Welcome to our dealmaker 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 #5, Jonathan Jay from The Dealmaker’s Academy covers:
- The bidding process for the takeaway coffee business, Coffee Nation
- The last few questions to ask in your first conversation with a business owner
- What motivates buyers and how buyers should prepare for an acquisition, according to Helen Moore, Operations Manager at Business Data which publishes the Business Sales Reportabout the number of businesses up for sale in the UK
- The importance of conducting due diligence before buying anything
Listen to find out:
- How up to 50 potential buyers lined up to acquire Coffee Nation
- The number of management presentations involved in the Coffee Nation sales process
- The factors that influenced the sellers of Coffee Nation
- Why Coffee Nation’s founder Martyn Dawes decided to exit the company
- What stalled the initial sale
- What buyers should do to prepare for an acquisition
- The first thing a seller is likely to ask a potential buyer
- The role LinkedIn can play in establishing a buyer’s credibility
- Why buyers should Google themselves before approachingsellers
- The three things sellers look for in prospective buyers
- Why rapport is a key element in a business sale
- Why a buyer should steer the conversation away from the financials
- What motivates buyers
- What’s the worst thing to do when dealing with brokers
- What proof of funding looks like
- What a proofof funding letter should contain
- How to stand out from other potential buyers
- Why buyers need to have a website
- Why asking about the business’ cash position is so critical to your success
- The tax advantage for sellers
- Why you need to determine if the business has any pressing creditors
- How to question sellers without being confrontational
- Why you shouldn’t discuss money in the first conversation with a seller
- How to avoid a question about financials in your first conversation with a seller
- How much due diligence is requiredfor a deal
- The elements of the business you need to cover with due diligence
- Why you shouldn’t accept a seller’s assurances
- Why chatting to staff at a target business will provide you with critical information
Prefer to Read? Here’s the Transcript:
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 five of the podcast.
This week, I’ll be talking some more to the founder of Coffee Nation, Martyn Dawes, and find out how he sold his business in a multi-million-pound deal.
We’ll also be talking again with Helen Moore, operations manager at Business Data, the publisher of the business sale report which lists companies for sale throughout the UK.
She’ll be talking about what motivates buyers and how buyers should be prepared for an acquisition.
We’ll be reviewing the last few questions that you should ask the seller of a business when you speak to them on the phone for the first time, and we’ll be talking with my accountant about the importance of proper due diligence.
Let’s get started.
Last week I introduced you to Martyn Dawes, the founder of Coffee Nation, a takeaway coffee business that Martyn sold in a multi-million-pound deal.
We heard Martyn tell the story of Coffee Nation up to the point where he and his fellow investors were motivated to sell.
I asked him to talk about the bidding process, and I started by asking him whether there were several interested parties in competition.
Here’s what he had to say.
Oh god, there was… We went out to probably 30 or 40 different, maybe more, 50 potential parties. It was hard to tell where the main…
Of course, from the PE house’s perspective, they had one primary motivation which was headline price. As you said, it was a very collaborative process, so they were willing to allow management to lead the process.
If we could find the right acquirer that would meet our needs as well as theirs to go forward with then that was fine. The process was pretty straightforward. We worked with Deloitte.
They set-up the first-round meetings with potential acquirers.
I would meet them along with my chairman and Deloitte. We’d do a management presentation.
There was a teaser, sorry, that was sent out to start with, which is a snapshot of the attractions of the business, the marketplace, the management team, the growth prospects et cetera, financial performance, a full IM as well.
That led to management presentations. Then there were offers in and we went from there.
How many management presentations did you do?
Probably 20, 30.
Quite a few?
How many offers came from that, just roughly?
Difficult to remember. Probably a dozen or so.
They varied widely. There were those companies that got it in the sense of what we were creating and the potential. There were some very attractive big numbers, and there were some companies that didn’t understand.
They couldn’t see it as more than a collection of its parts, as a sort of operating system of a vending business. They didn’t understand the whole new category of piece that we’re creating.
You’ve got a range of offers on the table. We know it’s not always the highest offer that wins. It’s about terms as well.
What were the influencing factors for you?
It was all about the business.
I think I and the rest of my management team, we were all in.
We were very excited.
This was still early days really.
We had contracts with three or four major companies.
We had at this point, 2005, around 300 locations. The growth was just coming, but it was early days really. It was very much about finding a partner that was going to take the company forward, invest more.
I think we were looking for a partner that had global ambitions as well because there was nothing that prevented this being transplanted into other countries.
Then a chemistry with that partner, and a willingness for them to leave us to get on with it and continue the journey and building the company.
Also, for us to take some money out at that point, and a good exit value, headline price for the exit.
What actually happened that you exited completely?
What actually happened, so we got a great offer. The offer was for the whole company.
It was from a US family office. That family was the founding family of a major US high street retailer.
They’d established a fund and they’d made one or two acquisitions of companies. We met them. We got on very well with them.
They obviously had a lot of good connections in the US, so they saw the potential for, for example, rolling Coffee Nation out into places like Walmart, which, of course, was very exciting.
They also had good connections in Japan because they’d grown their core retail business in Japan.
If you know anything about Japanese, they absolutely love vending machines. They’re just crazy about anything to do with kit. We saw some big global opportunities.
They were also willing to write a ticket, put another £5 million into the development of the business on day one which was very exciting. The headline price was £30 million at that point. We were doing about £800,000 EBITDA, so it was a hell of a multiple.
That’s pretty good.
That’s very good. Now, moving the story much further on, that deal didn’t come off.
As my chairman used to say, ‘Many a slip twixt cup and lip.’
We got on very well with them. Their ambitions for the business were very exciting. The sticking point ultimately came down to our contract with Tesco.
We were a tiny business and Tesco are very large, but we had a lot of power in the relationship with Tesco because we had something they wanted.
We were now into roll out with about 100, 150 stores. It was a one year rolling contract with Tesco. The potential acquirer saw the benefit of Tesco as a calling card really in the US, and wanted a much longer-term contract with Tesco, which we did too.
Contractual negotiations take time. This is a long-term process in building the company and building a bridgehead in that retailer.
We said, ‘Great. Yes, buy the company. Come onboard and then help us get a three, four, five-year deal with Tesco as we’ve got with other retailers.’ They said, ‘No. That’s contingent upon… We’ve got to have that in place before we buy the company.’
In the end it was therefore we couldn’t join the two ends together.
We couldn’t put a gun to Tesco’s head. In the end, 18 months, two years later, we then got a much longer-term deal with Tesco, but that buyer had gone.
That’s part of the reason we decided to up sticks and go back to the drawing board, carry on and build the company further so that when we actually sold the company we were delivering a much higher EBITDA, bigger in-store-base of machines and so on.
We’ll be hearing more from Martyn next week.
Last week we heard from Helen Moore, the operations manager at Business Data that owns the business sale report which lists companies for sale throughout the UK.
Here she is again, and this time I asked her about how a buyer should prepare for an acquisition.
What should a buyer do to prepare for an acquisition, based upon your experience of buyers contacting your office and maybe not being very prepared?
The first thing I would say is to take a look at your own financials, work out how much you want to put in, what sort of deal you want to do. Have you got a lawyer ready? Making sure you really understand where you are, and ready to start the deal because it’s going to be the first thing the seller asks you.
The second thing is to think about packaging yourself. When you contact a seller, either by phone or email, you’re literally just a name, telephone number, email address to them. That’s all you are. The more information you can give to the seller about who you are, the more qualified you’re going to be.
Think about a LinkedIn profile that’s up to date or a website or perhaps an edited CV with some industry experience. You don’t need to breakdown every job you’ve ever done, but maybe a couple of paragraphs about why you want the business, what industry experience you have.
The more you can give the seller about why you’re really interested, and you can buy this business, the more qualified you’re going to come across.
The other thing that’s worth doing is Googling yourself. Most sellers will Google you before they meet you. Check when you Google yourself you like what comes up in the results and you don’t need to remove anything.
You could be associated with an old company, have an old website that should have been taken down. It’s very common now for people to do that. It’s really worth checking.
You’ve got to think, the three things a seller is looking for, it’s financial capability, past experience or industry experience and then rapport.
Anything you can do to demonstrate those three things is going to put you above other people who are just ringing up saying, ‘It looks like a good opportunity.’
People will sell to you because they like you?
Yes, and trust you.
They’ve got to trust you because there’s going to be a deferred consideration element. They’ve got to feel inspired. They’ve got to feel that the business is going to do better with them, especially if you’re doing some sort of deferred which is linked to performance. They’ve got to feel that the performance of the company is in safe hands. All these intangibles…
What I would say is that people don’t realise that these intangibles are important to them until you demonstrate them. At the beginning, all they think about is money. It’s about money, money, money, especially if it’s a broker because all the brokers talk about is money.
The worst thing to talk about, at the beginning, is money. You want to talk about everything else except money because we need to get everyone off this, it’s all about finances into, it’s about, ‘Now you can move abroad, emigrate.’
It’s all about spending more time with the family. It’s about lifestyle, getting rid of the stress. That looming VAT payment which you’re going to have to put the money into the business, this is going to cost you £40,000 putting money into the business if we don’t do this deal before that VAT is due.
Of course, you know how to deal with that partly through our first session this morning. It’s steering the conversation off the financials, talking about the intangibles which, of course, the brokers never really talk to them about.
I also asked her what things about a business motivates a buyer most?
There’s a few motivations. I’d say the first one is they want to buy a business that’s going to grow quickly which is why technology is so hot because they do have the potential to really just take off, especially with the right investment and the right management.
I’d also say bolt on business are really something we see asked about all the time. You’ve got a core business and you want to buy another business that’s going to add a product or service instead of developing it. It can save years in development and you’ve got something successful straightaway.
I’d say the last reason is they want to start a business, but instead of doing a start-up and the trials and tribulations that come with that, you acquire a business and it’s going to be much more profitable much quicker, and you’re going to have to put less time testing the waters for the market. It should be fairly established early on.
What I always say is that with a start-up you’ve got those several years of uncertainty at the beginning. Is it going to make any money? Is it not going to make any money? You put money into it. You borrow money to fund it.
Eighty per cent of businesses fail in five years or whatever the stat is. In actual fact, by buying a business that’s already got past the five-year mark, you’ve beaten the odds already.
Then if you’ve got someone who’s very keen to sell, and is happy to structure a deal… I find that brokers are very rigid in their…
They right from the start, ‘I want proof of funds.
I want to know that you’ve got cash.’ The worst thing that you can do is go waving your bank statement around because then they know what you’ve got and what you haven’t got or what you haven’t got, and it puts you actually in a weaker position in that case.
Quite often the reason they’re pushing for cash upfront is because they know that the financials don’t really stack up.
They’re looking for a high net worth individual who’s got more money than sense who will write a big cheque. That’s the only way they’re going to get a result because in actual fact, when I was talking to people earlier if you took out… You looked at the figures of a business very recently, didn’t you, and you discovered that in fact it wasn’t making a profit.
It was making a loss. That’s why people push for the money upfront because it doesn’t look like a viable… It doesn’t look like you could viably sell it unless you can creatively structure the deal, which is what we’re doing here. ‘Yes, we can buy it.
We’ll buy it on the basis of we will remunerate you with a percentage of profits over a period of time, so if the business grows like your incredible forecasts tell us it’s going to grow then you’re going to win, win, win far more than anyone… You can wait for someone to write you a cheque but give me a call if no one does in the next six months.’
A member of the audience was keen to ask Helen a really good question, ‘What does proof of funding look like?’
It depends on where your funding’s coming from. If you’re getting funding through a financer, they’ll be able to send a letter or something to say, ‘This funding’s in place. We’ve agreed that we will produce funding.’ If it’s cash, you could send account details, although I wouldn’t necessarily show any of your personal information until the business has shown their personal information. If they’re holding things back, you should as well, and agree to exchange together or at an agreed date rather than they get everything from you, and you’re waiting to get stuff from them and suddenly they send you their financials. It’s not what you thought it was, and you’re actually not interested, and you’ve been waiting a month to get those.
You don’t want to show your hand.
Not at all.
What you can have, if you’ve got a good relationship with your accountant is a letter that says that Mr J has the ability to access suitable funding depending upon the desirability of the acquisition which effectively means nothing. It’s on an accountant’s letterhead, so it’s got to be something.
M: Would that satisfy you as a broker though?
We’re not a brokerage. We’re a leasing firm.
M: Would that satisfy a broker?
I said it would satisfy a broker. They just want to know that you’re serious. If you’ve gone to the trouble of going to your accountant or your proof of funding and said, ‘I need some form of assurance to give to a seller,’ it says you’re serious, and that you have already had those discussions and you’ve got it in place.
The accountant’s letter will come with a disclaimer that was saying, ‘This is the best of our knowledge and we have not validated recent accounts. This information needs to be taken at face value,’ or the professional terminology to that effect. Waving around a letter… Don’t forget you might have a letter without a date. You can use the same letter for the next five years. I don’t know. What it does, it does the equivalent of getting you past the gatekeeper. It gets you past the junior person who answers the phone in the brokerage. What you want is a meeting with management. Once you’ve got the meeting with management, everything else is moved to one side because suddenly you’re the person who’s interested. You’re the only person who’s shown interest in the last six months.
Yes, who’s been serious enough to have a letter written by the accountant.
Have a word with your accountant.
It’s all about being a qualified buyer, like we said. Anything you can do to qualify yourself and say, ‘Hey, I’m serious. I’m ready. I want to acquire now,’ is going to put you in front of all those people who are just ringing up just saying, ‘I just wanted to acquire and find out a little bit more.’
Yes. The big brokers are going to be getting hundreds of phone calls and contacts a week. You need to stand out from them by showing that you’re a professional. You can say, ‘If you want to look at my LinkedIn profile, there it is. This is my website.’ It can just be a simple one-page WordPress site. It could be very, very simple. Something you even build yourself. It just has to have a photo of you. This is a little bit about you. Just a couple of paragraphs. Just having a website in itself has a big tick in the credibility box. You push your way to the front of the queue as a result.
M: Over previous episodes, 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 the final few questions that you’ll want to ask.
Here’s a good question. It’s a brave question, but it’s a good question to ask. ‘What’s the cash position of the business at the moment?’ You might not get an answer, but you would certainly be able to determine, are we at crunch point? Do we have an issue here? If the answer is not very good, then that implies a level of motivation to do something. If they’re sitting with a lot of money in the bank, then up your sleeve now you’ve got a great negotiating point because you can use that money in the bank as part of the acquisition cash which means that they only pay a ten per cent entrepreneur’s relief on that cash. The advantage to the seller is that they actually end up with more cash because they only pay ten per cent on it rather than taking it out as a dividend. ‘What’s the cash position,’ gives you a sense of how urgent the situation is. Following on, and you’d ask me the same about this question, by the way, ‘Are there any pressing creditors?’
You might want to soften this question by saying, ‘Let me ask you a question that my accountant will ask you, so I thought I’d ask you first.’ ‘We’re going to be asking this question anyway, so let’s ask you the question early, and let’s just find out, are there any pressing creditors?’ ‘Yes, there’s a VAT bill due in two weeks.’ ‘Okay, so judging on what you’ve just said the cash position of the business is, are you saying that’s going to be hard to pull that money together?’ Not, ‘You can’t pay it,’ which is a bit blunt and a little bit rude. It’s, ‘Are you saying it’s going to be hard to pull that money together?’ What you’ll notice about everything that I’m saying is that it’s non-confrontational. I’m finding out the information that I want, but I’m not making them feel a bad person. You do not want them to feel as though they’ve screwed it up. ‘Are you saying it might be hard to pull that cash together in the next two weeks?’ Then you can mutter under your breath, ‘Maybe I can help you with that.’ Almost like an afterthought, ‘Maybe I can help you with that.’
The key thing is we’re in the phone call here, you don’t agree anything on the phone. I see people try and put pressure on, ‘What would you offer me?’ I’ve had calls with people where they’ve said, ‘Look, just to let you know, I won’t take a penny less than this.’ How do you deal with the questions when people say, ‘Just to let you know…’ I say, ‘Okay, I’m hearing you but…’ This isn’t right for everyone, but this is what I say. I say, ‘My mother told me never to discuss money on the phone.’ It shuts down the money conversation because it’s quite right really. You shouldn’t be. You should be sitting down and having a conversation about it face to face. Don’t agree anything on the phone.
M: Now you probably heard about the importance of due diligence, so I asked my accountant, [?Geoff 0:22:04.2], ‘How much due diligence is typically required for a deal?’
We talked about due diligence a little bit, but I think now is the time just to go into a couple of due diligence things because I can tell from what we’ve been saying that sometimes we don’t know what questions to ask. This will help us. The first big question, Geoff is how much due diligence is typically required for a deal?
M: You need to know what you’re buying. The trouble is… I’m going to talk a bit of Latin now, caveat emptor, buyer beware. If you’re buying something, it’s up to you to find out what you’re buying. If you make a mistake, you make a mistake and no one’s going to… The fact that the seller’s made some representation to you, you know what, it’s not going to make much difference. You’ve got to know what you’re buying. The due diligence really is vital to see the assets within the business, the liabilities within the business, what’s really going on. Even if it’s an asset sale, what’s going, and you look at the debtors… I gave an example at lunchtime about debtors. When you’re going to look at the debtors you might say, ‘Fine, there’s £200,000 worth of debtors.’ That’s great. Then you might see, ‘Look, they’ve just raised invoices in the last month.’ They’re doing £10,000 a month and suddenly they’ve done £180,000 in the last month. Those invoices may not be the most quality invoices, so to speak. You need to check what you’re buying. The amount is required.
Often on an acquisition, we will do a… The term we’d use is quick and dirty, but just have a good kick at what’s in there. See what’s in there. I’ll go down or send someone in my team to go down, look at what’s in the filing cabinets. Look at the list. See the assets through, and give a… The first thing we do is do a quick report of what’s there because often people have no idea. People make a representation, but the representation can’t be relied upon. You’re buying this. You may not be buying it with your own cash, but even if you’re raising finances the way you’ve described before, you’re going to have a personal guarantee on that finance, even if you’re not putting the money in. You’ve got to make sure that those assets are sensible. Those assets are there. You need to know what you’re buying. That’s the amount of due diligence, what you’re buying. You don’t need an accountant to do that. Anybody can do that. It’s just you need to spend the time to find out what’s in there. Check that, check the fixed assets. Check the licences. Check any litigation because often there may be a pending claim on something. You’re not going to know that unless you ask the questions. There’s quite a lot.
Yes, so you can protect yourself to a certain degree in the warranties, but warranty claims can be a long, drawn out process.
M: At that stage you’ve spent money. They’ve disappeared. Long, drawn out, and especially if you’re not paying very much for it or all they’re doing is using that money to repay back something, they won’t have any assets anyway. I wouldn’t solely rely on a…
The question is, should I accept the seller’s assurances because everyone’s going to put their best foot forward and be telling you, ‘This is wonderful. It’s all fantastic,’ because why wouldn’t they? They’re going to say that.
M: Yes. Years ago, one of my clients looked to purchase a business. It was a garage door business. I went down with him to look at this company. It was great. It was a real piece of theatrical art. We wanted to go down there at nine o’clock and the bloke said, ‘No, don’t come at nine o’clock. I don’t get in till 11.’ We go in there, saw his office. Not a piece of paper on his desk, nothing. On the TV the racing was on. He had a newspaper. My client, ‘I really want to buy this business.’ I said, ‘Let’s see what’s there.’ There were some things in there that I just really didn’t like. The client was furious at me for not buying it because he really wanted to buy it. The person who did buy it, three months later the company was in liquidation. There was nothing there. Was it a complete sham? Yes, it probably was.
Just so I understand, are you saying that the seller was implying that he or she didn’t do anything?
M: Absolutely. Completely. It was such a game. It was so funny. It was just amusing, the game they were playing. I was taken in as well up to a point. It’s just there was other stuff there that also didn’t quite match up.
With our coffee machine company, I know that he makes this big thing about, ‘I don’t go to the office very often,’ but really the people who should be telling you that are the staff. They’ll tell you the true story.
M: Exactly. Even before the meeting starts, you’re sitting there, we would chat to the receptionist. ‘What’s going on? Does the phone…? Is it busy? What’s your job like?’ That sort of thing. You get a bit of a feel what’s going on in the business. You do get a feel about businesses. This is all part… The first part may be two or three days just there, seeing what’s in there. Sometimes you may need to get more information if it’s quite specialist. Might need to get a specialist valuer in on certain assets within the business, but you’ve got to know what you’re getting. I’m very sceptical about people’s assurances because ultimately, they’re trying to sell something. A company purchase is not like a house. A house, there’s a really ready market in it. It’s really easy. Fine, if it’s this area it’s sold at £800 a square foot. Fine, then a bit of adjustment for décor, but you know where you stand. With companies it’s all over the place.
M: We’ll have a few more questions for the accountant in future episodes. That’s about it for this week. Remember to visit our website at HYPERLINK “https://www.thedealmakersacademy.com” www.thedealmakersacademy.com. Have a good week and see you next time.
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