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 #7, Jonathan Jay from The Dealmaker’s Academy podcast covers:
- A cautionary tale from a serial investor who tried to put a series of deals together without taking proper advice or having the right experts on board to support him
- The key negotiating skills that you’ll need to become an effective dealmaker.
- Three things you must do to be taken seriously as a dealmaker,
- Five real-life examples of how dealmakers raised finance from within the businesses they were buying
Listen to find out:
- Serial investor Mark Masiak describes how his first merger nearly cost him his home and livelihood
- The importance of shareholder agreements
- Why you need an expert team to guide and advise you
- Why you need to compile a target list of at least 100 companies
- The steps you need to take with those 100 companies
- Why every dealmaker should have business cards
- What to say to encourage people to send business owners your way
- What not to say to business brokers if you want to be taken seriously
- When a refinance deal is worth considering
- How to structure a deal for a business with seasonal payments
- How to buy out an existing shareholder
- How to limit a personal guarantee
- How to strengthen your negotiating position
- Why you need to be the one to initiate the signing of a Non Disclosure Agreement (NDA)
- How revealing you are involved in more than one deal will give you a psychological edge
- What weakens your negotiating position
- What term should you use with brokers
- Why you should always tell a business owner that you have a business partner
- Why you need to present your deal in a positive light
- The benefits of deferred consideration and how to present them to a business owner
- Why you should practice selling the benefits of deferred consideration
- How to couch a less than desirable deal in terms that make it sound more appealing
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’ll find all the very best information on how to buy and sell businesses and become a deal maker.
Welcome to episode seven. This week, we’ll be hearing a cautionary tale from a serial investor about what happened to him when he tried to put a series of deals together without taking proper advice or having the right experts on board to support him.
If that doesn’t put you off, I’ll be introducing you to some of the key negotiating skills that you’ll need to become an effective deal maker. We’ll be following up on last week’s piece on the importance of LinkedIn profiles, with three more steps you must take to be taken seriously as a budding deal maker, and we’ll be looking at five real-life examples of how deal makers were able to raise finance from within the business that they were buying, so, let’s get started.
Earlier this month, I was fortunate to introduce my audience at the Dealmakers’ Academy to [?Mark Maciag 0:01:19.3], a serial investor who’s bought and sold many, many companies over the last 15 years.
It hasn’t always been easy. In fact, his first investment was a disaster, and almost cost him his home and his livelihood. Take a listen to his story.
[Transcript of recorded Interview]
Tell us about the first deal that you did. How did you find that deal?
Well, I’ll actually talk first of all about a deal which wasn’t really a deal, in how we’re talking about it today. It was, I don’t know, it must be about ten years ago now, I bumped into an old friend of mine who used to sell to me, from IBM into EDS, IT equipment for global roll-outs, and he’d set up an IT services company down on the south coast, and we were doing IT services, telecoms in Milton Keynes, and we said, ‘Oh, why don’t we merge?’ So, we merged the companies together.
We were roughly about twice the size of him, and I say we, because I work with a business partner, always have done, so, he came in and so it was a 33/33/33 split. The first quarter started off really well, doing quite nicely, and then he decided that he’d been doing enough work and disappeared for a little while, and wasn’t picking up the phone, and it started to go a little bit sour then. We had a meeting, and everything was okay, and we were all coming back together and working together nicely, and then he disappeared again.
He decided he was going to go and get married, and, so, he took some time off, about two months, I think it was, to go and sort out his wedding, and then he decided he wanted to go on honeymoon, so he took £10,000 out of the bank, the business bank, to go and pay for it.
We couldn’t pay wages that month because he’d done this, so, he’d been doing this, wasn’t picking up the phone. He then decided, he sent an email in, saying, ‘Oh, I’ve had to take another £2,000 so I can have a pre-honeymoon’! So, all in all, he’d taken ten out, and he said, ‘But don’t worry, just take that from my salary for the next three months.’ It left us really short, myself and Dave, my business partner, we couldn’t pay ourselves that month because we had to pay the staff first, and it got all very tight. We couldn’t pay some suppliers, and bits and pieces.
We went to see a lawyer, and he says, ‘Well, you’ve got grounds there for gross misconduct, just fire him.’ I said, ‘Even if he’s not here, to be able to come and do this, because he’s on one of his honeymoons?’, and, so, he says, ‘Yeah, yeah, that’s fine’, so we did that, and got rid of him, and we were like, ‘This is going to be good.
We’re back in here, we’re going to be back in our business soon, and start working on that again.’ Then he came back, and he made up, just like we were talking about, the share documents, actually.
He actually forged share documents to show that he was 100 per cent shareholder and got himself put back on the bank account and took all the money out the bank. We didn’t have any shareholder agreements, or anything like this, but, lucky enough, I keep all my emails.
My inbox has got about 7000 unread in one of them, and I don’t know how many companies I’ve got now, about nine or ten, and they’ve all got loads of unread emails, so, I like to keep everything.
Then we went through that, we went to the lawyers. I found out who his lawyer was and went to his lawyer. We got the money put back in after a couple of weeks, but then he decided that we weren’t directors of the company, and, so, we couldn’t fire him, so he went to an employment tribunal.
That side cost us, I think with the lawyers, and that sort of thing, I’m going to mix it up with another legal case that he decided to put as well, but that cost £120,000 in legal fees. He was making all of this stuff up, but it’s very difficult, if you haven’t got all these agreements in place, it’s very difficult to be able to prove that it’s a lie, so you still have to go through the process, the legal process, due process, and still go through it.
So, we did this, and it got to the employment tribunal, and eventually, on the doorsteps of the tribunal, on, I think it was the fifth day, his lawyer says, ‘Okay, we’re willing to do a deal now’, because I think he thought he was on rocky grounds from everything that was going on.
We had made some mistakes, so we agreed to buy his shares off him, I think it was £21,000, and we were paying in payments over a year, or something like that, but, once we hit certain amounts, he was supposed to transfer shares back across, and he wasn’t. We went back to a lawyer and said, ‘Look, he’s not doing this, what can you do?’ He says, ‘Well why don’t you just go to an administrator, and you can just close the company down and reopen it again?’ That’s how I understood it. You just close it down and reopen it again, so, we went off and did that.
We didn’t bother with the administrator side. We did ask them, and they were going to charge us about £16,000 to do all of this, so we thought, we’ll just close it down and reopen it again. Bearing in mind, in hindsight, if I’d really thought about it, here’s a guy who’s forged share certificates, put us through employment tribunals, and some of the points he came out with was untrue.
When we did that, he complained that we shouldn’t be able to shut the company down, so administrators were called in, and they came through and says, ‘Well, you’ve actually taken these monies as directors, and we’ve got these documents here which say you’re not directors’, and administrators aren’t like the court.
If an administrator says, ‘This is the document I’ve got’, you’ve got to pay up, because, otherwise, you’re in high court, and then that’s quarter of a million pounds in legal fees. That was another £40,000 we had to pay back into that company, so, if I’d have been here [laughs], I would have saved a few pounds. So, that’s my sort of first one. It was a merger which went absolutely, horribly wrong.
Now, don’t be put off by Mark’s cautionary tale. He’s made many successful investments along the way, since that lowly beginning, and we’ll be hearing more of Mark’s story next week. It just goes to show, though, what can happen if you don’t have the right team on board.
Last week, we looked at the importance of getting your LinkedIn profile right. The first in a series of steps every investor must take to be taken seriously as a deal maker. This week we’re going to look at three more.
[Transcript of recorded interview]
The next action point is to compile a target list of at least 100 companies that fall into your target market, so, those 100 companies might be compiled just by searching Google, so, IT companies, London, you’ll find 100 of them immediately. We did this when we were looking to sell a digital marketing business, and I got my receptionist, who had some spare time, to go on to Google and go beyond the first page, beyond the second page, beyond the tenth page, beyond the twentieth page, and find every web design, digital marketing business, and she found about 1000, okay. So, I’m asking you to find 100.
Get someone else to do it, outsource it to one of your team, if you have a team, and to find 100 businesses in your target market, and what we’re looking for are not email addresses.
We’re looking for physical addresses, and what you’re going to send them is a letter, either an adaptation of the letter that most of you already have, if not, I’ll put it in the LinkedIn group.
Then you photocopy 100 letters, you’ve got to sign 100 letters, and put 100 letters in envelopes and put stamps on them. I know that you’re busy people, but, if you have children, it’s a wonderful job for them, and they will just love doing it, and they will be participating in your future success.
So, we’ll get 100 letters out the door. You got, was it a nine per cent response? Yes, nine per cent response, so, if you send out 100 letters, you might not get nine responses, but you might get three or four.
You’ll get three or four people contact you to say, ‘Yes, I’d like to have a conversation with you about selling my business’. Now, some of those will be of interest to you, some of them won’t.
The ones that are, you have the phone call. The ones that aren’t, maybe after the phone call, or even just an email exchange, where do you put those people, in the bin?
F: In the LinkedIn.
In the LinkedIn group, because if they’re not great for you, they might be great for someone else. You never know, okay. You need to get new business cards. Two people have already presented me with their cards, so, Christophe, you’ve got the business investor, and Andy has a very nice card, beautifully designed, I’ve got to say, saying, very lovely actually, ‘A Nice Investor’, is the name of the business. Oh, we’ve got another one! How do I pronounce your first name?
F: [? Sayowa 0:10:33.8].
Sayowa has a very nice, smart business card here with business… Oh, my goodness, they’re all coming in at the same time now. Cat Business, Investor Business, Growth People Ltd, thank you, and yours is the same. So, get some business cards, go to Vistaprint.com, or, I use moo.com.
They are cheap, they are inexpensive, you do not need a graphic designer. You just fill in the form on the site, and, two or three days later, a box of business cards appear. There is no reason not to have business cards. Sometimes I see on LinkedIn, conversations where people are saying, ‘Oh, business cards are very old-fashioned.
Do you have business cards?’ I mean, you always carry your card, because, everywhere I go I’m talking to people, and everywhere I go when I talk to people, I say to them things like, ‘I invest in businesses and people where maybe the owner wants to exit their business, they don’t know how to.
Maybe they’ve become tired and frustrated with their business, and, by the way, let me give you a card, because, if you come across anyone like that, would you give them my card?’.
When I do this at a networking event, the person often goes, so, Nick here would go, ‘Thank you very much Jonathan. I’ll pass that on to someone’, puts it in their pocket, and, as Nick circulates around during the course of the evening, I bump back into Nick at some point in the evening, and Nick says to me, ‘You know what, Jonathan, actually, I would like to have a chat with you.’ I say, ‘Okay, whose business would…?’ ‘Well, actually, it’s my business I’d like to talk to you about.’ You need something with your contact details on, simply because, just telling people to find you on LinkedIn really isn’t good enough. You need something… And don’t forget, you need to get their card back as well.
Then I would suggest you contact six brokers, and tell them which type of business you are interested in. Now, I would only suggest you do this if you are, at this stage you know what you’re interested in. Don’t just say, ‘I’m interested in any business’, because you won’t be taken seriously, and, quite frankly, if they’ve got 1000 businesses for sale, you’re not going to get anywhere.
There’s no point doing that, so, if you know precisely what you’re interested in, the more precise you can be, the better the quality of response that you’ll get back.
It might be, ‘I’m looking for businesses of a certain size, in this sector, in the south east of England’, and you’re on their radar, and they say, ‘Do you have proof of funds?’ I say, ‘Well, it’s a little bit hard to do that without knowing what sort of business we’re looking at, but, if the numbers stack up, then funds are always available.’ You say it like that, with that confidence, end of conversation, ‘Let’s move on to you doing some work and sending me some businesses.’ Find six brokers. Where do you find the brokers?
You go on to Google and you google businesses for sale, or business brokers. So, you might register with some small ones, some big ones, but I want you to do six by this time next month, and what that will do is, that will start getting the deal flow.
I was looking to buy digital marketing businesses, and when I sold the group I didn’t de-register, if you like, with the brokers, so I was getting them through all the time, and I was actually just forwarding them on to the company that bought my company, and saying, ‘Look, if you’re still acquisitive, here are some opportunities for you.’ So, register with six brokers.
We’ll be discussing more steps that you need to take in future episodes. At our mastermind group last month, our finance expert, Neil, presented a number of real-life examples of how deal makers were able to raise finance from within the business they were buying. Here’s what he had to say.
[Transcript of recorded Interview]
Okay, so, the first deal that we’re going to have a quick look at was a refinance, so, a refinance is where we’re actually buying the asset off the company, buying it, raising some cash, maybe restructuring finance that they’ve already got. A lot of these deals come to us via a broker, so that might be a specialist asset finance broker, or a specialist invoice finance broker.
It might be a commercial broker, who’s looking to help somebody sell or buy a business, and they come to us for help in raising the money. In this particular case it was a very good company.
They would have, generally, probably gone to one of the high street banks, like HSBC, Barclays, that kind of thing. However, because of the type of refinance, those funders wouldn’t have been particularly interested in this deal, so it came to us.
There’s five printing machines, various ages. Some funders will only look at a refinance if you’ve bought the asset within the last three months, but, if you’ve owned it for ten, 15 years, or the business has, then it reduces your market.
So, they came to us, we pretty much turned it round within about 12 hours, and raised the funds, so, essentially, we were able to ID the asset, we were able to get a valuation on it, assess the information, and turn round and say, ‘Yes, we want to do this.’ This is a very simple one, take the assets, pay off a load of finance, and put money back into the business, okay?
If you think about some of the deals that you’re talking about, if you’re buying a digital agency, or an online business, this isn’t going to be applicable to you, but if you’re buying something with assets, it’s going to be of use.
Flick over to the next one.
This is one where we say the advance is only £14,000. This one, again, I’m trying to give you different examples of how finance can work for you.
If you buy into a business that’s got seasonal payments, it could be that your cash flow is going to be really hit hard during off-months, so, in this particular case, it was a grain-tipper for a farmer.
What we were able to do was structure the deal so that he made bigger payments when he had more of the cash coming in, and smaller payments in the lean times of the years.
So, again, when you’re thinking about, when you’re looking at a business, and you’re looking at the cash flow, and you’re thinking about refinancing, just have a look and see if there are times of the year where it may or may not be, you might see a bit of stress on your cash flow.
Another example, if you made Easter eggs, all right, you’ve got one shot at it every year, okay [laughs], but the rest of the time, you’ve got to keep the premises running, the machines running, and keep staff employed, maybe. So, again, we can look to do very specific, very structured deals, and most funders should be able to help you with that, but it depends whether they like the industries, okay?
Okay, so, the next one, let me remind myself… Okay, so, £25,000 again just to refinance, so this is, again, us buying assets off the business. It’s putting money into the business, and, in this case, it was to buy out an existing shareholder. This wasn’t an MBI, it was an MBO, so it was internal, paying off a shareholder.
So, you might take over a distressed business, take if for £1, turn the business round, and, six months later, you might want to buy out other people, raise money. It’s exactly the same thing, okay? The rationale for refinance is quite important, so, what we’re saying is, funders will not just lend money to pay off HMRC, or PAYE, or whatever the stress is. There needs to be a legitimate business reason as to why you’re doing this. So, very simple one, raise money, buy somebody out, business is yours.
Taxi company. The director had a fairly decent property portfolio, and he wanted to do quite a bit of renovation on it, but didn’t have the cash, so, he wanted to raise the money out of a separate business. The only way we could do this was to take cross-company guarantees and directors’ PGs, so, we essentially bought a fleet of taxis off him, rented them back to him, and he used the money in his property portfolio.
So, it was a little bit unusual, because the money’s passing from one company to another, but to make it secure for us, we have to make sure that everything’s tied together in that instance. Does that make sense? We take money out of one business and it just disappears off. You can see the risk to funders.
That one was easy, we’ve got a net worth of £4,500,000, been around for 25 years. From a covenant point of view, it was fairly low-risk. What we had to do was tie up and make sure that, actually, the money just doesn’t disappear and the company gets put into administration or receivership.
Drilling rigs. This was an interesting one.
The company was a little bit stressed, due to the non-payment of debts, et cetera. What we did, we took their entire asset base, and, also, throw into this, this is based in Scotland, so the legalities of trading in Scotland are slightly different to England and Wales, but they’d been around for a long time within the sector.
What we actually did, to raise the money, we took security over pretty much everything, but we didn’t pay out the full amount that those assets were worth. We wanted to make sure that we were very secure, so, I think we ended up at something like, £1,000,000 worth of assets to raise the £500,000. Now, back in March when we talked about raising finance, we said we’d go to maybe 80, 85 per cent.
This is one of those occasions where, actually, it didn’t make sense to do that, because the risk to us would have been too great, so what we actually did was restructure the deal and come up with an agreement where we could limit the PGs that the directors were being asked to give, by taking a bigger security.
Quite often, funders will look for some sort of security, now, whether it be a director’s personal guarantee, or a cross-company guarantee, or a deliver-up guarantee, they all vary. What I would say to you is, if you get asked that question, is, look to limit the guarantee, so you can say, ‘Okay, I’m not going to pay the full amount.
We’ll limit it to an amount’, and that could be your way of putting some money into the deal without actually putting some money into the deal.
Over the years, I’ve learned a series of negotiation skills that have been incredibly effective when negotiating the purchase of a business from its owner, so now, and over the next few episodes, I’m going to be sharing some of them with you.
Let’s talk about strengthening your negotiating position. What you need to do, is that you need to initiate the NDA, the non-disclosure agreement.
Now, the chances are, they don’t know what that is, so you say, ‘Well, that’s a non-disclosure agreement. It means that, when we have a conversation, you know that it’s going to stay between us and our advisers, and not go elsewhere, which means that it’s a confidential conversation, which means that you can be totally honest with me, and it means it won’t be discussed with anyone else.’ Of course, the ‘anyone else’, their interpretation in their head when they hear you say, ‘anyone else’, is their competitors, or their suppliers, or their customers, or their staff.
So, you doing this, shows that you know what you’re talking about, you’re going to treat the whole thing professionally, and you know more than they do, which is a powerful, psychological position to put yourself into.
Now, the actual true validity of an NDA is somewhat dubious, but, it doesn’t really matter What matters is that you’ve instigated the conversation, and I’ve had conversations where people have been the first to mention in, and I kick myself, because I should have mentioned it earlier myself, so, you need to get in there early with it.
I may have mentioned before, but it’s worth mentioning again, by accident, last year, I sent the wrong NDA back to an accountancy firm, and he called me, and he said, ‘You’ve sent the NDA back, thanks very much, but it’s a different project’, and I said, ‘Oh, I’ve got so many going on at the moment.’ So, again, it was an accident, but I thought, you know what, that’s an accident worth repeating!
Because no one should think that they are the only deal in town, you know? The idea is, you’ve got money to spend, and where you spend it, well, who’s going to give you the best deal, the best terms? You are not in a hurry. If you act like you’re in a hurry, it will weaken your position, so, patience is a virtue.
You can be very, very patient, even though, inside, you might be desperate to move this on, you must never let that show outwardly. Always let it be known that you are evaluating several opportunities.
Now, when you’re talking to brokers, use the word, opportunities, because that is the correct word to use.
It might sound a little strange. It almost sounds a little silly, actually, but, really, that is the right word, so, ‘We’re evaluating several opportunities at the moment.’ It’s this financial, private equity talk, where we all know what we’re talking about, but we don’t necessarily say what we’re talking about.
There’s always a partner to confer with, so, you all have a partner, from this moment onwards, you all have a partner. Now, partner is a very good word, because, very few people will actually enquire deeper than that.
They won’t say, ‘Is this a business partner, or is this your life partner?’ ‘No, just my partner, It’s my partner.’ Now, your partner can be your lawyer. Your partner can be your life partner, who doesn’t really have anything to do with it, but you probably will talk about it over dinner. So, having another person in the background that they never meet, having someone else who is referred to, means that you’ve got a good cop, bad cop-type scenario that you can play later.
It’s really important that you present your deal in the strongest possible way. Deferred consideration is not, obviously, appealing, unless you sell the benefits of it, so, think of it like this, John, for the next three years, you can be in Barbados, and, every month, you’ll look on your phone at your online banking, and a sum of money will appear in your bank account every month for the next three years, and you never have to step foot in this office once again.
You’ve got to be able to sell it in the strongest possible way to the seller, and that takes practice, and it’s practice that you can do at home in front of the mirror, but you’ve got to practice it.
Don’t let the first time you talk about deferred consideration, as an example, be when you’re actually sitting in front of a real deal, in a seller situation. You’ve got to do this behind closed doors, so that when you are in that first situation, it feels like you’ve done it 20, 30, 40 times before, because you’ve said it, and you’ve practiced it.
A little bit like an actor rehearsing their lines, and when they go out on stage for the first time, it’s like they’ve been doing it their entire life.
So, presenting you deal in the strongest possible way, that this deal is better than any other. Say, ‘Look, there might be someone out there who will come along and write you a big, fat cheque, but your business has been on the market, how long did you say it was? Fourteen months, and, so far, no one’s done that.
Now, I realise that everyone would like to ride off into the sunset with a big cheque. We’d all like that, but these days it just doesn’t happen, so, the deal I’m presenting to you, though, has certainty, and it has speed, and, from what I’ve heard you say to me so far, certainty is important to you, because you were let down by the other guy, and speed is important to you, because you don’t want to start the new school term in September.
So, really, we’ve got to get this tied up, July, August time, which is, well, that’s, like, five, six months away at most.’ You’ve got to think about the things that you can offer, if you’re not offering the best financial deal, but, it’s couching it in the very best possible terms. The key to all of this is self-confidence.
We’ll be learning more negotiating skills next week.