Welcome to the business flipping podcast where you find all the very best information on how to buy and sell businesses and become a dealmaker. In Business Buying Strategiespodcast #14, you’ll hear:
- Crucial advice for making your first deal from business investor Paul Green including two key insider secrets that every new dealmaker should know.
- Bill Morrow, who City AM describes as “the most influential person in alternative finance in the UK today”, explaining how his company acts as an introduction agency for people seeking finance and people looking for investment opportunities. Bill is the co-founder of the online investment platform Angels Den.
- Jonathan Jay, founder of The Dealmaker’s Academy, describing more key negotiating skills you’ll need to be a successful dealmaker.
- Peter Kiddle, businessturnaround expert and the Chairman of Business Transfer Agent Ltd., revealing how he put his first deals together and about how his business evolved. Peter now divides his time between consulting on company turnarounds and selling training companies for clients.
Listen to find out:
- Why you must discover a seller’s real reason for placing their business on the market
- How sellers tend to hide the real reason for selling initially and why it is so crucial you discover what it is
- How a seller’s business partner can unintentionally help you to uncover the seller’s real motivation for selling the business—if you ask the right questions and listen carefully
- How business brokers and business owners use the same sales techniques as real estate agents and how to see through what they present
- Why you should always be prepared to walk away from a deal, no matter how good it seems on paper
- How a business transfer agent works
- Why Bill Morrow’s business venture works so well
- The biggest mistake people seeking funding make
- What business investors reallywant to know
- The three reasons alternative investors will provide funding
- The biggest value that an investor can provide (and it’s not funding)
- Why so many crowdfunded companies fail within two years
- The three things you should look for in an alternative funding source
- Why you should always allow the other party to raise the issue of pricing
- Why so many sellers have such low aspirations for their business
- The key difference between a business operator and a business investor
- Why you should never denigrate a seller’s business (no matter how poorly it’s been run)
- How to drive a wedge between a seller and his or her broker (without appearing to)
- The key question to ask a seller about their valuation
- What you should do when sellers describe the grounds for their valuation
- Why you should ask who valued the business
- Why you can immediately reduce a broker’s valuation
- How to get the seller onside just by asking questions
- How to make the idea of a consultancy more appealing to a seller
- How changing tactics helped propel business turnaround expert Peter Kiddle towards huge success
- The signs that a business is struggling
- Why you should never let a business owner know that you’re aware of how the business is in difficulty or badly run
- How slashing overheads helped Peter remove hundreds of thousands of pounds in costs
- How merging back-office functions with his existing business helped take one company from a £3 million turnover with negligible profits to a £5 million turnover and £1.5 million profits
- Why it took Peter two years to sell his business for £5 million
- How the mistakes Peter made helped him to create a business brokerage
- Why he bought back a company he’d sold three years earlier
- How to come out on top when dealing with administrators
Read the transcript here:
Hello and welcome, this is Jonathan Jay for 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 14, in this week’s episode we’ll be hearing for the final time for serial dealmaker Paul Green.
Last week we heard Paul talk about the importance of psychology when buying a business and also about looking at a deal from the viewpoint of the business seller.
In this final session Paul gives his advice to anyone about to make their very first deal. I’ll be introducing you to Bill Morrow who CITY AM described as the most influential person in alternative finance in the UK today.
Bill introduces business people looking for finance to business people looking to invest, and he’ll be explaining how his business works.
Later in the episode I’ll be teaching more of the key negotiation skills that you’ll need as an effective dealmaker and I’ll introduce you to Peter Kiddle, another serial dealmaker who having built up and sold his business successfully bought it back from the new owners barely a year later.
He’s also a superb business broker and Peter was the person I relied on to sell my own business a few years ago.
Peter explained how his business evolved and how his first business deals were achieved. If you’re ready, let’s get started.
Last week we heard Paul Green talk about the importance of psychology when buying a business, and also about looking at a deal from the viewpoint of the business seller.
In this final session Paul gives his advice to anyone about to make their very first deal, here’s what he had to say.
If there is one sort of sentence, something to summarise, what piece of advice would you give people who haven’t yet bought the first company or haven’t yet done the first deal?
Get out, talk to – okay, no, actually if it was one piece, one is to look for the real reasons for the sale, so sometimes it’s a – you know you see retirement sale or my favourite one is the owners have other businesses they want to focus on, which it’s all bullshit, so you have to look at – it’s like with estate agents, spacious and airy, ignores the fact there are lorries going that far from the window or whatsoever.
There’s a lot of dressing up that’s going on and I think the, you’ve got to look for what are the real reasons.
Sometimes it’s genuinely they want out, it’s like the vets at the moment, vets are selling because it’s, the market will never be like this ever again and they can get two million instead of a million.
Why wouldn’t you do that? I think for any other thing you’ve got to look at what’s really motivating them, and as you said it doesn’t come from talking to brokers and advisors, you’ve got to get the seller and preferably their partner, and I don’t mean their business partner, their life partner, get them into – in fact, the best conversations I’ve had is when someone’s brought along their other half, their wife or their husband as it’s been [unclear word 0:03:06.5], because the wife or the husband isn’t on message.
They’ll sit there and they’ll say, you’ll say things like, ‘Tell me about your work life balance,’ and the owner will go, ‘Yes, absolutely, so I work six or seven hours a day,’ and the wife will go, ‘You bloody don’t, you’re never home before eight o’clock at night,’ and then they’ll have a little argument. It’s great because you really start to get into the crux of it.
Some of the IT support companies, because I have a pipeline already of people that’s only been held back by having an operations person to run that business for me. From the pipeline and the conversations I’ve had, it’s exactly the same conversations of – they’re no different to vets, they’re exactly the same with vets except they fix computers, not dogs.
There’s no one doing a lot of acquisitions in that particular sector currently and that makes it actually a buyer’s market, not a seller’s market, which is awesome.
I think getting to understand the seller’s motivations is one thing, if I could add a second one is that they’re, if the deal isn’t absolutely great, walk away because there’s another deal.
We had loads of vets that were pushing us for better deals and high-levels of EBITDA and we just played it straight down the line, ‘Look, this is the offer because this is what can get funded, if we do a complicated deal with you, word gets out, it’s off.’ The same with some of the IT support companies, I’ve had people saying they want ridiculous amounts of money and this and that and overvaluing it.
I’ve got a great accountant working on, doing not quite as good as your due diligence pack, although that’s going to, I’m going to up my game on that one having seen that.
You’ve got to trust your advisor if they say, ‘This is the situation, this is that,’ if it looks and feels like a good deal and you’ve got to do it because it will never come along, no, that’s not the case at all, there’s always another deal.
You can do the, whether it’s letters, phone calls, emails, Facebook, whatsoever, there are thousands and thousands of people out there that would sell their business like that if the right buyer came along.
We’ll be hearing from more successful dealmakers in future episodes.
Let me introduce you to Bill Morrow who CITY AM described as the most influential person in alternative finance in the UK today.
Bill introduces business people looking for finance to business people looking to invest, and here he is explaining how his business works.
I spent tens of thousands of pounds with these people, tens of thousands of pounds to get not a sniff.
I thought to myself here I am, if I am getting ripped off what the hell is it like for people who want to minimise the amount of time they spend with freaks of nature like me who like numbers and balance sheets, even if they don’t balance, and really just when to do it.
We came up with a name and the concept is simplicity itself, we sit in the middle and we introduce people who are looking for money to people who have got money.
Imagine my surprise and your surprise about five and a half minutes of listening to me talk that today it is Europe and Asia’s largest [?angel 0:06:13.8] network.
Nine years ago we opened in Singapore, eight years ago in Hong Kong, we got a pretend office, somebody sitting in their bedroom in Malaysia, we’re sponsored by the Qatari Government, we’re in Kuwait, Abu Dhabi, Tel Aviv and hopefully moving into Kuwait, got four offices in Mexico, two offices in – you get the drift.
I think its success is twofold, the success is based on its simplicity, the simplicity is that we translate what it is the investors are saying to these people looking for money, and we translate what the people looking for money say to the others because they speak very different languages, very different languages.
In fact, I had a course on last night where people were presenting their businesses, and what people do when they present the businesses is they present them very badly.
What people do, the biggest mistake they make in terms of presenting is they present the product.
When people are looking to invest into your business they don’t want particularly to know about your product, guess what they want to know?
Yes, well they want to know numbers, but they want to know about your business.
You’ve got a great product, great, well done, the idea is the really easy bit, not easy but it’s the real easy bit, actually understanding the nature of what it is that you’re talking to, the person doesn’t want to buy your product, he wants to buy the business behind the product.
What I’m going to do this morning is I’m going to tell you the three reasons that investors invest, and that took us 17 months to figure out, yes, that’s how stupid I am, and the three things that you need to have, in my humble opinion, in terms of having a chance, no, not having a chance, if you want to be successful and also I shall define success.
We see 126 business plans every day, every single day, so we have interns from MIT and Harvard who would pay me, and actually I would take their money, to come and work for us because they’re going, ‘Where the hell else in the world would I see 126 different business models?’ they go through them, it doesn’t actually take that much time, but we see 126.
The number one problem that we have with the 99 per cent of them is that they come to us and they ask us for the wrong thing, they ask us for money, whereas what I think and I can prove it, the real value that comes from an investor is not money.
If you just want money every day of 126, we see 17, not 16, not 18, every day it’s 17 and they are 29-year-old, they’re all wearing skinny jeans, they’re all male and they probably all live in Shoreditch.
They are God’s chosen people because they know everything already, we’re going, ‘Wow, dude, that’s incredible,’ ‘Really?’ ‘Yes, absolutely,’ ‘We know everything already’, ‘Okay, that’s great. Is there any -‘ ‘Ssh, ssh, ssh, you’re wasting my time, can you just give us the money?’ I go, ‘Tell you what, we’re not going to waste your time any more, what you must do is go to Crowdcube or Seedrs and your dreams will come true, but be very careful what you wish for.’ Crowdcube and Seedrs for people that don’t know, they’re crowdfunding websites, so rather than getting a bulk of money from one person you get 300 people to give you smaller amount of money and you get the money.
My board says, ‘Are you sure that we should be sending 17 people to people who we might think of as competitors?’ I’m saying, ‘Absolutely not, no problem at all, just wait and see.’ We are the biggest introducer to equity crowd funding platforms, nobody sends them more deals than us, [unclear words 0:10:37.8] be very careful what you ask for. Off the companies that we send, a high proportion of them go and get funding and they come back and go, ‘Got funded,’ I’m going, ‘Dude, that’s fantastic, well done,’ they go, ‘Yes, ha-ha-ha,’ I’m going, ‘Oh.’
Not one of them has got beyond 14 months, not one of them. Inherent within their arrogance, no, it’s not arrogance, it’s just they don’t understand because people haven’t told them what it is that they need to know.
The things that you really need for an investor, money I would say comes in at number four, number one by far in the way is their mentorship, is the value of their experience in that marketplace, what they know, their wisdom.
They don’t necessarily need to come from a car charging environment for you to be able to get some value out of it.
How should I raise my next round of money?
I’m now looking to raise £2.7 million, well I’ve got people that can actually help you with that, or I can help you exit the business, or I can set it up so that you can do whatever.
Mentoring is by far in the way the biggest thing, the second thing is their experience just in particular sectors.
If you’re lucky enough to actually find somebody who actually understands your sector then that is going to be really, well I would have thought that was kind of important and experience once again has proven that it’s true.
The third thing which probably, well hardly anybody ever asks us for, but it is in my humble opinion once again probably the most important thing that you actually get are the contacts that people come with.
It’s their mentorship, it’s their experience, it’s their contacts and then it’s the money. The inherent flaw that will bring about to their own demise in terms of crowd funding is that you just get the money.
I’ve given you £300 now, £300 you’re probably not going to say, ‘You know what, I was in Tesco the other day and your stock was running a little bit low,’ you’re going to go, ‘I can’t even remember if I invested in that company,’ you’re not emotionally tied to it. You put £200,000 into a business you’re emotionally tied to it, you kind of want to help the business, yes?
Kind of makes sense.
We’ll be hearing more from Bill next week.
For some time now we have been considering many of the negotiation skills that every dealmaker needs in order to purchase a business from its owner.
Here are some more skills and tactics that will improve your negotiating position.
Always let them make the first move on price because you might be surprised how low their aspirations are, they might think my God, who would ever buy this business?
It’s not worth anything, it’s not worth anything, because, it doesn’t mean that it isn’t worth anything, what it means is that all they see are problems because they are an operator, not an investor and all they have is, ‘I’ve always got a customer complaining, I’ve always got a supplier who doesn’t deliver, I’ve always got a member of staff who is going off sick.’
This business is a nightmare, who would want to buy this? They’ve lowered the value in their own minds, so let’s hear what they think the value is. Stroke their ego, ‘You’ve got a wonderful business here, no, I know you said all those things but I think it’s a fantastic business,’ you can’t tell them their business is rubbish first of all because it’s insulting and secondly why do you want to buy a business that’s so rubbish?
If it’s so terrible why are you interested in buying it?
You’ve got to tell them what a great job they’ve done, I say, ‘Well, yes, but I think the premise is, I think we need to improve the quality of the premises.
You know what, you’ve run it a long time, I know these things get a little bit rough around the edges over the years, I think you’ve done a great job, I think you’ve done a fantastic job.
You’ve said you’ve had difficult circumstances recently with the family, I get that, I think you’ve done a wonderful job.’
Help me understand. You’ve told me that the figure that you want is £300,000,’ Columbo moment, ‘Help me understand how that evaluation’s reached, help me understand it.’
Then you just shut up, get your pen and poise the pen over your pad and wait for them to explain it to you. Why?
Because they can’t do it, because it is, because they’ve worked out that the holiday home is going to cost this, and they’ve got some credit cards that they need to pay off as a – that’s the number that they want.
In fact, it bares no relation to the business that they’re selling or they’ve plucked some, they’ve read something on the internet and they said, ‘I think we can get a multiple of eight times profit,’ yes right, yes, maybe 15 years ago, not going to happen now.
Here’s a good question, was this your evaluation or someone else’s? If there’s a broker involved it’s probably the broker’s, which means instantly it’s been inflated.
The broker knows that, so as soon as you hear the evaluation was the broker’s you know you can immediately slice a huge number right off the top.
Here’s how the conversation would go, so, ‘Was this your evaluation or someone else’s?’ ‘It was the broker’s,’ ‘Interesting. Do you know how they arrived at that evaluation?’ ‘I don’t, well they did something and they – I don’t really understand numbers, and they came back to me and they said this is what it should be,’ I say, ‘That’s interesting.
When you saw that number what did you think? Did you think it was more or less?’ now it’s never going to be less clearly, so the only option is it can be, ‘About the same as I thought it was going to be or more,’ so they go, ‘Well actually we thought really it was going to be less, so we were quite surprised when they came back with this number,’ ‘How much less did you think it was going to be?
I think you’re right, how long has it been on the market for?
A year, well I think that’s just proven that you’re right.’ You’re stroking their ego and you’re also bringing them around your side of the table so that the broker is now being pushed out a little bit and their advice isn’t going to be listened to so much.
Now there are times when you want the broker to be on your side and we will cover that at some point.
Three-hundred-thousand, interesting number, if we were to reach that evaluation what are the factors that contribute, what are the elements that contribute?
Now this is an interesting way of looking at evaluation, just because the number’s 300, it doesn’t mean that that’s £300,000 day one cash, we get that now, we understand that.
What are the elements that contribute?
Here are the components of a deal. They might get equity in their new company, now interestingly if you’re buying day nurseries and you’re buying the assets of a day nursery and putting the assets into a new co, you lose your Ofsted accreditation.
You need the previous owner, in fact actually you need them to have equity in the new co. You might say that that equity, let’s say it’s 15 or ten or 20 per cent, has a value, so your £300,000, if you think of it as a pie chart, now has a slice of it as 20 per cent equity, so we’ve just chopped the 300 down by maybe £75,000.
They’re all sort of arbitrary numbers but then the £300,000 was an arbitrary number in the first place. Instead of me saying, ‘I don’t think it’s 300, I think it’s 200, you think it’s 275, I think it’s 225,’ and you do that horse trading thing, it’s like so how do we reach the number?
How do we reach the number that you want?
Let’s say there’s consultancy fees where we pay you £500 a day and we pay you for a day a month over the next three years, well that’s £18,000, so that’s 18, let’s put £18,000, so that’s £18,000 contributes to the 300, you put that in there.
Obviously the bigger the number, you know what, I’d go for a bigger number on that, make it a little bit more exciting.
Don’t forget you’re not obligated to use the consultancy, you’re not obligated to use them as a consultant.
It’s a consultancy agreement that can be terminated by either side, it’s not unfair, it’s not only turn it one side and turn it on a – let’s say, let’s get a little bit more exciting, let’s say it’s £2000 a day and it’s a day, I’m going to say it’s 24 times three, times three years, that’s roughly £75,000, £75,000 of our £300,000 is going to be consultancy fees.
We’re getting there, we’re getting there, so we’re looking at all the elements that can help us reach this arbitrary figure that the broker’s come up with.
We’ll be discussing some more negotiating skills and tactics next week. Now we’re going to hear from someone quite remarkable, meet Peter Kiddle.
Not only did Peter build an enviable business and sell it for a handsome sum, but when the new owners struggled to make a decent fist of running their newly acquired business, he was even prepared to buy it back again.
Peter is also a first class business broker and he was the business I relied on to sell a business of mine several years ago. I asked him how it all started and here’s what he said to say. Peter, how did it all start? Tell us a little bit of background.
I failed my 11 plus, some of you will recognise what that means.
I wanted to be a policeman, I was too short, but I did become a forensic officer with the Metropolitan Police and hated it and decided I’d go into the commercial world to learn what business was all about, and did that for a few years with larger organisations such as Philips.
I then thought oh, do you know what, I can do this business stuff, I don’t need to work for somebody else.
It took me to the age of 34 to decide that I’d start up my own business on my own, serviced office above the Midland Blank in Frimley, petrified, credit cards maxed to the absolute limit, borrowed money from everyone I could find and was panicking like hell, but I took the plunge. I also had a large mortgage and two young children, which didn’t help.
The business was successful, it took a long time for me to build the business but I did it the hard way.
If I’d known at that time what I know now I would have done it completely differently, but I did build up the business, I got it to 120 staff, I got it to a five, £6 million turnover every year and it was damn hard work.
I was working 12, 18 hours a day, I’m sure many of you that have your own businesses currently will recognise this, absolute exhaustion, I did it definitely the hard way.
Got the business to about £3 million turnover and started to realise that there must be something in this acquisition thing that would work for me, so I started playing around with acquisitions and spent far too much.
If you think about it, typically in the marketplace businesses sell for a, in my sector, around about four times profit before tax.
What I was doing, I was buying businesses at four times profit before tax and it was taking me four years before I got my money back, crazy.
Once those four years have gone by of course, okay, I was starting to reap the benefits, but it just took too long. I made those mistakes and bought those companies for far too much and then decided I ought to change tactics a little bit.
Along the lines of the sorts of things that you’ve been discussing in this group, I started to try and hunt for businesses that might be keen to get rid of them but at a price that’s fairly reasonable. I started doing my research by talking to, there wasn’t so much internet stuff then, by talking to people within the industry to find those businesses that seemed to be struggling.
A core sign is they start paying people a bit late or they start giving you stories in the marketplace about why they’re not expanding quite as they should do. I was running a management training business, turning over £3 million and I found a company called Guardian Business Services, it’s the Guardian newspaper group’s training company.
Turning over about two and a half million, struggling, so I wrote a letter to the MD and said, ‘I would like to talk to you about buying your really, really successful business.’ The last thing I found in my experience is to go into these discussions giving them the impression that you know that they’re on dodgy ground and struggling, they don’t tend to come through so easily if they think they’re going to get a duff deal.
I did this letter, I went to see the MD in Farringdon in Fleet Street and sure enough they were just about breaking even, they had the most ridiculous overheads, utterly ridiculous and I could see that there was some potential here.
A business making no money isn’t really worth very much, they knew that, I made sure they knew that, but I spent about four hours, maybe five, looking at their accounts, looking at their overheads, looking at the way in which they worked.
It was so easy, I could see straightaway that their office accommodation in Fleet Street was ridiculous.
I mean, the MD’s office was probably half the size of this room, the staff were so laid back and they were all doing things that were ridiculous, there was 20 of them in this office.
The opportunity was clear to me and because of that enormous opportunity I didn’t do the normal type of due diligence that you would do on the basis of, well, if it doesn’t work I’ll close it down.
The MD was keen to get out, he was 66, he was knackered, he just didn’t want to know any more and it was quite an easy sell, to purchase that business for £1.
The £1, I actually paid him with a proper piece of money, the business turned over two and a half million, I sold, we got rid of the offices straightaway.
I think the lesson I learnt there was, the lease had five years still to go, most people go, ‘Well, we’re stuck, we’ve got to stay in this ridiculous sized office,’ well, I approached the landlord, said, ‘Look, we’ve got two choices here, we’re going to go bust and you’ll get absolutely nothing or you let us off the hook and I’ll give you a few bob,’ they said, ‘Yes,’ it wasn’t much of an issue.
I took £450,000 out of cost immediately, I then looked at the staff and this was quite some time ago, all drastically overpaid and, yes, I had to be ruthless and let half of them go.
That business was very quickly producing a £1 million a year for me, because all the back office functions were handled by my existing business.
That quite quickly moved me from a £3 million turnover business to a £5 million business producing one, one and a half million pounds a year profit for me, it cost me £1 plus a lot of hard effort getting my core business to the point where it was.
That’s the point I thought really it’s time to sell, £5 million, a million, million and a half, the bottom line, an attractive little business.
Sold it for £5 million, it took me two years to sell that business, I was so arrogant.
I interviewed a load of brokers, I’m the good guy remember, they’re the bad guys, I interviewed these bad guys and they didn’t understand my business at all and I thought I can do it, I don’t need help. I went out and I made every single mistake in the book for two years and that’s why it took so long.
I learnt that you have to validate that the potential buyers have got the cash, that they’re serious, that their due diligence is just not playing a game, because we know what corporate people are like, they keep themselves busy by doing stupid things.
All that stuff that I learnt I used when I set up my broking company to help companies in the same sector as me to sell this businesses.
Just to go back to the business I sold, they put an MD, they didn’t want me to stay, I didn’t want to stay, put an MD in who was pretty useless this really.
It was a venture catalyst firm that put the money up, staff would ring me at home, because by then I was just sitting with my feet up, playing golf, they would say, ‘He’s useless, he’s just sitting reading the newspaper all day,’ oh, the stories.
Anyway, three years later it went bust and that’s the difference between entrepreneurial management and normal operational type management I believe.
I was in the know and new the people there, I liaised with the administrator that was handling the closing of the business and he wanted to negotiate a price for me to purchase this business back.
He knew what I got for it, that’s where he started, no chance. In the end if you do your research and you’ve got enough ammunition you can beat up administrators really easily.
For example, in the training industry the key people in the business are those freelance trainers that deliver your service, without them there really isn’t much of a business.
All of them were owed a fortune because the company hadn’t been paying their debts, most of them were owed about 20, £25,000 each, but these are one-man bands with mortgages, with children, a bit desperate really.
I said to the administrator, ‘To start with I’ll have to pay these freelance people to keep them, so there’s £800,000 that I’ve got to spend anyway.’
I started to build up this story as to why buying this company for anything more than very little would be crazy, because they don’t understand every business they eventually agreed with me.
I bought a £5 million turnover business which had dropped to about four and a half for £60,000 in the end.
Turned it around fairly quickly and sold it again for £5 million, so you’ve got to have your ammunition, you’ve got to – when you go to talk to anybody, administrators, anybody, you’ve got to have done your homework and be ready for the arguments.
We’ll be hearing more from Peter next week. That much about wraps it up for this week, next week we’ll be hearing more from Bill Morrow and Peter. Remember to visit our website at www.thedealmakersacadamy.com, have a great week and I’ll see you next time.