Welcome to Jonathan Jay’s podcast where you find all the very best information on how to buy and sell businesses and become a successful dealmaker. In Business Buying Strategies podcast #15, you’ll hear:
- Bill Morrow, the co-founder of the online investment platform Angels Den and who has been described as “the most influential person in alternative finance in the UK today”, explaining how early mistakes eventually led him to understand what investors are looking for and what motivates them to invest.
- Jonathan Jay, founder of The Dealmaker’s Academy, sharing more key negotiating skills you’ll need to be an effective dealmaker
- Peter Kiddle, businessturnaround expert and the Chairman of Business Transfer Agent Ltd., discussing the deal he successfully brokered to sell one of Jonathan’s businesses and what made it unusual.Peter now divides his time between consulting on company turnarounds and selling training companies for clients.
Listen to find out:
- Why a shareholders’ agreement is absolutely
- What really motivates investors
- Why it’s a mistake to assume investors are interested in your projections
- The real reasons angel investors agree to invest
- Why women make fantastic investors
- Why you should consider offering a seller an anti-embarrassment payment
- How to persuade a seller to work as a consultant for the target business
- How to sweeten a deal to get sellers onside
- Why you should offer a deferred period of five years and work backwards
- How to avoid arguments about the value of the business
- How Peter Kiddle secured a buyer for one of Jonathan Jay’s businesses
- How Peter found a replacement MD then introduced him to venture capitalists who funded the deal
- How to win over an owner-manager to buy the business
- Why Peter bought a business that had just lost £1 million
- Why you should consider buying a business with problems
- How Peter turned the loss-making business around in 12 months, so it made £350,000 profit
- How Peter constructs deals
- How he expects to achieve his goal of making £15 million in three years
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’ll find all the very best information on how to buy and sell businesses and become a dealmaker.
Welcome to episode 15, in this week’s episode we’ll be hearing again from Bill Morrow who you will remember that CITY AM described as the most influential person in alternative finance in the UK today.
In this episode Bill explains how early mistakes eventually led him to understand what investors are looking for and what motivates them to invest. We’ll also hear again from serial dealmaker Peter Kiddle, this week Peter will discuss the deal he put together when he successfully brokered the deal that led to my own company’s sale a few years ago, and what made it unusual.
I’ll be teaching some more key negotiating skills that you’ll find as an effective dealmaker, so if you’re ready, let’s get started. Last week heard from Bill Morrow who CITY AM newspaper described as the most influential person in alternative finance in the UK today. Bill explained how his business works and how he introduces people looking for finance to people who want to invest.
This week Bill explains how early mistakes eventually led him to understand what investors are really looking for and what motivates them to invest.
For 17 months we got it wrong, for 17 months we assumed why angel investors – do we understand what angel investors do? They give you a sum of money in exchange for some of your equity, yes.
The documentation is absolutely key, once again you’ve never done it that way, probably you haven’t done this before, but the shareholders agreement is crucial, as with a marriage contract, a prenuptial, a house sale, crucial, and things will be wrong and then you will need it and it’s only then that you’ll understand the value.
Seventeen months we assumed that investors were investing to make money as their primary reason, and we presented deals in terms of MPVs, IRRs, [?DOCFs 0:02:29.8], whatever, and they were going, kind of like you, they were going, ‘Ah, whatever, really, this is really boring.’
It actually comes in at number three, so today we take, we got an external company to go away and talk to the investors, because the moment I lose the reason that these people are looking to invest, and we now have 21, no we don’t, 22,000 of them, 22,000 investors with an average €360,000, don’t ask, to invest.
I told you I was a bad accountant, it’s a nonsense number, 22,000 times 360, you get the drift, it’s more than enough to fund everybody in this room and all the 126 that we see every day.
The sadness is however that we need to see 155 businesses to find one good enough to pitch and I will tell you what those are. Back to what the enemy demands of you, why are they looking to invest? It’s important for you guys, if you just go, ‘My business is going to make 11 times money and I’m going to return you 23 per cent,’ what does that immediately tell them? That you’re a fool.
You have no idea, no idea how much money your business is going to make. If you think you have an idea of how much money your business is going to make, you’re stupid, there’s no way. People that go, ‘Oh yes, that’s great, could you give me your three-year cashflow projection?’ are muppets.
We see 400, 412 angels a day on average, how many of them bother to look at the numbers? They don’t even look at the numbers, don’t even look at the numbers, why? Your numbers are bullshit, absolute nonsense. Anybody disagree? I mean, there must be an accountant in the room who disagrees!
A little bit of disagreement?
They don’t even bother looking, they look at it later on to have a laugh, to justify your ridiculous evaluation, they will look at it then, I’m not saying that, but they don’t even bother looking at it now because it’s not about the numbers.
Making money comes in at number three, we were kind of like weirded out by this, I mean – then we did something deviously clever which allows me to stand up and spout, I’ve got 11 speeches this week.
We did something deviously clever to find out what the rationale for angels investing was, we asked them.
I know, I know, that’s the kind of intellectual giant that you’re standing before!
Yes, we asked them, we asked them, ‘Why are you looking to invest?’ Number two was they want to give something back, they want to help other people not make the mistakes that they have because nine, no, 87 per cent of them are men, it’s ego, ‘You see that thing there, I’ve invested in that, you see that, that’s me.’
Female investors are not that stupid, they’re not into ego, if you can get a female investor onboard get a female investor onboard, guys are stupid. If you’re looking to raise money and you haven’t got a woman onboard, newsflash, they make up 51 per cent of the population. If you haven’t got a woman onboard, that tells me something. You’re a one-man band, two-man band, three-man band, four-man band and you haven’t got a woman onboard? You’re stupid again, stupid.
Woman are more intelligent, more emotionally intelligent, more collaborative, they make up 70 something per cent of the buying decisions in the marketplace, they give you another way of looking at it, testosterone has got us into a lot of trouble and is a lot of – anyway, I’m starting to rant, you get the drift, that’s number two.
Number one by far and away, number one, bigger than two and three combined, there’s a major reason these people are looking to invest their hard-earned cash is that they, yes, they’re bored, they’re looking for some stimulation.
Now don’t get me wrong, they’re not philanthropists, they’re not looking to give the money away, but they want something that is going to challenge them, something that is going to be interesting, something that interests them, that is by far and away the most interesting thing that you could do.
It takes them on average 14 months to come to this realisation, they have what my private banking friends call an equity event, it’s a great term.
They get some cash, so they’ve been made redundant, they retire, they sell their business, they do whatever, they have the holidays, they play the golf, they buy the toys, by 14 months they’re starting to go, ‘There’s only so much golf you can play, trust me.
I bought a house on a beach and a golf course, I never want to play golf again, so bored playing golf,’ they’re just going crazy.
A lot of people die two years after having an equity event, it’s a very stressful thing, all your life you’ve been chasing money, after 11, 12, 13 months you actually then begin to realise there is more to life than making money. These little things, what are they called?
F: [?Children 0:08:11.7]
Children, children, so I’ve thousands of them and whilst I was still working I missed out on some really formative years because I prostituted my life away, and I regret it, totally, totally and utterly, it’s utterly wrong.
Without getting into the morality of why people get money and what they should be doing with it, that is a really important thing. What you’re looking to do is to connect with them, I said I was going to tell you what the three things are that you need and I shall run past that and then cleverly segue into the very first reason that they are looking to invest.
We’ll be hearing more from Bill next week. For some time now we’ve been considering many of the negotiation skills that every dealmaker needs to have in order to purchase a business from its owner. Here are some more skills and tactics that will improve your negotiating position.
Anti-embarrassment payments, I’ve had this, someone says, ‘Look, you buy this business from me, you might turn it into a huge success and sell it in 12 months and make a fortune.’ Now the correct answer is, ‘Yes, so what? Because if I do that I’ve done the work, right? That’s my right to do that.
Once I own your company, if I choose to close it the next day or sell it the next day that’s my right,’ but you say, ‘You know what, that’s an interesting thought,’ or you could even put that thought in their head.
Let’s build in an anti-embarrassment payment, if we sell the business in the next 12 months, because they might say, ‘I know what you’re going to do, you’re just going to sell – I know that you buy and sell businesses, you’re just going to sell it to someone else, you’re going to flip this business,’ ‘If I do we could, we’ll pay you an anti-embarrassment payment of, I don’t know, what do you think is a fair amount? Fifty-thousand? Okay, we’ll put that down as well, there’s £50,000 there,’ so now we’re building up the components of the deal slice by slice.
Success triggers, I know you told me that you’re going to get this big NHS contract, I get that, the thing is we don’t know it’s going to happen. Now I know the big NHS contract is worth a lot of money, I know it’s worth a million pounds over the next two years, I know it’s a lot of money, it’s a wonderful contract, ‘Why don’t you help us get that contract and we’ll pay you a success fee of £100,000?’ let’s write £100,000 down on the pad, okay, so we’re building up the value. Now if they do get you that contract and it’s worth a million pounds and you know that you can afford £100,000 out of that million because the margin is there, then suddenly we’re going to be paying them another £100,000, well that’s fair.
If it doesn’t happen because they were BS-ing you, then you’ll see it on their face when you write it down. Performance related payments, if they’ve worked with a broker, the broker has asked them to produce three years of forecasts.
Now we all know, because we’ve done it for our own businesses, that forecasts are the world of fantasy, aren’t they?
If everything’s lined up with a fair wind these are the numbers that we’re going to hit.
No, no, no, they’ve put them down in writing, remember when we put something down in writing we legitimise it, they have legitimised their forecast, said, ‘Look, if we hit these forecasts then we’ll pay you these extra amounts, what do you think is a fair amount?
Fifty-thousand-pounds per year for hitting this forecast, okay, so that’s three years, £150,000.’ Now the questions in some people’s minds might be, they would say, ‘Well, I don’t have any control over hitting those forecasts because I’m no longer running the business,’ which is a fair point and if I was on the other side that’s exactly what I would say.
Your answer to that is, ‘Yes, but you’re going to be a consultant, right? Why don’t we put in the consultancy agreement if we don’t follow your advice then that’s our fault, but we want you to be a consultant because we’re really impressed with what you’ve done with the business over the last ten years.
We think that with a little bit of extra impetus from us we can lift it up to the next level.’ Are there any assets, such as a car? This actually came up yesterday, we were looking at the assets of the business and there was a car that had a value in it of one and a half thousand pounds.
We said, ‘You know what this woman’s doing, she’s let the company buy her – that’s her personal vehicle, she doesn’t need the car for the business, it’s a nursery, she doesn’t need a car.
She’s driving that to and from work, she’s using it at the weekends, if she sells that as part of the business, which she should do because it’s an asset of the business, she won’t have a car. Why don’t we sweeten the deal and say you know what, you can keep the car,’ it’s worth more to her than one and a half thousand because she’s got to buy a new car which will cost more.
Let’s put the car in there, what do you think the car’s worth? Now people don’t read their own balance sheets and their own, they don’t look at their own financials, so she’s forgotten that her accountant’s depreciated it to one and a half thousand.
She’ll take a stab at it and say, ‘It’s probably worth about £5000,’ ‘Great, well let’s put that down in there as well.’ Now we’re building up all these elements that contribute to the value, there’s a deferred period obviously, so let’s say we pay you X, let’s say £100,000 over a three-year period, so the deferred period term, start with the longest possible term, like five years and work backwards.
You can’t say three years and they go, ‘Yes,’ and then go, ‘Actually I’ve changed my mind and I want it to be five years,’ start with five years and work backwards.
I had a woman at a seminar last Thursday who has actually joined Mastermind and she sold a Harley Street Dental Practice, so I don’t know what the numbers are but you’d imagine they’re quite decent, and she sold it completely on a deferred consideration basis over three years.
She stuck her hand up in the audience and said,’ I sold my business like that and I was really happy,’ she said, ‘I’m still getting the money now, it’s brilliant,’ and she plays golf and just enjoys herself in the day time, but she’s receiving the money.
The amount paid at the beginning, say, ‘Look, if we’re going to do all this it means, because you’ve told me that we need to invest in a new website and we need to bring in some more sales people, you realise that has the impact of reducing the initial consideration?’ so the amount paid at the beginning might be a very, very low amount, it might be, ‘Look, we’re starting to know each other a little bit here, what do you need right now to meet your immediate financial requirements?’ ‘Well, I’ve got a £5000 credit card bill that I really want to get rid of, I don’t want that hanging over my head,’ ‘Okay, let’s put down £5000 initial consideration.’
Yes, all of these things are negotiable later but what we’re doing, instead of arguing with them over the valuation of the business, we’re building up the value with all these different layers.
We’ll be discussing some more negotiating skills and tactics next week. Last week I introduced you to a remarkable serial investor, Peter Kiddle.
This week Peter turns broker and explains how he went about securing a buyer for a business that I owned several years ago. His concern was that my business was too closely identified with me personally, so here he describes how he went about answering the objections that a potential buyer was likely to raise.
I’ve done many deals as a broker including selling Jonathan’s company, he couldn’t get it sold via an alternative broker, it was clear that to sell Jonathan’s company was going to be a bit of a challenge because he was so key.
Most acquirers would not be interested in buying a business when the key person was not going to be there in the future.
Being innovative in the way in which I do broker-type deals, I went out and found a Jonathan replacement who wanted to run the business. I then introduced the new MD with a Venture Capitalist firm, [?our capital 0:17:15.4], put the two of them together, the funding came from our capital, the expertise came from Jonathan’s replacement and we sold the business fairly quickly for what I must say was a fantastic price.
I’ve done many deals, probably about 20 of that type, all of them were slightly different, the process is always the same and that is that the seller, and this is something that you’re going to experience a lot of, becomes very emotionally involved in that business. They can’t see reality, they want to make sure that their people are all going to be looked after, it’s all about emotion but they say it’s about money, but it isn’t.
If you’re looking to buy a business that is an owner manager-type business, play on it, work it, make sure that you’ve met the people within their business, make sure that they love you to death, make sure that it feels it’s going to be warm and cuddly and everything’s going to be wonderful, and they’re all going to have a lovely time with their new boss.
If you can make that happen the chances of you being successful in acquiring that business, whether it’s for a pound or a larger consideration, you will possibly be competing with others and it will be an emotional decision that’s made by the seller.
I’ve played around with buying and selling, I’ve played around with being a broker and then I hit 62 years of age a few months ago and thought, do you know, I think I’m going to retire at 65 but I’m going to just do one more deal, one more big deal, just to prove to myself that I can actually do it.
The criteria I gave myself is I want to make £15 million in three years and I’m not going to spend any money, that’s my challenge.
A year ago, April last year I hunted and found a training business that was turning over two and a half million quid.
In April when I went to see them last year they just finished their accounts and they’d lost a million pounds in that previous year.
Now that’s quite something really, to turnover two and a half million and lose a million, you’ve got to work at it!
They were at the point of trying to make a decision, do we close it down, because they were getting so close to that dodgy bit of trading whilst in solvent, because as you know if you can’t afford to meet your obligations and you continue trading, you break the law, a very serious matter.
They were very anxious about this breaking the law bit, they couldn’t decide whether to close it down and they’d sort of come to the conclusion that nobody’s going to buy a business losing a million quid, why would you with such a small turnover?
Again, the advice I would always give you is look for the opportunities, don’t take it on face value, look for those opportunities.
Every member of staff earning over £100,000 a year, premises £350,000 a year, it’s all bonkers and it’s all common sense.
Like with that first deal with the Guardian Newspaper Group, I negotiated with the landlord to let us off the hook.
The deal I did was we’ll take one of their serviced offices instead, otherwise we’re going to go bust and you will lose the lot.
We went from, oh, I don’t know, I don’t know how many thousands of square feet, it was probably six or eight times this room here, and we went to a small serviced office that could take eight people.
Wiped out all that office-type cost, made redundancies galore, these people were so flipping lazy, they had no idea of the real world and I was delighted that they could go, and just kept the good people.
That was a year ago, so we started last April with that £80,000 a month loss continuing through.
The year end, which ended a month ago, in our first year of trading under my help and guidance we’ve just recorded a £350,000 profit.
This year we’ve already doubled the turnover compared with last year and kept the overheads at the same level.
Again, it’s about thinking around the problems, not accepting those problems that are there but making bold decisions to make things happen.
That’s not going to get me my £15 million, so the next stage of logic is to build a group by multiple additional acquisitions and that has now started.
Six months ago I bought a leadership development company that had a very unique level of accreditation with professional bodies, not straightforward to get and certainly not good if you haven’t got credentials to achieve it.
This was a very different deal, one that’s actually quite unusual, two owners wanted to retire but the business wasn’t really making enough money to give them the income from the sale that they wanted.
I’ve done a deal, ‘I buy your shares for £1 and you get 20 per cent of profit before tax for the next few years, I get 80 per cent but then I’m doing all the work,’ they retire.
Now if I do what I plan to do with this business that 20 per cent to them is going to be worth a lot of money, if it doesn’t work it hasn’t cost me a penny.
Deals in my view are all about understanding what the seller wants and then constructing something that works for all parties.
This group that’s being built has now got two companies in it, the third one is launched next week and I’m very hopeful that that will achieve my goal of £15 million by the time I’m 65, in three years time, and it won’t have cost me any money at all.
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 and more from Peter.
Remember to visit our website at www.thedealmakersacademy.com, have a good week and see you next time.