, so it was a case of we had competing offers but none that were as economically attractive as this one.
As we got going, they were hugely supportive and they were great bed fellows along the way.
It always felt like I and the rest of the board and my management team were completely leading and running the business.
They didn’t meddle, they didn’t interfere and they were there when we wanted them.
When we raised the funding, we wrote a five-year plan which said that we get to a thousand locations in that five years.
The numbers were pretty chunky, so it was a five-year horizon, which felt like a very long way away at that point.
Out of interest, how close did you get to matching the forecasts?
I think we did 700 machines.
No, we did 650 in seven years and it was a thousand then I think in 11 years, so as my chairman used to say, ‘You’re either under or you’re over but you’re never on it’!
I think if we’d hit the numbers, well, I think we’d have been…
We were one of the top 100 fastest growing UK companies for three, four years in a row, I think if we’d actually hit the business plan numbers, we’d have been number one every year for [laughs], you know, so it went pretty well.
So you were riding a wave of popularity.
Yes, I think it’s interesting actually that whilst coffee was growing enormously, I remember in that five-year plan, the forecast was that the coffee bar market in the UK in 2001 would be worth about £100 million.
Well, now it’s about £3 billion but it’s easy to look back and I think, at the time, once we got the money and we got some rollout contracts, it surprised me actually.
I remember going and meeting other companies and, of course, we didn’t always know where these concessions were going to work best or whether they’d work at all.
When you’re building a new category, it’s a long haul.
It can be explosive growth eventually but it takes a lot of energy upfront to convince people that you’re going to take them from here to here.
You’re creating a new norm in society which the rewards are there but it’s hard work.
I wanted to hear more about the sales process, so I started by asking Martyn whether he wanted to stay with the business after a sale or whether he wanted out.
So the original thinking, my original thinking was that I wanted to stay with the business and actually carry it on, so find a new investor that would put more money into the company, share the long-term vision.
The company today now, it’s been sold twice, so I sold it once to another private equity firm and then it was sold again in 2011 to Whitbread and it’s now called Costa Express.
Wherever you see a Costa Express machine, that was Coffee Nation. Building these new categories takes a long time, so five, six, seven years in, it’s still very early days, so my thinking for myself and for the rest of the management team was, ideally, we’d like to have stayed in all the way and build that further.
But, again, this was one of the trade-offs, which you can’t always fully control in the early days of building a company, of the funding landscape, so what was great was that we got one chunk of money from primary capital, which meant we never needed to worry about money again.
We could go like gangbusters to build the company, we then got term loans and we got some term debt later on but we never had to worry about money.
So, yes, the thing was, I would have liked to have stayed on but actually, for reasons we’ll perhaps come on to later, that I exited then with a PE house, so I exited cleanly and fully at the time in 2008.
So 100 per cent was sold to the next…
Correct, correct, absolutely.
I would imagine then you didn’t have too much of a role in appointing advisers.
Yes, very much so, yes, absolutely.
Oh you did.
Yes, yes, yes, because, of course, I didn’t know that I was going to sell 100 per cent!
To start with, it was, okay, and actually the first…
So it was a collaborative…
Yes, and very much so, oh, it was totally collaborative.
So we appointed advisers probably 18 months out, they were our audit partner and accountants, that was Deloitte who’d been with us right from the start and that’s how the process started.
The thinking was that we’d find a new investor to replace primary and then we’d carry on.
There would be a degree of second – a secondary element, I’d take some money off the table and then we’d roll and carry on and, over time, it became apparent that that wasn’t going to be possible on the right terms.
So then we drew our necks in slightly, decided actually we’re going to wait for another year or more, take the company further and then go again and then, at that point, I exited cleanly with the PE guys.
Was it marketed to trade or just to a financial…?
It was a broad piece actually.
It was a long, long list in terms of potential acquirers because we didn’t neatly fit into any particular peer group, so it wasn’t possible, we weren’t a vending company.
We’d created this new category of self-serve gourmet coffee, which we owned, and so we weren’t a vending company, so there were some vending companies that looked at us.
There was food service, there was private equity consumer-focus PE firms that were interested.
We looked at doing an IPO, so it was a very broad church of possibilities and, yes, so it was all sorts of possibilities really.
We’ll be hearing more from Martyn next week.
Each week, we’ve been looking at questions you should ask the seller of a business when you speak to them for the first time on the phone.
Here are a few more questions that you’ll want up your sleeve.
Here’s a good question right up front.
Is the business on the market?
Now you might think if they’re calling you directly or contacting you directly, then clearly it’s not with a broker.
Possibly that might not be the case.
It might actually be with a broker, so why would they then be contacting you themselves if it’s with a broker?
Because the broker hasn’t done anything, hasn’t performed and they’re disappointed with the broker.
So they thought, you know what, I’m going to do something about this. What does that say about their mindset? They are motivated.
So finding out whether it’s on the market is a good question to ask and then for people who do property and there are quite a few of you here who do property, it’s a little bit like saying to the seller, ‘How long has your property been on the market for?’.
Because we know, don’t we, if the property’s been on the market for a certain length of time, we all know when we’ve sold our own houses, we get concerned if we don’t get viewings immediately.
After a couple of months, we’re thinking of changing agents or bringing in a joint agent.
If our property’s been on the market for more than a year, we know that something is wrong and we figure we’ve got to start spending some money on the property or we need to reduce the price in some way to get that level of interest that is missing.
So asking if the business is on the market establishes if there’s a broker in the picture.
Now, technically, and really legally, if there’s a broker in the picture, the broker has a contract with the seller and the seller should not be talking to you.
Now the broker will want their slice of the action. In some ways, they’re probably quite pleased if you’re willing to do all the work for them, yes, and to negotiate a deal and they don’t have to do anything and they still get their slice but they will pursue the seller for their success fee.
Now if there’s a broker on the scene, you find out if the business is on the market, you store that information, who is it with?
So is the business on the market is a great question to establish who they’ve placed the business with, and this is why your knowledge of the broker market is important, and then the follow-up question is, how successful have they been?
Now we know the answer, it’s not, they haven’t been successful!
If they’d been successful, he’d have sold it and we wouldn’t be talking. And how long has it been with them for?
Quite often, people will ask you whether you’ve heard of that broker and the answer is no.
Always no, never heard of them! Never heard of those people.
It could be a pretty major player but you’ve never heard of them, never come across them because what you don’t want to be drawn into doing is saying anything negative and sounding competitive.
They say, ‘Oh, he must have a vested interest in being negative about the broker’.
You don’t want to do that because the word might get back and they’ll block you.
So, no, I’ve never heard of them, it’s a great line actually for those of who have businesses, which is most of you, when someone asks you about a competitor, no, never heard of them, never come… It’s funny, I’ve been in this business 20 years, never come across them before. Because it just dismisses them and it defuses what could be a antagonistic conversation.
Quite a blunt question here but I think we’ve got enough rapport at this stage to ask, how much profit did the company make last year?
Now the chances are they don’t know the answer or they fluff the answer with, ‘Well, at Companies House, it says this but we did a lot of cash business, you know’. Okay, you’re admitting to tax fraud, very interesting!
So those sorts of things you hear but you don’t acknowledge, you don’t want to be party to a conversation like that, although it’s useful to know because you can only negotiate on filed accounts.
You can’t add into the equation the bit that never went in the till but if there is, let’s say, 20 per cent that they’re not putting through the till, some businesses, there’s a lot of cash, then you know that when you run the business properly and you put everything through the books, you’ve suddenly got a 20 per cent uplift.
But they can’t sell you that 20 per cent because they would be incriminating themselves by saying that there’s this value that hasn’t been declared!
So how much profit did you make last year?
They usually don’t know the numbers.
We’ll review the final few questions next week.
I often find that people get confused between liquidation and administration, so at a recent event, I asked my two experts to explain the difference.
Administration was put in place, it replaced the old administrative receiverships and I’m sure you would have all heard of the receivership term in the past but largely this is a protective measure.
So it creates a moratorium against legal processes which allows me the time to look at the business, assess whether I can sell it, and sell it.
Now that moratorium can remain in place for 12 months or longer if I make application but that is a process where you’ll use an administration if there is a business to protect.
If we’ve got a situation, as Michael said, where we’re looking at a break-up situation, then you’d use a liquidation.
Now a liquidation is the end.
It goes into liquidation, we’re going to sell the assets, whatever is left goes to the creditors and there may be investigations to do in relation to directors but once we’re done, it’s done and struck off.
Administration, you can go from administration to liquidation.
If I’m going to pay someone out, unsecured creditors, then often I’ll use a liquidation after administration in order to allow that.
But if you think of administration as protection and very much so when you’re looking at, you know, winding-up petitions aren’t necessarily the best thing, the best businesses to be chasing.
Whereas if something has gone into administration, is indicative that there is a core business there because, otherwise, we wouldn’t use the process.
So that is really key, so the fact that there is an administration means there is something of value.
That by virtue of an administrator being appointed.
So administration really has its origins in turnaround but also in the prediction of the secured creditors’ rights, so if you think of it broadly in those terms, there still should be something there to protect if you’re using administration.
If there is no purpose defined on the insolvency, add purpose, then you can’t go with the administration option.
As always we’ll be hearing from Michael and Mark again soon. Recently, I introduced my audience to Helen Moore, Operations Manager at the Business Data, the publisher of the Business Sale Report which lists companies for sale throughout the UK.
I asked her about the number of UK companies typically for sale at any one time as well as about sale success rates. Here’s what she had to say.
So it’s actually quite surprising that over half of UK business put up for sale don’t actually sell and businesses can often take well over a year to sell. In some larger businesses, you can talk four to five years in some cases depending if they want to take them off the market and they might put it back on. They might do a reshuffle as well.
What’s the signal if someone takes something off the market and then puts it back on again after a period of time?
It depends really. There’s lots of different reasons.
When people get their businesses valued, sometimes they put a much higher figure on it than it’s perhaps worth and sometimes they’re not getting the offers they want.
So they take it off, maybe do some more work on it, try and justify that value a little bit more, put it back on to the market. There’s lots of different reasons. If you find that you’ve seen a business off the market and it goes back on, it’s always worth talking to seller about the motivation and why specifically they took it off and then why they put it back on.
Let’s dig into that a little deeper in a moment, so in your estimation, 50 per cent of businesses that are advertised for sale don’t sell?
Where is the opportunity for these people?
Well, like I said, one of the main reasons a business doesn’t sell is it’s valued incorrectly. Something you can do, especially if you’ve got financing in place or prior experience, is go in and say, ‘I can offer you this’, and work out different ways of getting into that business.
What can you give them now that means they’re going to get out of this business? If they’ve made the decision to sell, they don’t want to run this business any more!
Let’s take each of these points in turn. So if someone’s made the decision to sell, they’re mentally checking out.
Yes, 100 per cent and the business will be affected by that from the day they make that decision, I’m selling, they’re going to take a step back, they’re going to be working a few less hours, they might not be as on the ball as they would have been.
So actually business performance is likely to go down…To drop….the moment someone decides to sell. In actual fact, if we follow this logic through, their negotiating position diminishes in effectiveness because the business isn’t performing as well as it did same time last year?
Yes, and it will probably continue to diminish, not at a huge rate but it will go down the longer it stays on the market, so the longer a business has been for sale, the more flexibility you have in coming in and negotiating offers and deals.
On your website, I’m not sure, is there a date when the business was first posted?
Yes, we always list the date it was first posted and we also assign to list the date when it was last updated. Some brokers will update the businesses every two, three months; some won’t, so it’s just a good indication of how long it’s been on the market.
A little bit like I think it’s the same with Rightmove, isn’t it, for property, so you can see if a business has been on your website, which you want people to – if a business sells, you ask the broker to remove to make sure that the listings are tidied up.
Yes, yes, we remove them, yes.
If a business has been for sale for six months and hasn’t sold or a year and hasn’t sold, what would you say is the state of mind of the seller at that point?
They’re pretty frustrated, especially when they’ve made decision to sell, they thought this is the best time to sell my business, they wanted to get the most from it, they really want to get out, especially if perhaps it’s a business they’re working long hours in, there might be reasons for selling that they want to work less. I think the best thing you can do is you go in and try and negotiate. The more rapport you can build with the seller, the better relationship, the more likely you are going to get an earn-out deal or something along those lines.
Let me pick up on a couple of things, so you’re saying the better the rapport, the better the relationship, then the more likely you are to get a deal that is preferential.
We’ve all met at least once before and you’ve been to some sort of introductory-style event, then you will know that we talked about at those events that one of the key attributes of a successful buyer is being the nice guy and not being the aggressive Gordon Gekko…
Definitely….Wolf of Wall Street-type personality.
So how many businesses do you have listed at any one time?
Normally about a thousand, something along those lines.
You’ve got about a thousand businesses listed for sale at any one time, you might not know actually but do you have any breakdown of how many of those have been on for more than a year, more than six months, more than three months?
I don’t have a breakdown but I’d say, from knowing our database fairly well, it’s probably about a third of businesses I would say are a year or older.
Great opportunity, 300 plus businesses that have been on for more than a year, frustrated sellers, got to the point where business has maybe gone down in performance.
Want to get out and have probably got to the point of frustration where they’ll do anything to exit.
Yes, but, like I said, it’s about building that relationship and especially if someone’s built this business from scratch, they are going to be quite emotionally involved in it. It’s their project, they’ve seen it grow, they want to make sure the person they’re selling it to cares and wants to see the business grow and isn’t just going to come in, strip the assets and get rid of the business.
So, like you said, the more you can become across as nice guy, someone they want to speak to, someone they want to sell to, that relationship is really important.
Thank you. So what’s the motivation for selling your business? Again, you say only two years but actually a thousand businesses at any one point and seeing all the interactions, I think that’s actually quite a lot, so what would you say are the motivations for someone wanting to sell?
I’d say there’s sort of two main motivations. The first is financial. They think the business has hit its peak point where it’s ready to sell. The best time to sell a business is at the top of the curve, so when you’re really doing really well and the business is growing, that’s your best time to get out as a seller but also lifestyle reasons.
So someone just doesn’t want to work as hard as they have been or they’re retiring or there might be personal other reasons why they’re ready to sell. In both those scenarios, they’re not going to want to wait around more than a year, 18 months to really leave that business for whatever reason they’ve made the decision, you know, they’re ready to go.
So that’s about it for this week.
Have a good week and see you next time.