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 #8, Jonathan Jay from The Dealmaker’s Academy covers:
- The lessons serial dealmaker Mark Masiak learnt from his early disastrous merger
- More key negotiating skills you’ll need to be an effective dealmaker
- How to raise finance from within the businesses you’re acquiring
Listen to find out:
- How Mark Masiak sources deals using LinkedIn
- How Mark Masiak and his business partner bought an unprofitable company for 85 pence and turned it around so it made £45,000 profit in its first six months
- How to capture people’s attention on LinkedIn
- How to persuade business owners to sell even when you’re offering very little money
- How to get business owners to agree to a merger
- The three things you need to know to improve your negotiating position
- How to discover what pressure the business owner is facing
- How to find out the weakness in the seller’s position
- How to resolve a weakness and turn it into an opportunity
- How to discover what a seller will lose if the deal falls through
- How to find out what a seller really wants from the deal
- How to use the fact you’re not a large buyer to your advantage
- Why you should read Barbarians at the Gateabout the takeover of RJR Nabisco
- Why you should always be willing to walk away from a deal
- How to use a target company’s assets and debtor book to finance your acquisition
- Why you shouldn’t automatically offer personal guarantees
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 deal maker. Welcome to Episode 8.
This week we’ll be hearing more from serial dealmaker Mark Masiak about the lessons he learned from his early disastrous acquisitions.
We’ll also be learning more of the key negotiating skills that you’ll need as an effective dealmaker, and we’ll be hearing more from Neil, our finance expert, looking at some more real-life examples of how dealmakers were able to raise finance from within the business that they were buying. So if you’re ready, let’s get started.
You may remember me talking in last week’s episode to Mark Masiak, a serial dealmaker whose first acquisition was a disaster and almost cost him his home and his livelihood.
I wanted to know what lessons he’d learned from that initial experience, and how he emerged less than two years later as the owner of a group of eight companies. I started by asking him whether his first deal had made him lose face.
M1: We didn’t lose face because we realised that even just putting these companies together we cut out a load of cost. It was more profitable, because with his customers we were able to cross-sell a lot of our services.
The company we’ve got actually got eight service lines behind it, and he just had one, so we were able to generate more revenue from the existing customers, get rid of a load of the costs like office space and things like that, so it was working. We decided, let’s read up a little bit more, so we studied a few bits and pieces, and then about 18 months ago I posted on LinkedIn saying that I’m looking for a company to buy.
There was one of our friends from the networking groups around the region, says ‘Look, I’ve had enough of my company, come and buy mine’. We started to talk to him and what we found out was, one of his core suppliers had actually blackmailed him for his biggest contract that he had, with Dr Martens.
That was the reason why he’d lost heart in the whole thing. He just wanted out, he didn’t know how to get out of the company, so there was him, a finance guy and somebody who’d worked there from the start, who had 15 per cent of the shares. We bought the company for £1, although it only actually cost 85p, because the minimum shareholder with 15 didn’t want the 15p and actually threw it back to me in the meeting. Bought a Sherbet Dip.
We started to look into this company, and this was a company who’d not made profits, ever. They turned over I think, off the top of my head, £485,000 the previous year.
They’d lost this big contract, which I can’t remember how much it was off the top of my head now, but it was significant, and it was nearly half of their turnover.
From him giving up on the company we were starting to lose other customers, because he wasn’t responding to them, so it just looked as if it was a massive negative, but as I started looking at the financials, I thought these don’t look right. You’ve got all these companies who owe you money, you’re not collecting, and things like that.
I started digging into the suppliers with the financials and then started going after the customers who owed him money, who actually paid him within a couple of weeks, so after buying this company for £1, we straight away got £40,000 in the bank, which he’d never ever had money in the bank before.
Bearing in mind, we’d now also got rid of his office space, some of his staff had gone as well, so his costs are coming down, too. We then started looking at some of the suppliers and who was doing what, and I also found this international supplier he had with free call numbers all round the world. Dr Martens and Monica Vinedar, the jewellers, they were using this.
He’d been doing it for two years, and apparently he didn’t know how to bill it, so he’d just never bothered invoicing the customers for this. I phoned the customers up and said ‘Look, you’ve got these services, you haven’t been billed. Expect a bill. It’s going to be quite large because it’s two years of it’, and they says ‘Oh, yes, we wondered when we were going to get billed for this’. I went to one of my finance girls and I says right, we’ve got all these bills. Add them all up, double it, and send them the bill.
We did that and it was another £20,000, so this company that cost me £1, in the first quarter we actually walked out of there, Dave and I, with £80,000 in our pockets from that. It was like, this is really, really easy. That was my first one. We’ve still got that, it’s going along. The first year’s accounts went in, so from making losses all this time – previous year was £80,000 loss – our accounts after doing six months of it was £45,000 profit, so it’s…
You found that via a post on LinkedIn.
M1: Just on LinkedIn, yes.
Tell everyone what you told me outside, how you made the LinkedIn more effective. It was quite a clever idea.
M1: Yes, just recently we closed on another IT services company. It’s only turning over £130,000 or something like that. It’s him and a couple of part-time employees.
As we’ve taken over that one, I’ve posted on LinkedIn that I’m looking for more IT and telecoms companies to be able to purchase or merge and bring into the group. As I’ve posted that, I’ve also posted that I’ve got a new role as the director of this new company, because what LinkedIn does, as soon as you post a new job, it bombards everybody, congratulate them, so they’re straight away coming and looking. The views on my original post, within a matter of three days went up just over 3,000 per cent, just from doing that.
On Wednesday I got an enquiry from, it wasn’t an IT and telecoms company, it was a recruitment consultant. The guy wanted to retire, he’s 71, and so I phoned him the next day and I got his financials through this morning. Meeting him on Monday to be able to get his company as well.
Tell us about some of the other deals that you’ve done. How do you approach the concept of ‘There’s not going to be a lot of money in this for you but we’re going to take over your stress and hassle?’.
M1: It varies. We don’t just go after one thing, we are building groups. One of the other groups that I’m building is a digital marketing group, so we’ve taken a sole trader and a half. He’s not been able to grow because it’s just him, it’s feast and famine all the time for him.
He gets the deal, he’s working on it. Sound familiar? He’s working on that, so I’ve gone and said, ‘Look, I’m putting a group together. I’ve already got a massive base of existing customers who you can go and approach. We’ve got about 1,000 customers there that haven’t got web services, or some will, but… Come on board, give me 50 per cent of your business. Here’s £1’. He’s on board.
He’s going up into a main group. Hopefully in the next couple of days I’ll close on a PR company. He’s going to be able to do the digital content, which is always a big weakness. If you talk to anybody who’s doing websites, they always say ‘Oh yes, the businesses never get the content’, so I’ll just buy one.
That’s what I go and do. I’ll go and look at these and then I’ll approach them and say ‘Look, you’re doing this, there’s only a couple of you there, you’re struggling, feast and famine. We’ve got these existing customers, we’re going to do this. 50 per cent of the company’.
You present it as a solution to their problem, plus they’re going to be better off with you than by themselves.
M1: Yes. I think one of the key things which really helps, and you were talking about it a little bit there, is how we approach the actual first conversations. I like to get to know the people first. I did timeshare and if anybody’s ever been to a timeshare pitch, it takes two and a half hours, three hours.
My longest has been six. Expect that tonight as well! That’s just about rapport. Getting somebody to like you. When somebody gets to like you, they’re more willing to just give you something, so that’s what we do. With this recruitment consultant, I’m meeting him on Monday night, and I’ve said to him, ‘Look, I’m not really interested in your financials right now’, because I’ve already looked at them.
I do a bit of my due diligence before I’ve even started speaking to people. So on Monday, I said ‘It’s just about getting to know you, seeing what you’re like, because it tells me what your business is going to be like and whether it’s worthwhile me getting involved’.
I try and build rapport before I go and do anything else, and it is just all about that, and then we get into the financials and the nitty gritty, and most of the time that works. I have had one, it was at Christmastime, a scaffolding company. I think we mentioned it.
Yes, we did.
M1: This guy, it was looking promising, he wanted to get out. He wanted to sell.
He’s got a scaffolding and event structures company, so they basically put scaffolding up and wrap it, but he wanted to sell.
It was a £2 million turnover. Went along, had a meeting with him the first time, nice chap, got on really well. We knew a lot of people around the area that each other knew, and we were talking about this, and then I get him to show me round his business.
He’s a peacock now and he’s showing how fantastic his business is, how great it is, and we go into his second building next door, which I didn’t know about, which was his building where he’s got all the steel.
He had just under £2 million of steel in value in this thing, and it wasn’t on his balance sheet, so he’s got loads of other value hidden away in this company that he doesn’t know about, which is quite common, by the way. Most businesses under £2 million are, it’s a lifestyle business, so people don’t know about financials. Most of them don’t even know how to put a P&L together or read a balance sheet anyway; they rely on their accountants.
We get there and I’m seeing all of this and we get back and sit down, so ‘What sort of value do you put on your company?’ bearing in mind it’s £2 million turnover.
He says ‘Oh, I’ve seen multiples between three and five, I’ll be quite happy with three if we did this’. I says ‘Oh, what is that, then?’ He goes ‘Oh, well, it’s £2 million so that’s £6 million’, because he thought the multiple was on his turnover, not on his profit! When I explained that to him, his face dropped a little bit.
Now that is a turnaround story. I don’t know about you, but when you hear Mark saying that he’s still learning, it makes you feel that buying and selling companies really is an opportunity for anyone with the right frame of mind.
Last week, we began a series of lessons on the negotiation skills that every dealmaker needs to have in order to purchase a business from its owner. This week, we’re going to consider the three things you need to know in order to improve your negotiating position.
M2: These are the three things that you need to know to improve your position. What is the pressure on the other side, and if you can’t answer that question, you haven’t asked enough questions earlier on to find out the answer! Or you haven’t allowed enough time.
What is the pressure on the other side?
There is always a pressure. Always.
It could be the pressure is from their business partners, or their personal partners. The pressure might be health, for themselves and the people around them. The pressure could be one that they’ve invented in order to get the deal done quickly. ‘We’d like to do it by the end of the financial year’. That’s an interesting one. What is the pressure on them? It could be they know they’re about to lose a big client and the business is going to be worth even less in six months’ time, so what is the pressure?
What is the weakness in the other side’s position? Someone just asked me about a company where the lease was, only two years left to run on the lease.
What’s the downside of buying a business that occupies leasehold premises? In this case it’s a café bar. What’s the weakness in the seller’s position?
Well, the weakness is that the lease might not be renewed, and let’s say the lease isn’t renewed, well, the business has only got two years left to run, so there’s a massively weak position that when you know what it is, you can use as leverage.
Now, it doesn’t mean it’s insurmountable, because what we were just saying in the break was that you go to the person they lease the premises from and you say ‘I’m thinking of buying this business, but I would need a new ten-year commercial lease’, so for you, as the future owner, the value’s immediately gone up, because if you wanted to flip that business and sell it on, you’re selling it with a shiny, brand new ten-year lease.
It’s a little bit like with leasehold property; I think when it gets below 60 or 70 years it’s harder to sell and it’s harder to refinance. So the weakness in the other side’s position you might be able to solve and turn into a strength, i.e. a new lease, and the new lease allows you to sell the business for more than you bought it for.
What is at stake for them? What are they going to lose if this deal doesn’t go through?
Again, because it’s very fresh in my memory, conversation from yesterday afternoon.
The question I gave to go back to the seller of this nursery with, who’s 70 years old and wants to retire and wants to do the deal by September, is what will happen if you don’t find a buyer? What would happen if you didn’t find a buyer?
Then you just sit back and you listen. What if they said, well, I suppose we’d just close the business down? They’ve just demonstrated there’s no value in it.
They’ve just told you. They’ve actually undermined their own position as soon as they say that. ‘What would happen?’. ‘Well, I suppose I’d have to keep on running it’. ‘How would that make you feel? I thought you told me you were exhausted’. ‘Well, yes. It’s not what I want’. You’ve got to find out what’s at stake, because if it comes to it, you can actually bring that back into the conversation. Say, ‘Look, we seem to have reached a bit of a sticking point. Our two lawyers seem to be knocking heads here.
I thought it’s time for us to have a coffee so that we can unstick the situation, because I know that if this deal doesn’t go through for you, you’re now committed to running a business that you don’t want to commit. I know you don’t want that, and I’m trying to help you get out, but we need to just agree this thing and do it on a handshake today. Then we can both phone our lawyers and say “We’ve sorted it, let’s get the deal done”‘.
Sometimes you do need to leave the lawyers to one side and sit down as the two principals and agree something. What do you have that they want? It’s not just about the money.
It could be something else. It could be that they want speed. If a large corporation were to buy this business – they might say ‘Oh, we’ve had some big companies sniffing around’. Oh, really? That’s interesting. We’ll cover how to deal with that in a moment. The alternative is that ‘Look, if I buy your business, we’ll do it quickly. We’re not one of these big corporations where they’ve got to have a committee meeting about everything.
You know what they’re like, don’t you? No-one can decide, and then in six months’ time they’ll come back to you and tell you the deal’s off. In six months’ time you’ll be in Barbados’.
Your USP is that you can do it quickly, because there isn’t this big committee, because quite often with large companies they have a strategy which is, let’s acquire these businesses, and then the board changes, maybe the CEO is replaced, and the new CEO says ‘No. New strategy. We’re not going to buy those companies’, and the whole thing just falls apart. I recommended a book to you last month. It’s called Barbarians at the Gate, and it was written in, must have been the late ’80s, early ’90s, and it’s about the takeover of RJR Nabisco, which was a food and cigarette manufacturing company.
At that time it was the biggest buyout in corporate history, and there’s a great phrase in there where they weren’t even sure whether they could do this buyout, because they weren’t sure whether there was enough money in the world available to do the buyout! It’s a great story.
You get halfway through, because I was reading it on my Kindle, and you think you’re coming to the end, and then you look at the bottom of the Kindle and it says you’re 50 per cent the way through the book. You think, 50 per cent? We think we’re at the end of the deal, and it’s still going on and on and on. If you look on YouTube for Barbarians at the Gate, it’s a rather grainy film.
The main character’s very good, but there’s some dubious acting at times, but it’s worth watching how a big corporate deal works. What you’ll see is that everyone changes their minds every five minutes.
We’re doing the deal, we’re not doing the deal, we’re paying this, we’re not paying this. We want this in, we want this out. Your USP is, I’m not one of those guys. I can make the decisions quickly. If we decide on something right now, that’s what’s going to happen.
Also, the deal can proceed with us, so if they’ve been let down by someone else, that’s worth knowing because, ‘If we decide to do this deal, Geoff, we’ll do this deal. We’re not going to mess anyone around.
There’s not enough time to mess people around’. Always, remember this is about strengthening your position, always be willing to walk away. Always. If you feel you can’t walk away from this deal, then you’re emotionally involved, which means that it weakens your position along the way.
The best way to be able to walk away is to have several bubbling at the same time, so you can say no and walk away. Being able to walk away strengthens your position because the other side never think that you will. Say, ‘Look. I think we’ve reached a little bit of an impasse here.
We’re not getting any further along. If we can’t agree this by the end of the day, I’m sorry but I’ve got so many other deals we’re looking at, we’ll have to pass on this one and wish you the very best of luck.
You’ve got my number, give me a call. If I hear from you, wonderful. Let’s proceed. If I don’t, good luck to you and your team’. Wow.
That’s another sentence that you need to practise, so that when you say it, it feels natural to you. It doesn’t feel nerve-wracking. If you’re doing it on the phone, have it written down and read it.
We will be discussing more negotiating skills and tactics next week.
At our Mastermind group last month, our finance expert Neil presented a number of real life examples of how dealmakers were able to raise finance from within the business that they were buying. Here are some more of his real-life examples.
M3: Right, one on the back, advance 100,000.
This was a straight MBI, an outside party wanting to buy a business. I think we did this in January. Business purchase, the business had been trading for nearly 40 years.
It was purely a ‘I’m tired, I’m fed up, I want to give up, sell the business’. There was nothing wrong with it, it was a very nice little business.
They worked business to business, so their customer base was all business users.
They had a lot of small, bitty bits and pieces, so there was some lathes, there were some cutters, bits and pieces in there, but the agreed purchase price was £350,000.
What we managed to do, we raised the money from the assets.
I think it was about £140,000 worth of assets that we got valued. We also looked at the debtor book, which we put on to a factoring facility, and were able to raise about £250,000, so between the two of them, on the day of completion we were able to pay the incumbent owner £350,000 without any money going in from the person who was buying.
That’s what we like, isn’t it?! Yes?
That was one that we’ve done this year.
We’ve done a couple like that, but unable to discuss it because of privacy clauses, but this one, nice little deal down in Devon.
It took us, I think it was probably less than a week from first being told about the deal to actually activating it, which put us under a little bit of stress, a little bit of pressure, and I’ll come on to that. Last one, sale and lease back facility. This is literally, the guy had fallen out with his current finance company. He wanted to do more stuff with them, they weren’t having anything to do with it.
He’d been going for 18 years, grown very quickly in the last two years. The recovery market is quite an interesting one. You’ve got the likes of Green Flag, RAC, AA; they will use lots of local companies, and they’ll pay a fixed fee. Some people don’t like that fixed fee, so they drop out of the contract. Somebody else has to pick it up and all of a sudden you can find somebody takes on four or five areas. They increase their turnover by half a million without even realising that they’ve done it. These guys wanted to expand. They weren’t being supported by the funder. Bank wouldn’t extend their overdraft.
We refinanced the whole of the portfolio, extended it over a longer term, brought their payments down, made cashflow a lot easier and also allowed them to get into some new equipment, which meant the service to AA, Green Flag, etcetera, was enhanced as well. Great little company, strong DPGs.
The guy offered them, we would have probably done it without, but if you’re going to offer them up, we’ll take them. It’s just more security. Maybe a little lesson there.
Don’t always offer the PGs. Twenty-four hours and paid out on the same day.
I think the guy that did this one pretty much, we agreed the deal in the morning, he set off about four o’clock in the morning, drove up to see the customer, looked at the equipment, agreed that that was the equipment that we’d been told about, gave the verbal agreement to the office.
The office raised the paperwork, emailed it out, signed it up, took photos of the document, sent it back to the office and we paid the customer out, all within about four or five hours. Again, great little deal, but put pressure on and it can get a little bit stressful.
Next week, Neil will be discussing some guidelines that you will need to understand when you are looking to raise finance in a hurry. Thanks for listening. That just about wraps it up for this week.