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 Strategiespodcast #6, Jonathan Jay from The Dealmaker’s Academy covers:
- How the multi-million-pound Coffee Nation deal was put together
- What sellers really want, according to Helen Moore, Operations Manager at Business Data which publishes the Business Sales Report about the number of businesses up for sale in the UK
- Why you should update your LinkedIn profile
- The importance of buying assets rather than the shares of a business
- The terms every dealmaker needs to understand
Listen to find out:
- The challenge of presenting a company’s potential growth rate
- Why sellers need to discuss management terms early in the sales process
- What sellers look for
- Why cash will get you a better deal
- How to de-risk an acquisition
- Why industry experience will count in your favour with sellers
- Why your first acquisition should be in a sector you know well
- Why updating your LinkedIn profile will help to establish your credibility with brokers and sellers
- What you should say in LinkedIn messages to business owners
- Why you should use the word ‘investing’ rather than ‘buying’ in LinkedIn messages
- Why you should write regular posts on LinkedIn
- The advantages of buying assets rather than shares
- Why you should have a third-party valuation of the company’s assets
- Why sellers don’t like to sell assets from the business
- The definition of fair value
- What secured creditors are
- Who appoints administrators
- Where to find information about a company’s secured creditors
- The winding up process
- How to buy a company that has a winding up order
- How to get a validation order
Prefer to read? Here’s the Transcript:
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 dealmaker.
Welcome back to episode six of the podcast, this week we’ll be talking for the last time to Martyn Dawes, the founder of Coffee Nation, and finding out about how the final multimillion pound deal was put together.
We’ll also be talking again with Helen Moore who is operations manager at Business Data, which publishes the Business Sale Report which lists companies for sale throughout the UK.
Last week she talked about what motivates buyers and this week she’ll be turning the tables and looking at what sellers are ideally looking for.
I’ll be introducing you to the first of many steps you must take as a budding dealmaker, which is updating your LinkedIn profile.
We’ll be talking with my accountant about the importance of buying assets rather than shares, and we’ll be talking again with me experts Michael and Mark, defining some of the terms that every potential dealmaker should know and understand, so let’s get started.
Over the last two weeks we’ve been hearing from Martyn Dawes the founder of Coffee Nation, a takeaway coffee business that is now owned by Whitbread and rebranded as Costa Express.
Martyn Dawes Interview
In this final piece Martyn tells us about the sale itself and about what he would do differently knowing what he knows now.
The late 2005 numbers, I think the run rate was about 13million revenues, EBITDA 800k, we had 300 machines and I think we had sort of three major contracts. When we actually sold that in March ’08, revenues were 20 going to sort of 25, I think we were 25million run rate of sales, 3million EBITDA and resolve rate times.
It was a lower multiple, but I think one of the things of moving onto the, sort of the learning, one of the learning points, this is slightly maybe jumping ahead, is this point about deliverability, so it’s attractive offer letters and high headline prices are very attractive and can catch the eye of the founder or the management team.
The key thing is deliverability of the deal, if it can’t deliver, you could be any number and I think that was one of the challenges, because we’d grown very quickly and we were at 300 sites, we’d got trials in the Netherlands, we’d got trials in Germany, so the future growth potential of the company was enormous.
There’s now about six, six to 7,000 machines across the UK or Middle East, but actually being able to say with confidence when all that growth was going to come off was very difficult as an early stage business, which we were.
Getting the balance right in terms of when we were putting the IM together and presenting to potential buyers between over-egging the growth rate and under-egging it, if you under-egg it you won’t get people through the door, if you over-egg it you turn them away, so it’s a challenge.
Knowing what you know now, what would you do differently, what would you have done differently?
What would I have done differently?
I think the point I’ve just made I think is a, I’m not sure what I could have done differently but we, some of the growth forecasts were optimistic when we were meeting some of those buyers, potential buyers.
The growth rate of Tesco, for example, was, we forecasted it to be greater than it actually was, we forecast earlier, quicker expansion into Europe than we actually went on to achieve, but this was very difficult to predict, so that’s an observation. I think advisers, personal advisers I think for the management team, particularly if you’re staying with a company, I think I perhaps, perhaps not relied, but I’d use my chairman perhaps a little more, we had a very close working relationship, it was a very successful relationship and still is a great relationship to this day.
I brought in advisors for myself and management, but I brought them in later on and I would have done that, I think I’d do that earlier.
I think another point would have been, but again it’s, as with so many things in building a company it’s not always a clear cut left or right sort of thing.
The preference share structure, we had the opportunity to pay off those preference shares earlier on and as we started to generate a lot of cash.
Now in the end we actually decided to invest in what we call 3G third generation, which was a piece of kit, which meant that the machine would clean itself, it would do filter coffees as well as expresso, iced coffee, everything, touch screen as you see on the machines these days.
The strategic thinking behind that was to leapfrog us into the future and close the doors to any potential competitor, the problem was that sucked up all the money that we could have used to pay off the press, which meant that whilst we never lost control of the ball, it meant that we didn’t have control the board, it wasn’t as clear a cut position for management later on as it could have been.
Having said that, if we’d paid off the preference shares we wouldn’t have landed one of the contracts that we did with Moto on the motorways and that generated about a million of EBITDA, so this is the point, it’s sort of a swings and roundabouts thing I think.
I think that I would also encourage you to, and doing it again, have a much earlier discussion about management terms, don’t get into exclusive negotiations before you’ve actually got where you wanted to be in terms of management terms going forward, have that upfront as opposed to sort of getting the headline price, getting everything settled in that sense, then into DD and then, oh, hang on a minute, what about the management?
It’s kind of you’re trying to stop a train that’s already left the station.
Wasn’t Martyn’s story inspiring?
It just goes to show that a business doesn’t always have to be successful right from the start in order for it to be sold for millions.
We’ll be talking to some more multimillion pound business sellers in future episodes.
We’ve been hearing from Helen Moore, operations manager at Business Data, the publisher of the Business Sale Report which lists companies for sale throughout the UK.
Last week I asked her about what motivates buyers, this week we’re turning the tables and looking at what sellers are ideally looking for.
What are the sellers looking for in an ideal world?
The main thing sellers are looking for is proof of funding, which is something we’ve discussed.
Cash is always preferable, if you do have cash you are going to get a slightly better deal in the early stages of a business for sale, you can negotiate a little bit more and you can also potentially get a bit more out of the deal.
As we’ve said, if the deal doesn’t go through initially, as long as you have financing and that you can do a chunk of it or show how you have industry and experience and how you can continue the business to grow, so you can do something like an earn out, there is opportunities.
We approach it from the attitude of if I’m going to write you a cheque for 100 per cent of the money on day one, that’s a high risk strategy?
Yes. A high risk strategy, because despite due diligence you discover that maybe it’s, some things have been glossed over, it’s been polished up and maybe the owner is more intrinsic to the business than you had first thought.
By structuring, and no deal these days unless it’s really small ones, a 100 per cent cash on completion, there is always an element of deferred consideration.
The greater the element of deferred consideration, the more you de-risk the acquisition so that if effectively you have been lied to, you can make a warranty claim or you have some right offset against future deferred consideration payments, i.e. you stop paying them.
Another important thing a seller looks for in a buyer is how qualified they are, have you got past experience in the industry, what’s your background, where are you coming from?
It’s very difficult if a seller’s got two buyers, one of them has got ten years in the industry, someone’s just buying it because it looks like a good deal, they’re always going to go with the buyer that’s more qualified.
You’ll seem more serious when you’re making enquiries and they’re going to trust you a bit more, when you’re doing your due diligence they’re also going to help you because you’re going to have more of an idea of how the business should be run and what to look out for, whereas if it’s brand new you don’t necessarily know the pitfalls of that industry.
Yes, so in actual fact having some industry knowledge gives you the rapport, you’ve got some commonality, you might even know the same people, you’ve been to the same events and you’ve got a bit of history in that business, they might know you, you might know them.
Also, and we always say that the first acquisition you do should be something that you know about, you know what you’re buying rather than doing something completely off the wall.
Now the big turnaround people, they buy based completely on financials, not necessarily on having any industry knowledge, but then they have a lot of experience.
They have the brand name, yes, they’ve got the name, people like Google for example, they’re a massive serial acquirer, they normally make their new products and services by acquiring a smaller company, but because of the brand name and who they are people are going to sell to them, yes.
Now there are a number of steps that potential dealmakers need to take in order to be taken seriously with brokers and sellers, this week we’re going to look at step one, which is updating your LinkedIn profile.
The first is to update your LinkedIn profile, now I realise you might not want to change your LinkedIn profile completely because you’ve got your existing business on there, but I want you to add something like investing in businesses in the X, Y, Z sector.
If you’re not sure specifically which sector you’re interested in, you might say something like investor in private businesses.
Update your LinkedIn profile, that immediately gives you a little boost, the fact that you’ve updated it is good for your profile on LinkedIn, and start connecting with people who fall into your target market.
Let’s say, for example, I don’t, let’s continue using you as an example, Mike, you have an interest in marketing, PR, advertising-type businesses, then you would start finding those, connecting with them and sending a personalised message.
It’s a copy and paste personalised message, but it is, ‘I’m interested in investing in this sector so I thought I would get in touch.
I hope that you will accept my LinkedIn request,’ so very polite.
Some people seem to get upset on LinkedIn if you approach someone you don’t know, which is a weird thing because it’s all about connecting with people, if you just connect with people you know already there doesn’t seem to be too much point.
Just a quick check around the room, who is already on LinkedIn?
Hands down, let me ask the question the other way, who isn’t currently on LinkedIn? Yes, but you will be by tonight, right? Great, okay, so I would dust off that LinkedIn profile, open up a free LinkedIn account and get yourself on there.
You’re going to start building up connections in your target market, if you don’t have a target market yet don’t worry, you can just carry on doing what you’re doing.
I would start posting on your LinkedIn profile status update, yes, so I would start posting in there, if you’re a member of any groups, I’d start posting in the groups. I would say something like, ‘I’m interested in -‘ investing is a great word because sometimes people are a little nervous when some say, ‘I’m interested in buying,’ because then there’s, some defences go up a little bit, but investing is a very positive word.
‘I’m interested in investing in, or acquiring -‘ so don’t use the word buy, ‘So investing in or acquiring businesses in the X, Y, Z sector, please PM me if you know who I should be, or if there’s someone you think I should be talking to.’
The last time I did this I got 17 responses, all different businesses and some of those were businesses that were way outside of what I was interested in, and some were a lot, there were three sort of quite chunky ones.
Now obviously it depends how many contacts you have, if you post about a very specific type of business but you don’t have any contacts who own businesses in that very specific type of business, then obviously you’re going to get a very low response.
If you are connected to 1,000 owners of breweries, microbreweries in the UK and you post about microbreweries, then quite clearly there is a very obvious connection between your post and the people reading it.
I would post something every single week, so between now and when we meet in four weeks’ time, you will have posted three to four times, okay, and you will find that you will, may not get all the response the first time or even the second time, it takes someone several times sometimes to see something before they respond to it, which is why advertisers don’t advertise a product or a service once, they do it again and again and again.
You might not just copy and paste the same post, you might change the wording, you might find that you word it in such a way that people respond in not the way you were expecting.
You might want to drop the word investing and just have the word acquire, lose the word acquire, keep the word investing, I don’t know, it’s going to be different for every market.
The most important thing is you update your LinkedIn profile, you start connecting with people in the target market if you know it, and you start posting your interest in investing and acquiring, and you do that three to four times between now and this time next month.
What will happen is that people will approach you and you can start engaging with them, and remember the first step of the engagement, you do not leave your living room, you have a phone call with them at a time that suits you and you phone them, so you’re not caught on the hop.
You call them but you don’t go and meet people, you just have a phone call, and you don’t talk to anyone on that phone call about money, you talk to them about their business and how they started it and their aspirations and, ‘Out of curiosity, why did you contact me today?
What was it that made you send me that message last night?
What was it that prompted you to email me?’ okay, so LinkedIn activity, very, very important.
At our mastermind group last month I talked about the importance of buying assets rather than shares with my accountant Jeff, here’s what he had to say.
If I could just summarise, the rule of thumb is you buy the assets, not the shares because it’s faster, it’s cleaner, you don’t have the liabilities, it’s less costly in terms of your legals because it’s a faster, easier, more straightforward transaction, there are no surprises in the future, the key is though the assets have to be valued by a third-party valuer so there’s no dispute later as to whether they were sold undervalue or not.
The difference though, from an acquirer’s point of view you are certainly much more, it’s going to be much better for you to do an asset purchase.
However from a vendor’s point of view it’s different, because if they’re trading in a limited company and they’re selling the assets out of that limited company, that asset sale would not qualify for entrepreneur’s relief.
What they would do is they’d have a gain within their company and then they’d have to distribute the gain out, so they’d be at a tax rate of about 27 per cent as opposed to ten per cent.
They would be inclined to certainly encourage you to purchase the shares, not purchase the company, so you’ve got a slight sort of conflict…
The difference in tax rate is 20 per cent versus ten per cent?
Twenty-seven to ten, so it’s quite a, potentially quite a big difference.
They would potentially direct you in a particular way but often you just, that’s just part of negotiation, you just, that’s just another thing to decide what you’re paying, how you’re going to structure the deal.
There’s no one way of doing it, is there, there’s so many different ways and it’s just, sometimes you just sort of, I quite like working with Sharpie pens and a big sort of A2 pad, because we just look at what’s in there and say, ‘Fine, now actually how are we going to structure this?’ because the deals are all different.
It’s listening, it’s understanding what people want, it’s understanding you’ve got a whole number of people in this transaction, you’ve got the person purchasing it, which is what suits you, you’ve also got the person selling it.
If there’s something you can do that’s going to massively help them and it doesn’t have a big influence on you, you know what, use that…
Like for example keeping their name above the door, saying, ‘Yes, we’ll retain Shirley in accounts for the foreseeable future, we’ll look after her for the foreseeable future, if that’s what’s important to you,’ those things have value that are equal in, they have a monetary value effectively but it’s easy for you to say yes to.
Yes, certainly, and don’t think what’s important for you, that doesn’t matter, it’s what’s important to them.
I know when I purchased a business a while ago, I purchased an accountancy practice a while ago, the only point we disagreed on was the TUPE obligations with his secretary who had been with him for 27 years, that was our – in the end we just said, ‘Look, if she goes we’ll split it 50/50,’ but it was a backwards and forwards to get to that deal, but that was…
I did a thing with, I knew that the buyer was going to be making all the staff redundant and of course there was going to be a cost to that redundancy, and we agreed to split the cost of the redundancy, so they shouldered half the cost and we took half of the – because we couldn’t agree who was going to pay it, so we ended up saying – it was only a few thousand pounds but it was just a way of easing the deal through by agreeing on something instead of arguing.
We’ll have some more questions for the accountancy section in future episodes.
Now every dealmaker needs to know and understand a number of specialist terms and phrases, so let’s run through some of them and get my resident experts Michael and Mark to explain them.
What’s the definition of fair value?
It’s something that you can support with a valuation from an independent valuer, so again to take a scenario, you might be approached by someone who is in trouble and is looking to sell his business probably to raise money to pay debts or just to get out.
You might also find that there is a secured creditor and that the secured creditor might be a large bank who isn’t necessarily going to agree to appoint the administrator that you would like as the buyer, because he’s not on a panel, he’s, you want to use someone who is too small, you want to use someone who is not PWC or whatever.
You won’t get the, which we haven’t mentioned before, but the secured creditor in that situation has to agree or, agree to the appointment of the administrator. You might think well, I want to do this deal but the guy that I want to use as an administrator isn’t going to be approved by the bank, how do I do it?
What you can do is to do a pre-appointment sale and sell the assets with evaluation that can be backed up, so that when a liquidator is subsequently appointed they can decide that in, the evidence is there, that the transaction can’t be, shouldn’t be challenged.
That’s correct and I think one other thing, it’s also a tool that could be used, and I think we had someone who was interested in advertising agencies, so I did hear someone of that ilk, you may use it in that sort of industry as well, where if we go to – if I advertise my point, but I appointed an administrator, it goes around the industry very, very quickly and effectively my client base had gone south.
Now in those circumstances then again this would be an appropriate method of actually dealing with the sale, and that would be more of a supervised sale in that the proposed liquidator would be fully aware of what was happening, and indeed it would ensure that you use the right agents, use the right lawyers and it held water.
That would be subject to the liquidator’s approval on appointment, but in practice that is pre-agreed. It is industry specific where you have got something where another way, another method, sorry, another time that I’d be using the system.
With secured creditors, maybe you could just define secured creditors, just so everyone’s really clear?
Okay, security, secured creditors, generally how you think of these are mortgagees, they are banks that will lend companies money subject to security.
The security will be in the form of fixed and floating charges, a fixed charge is very much akin to a mortgage in terms of it tends to be over property or equipment that’s bolted down amongst other things.
Whereas a floating charge sort of sits over the company’s assets and effectively means that if I’m selling Mars Bars, that I can sell that Mars Bar without the bench holder’s permission, which I’d have to have a fixed charge, if I sell my house I’ve got to tell the mortgagee.
With a floating charge it allows a company to continue trading but keeps the security in place.
A floating charge holder, providing the charge is promptly constituted, has the ability to appoint administrators and that is one of the methods by which I get appointed administrators.
You can either be appointed by the bank directors or creditors in broad terms.
Now this security provides, effectively gives the charge holders first bite of the assets and it means that we will be realising the assets of the company largely for the benefit of the charge holders ad any surplus, which there rarely is in those circumstances, would then go down to the normal creditors. It is a big consideration, if you’re looking at acquiring a business it needs to go through a process, then you need to understand the secured creditor position, that information is available on company’s house. In fact, it’s an acquirement that it’s registered to company’s house, but that will affect your strategy in terms of if you’re looking to put something through a process in order to acquire it.
Would you explain a winding up petition and a validation order phase?
Okay, so there are several types of liquidation, but winding up petitions at court, a court order, compulsory liquidation, so a creditor starts a process of petitioning the court for the winding up of a debtor company because they haven’t paid. A petition is filed with the court and then served on the company and then four, six, eight weeks later there’s a court hearing, and at that court hearing the company probably will go into liquidation. In the period between the presentation of the petition and the hearing, any transaction, disposing assets, property, money of the company can be clawed back by any subsequently appointed liquidator. It stops a rogue director from offloading all the assets in the company and nobody gets a petition knowing that he’s got four weeks to go.
Anything that happens in that time can be unwound by yourself or someone of your kin, so if however you come across a company, and this is what’s relevant for today, you come across a company which has got a petition and they’re in a desperate situation and they want to sell the company perhaps, maybe even to pay off the debt, that transaction can take place despite what
I told you about the disposition being void.
You have to go to court and get what’s called a validation order, and you have to prove to a judge that what you’re going to do is in the best interest of the creditor, so you’re buying it at a price which could be justified. You still then have to buy at further price that you would have paid for it if it would have been a successful enterprise, but it’s worth noting that if you are approached by someone and you find that in your due diligence there’s a winding up petition, then you need to deal with that winding up petition. If the amount involved is too great the easiest way to do it is by way of validation order, does that explain it?
Yes, so the validation order is, you need to go through a lawyer?
Yes, you need to go and see a judge, so I would recommend you get independent advice.
Of course we’ll be hearing from Michael and Mark again in future episodes. That’s about it for this week, remember to visit our website www.thedealmakersacademy.com, have a great week and see you next time.