Welcome to the podcast where you find all the very best information on how to buy and sell businesses, seek out businesses for sale and become a successful dealmaker. In Business Buying Strategies podcast #16, 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”, revealing the three things that make companies irresistible to investors.
- Jonathan Jay, founder of The Dealmaker’s Academy, sharing more crucial negotiating skills you’ll need to be a successful dealmaker.
- Peter Kiddle, businessturnaround expert and the Chairman of Business Transfer Agent Ltd., explaining the process he uses to source deals. Peter now divides his time between consulting on company turnarounds and selling training companies for clients.
Listen to find out:
- Why any business must have sales
- Why angel investors will take a larger share of a company that doesn’t have sales
- Why a business needs an unfair advantage that is protectedin some way
- Why you should have an IP lawyer on board
- Why an owner’s mindset is so crucial to investors
- What to do if you’re not passionate about your business but need investment
- How speed funding works
- What investors look for in business owners
- Why people who need certainty shouldn’t become entrepreneurs
- Why you should consider offering a seller a balloon payment
- Why the offer of a royalty payment might persuade a seller to choose you
- How a lawyer can hold up your deal or even make it falter
- Why you should consider paying the seller’s professional fees
- Why taking on the seller’s liabilities may clinch the deal for you
- Why your email subject lines to sellers must state subject to contract and due diligence
- What to do if your new business goes pear-shaped
- Why you should feel no guilt for avoiding the stress of managing a business
- Why Peter Kiddle uses the Companies House website to check out prospective target businesses
- The two factors Peter considers when researching prospective businesses
- How Peter calculates a company’s annual revenue based on client fees
- The time-effective process Peter uses to source deals
- Why Peter sends letters to owners’ home address
- Why you shouldn’t use the same approach for every dealyou do
Read the transcript here:
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 dealmaker.
Welcome to Episode 16. In this week’s episode we’ll be hearing again from Bill Morrow, City AM’s most influential in alternative finance in the UK today. In this episode Bill discusses the three things that make a company irresistibly investable. We’ll also hear again from serial dealmaker Peter Kiddle.
This week Peter describes just how simple the process is to find companies to purchase and how anyone can do it and as usual, I’ll be teaching more of the key negotiating skills you’ll need as an effective dealmaker. So if you’re ready, let’s get started. So last week we heard Bill explain how early mistakes eventually led him to understand what investors are looking for and what motivates them to invest. This week Bill discusses the three things that make a company irresistibly investable.
Here’s what he had to say.
If you don’t have sales in your business, I would strongly recommend that you do get sales.
Has everybody got sales here? I don’t know what kind of level you guys are at. You kind of look like you’ve all got sales and businesses that are up and running, yes? Yes, yes? Cool, that’s great. Of the 126 business lines we see in a day, I would say 70/80 of them don’t have sales.
I have a word for them, they’re called ‘ideas’. They haven’t proven their business model, ‘It’s an awesome idea. I mean wow, that is incredible, wow.
That is so good. Is there any business attached to that?’ ‘Oh no, no.
You don’t understand, I need the money so I can set up the business.’ I’m going, ‘Yes, that’s cool. Yes, get out.’ I mean it’s cruel but all I am is arbiter for the largest collection of high-net-worths probably in the world but who cares. You get the drift. I can talk with authority about what it is that they’re looking at. Why are they not interested in sales because when you do sales, when you do the… It’s easy for a muppet like me to stand up here and go, ‘Oh yes, you need sales, yes.’ Getting your first sale to someone who’s not your mum, the most difficult thing you’ll ever do. The most difficult thing. Oh my God, finance – getting the finance is easy. Easy, simple, go on Crowd Cube. There’s more money on there than you could ever, ever, ever want to spend but you’ll be missing the point.
You need to get – you don’t need to. You kind of look like clever people, you go I don’t need any more money. I don’t need any more clever people in my board or helping me or whatever.
That’s cool. Without sales – just covering it off quickly if everybody says they’ve got sales. I’m sure there must be some people that don’t have sales. So the point being that if you don’t have sales then it’s much riskier.
If it’s much riskier then they will take a larger proportion of your company to de-risk it for them.
Not difficult, well it’s not difficult, we all get that.
I mean that’s an easy bit. So to have sales would be a really good idea. The second thing that you need to set up a business is that you need to have some unfair advantage, a competitive advantage protected in some way.
If you do not have a competitive advantage that is protected in some way a patent, a trademark, a copyright, some intellectual level – perhaps first mover or second mover advantage that has then been cemented with a proven marketing strategy, that would work.
There are outliers of course, but on the whole, if you don’t have that, there is nothing – in fact it is incumbent on the shareholders of Google to come in to your marketplace and kill you. Incumbent.
Thank you so much for spending all that time and energy proving that marketplace and now we’re Google and we’re going to come in and – cheers, thanks very much.
It’s difficult. Get an IP lawyer on board. Words I never thought I’d hear myself saying. Something that actually differentiates you from somebody else in the marketplace otherwise, you know, people go, ‘Oh I haven’t got any competitors,’ well you soon will have. You soon will have if you don’t do it. I’m sending my product off to China.
I’ll tell you what, four days’ later you’ll have competitors coming out of China. Alibaba will be filled full of your product – four days.
We’ve seen it over 100 times. People go, ‘Oh it’s so much cheaper to manufacturer in China.’ There’s a reason for that. Perhaps the biggest thing that you need – you need sales, you need some unfair advantage.
The third one, those are binary. Have you got sales – yes/no? Have you got a competitive advantage that has accrued – yes/no? The third one, more difficult. Are you passionate about what it is that you do?
Are you in the right mindset?
Do you understand that you deserve the riches that are about to come your way?
Imposter syndrome, it’s real. One in every 11 deals that we get funded, someone’s asking for a hundred, we give them a hundred, all signed and sealed, then they go dark. They go away on holiday. They don’t answer emails because we’ve called their bluff.
Fuck, didn’t actually think you were going to get me the money, this is really bad. I’ve actually got to move out of my comfort zone now.
I get it, it’s really irritating but I get it. I truly understand it but also, if you’re not passionate about what it is that you do, two bits of advice. Get somebody on-board who is and, secondly, do not expect an investor to be passionate about what it is that you do. I’m not saying you have to be bouncing and dynamic and, you know, I’m not talking about [?wowing and zowing 0:06:30].
I wouldn’t use PowerPoint because why not? We don’t allow PowerPoint in our pitches. We did 5300 pitches last year across the world, not one PowerPoint. Why?
Because PowerPoint detracts from you. It’s about you as the founder. I said earlier, I lied to you earlier that it’s all about the business.
That’s what we’re looking to invest into, it’s not. It’s truly you. So with some – I mean we’ve tried 17 ways of pitching you in front of our investors, 17.
Two ways work equally but the one that’s most fun and it’s kind of messed-up as you can probably imagine as you stand, sit before me, is what we call speed funding. Imagine this is the table, there are one, two, three investors, no more, otherwise they all start showing off in front of each other. You sit down and you have four minutes to pitch your business.
Some people go, ‘No, you don’t understand. My business is…’ ‘Sorry, get out.’ Four minutes is a long time. Do you want to pitch your business or do you want to show off your ego and actually just show me a PowerPoint and show me how great it is? Oh it’s dazzling, is that the new Mac? That’s so cool, that’s like wow.
Bang – I just want it, it works. Some of our investors have invested in over 100 deals at what we call speed funding. So you pitch for four minutes and then you move to the next table, move to the next table, move to the next table, move to the next table. We never have more than eight people there because actually it’s really tiring for the angels.
Why’s it really tiring for the angels? They can’t pretend they’re interested. They can’t pretend, like you guys are doing right now, that you’re listening to what it is that I am saying, drifting off, checking Twitter – they’re there.
They’re actually this far away from you. Some of our investors have invested in over 100 deals. What they say is to a huge extent they have made their minds up about the business within, as you’re walking towards them. As you’re walking towards them.
We super-curate the deals. You have to be the best of the best. One out of 155 deals. So we then gather in – and that’s difficult.
So they all should get funded but we’ll fund 70/80 per cent of them, that’s all.
People want to invest in people that are kind of like them. Rather than what return are you going to show me in my investment in six years?
It is do you like lager or real ale?
Are you a craft beer person? Is it red wine or white wine? It is just as important. Why is it just as important? Because I show my learned colleagues back to the number one reason I spit on floors. The number one reason they’re looking to invest because they are looking for stimulation. Really hard to get stimulation from someone who’s kind of not like you. It’s not about your product.
It’s very much about your business but do you understand your business?
Do you understand your business sufficiently that you understand the drivers?
Which of your three products is the one that makes the greatest return on marketing? Do you know which of the 17 marketing strands that you should be using, which are the top three? Why are you not using the other 14? Absolutely agree with that.
The motivation of people looking to invest. For them, they’ve made their money. In our 11 years, in ten countries. Of all the deals that we funded 92.4 per cent of them are still growing.
For me success is not getting you the money. For me success is still being in business in four years and five years and six years. It’s going to rocky.
It’s not all going to go where you planned, that’s for sure but that’s kind of half the fun. That’s what being an entrepreneur’s about. If you want certainty, get a job in a bank.
We’ll be hearing more from specialist investors and brokers like Bill in future episodes. For several weeks we’ve been considering the negotiating 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.
You could have a balloon payment at the end, say, ‘Look, we’ll pay you £1,000 a month for the next three years and then, on month 37 there’s a balloon payment of £25,000.’ You get that often with car finance, don’t you?
So a balloon payment at the end. A payment holiday, ‘Look, if we give you the £5,000 on day one and we’re paying you £1,000 a month, we’d need to have a little bit of compromise on this.
We wouldn’t pay you the £1,000 a month for the first five months.’ So basically you’re getting the first five months’ money up at the front-end.’ Does that make sense? Now if the business has got some money in the bank or it’s got some money about to come in, you could say that that initial consideration is going to actually be paid within 30 days of completion.
So again the customers pay it. You get someone on the phone chasing all the debtors saying, ‘We’re the new owners, pay up.’ That’s where that money comes from. Again, it doesn’t have to come from your own pocket.
You could do a royalty deal depending on what the product or the service – well probably the product, what the product might be.
Say, ‘Look, we’ve worked out the margins, you know the margins, why don’t we pay you £1 every time we sell one of these products in the shops for the next five years or the next ten years.’ Or you could be really bullish and say, ‘For the rest of your life.’
Then, when you come to actually draft the agreement, you have a clause that permits you to accelerate those payments with maybe a one-off payment of £100,000.
So let’s say you’re now in the position of selling the business, the buyer says, ‘Hang on, you’ve got to pay this woman.’ ‘Who is this woman?’ ‘She’s the woman who started the company.’ You’re paying her a pound every time you sell a product for the rest of her life.
Oh yes but if you look at the next clause it says, ‘We can pay her off with a £100,000 and part of the consideration that you’ll be paying us will be used terminating the royalty arrangement.’ For some people a royalty arrangement, if they’ll telling you that, ‘This is going to be…’ Selling you and telling you, keep getting confused in my head. If we’re going to be telling you.
If we’re going to be telling you.
If you’re telling us that this is going to sell like hot cakes once you’ve got the distribution in Harrods, well in fact a royalty deal is probably the better deal for you.
If you’re telling me that once this gets into B&Q, everyone’s going to be buying it then actually a royalty deal could actually be the better deal for you.
I must admit, it’s a deal we could do a handshake on today, which is better for you, as well, because you get the certainty that we can do something quickly and consultancy fees, actually we’ve already mentioned.
You could offer to pay their professional fees. Sellers who are with a broker have already paid the broker.
They’ve already forked out £10,000, £15,000, £20,000, £30,000. So paying their…
Then they realise, it dawns on them they’ve got to pay a lawyer. Now the annoying thing about deals is the other side’s lawyer.
If you’ve got a good lawyer on your side, you get a sensible deal done. You get a silly lawyer on the other side who just procrastinates or is very busy or it’s out of their comfort zone in terms of skill set, then you find the deal will falter.
You say, ‘Look, I don’t know what your legal fees are going to be but there’s a few firms that I’ve heard of that are very good and we have no connection with them whatsoever. Use one of those firms and we’ll pay your legal fees up to £5,000. That means now you’re selling the business, you won’t be out-of-pocket.’
It’s a great sweetener for a no money down deal.
So hang on, you’re not going to give me any money on day one but I’ve got a legal bill on day one. ‘No, we’ll take care of that for you.’ Who do they send it to? The company that you’re buying. Who pays it?
The company that you’re buying but you ring fence it in a certain level.
I’ve done that. I’ve paid the other side’s legal fees because I knew that they hated paying legal fees so I thought I can get them over the line by saying, ‘Look, we’ll pay your…’ In this case it was up to £10,000, ‘We’ll pay your legal fees up to £10,000.’ Surprise surprise the legal fees were £10,000. I don’t’ know how that worked but anyway, amazing coincidence.
A contingent element can really make up the numbers. So this is very similar to the performance-related. So contingent upon you bringing that NHS contract over-the-line.
Contingent upon 80 per cent of the customers still being here in 12 months’ time because I don’t want an exodus. I don’t want all these customers leaving.
As long as 80 per cent of the customer list and don’t forget the customer list is attached to the sale and purchase agreement as a schedule, so we know who the customers are on day one.
As long as 80 per cent are still paying customers in 12 months’ time, £100,000. Write it down on the thing.
You might want to take on their liabilities.
Say, ‘Look, you do realise if we’re buying the assets of your business and your business is a sole trader, you personally are responsible for the NI and PAYE that you haven’t paid for last month.’ ‘How much is it?’ ‘£4,000.’ ‘Okay, well look we’ll take over that but we need to add it into the pie,’ and you put £4,000 on the list.
So this is all the elements of the deal. It might be the VAT bill, the £60,000 VAT bill.
Well if we’re going to be paying that, we need to put that in as well. So you take on their liabilities. Do you see how we…? I mean I haven’t been adding these numbers up, I doubt if anyone has but you see how we’re really adding numbers up here massively?
M: About £650,000 at the moment.
We’re at £650,000. Oh really, they wanted £300,000.
You’re actually now offering them a deal that, if all the things that they say are going to happen, happen, could be worth £650,000.
It’s starting to stack really nicely and it’s multifaceted.
You see when I talk to people who’ve never done anything like this before, they say, ‘But don’t you just buy a business by going to the bank, borrowing the money and giving them the money?’ That’s the only way they know how to do it but when you’ve got all these tools up your sleeve, you’ve got all these different options available to you to make up the components of the deal where it’s not all about getting money from the bank.
Are there any legal situations you can solve by buying the shares?
Now they have to disclose this and they warrant that they have disclosed any legal situations. Let’s say they’re being sued by a customer and it’s really got nasty, it’s got personal.
Let’s say there’s £5,000 at stake. Say, ‘Look, if we buy this business we’ll sort this out.’
What you do, you go and meet the customer and say, ‘Look, I realise that you have been knocking heads with Geoff. I’m the new guy, I don’t really know anything about it. I’m sure there’s fault attributed to both sides, there usually is, isn’t there?’ ‘Oh no it’s all Geoff’s fault.’ ‘Okay, fine, look I just don’t know.
I’m here to do a handshake deal, to settle this and I know what I can authorise. What would you accept right now for us to part as friends and not have this acrimonious situation that I’m sure is very stressful for you?
The £5,000 is the top-line figure, how can we meet in the middle?’ ‘£2,500.’ ‘Well [sic] look if we can say, £2,000, look we’ll shake hands now, I’ve got a full and final settlement agreement, you just sign that.
I’ll transfer the money on my phone to your account right now and we’ll have another coffee while it makes its way through the internet into your bank, how does that sound?’
So you can take on the situations that they can’t get out of and you can solve them. Everything that you say of course is subject to contract and due diligence.
All your emails say ‘Subject to contract and due diligence’ in the headline.
We’ll be discussing some more negotiating skills and tactics next week. So last week we heard from serial investment and broker, Peter Kiddle.
This week Peter describes how he sources deals himself. How simple the process is to find companies to purchase and how anyone can do it. Here’s what he had to say.
Why wouldn’t you do it. I can’t think of any reason to not do it. If you put a million quid of your own money into something, I can think of lots of reasons why you couldn’t do it.
But if you’re structuring deals like 20 per cent sharing in profit or whatever it might be, you’ve got nothing to lose and these people, sometimes stupidly, go for these deals.
You might have to pitch for three or four before you get one but why wouldn’t you? If it all goes pear-shaped, you just close it down.
I, by the way, have never closed a business down but it’s the backdrop, it’s a limited company, provided you haven’t traded whilst you’re not able to meet your obligations, provided you’ve done the right sort of things legally.
If your business, you buy something and it all collapses, because it’s very easy to collapse. Let’s say for example the seller knew that that big client that represents 60 per cent of their turnover was going elsewhere next month and you’ve gone in and not realised and it all goes horribly wrong, you just close it.
You don’t lose any money, you just close it down. So why wouldn’t you do it? Why haven’t you done it? Will you be doing it tomorrow? If you don’t you’re mad.
My parents, my father worked – he’s 90 but my father worked in a factory all his life making refrigerator cabinets. He worked so hard and he’s okay but he hasn’t got any money and he’s worked really hard for it.
What do I do now? I sit at home as the chairman of five companies wondering who I’ll give a call next and maybe I’ll go for a walk.
I’m not operational anymore. I did it the hard way to start with, running a business and you all know it’s damn hard but you don’t have to do it the hard way and I don’t understand why you all haven’t done it already.
Do you think sometimes it’s guilt because when you’re starting a business, you’re expected to work long hours and every business start-up book tells you you’ve got to put the effort in.
When there’s a better way of doing things like this, it almost feels like cheating. It almost feels like you’re taking a shortcut rather than burning out. Is it guilt do you think?
I don’t know. For me, with this new group that’s being created and with the company that was losing a million quid a year, the finance director was a brilliant guy. The MD went but the finance director was a brilliant guy.
I’m giving him a cut in the business, without him having to pay for it, a small cut but a cut in the business and I can completely trust him.
I’ve coached him through. I have regular meetings with him but he can run that business and he works incredibly long hours but no, I don’t feel guilty but why should I, I just like the cheques coming in. So, if you do feel guilty, get rid of it.
The only barrier to your success is you and when I was running that smaller, five/six-million-pound company and managing it, running it, I worked all the hours that there were, you know, got through two wives.
Never saw my children, I mean, madness. I feel guilty about that because perhaps I needn’t have got through so many wives. I’m on number four now but… I would’ve liked to have seen my children a bit more, that would’ve been nice.
So do I feel guilty about being an owner-manager that works all the hours? Yes, I do. Do I feel guilty about not having to do all that stuff and popping over to see my daughter who just gave me my second grandchild yesterday and not worrying about the businesses and what’s going to happen to them? No, I don’t feel guilty about that at all.
Talk to us about deal sourcing. So how did you find these opportunities?
I’m quite well-known in my sector. So I do get people ringing me up or just letting me know. Most of the sourcing is done through the websites that you all know of.
Okay, let’s turn that on its head.
There’s lots of businesses advertised by these different brokers.
They come through, you see them and they say EBITDA blah, blah, blah – asking price, sometimes they state it, sometimes they don’t but what they’ve done is they’ve done the adjustments, haven’t they? They try to make it seem that the profit before tax figure is much better than it really is.
So for example, they’ll take out the MD costs. Well it’s nonsense.
You’ve got to put somebody in to replace them, why would they do that? It just inflates the profitability. It makes it seem like the sale price should be higher than it really is.
So I ignore all that stuff and what I do is I go straight to Companies House for any prospects that I’ve identified.
Now there are certain publications like ‘Plimsoll’ and all that sort of stuff that you can look at the performance of businesses and ‘Plimsoll’ only have the data that Companies House have.
So if it’s a small business, you don’t have to publish the turnover, you just have to publish the abbreviated accounts.
What I do when I’m prospecting is I perhaps look at ‘Plimsoll’. Perhaps look at some of the other competitors that I’m anxious about and I’ll go and look at Companies House. As you know it’s free to look at Companies House.
You look at the Beta version, you can go in, put the company name in and it brings up all their accounts, all their people and everything. So I look at the accounts but there’s nothing much in there. So I look at two things.
First of all, have they got in their accounts a corporation tax bill outstanding? If they’ve made any profit, they will have and they have to put that in their abbreviated accounts.
If there’s no – nothing there about the corporation tax being due, it sort of says, ‘They haven’t made any money.
This is a £1 deal coming up.’ I then look at how much they’re owed by their customers because again you can’t get turnover figures or anything and I assume that that figure that’s owed by customers is six-weeks’ revenue. Very quickly you can work out then roughly what their turnover might be.
If it turns out that that turnover’s only actually £100,000, for me, I’m not interested so I move on. I’ve not even contacted the prospect. I’ve just done desk research.
If my desk research suggests that they’re not performing very well and their turnover’s a couple of million quid, that’s a good prospect for me and then I will start making direct contact.
So I use the broker-type information that comes through, I use publications, I use contacts and I encourage people to let me know what’s going on out there and that’s how I find all of my deals. I keep my time to the minimum by doing that desk research. Otherwise, you can send a letter. Let’s say, for example, you sent out 300 letters and you got 33 responses.
I don’t know why I picked those figures. If you’ve done that and you’ve got your 33 responses that could be quite a lot of work, if you then start meeting all these people. So I try to narrow it down and focus and then my time commitment is wisely used. I do prefer targeted, focussed, checked first and then a full-on approach. I sent a letter to one owner – no, I tell a lie. I sent about five or six emails because I wanted this one.
This was about six months ago – no response. Wouldn’t take phone calls. I wrote a letter, didn’t respond. Stupidly, if you look at Companies House and you look at the history of the documents that have been filed at Companies House, us directors always used to put down our home addresses.
You don’t now because you have a service address now and that’s the company’s accountants or your office address. If you go down deep enough, you can usually find the owner’s home address.
Very often, what I do is do a letter to them directly at home and that’s the best response rate I ever get. So I try to be creative in all things that I do but the most important thing is, when you do get face-to-face is that you understand what’s going to turn them on. Don’t do the same thing for every deal because you don’t know whether it’s going to work or not and any one of you here that’s in a sales role will understand.
You’ve got to ask questions.
You’ve got to shut up and listen and once you know what’s going to turn them on, that’s what the deal looks like and you’ve got to think a bit on your feet as to how you’re going to structure that deal but there’s no limit to the types of deals that you can structure.
Next week, Peter will be answering questions from a live audience from a recent Mastermind group event.
So that about wraps it up for this week and remember to visit our website at www.thedealmakersacademy.com.
Have a good week and see you next time.