Welcome to The Dealmaker’s Academy and our ultimate guide on how to buy a business in 2019 and growing your company via acquisition.
This really is the ultimate guide to mergers and acquisitions with over 35,000 words covering everything you’ll ever need to know in order to find, fund and flip businesses for profit.
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We’ll be covering everything there is to know about being a Dealmaker, how to value a business, the due diligence process and sourcing opportunities.
BUY A BUSINESS – PART ONE
What Is A Dealmaker?
A dealmaker buys a business often at below market value.
As a dealmaker, you never invest your own money because you don’t need to.
You fix the business you buy by making some very, very simple changes. You don’t necessarily have to make the changes yourself.
Often your management team will make them for you.
You generate cash from the business for yourself every month.
In other words, you are paid a monthly consultant’s fee by each of the businesses you own. Your goal is to sell the business for a big payday.
A dealmaker is not a business operator, which is what I call most business owners.
Business operators think they own the business when really the business owns them.
A dealmaker, by comparison, is an investor in a business.
Most business operators have a big payday perhaps once in their lives. A dealmaker can have many big paydays thanks to the fact he or she owns a portfolio of businesses.
Dealmakers also tend to have a lot of fun.
Far more fun than business operators who are mired down with running their businesses on a daily basis.
So much so that they’re often the person who unlocks the office in the morning, does the photocopying, changes the printer cartridge, speaks with the customers, deals with the suppliers and has all the hassle.
I’m going to show you how to buy a business without the need for all the stress and the heartache.
How to Value A Business
Discover how brokers, owners and accountants value a business.
How do you value a business you want to buy and how do you avoid getting it wrong?
Let’s imagine you’re in a situation where you’re interested in a business, and you get to the point of thinking, “Okay, well how much do I pay for this business? What is the value of the business?”
Firstly, there’s a distinction between what you pay for something and its value.
Now if the value is higher than what you pay, then you’ve got a great deal, but if the value is below what you pay, then you haven’t got a good deal.
You don’t want to overpay. No one’s concerned about underpaying, but you don’t want to overpay.
There are several ways to value a business you want to buy. The first way is through a business broker.
Business Brokers
Business brokers fall into two camps. The first will try to get you to go first and place a value on the business.
There’s a rule in negotiating which is the person who speaks first is the person who loses.
You might say the business is worth £100,000, but five minutes later someone else will say it’s worth £500,000.
Of course, the savvy business broker will want to talk to the person who valued it at £500,000.
The second type of business broker advertises the price of the business.
They do their client a massive disservice this way.
It’s a real shame that they do it because it really says, “This is the maximum price that will be accepted.”
Let’s say the business is valued at £100,000.
Everyone who looks at that price will think to themselves, “Well I’m not going to pay a penny more than £100,000, and I’ll probably end up paying less than three-quarters of that number.”
It’s a little bit like when a house is advertised for sale at a certain price.
You immediately discount it and think, “Well that’s clearly the top money that they’re expecting.”
Sometimes the house seller will add, “Or near offer” and you immediately decide you won’t pay the advertised price.
Business brokers fall into those two camps.
Either they don’t have a price attached to the business, and they want you to put forward a figure first, or they put a price next to the business.
You should avoid placing a value on the business because doing so will put you in a very weak negotiating position.
Instead, you should look for a business that has a value attached to it because it puts you in a very strong negotiating position.
The second way of valuing a business comes from accountants.
Accountants
An accountant values a business by looking at the net profit and then multiplying it by a number which is called ‘the multiple’.
I met someone the other day who’s buying a business at 1.5 times net profit, and that’s quite decent in that it’s a low number. An average multiple might be five or six.
When you get into double-digits, it starts to feel a bit like the 1980s when valuations were off the charts.
The third way of valuing a business comes from the business owners.
Business Owners
Let’s say you’re dealing with the business owner directly which, if you’ve done any of my training, you’ll know is the preferred route.
You don’t want to be the first person to mention value.
Instead, you need to find out how the business owner values the business.
I’m interested in what the business owner thinks it’s worth.
I like to get the answer to this question when I have established some rapport with the owner.
It might not happen during the first meeting, which usually happens on the telephone.
The second meeting is often face-to-face, and it’s typically during that meeting when you establish rapport with the owner because you can observe their body language.
I don’t like talking about the price on the phone.
I leave that conversation until I meet with the business owner face-to-face.
Then I say, “So you have a business that you’ve been running for a while.
You’ve told me the good parts of the business.
You’ve told me the parts of the business that you feel could be improved. You must have some concept of value? What sort of number are you looking at?”
Then I shut up and let the owner do the talking.
Occasionally, you will meet a savvy business owner who will say, “I’m not going to give you a value, it’s down to you.”
I respond by saying something like, “Well, in fairness, you’re the one who’s selling.
When you go into a shop, you see the prices on everything. It’s not up to the customer to decide the price of the baked beans so really, I think you need to put a value on the business. You must have some concept.”
Some business owners will refuse to give a number.
If that happens, I say, “Okay, let’s approach this from a different angle. What would be the highest and what would be the lowest? Give me a range.”
Asking for a range is a clever thing to do because when they give you the lowest and the highest number, you can decide not to pay a penny more than the lowest number.
The owner might say, “Well, I think it’s between £100,000 and £200,000.”
As soon as the words “a hundred thousand pounds” leaves their lips, I know that I’m never going to pay a penny more than £100,000.
This happens at a very early stage in the purchase process.
You won’t have done any due diligence or got to Heads of Terms.
You’re just talking. It’s the second conversation you’ve had with the person, and you’re just talking loosely about value.
If the business owner says, “I put the value between £100,000 and £200,000” I then ask, “So, if you were to make £100,000 on this deal, does that mean you would be happy?” The savvy business owner might say, “No, I wouldn’t be happy. Maybe I could get a better deal.”
I say, “Okay, well let’s talk about the other things that are important to you.
What other things in this deal are important to you? What are the other must-haves?”
The owner might say, “I don’t want the van that’s parked outside to be part of the deal. I want to be able to use that van for my new business.”
I’d then question the owner further to discover the things that are important to them.
That’s things like the timing of the deal. I never use the word ‘speed’ because that makes an owner suspect you’re trying to push him or her to hurry so you can get a better deal.
Instead, I ask, “What are the timings? Is there a point at which you want to get this deal done by?” Quite often people will say they want the deal done before the summer holidays or Christmas or New Year or their birthday.
I don’t like looking at numbers at the early stages because I want the number to be emotional and I want to get emotional buy-in on what the value is.
Once we have the emotional buy-in, we can start to use logic to reduce the value and price that we’re going to pay.
Let’s say the value the seller placed on the business was £100,000. I wouldn’t be critical of that value at the early stage of the deal.
I’d just ask, “Tell me how you’ve reached that valuation?”
They might tell you some more personal things. For example, they might say, “I have £20,000 worth of credit card debt, and it will clear that.
I owe £20,000 to my brother, and it will clear that.
I have tax to pay on that £100,000. I’m going to clear about £50,000 which will pay for a holiday and give me a little bit of money to start a new business.”
When you come to the due diligence part of the process, and you discover there’s a tax bill of £10,000 that hasn’t been paid, you’ll say, “You do realise that has to come off the asking price, simply because we can’t pay the tax bill on money that you’ve received and benefited from?
That just wouldn’t be fair, would it?”
You chip away at the price. You’re not too aggressive about it, but you don’t want to pay someone else’s tax bill.
Or you might discover that the deal, which is set to be done on the 29th day of the month, will happen one day before all the staff are supposed to be paid. That will be for the work they’ve done in the previous four weeks.
Quite clearly, it wouldn’t be fair for you to pay staff for the work that they’ve done for the previous owner, so your calculation needs to be adjusted for that.
So, when it comes to value and pricing, one size doesn’t fit all. You need to take lots of different factors into account.
The First Questions To Ask A Seller
When you buy a business, knowing the right questions to ask a seller is crucial to your success as a dealmaker.
After you’ve introduced yourself and exchanged pleasantries, the first question to ask the seller is if they can tell you about the business.
If they aren’t particularly forthcoming, you can encourage them to open up by asking when the business was started.
You can follow that up with, ‘What motivated you to start the business?’
Then ask the seller to tell you about their business background.
Listen very carefully to what the seller tells you.
The more you can find out at the beginning, the better.
It’s better to discover as much as you can in this first telephone call before you invest time in a face-to-face meeting.
We don’t want you to leave your living room or office until you know that there’s a level of interest in it for you that makes it worth pursuing.
To find out more, ask “Just out of curiosity, what prompted you to call me today?” Think of yourself as a non-threatening detective seeking information.
Ask open-ended questions and listen carefully to what the seller says.
The question, “What prompted you to call me today” will reveal the seller’s motivation. He might say,
“My wife told me to call you.”
“Really? Why was that?”
“Well, she’s been saying for years I need to retire, and I spend too much time at the office, and it got to the point where I agreed that, yes, I do spend too much time at the office and I need to do something about it.”
“That’s very interesting. So you’ve been having this conversation for quite a while, have you?”
“Well, yes, it is.”
“It’s got to the point where you need to do something about it?”
“Yes, absolutely.”
Sometimes people say, “It’s serendipity! I was thinking about selling the business or leaving the business, and then your letter arrived.”
The arrival of your letter will be a genuine coincidence, but people sometimes will take it to be a message or a sign, depending on their belief system.
The question you must ask is “Who owns the company and in what percentages?” It’s important to know who is in control of the business and if you’re talking with the right person.
You have to qualify the person with whom you’re speaking.
Brokers do the same thing when they ask you to provide proof of funding: they’re qualifying you.
You need to speak with the person who has the authority to sell the business.
If the seller tells you he or she has partners, ask if the partners are aware of the conversation you’re having.
If you’re speaking to a 20% shareholder, for example, who reveals the other partners don’t know about the conversation, then there’s something wrong.
Of course, the ideal scenario is to deal with one owner.
That’s because he or she will have the authority to make decisions.
You’ll avoid the situation in which one shareholder is keener than others to exit the business.
So, there are the first few questions to ask a seller. We’ll cover more later on.
How To Sell A Company For £70 million
An Interview With Neville Wright
The co-founders of the retailer Kiddicare, Neville and Marilyn Wright, sold their company to supermarket giant Morrisons for £70 million in the midst of the most recent recession. At the time, it was a world record sale price for an independent baby nursery shop. Neville reveals how the deal was done.
“We did the due diligence on ourselves so that people could look at it, examine it and they wouldn’t have to do it themselves, so it cut a lot of time out. It seemed expensive because we were investing in something that we didn’t know whether we’d get any bids for.”
At the time, 11 private equity companies were interested in buying Kiddicare, but Neville says he wasn’t interested in selling to them.
Two years earlier, a private equity company had approached Neville with an offer. Valuing the company at £40 million, they offered £15 million in cash and for £25 million to be kept in the business. However, Neville discovered the prospective buyer wanted to put a £15 million debt on the business.
“Also, they said, ‘This business will sell in three years’ time for £120 million.’ I asked, ‘How are you going to do that?’ They said, ‘We’re not. You are.’”
Neville rejected their offer, which would have meant he was kept on to grow the business on the buyer’s behalf then make a profit after a secondary buyout three years later.
“I didn’t want that.”
Other prospective buyers appeared with offers between £40 million and £50 million, but they too had fallen by the wayside.
By 2011, the UK retail sector was reeling from the recession. Despite this, Neville was looking for a way to take his company to the £200 million mark.
“The whole of the high street was in turmoil. They were falling like a pack of cards. We were trying to decide whether we should become a hunter and look for acquisitions we could bolt on to get the value up to £200 million.
“One day I thought, ‘This is too much. We’ve been in it 34 years. Retail is getting harder, so why not become the hunted?’ Everybody else was hunting for bolt-on acquisitions to keep their business alive, so that’s what we offered. That’s the reason why we put it on the market because it was the easiest and the most profitable thing to do.”
The accountancy firm, Grant Thornton UK LLP, then put the business on the market, and it attracted seven bids. The bids were all about the same value, remembers Neville.
The seven buyers wanted the company for different reasons, he says.
“I felt sorry for some because it was rumoured that they were all spending about £2 million on the due diligence and everything else. The seven were allowed access to the data room. It was then a race to see which one could complete.
“It was about a month for the data room, and on January 29 we decided who we were going to sell it to, and the deal was completed on February 14, so it was very quick.”
Key Addresses For Dealmakers
The following addresses should be in every dealmaker’s address book.
You can get some details about a company for free, including:
- Company information, for example registered address and date of incorporation
- Current and resigned officers
- Document images
- Mortgage charge data
- Previous company names
- Insolvency information
- You can also set up free email alerts to tell you when a company updates its details (for example, a change of director or address).
- You can access more detailed information for a fee.
The report has the UK’s most comprehensive online database for distressed business.
It lists UK companies that fall into administration, liquidation and have winding up petitions lodged against them.
The online database is updated daily with new distressed listings and members are notified of new distressed businesses via daily email alerts.
To get access, you will need to sign-up to become a member,
The Federation of Business Brokers UK
Members offer free no obligation and realistic business valuations.
Information and resources for business owners who want to grow their business quickly through acquisition.
The Academy offers free podcasts as well as Discovery Days and a 12-month Mergers and Acquisitions Programme.
As a DMA member you receive thousands of pounds of advice and guidance every month that will help you avoid making costly mistakes — The Dealmaker’s Academy Membership will be your companion on your business buying journey!
You also receive access for a monthly webinar and a membership newsletter, jam-packed with vital information to guide you on your dealmaking journey.
How To Get The Right Staff For The Business You’re Buying
When you buy a business you need a great team of people to run it, but where do you find them?
Let’s assume that the business that you’re buying already has staff in place and that some of them do a brilliant job and some of them do a not so brilliant job, just like in every business.
When you’re looking at the staff that you inherit as part of the business, what you’re really looking for is a manager.
There might be a manager in place, but if there isn’t, you’ll need to find one who can run the business to replace the exiting owner.
Look For A Great Manager
That manager maybe someone who’s been in the business for a long time and who knows it inside out.
Maybe they’ve got more ambition than the exiting owner.
He or she might say to you, “Look, there are a dozen things we could do with this company.
John the last owner didn’t really push it very hard. I think he was tired and frustrated. He didn’t want to stay in the business anymore.
He just had enough of it, so he never did any of these things.”
You say, “Great job, let’s create a 12-week plan of all the things that you’re going to do and a bonus structure so that when you make these things happen you get a bonus.”
Occasionally I bring in someone from the outside like a manager who’s worked with me on other deals and say to him, “Run this business for me, and when we sell it you’re going to have five percent of the sales process.”
That gives the manager a great incentive to create the changes you want.
The manager I use is someone I trust.
He sends me email updates once a week and sits with me once a month at a board meeting where we discuss what’s been happening.
He’s my right-hand man.
But I think that nine times out of 10, the right staff are in the business already.
You’ve just got to find them.
You need to identify the people who are ambitious then you’ve got to nurture them, give them a goal, work out a plan of action and motivate them to go and do it.
This is all about nurturing the talent within the business and letting them run with it and make it more successful for you.
How To Prepare For The Sale Of Your Business
To make the sale process as smooth as possible, gather all the information that prospective buyers will want to see, including financials, paperwork, legal documents and contracts.
The more organised you appear the more confidence prospective buyers will have in you and the business.
What Documents Do You Need
Prospective buyers will want to see paper-based evidence that your claims about the value of your business based on profit and loss figures, assets, contracts and other details are accurate.
Financials
To gauge the level that the business is operating at, how profitable it is and whether it has debts, prospective buyers will want to see financial figures including profit and loss accounts from the past three years as well as up-to-date balance sheets.
Assets
You’ll need to prepare a written list of all the business’ assets including properties, equipment, IT systems, vehicles, and so on.
Contracts
You’ll also need to provide a list of contracts for clients, employees, suppliers and contractors.
Key Processes
If the business’ success is due to outstanding systems, describe them.
Information Memorandum
An information memorandum is a comprehensive document that is created to highlight ALL the vital information required for the sale of your business.
This document will be shown to prospective buyers after they have reviewed a summary sheet and have signed a confidentiality agreement.
It must be appealing to prospective buyers yet factually accurate, clear and concise.
How Do You Get Financing For A Business You Don’t Yet Own?
There is often an assumption that the only way to buy a business is to use your own money or borrow it from somewhere, usually a bank or a relative.
That’s the exact opposite of what I tell people to do.
I advise against borrowing from a bank, taking out a second mortgage or releasing equity from your home, or signing a personal guarantee.
I recommend you approach this with a different mindset.
Distressed Businesses
When you buy a business that has problems and issues, and the business owner just wants to get rid of it.
You see opportunity, and you see that with some simple changes you can turn it from a business that is a nightmare for the current owner into a business that is wonderful for you.
When you see a business with problems, the payment you should make for it and for solving the business owner’s problems is £1.
If I buy a business with problems, I don’t expect to pay a penny for it.
I bought a business with annual revenue of £4.7 million for £1.
Can you buy a £100,000 a year business for one pound? Of course you can.
Can you buy a £1 million business for a pound? Yes, you can.
Can you buy a £100 million a year business for a pound?
Absolutely. There are plenty of examples of this.
So if it’s a distressed business, that is, a business in trouble, you don’t need financing because you’re not going to pay anything for it.
Let’s say you’re talking to a business owner who wants £100,000 for the business.
Deferred Consideration
During the due diligence process, you find that there’s some tax that hasn’t been paid, some staff that haven’t been paid, bonuses that haven’t been paid, and bills that haven’t been paid.
The total outstanding amount is £20,000. That reduces the £100,000 down to £80,000.
So now the price that we agree to is £80,000.
You need to discuss the terms with the owner because he is probably assuming that he’s just going to walk off into the sunset with £80,000 tucked into his pocket and that he’ll never have to think about the business again.
Now that’s what a lot of business owners initially think.
However, they discover very, very quickly that very few buyers are going to do that regardless of the amount of money that they have.
They might have a lot of money in the bank, but they’re not going to go and spend a lump sum on a business.
That’s because buying a business has a degree of risk and they don’t want to invest a lump sum upfront. Instead, they pay for it in instalments.
So, you should suggest to the owner that you pay the £80,000 over time.
It might be 12 months, 24 months, 36 months, 48 months, maybe even, 60 months. It really depends upon your due diligence.
Now, remember due diligence is the checking that you carry out on a business before you buy it. It’s like the survey or the valuation report that you get done on a property before you buy it.
You check that the business can support several things. First, it can support the repayments to the former business owner, whatever they might be per month over whatever time period and, secondly, that it can support payments to you.
Remember, you should be paid out of the business every month as well.
I’m not an accountant, and I don’t give accountancy advice, but I have due diligence people who carry out those checks for me. So they work out that I can pay the business owner over whatever time period.
With this structure, you win and the business owner wins.
Asset Finance
But what if the company you want to buy has some assets.
Let’s say there’s still some payments left to be made.
In that situation, you can use something called, ‘Asset Finance’, so you get an asset finance broker—and I’ve got a wonderful asset finance broker who works with the members of our Mergers & Acquisition Programme—to refinance the assets and pay off the old finance.
The difference between the two will be yours.
It’s a little bit like re-mortgaging a property.
When you re-mortgage a property, you pay off the old mortgage.
You’re refinance at the current value of the property.
You pay off the old mortgage, and if the old mortgage is paid off and there’s a difference, that money is yours.
You can do several things with the money when you refinance the assets in the business.
You can use it as working capital, so you can pay for an advertising campaign to boost sales. You can use it to hire some additional staff.
You can use it to pay for anything that’s going to make the business more successful.
If the business has struggled with cash, this is a good way of releasing cash.
Don’t worry that you’ll overstretch yourself because the finance broker will never finance something that the business can’t afford to pay back.
Of course, the finance broker will take into account the amount you’ll pay the owner and the amount you’ll withdraw every month as a consultant’s fee.
You can use the money to pay the business owner. Let’s say that your refinance of the assets releases £80,000.
You could use £80,000 to pay the business owner in full. I wouldn’t recommend it, but you could do it.
You could also use part of that lump sum to pay the business owner to reduce the payments you’ll be making over coming months.
So you’d still be paying the business owner over an extended period but you will have reduced the amount of those monthly payments.
You could also use the money that you release from the refinancing of the assets—and this is my preferred option—to pay yourself.
Think about it: you’ll have spent the previous 12 or 16 weeks negotiating the deal with the business owner.
You’ll have had numerous meetings and telephone calls in that time. You’ll have sent numerous emails. But you haven’t been paid.
How Do You Get Paid?
When you buy a business you get paid with a deal fee.
Here’s how that works:
Let’s say you refinance the assets, and it releases £80,000 in cash. You can now take that £80,000 as a ‘deal fee’.
That is what people get paid for putting a deal together.
It happens in the private equity world on every single deal.
Now you are a private equity company, so why don’t you put together a package where you pay yourself?
In this scenario, you’d be £80,000 better off.
I think you’ll agree that £80,000 is a very good return on your time investment.
Someone I know refinanced the assets and released £7 million in cash and that £7 million, of course, was the deal fee that went back to the people who’d put the deal together.
Why You Should Never Accept A Seller’s Assurances
Most business owners will spin you stories about how profitable and successful their business is but it’s a mistake to believe everything they say.
You should never accept what business owners tell you about their company because they will naturally gloss over the less desirable aspects of the business.
An accountant recently described how one seller tried to make out the business was so successful that he didn’t have to do any work or make any effort.
When the accountant and the dealmaker asked for a 9 am meeting, the seller said, “Oh don’t come at nine o’clock: I don’t get in until 11.”
When they met the seller at the appointed time, he was sitting at a desk devoid of any papers. He didn’t even have a PC or laptop.
The only thing on his desk was a newspaper. A horse racing programme played on a TV.
“It was so funny,” the accountant told me. “He was trying so hard to create the impression that his business required no effort to run.”
The dealmaker really wanted to buy the business, but the accountant’s suspicions were aroused. He investigated and didn’t like what he found. He advised against the purchase, much to the annoyance of the dealmaker.
But his suspicions were well-placed: the business was sold to someone else and, three months after the purchase, it went into liquidation.
That’s why you should take what a seller tells you with a pinch of salt. Always investigate.
How To Get What You Want From A Deal
An insolvency expert reveals how you can buy the assets of a company and leave the shares.
When you buy a business, you have a choice between buying the shares and buying the assets.
When you buy the assets, you can select which ones you want to acquire.
The starting position and obligation of an insolvency practitioner (IP) is to realise the assets for the creditors.
It’s fair to say that the starting point is to try and sell the whole business as a going concern, if possible, because that will get the greatest realisation, but, if we’re doing a liquidation, the business is actually shut, or there are no bidders then the next best thing is to sell the assets on a break-up basis.
With the business sale as a going concern, there are VAT benefits for you, but if that’s not an option, then you might decide to buy the plant and equipment but not the goodwill.
In digital marketing, you might want the database, but not the whole business, so you can cherry-pick.
In a situation where the administrator, or the liquidator, is looking to sell whatever he can, you can cherry-pick the best bits and put bids in for those.
Equally, you can cherry-pick for different sites, so, if you are just concentrating on the north of England, for example, you can make a bid for those.
It will all depend on where the liquidator or administrator is in the process.
In the very, very early days of the insolvency, the administrator, or the liquidator, will be looking to sell off the whole thing as a going concern.
The issue when you’re selling a business is to mitigate the liabilities.
Let’s say you have TUPE in terms of staff, and if you’re looking at the return to creditors, and the overall deficit position, by offloading the staff in a sale as going concern, then you’re offloading future liabilities, in terms of redundancy, pay in lieu of notice, so they transfer off.
If you buy the whole business, you could be liable for TUPE.
That’s about transferring staff from one entity to an existing or a new entity.
Hire an HR professional to take care of it for you.
If you try to do it yourself it is likely to go wrong.
The Difference Between A Share Sale And An Asset Sale
In any sale, distressed or otherwise, you can buy the shares or the assets of the target company.
If you buy the shares, you’re taking on the problems the company may have experienced.
There are tax benefits in buying shares, such as entrepreneurs’ relief, but, if you do buy the shares, you’re buying everything that goes with it, warts and all.
One reason to consider a share purchase is where you have contracts or registrations that are peculiar to the company itself.
Sometimes they aren’t easily transferrable.
I’ve done one recently in which the business had an EU grant along with intellectual property.
While I went in as an administrator, I was selling the shares as a subsidiary because moving the EU grant would have been too complicated.
If you’re buying just the assets you’re not necessarily buying any problems that go with it.
Secured creditors, et cetera, are exceptions, but, broadly speaking, that is the difference.
If you’re looking at a company with financial problems but which isn’t yet in insolvency, you might want to put the company through an insolvency process, just to make sure that you don’t end up with all the problems.
BUY A BUSINESS – PART 2
In this section of our ultimate guide on how to buy a business, you’ll discover the following key insights and ideas that will take your acquisition strategy to the next level:
- Where to find businesses to buy
- More crucial questions to ask a business owner in your first conversation
- Key negotiating skills every dealmaker needs to develop
- The expert advisers you need for every deal
- The hard lessons former Kiddicare founder Neville Wright learnt from the £70mln sale of his company
- The traits of a great dealmaker
- The Rule of Six
- How to put the right corporate structure in place
Only one in five businesses that are sold are advertised.
For that reason, you should take the initiative and seek out prospective sellers rather than relying on finding them through adverts.
Approach Business Brokers
There are advantages and disadvantages to using a broker to source businesses that are up for sale.
On the plus side, brokers are already working with willing sellers.
They’re also likely to have comprehensive details about any business that’s up for sale.
This will speed up the buying process because you won’t have to wait while the seller compiles the information you need.
However, there’s a risk that the broker will have inflated the seller’s expectations in the same way that real estate agents tend to do with property owners.
There is also a strong possibility that to get the best price for their client (the seller), they will encourage you to get into a bidding war.
A broker is also likely to want you to pay 100% of the purchase price at the point of sale.
There are plenty of ways to find businesses for sale without resorting to brokers or looking at adverts.
They include:
Word Of Mouth
Talk to your personal and professional network.
Clients
Your existing clients or suppliers may also know people who could be persuaded to sell their business to you.
Let them know the kind of business you’re interested in and in which sector.
Pitching To Competitors
Arrange meetings with competitors and suggest that your two companies merge.
Web Listings
There are online directories that list businesses for sale like www.rightbiz.co.uk.
Find one that specialises in your chosen sector.
Direct Marketing
Buy or build a database that has the names and physical addresses of business owners in the specific sector you’re targeting.
Write a personal letter.
Explain that you’re a private investor and share your motive for wanting to buy businesses in their sector.
Advertising
Place adverts in publications that serve your sector.
Your advert can say something like, ‘Private investor seeking new business opportunity.
Contact [your email] for more information.’
Search Engine Ads
Advertise on the major search engines like Google or Bing to attract willing sellers.
You’ll need to invest in PPC advertising and have a landing page where sellers can enter their contact details.
Display Ads
You can attract the interest of willing sellers by using Display Ads on platforms such as LinkedIn, Google and Facebook.
Organic Social Media
Write brief posts on social media platforms such as:
This will let people know that you’re looking for businesses to buy.
I put a post on LinkedIn recently about how I was looking for businesses to buy in the children’s nursery sector and received 17 responses.
You need to keep posting.
The more often people see your posts, the more likely they are to respond to them.
Trade Shows
Visit trade shows in your target sector.
Use it as an opportunity to contact business owners.
Let them know you’re interested in buying profitable or distressed companies.
Other Dealmakers
Get to know other dealmakers and let them know the sector you’re looking at, and what kind of businesses you’re interested in buying.
Partnering
Form a partnership with another dealmaker.
Deal Swapping
Swap deals with other dealmakers.
After all, a deal you don’t want might be someone else’s ‘dream deal’.
Adminitrators
There are a few drawbacks to going through administrators.
You won’t be able to carry out due diligence on the purchase so you’ll be buying the assets ‘sight unseen’ and will probably have to make a blind bid.
The First Questions To Ask A Seller
Your first conversation with a seller is critical, and you must use it as an opportunity to discover key information about the business and the seller.
Here are three more questions that you need to ask a seller when you speak to a business owner on the phone for the very first time.
Let’s say there is more than one shareholder or decision maker. Ask, “Is it possible that we get everyone together at the same time?” Quite often, it will turn out that one shareholder is based in Dubai and another is based in South Africa. It makes arranging a group phone call difficult.
Now, it still might be worth pursuing a business with multiple owners but, compared with one that has a single owner, it will be more complicated.
A good question to ask is, “What is the name of the limited company?” The person you’re speaking with might just have given you the trading name.
You need the limited company name so that you can research it at Companies House.
There you can find out who the owners are and who’s in control. You can get an idea of charges over the company.
Once you’ve discovered what companies have a charge over the company you can return to the seller to find out more details. You can also see if they are invoice discounting, or factoring in some way because that company will have a charge over the business.
You should also ask, “Do you own any other businesses?” or “Is this the only business you’re thinking of disposing?” You might discover that XYZ Limited is one of six companies.
You may then be able to buy more than one business.
Disposing is a very good word to use instead of selling.
That’s because selling conjures up images of pound signs, whereas disposing implies shoving their problems over to you!
If you use the term ‘selling’, you’re putting the idea in a seller’s mind that there’s going to be a lot of money changing hands.
It will give them the idea it’s a big transaction.
Using the right language does make a difference.
Another very important question to ask is, “Are there any family members involved?” The ideal scenario is where there are no relatives involved in the business.
It will mean you don’t have to deal with family dynamics.
Buying a family-run business can be more complicated than usual because you may have to counsel family members through the process to ensure everyone’s happy.
Key Negotiating Skills Every Dealmaker Needs
Jonathan Jay shares negotiation skills that have been incredibly effective when negotiating the purchase of a business from its owner.
Start by initiating the NDA, the non-disclosure agreement.
There’s a chance your seller won’t have a clue what that is.
This is how I explain it to the sellers I meet: “It means that, when we have a conversation, it’s going to stay between you and me and our advisers.
That means all our conversations will be confidential and that in turn means you can be honest with me. Our discussions won’t be shared with anyone else.”
It means you won’t share your discussions with the seller’s competitors, customers, suppliers, or staff.
You won’t share any details on your website, blog or social media posts.
It will demonstrate that you know what you’re talking about and that you’re going to treat the whole thing professionally.
It also shows that you know more than the sellers do and that puts you in a powerful psychological position.
The validity of an NDA is somewhat questionable, but that doesn’t matter.
What matters is that you’ve instigated the conversation. You must make sure you’re the one to raise the issue of an NDA.
It’s all about psychology.
Last year, for instance, I sent the wrong NDA back to an accountancy firm.
One of the accountants rang me and said, “Thanks very much for the NDA, but it looks like it’s for a different project.”
I said, “Oh, I’ve sent you the wrong one by accident.
I have so many discussions going on at the moment…”
It was an accident, but I decided it was an accident worth repeating because it doesn’t do any harm to let sellers know you are considering lots of deals.
It shows that you have money to spend, and you’re looking to find the best terms and best deal.
Make it clear that you’re not the one in a hurry.
If you act as if you’re in a hurry, it will weaken your position.
Behave as if you have all the time in the world to sort the deal out, even if on the inside you’re screaming with frustration.
Never let your desperation to close the deal show outwardly.
Always let it be known that you are evaluating several opportunities.
Opportunities versus Deals
When you’re talking to brokers, use the word ‘opportunities’ rather than deals.
It might seem a little pedantic, but it’s the language used in private equity finance.
Talk About Your Partner
When you talk with a seller, always tell them you have a partner with whom you’ll have to confer. Now, your partner can be your lawyer.
It can be your life partner, who doesn’t have anything to do with the opportunity per se, but you probably will talk about it over dinner. The seller never has to meet this mysterious partner.
Emphasise The Benefits Of The Deal
It’s important that you present your deal in the strongest possible way.
Deferred consideration is not, obviously, appealing, unless you sell the benefits of it.
For example, you could say to the seller something like, “Think of it like this John, for the next three years, you can be in Barbados.
Every month for the next three years, you’ll look at your online bank account, and see that a sum of money has been deposited there.
You’ll never have to step foot in this office again.”
Practice
You’ve must be able to sell it in the strongest possible way to the seller, and that takes practice.
You can practice that at home in front of the mirror.
You need to practice it 20, 30, even 40 times so that when you’re sitting in front of a real seller, it feels natural to say it.
Only by practising it will you become confident and persuasive in your delivery.
It’s a bit like an actor rehearsing their lines so that when they go out on stage for the first time, it’s as if they’ve been doing it their entire life.
Focus on the positives. Say, “Look, there might be someone out there who will come along and write you a big, fat cheque, but your business has been on the market, how long did you say it was?
Fourteen months, and, so far, no one’s done that.
Now, I realise that everyone would like to ride off into the sunset with a big cheque.
We’d all like that, but these days it just doesn’t happen.
“The deal I’m presenting to you, however, has certainty, and it has speed.
From what you’ve said to me so far, certainty is important to you, because you were let down by the other guy.
I understand that speed is important to you too because you don’t want to set foot back in the office from September.
“So, we’ve got to get this tied up, July, August time, which is, well, that’s, like, five, six months away at most.”
You’ve got to think about the things that you can offer and couch them in the very best possible terms.
It might not be the best financial deal, but if you do it right, it will be the most appealing deal to the seller.
The key to all of this is self-confidence, and that comes from practice.
The Expert Advisers You Need For Every Deal
Whether you sell or buy a business, to do so successfully, you need access to a team of people who have the expertise, skills, experience and qualifications that you don’t have.
It is foolish to believe that you can do everything yourself.
By leveraging other people’s talents and time, you can compound your achievements.
You need the following experts in your Deal Team.
Merger & Acquisitions Lawyer
Mergers and Acquisitions is a speciality subject that most business owners don’t use in the day-to-day course of their business.
But merger and acquisitions can involve a range of technical considerations including tax, competition, pensions, and regulations.
An M&A lawyer will advise and guide you through these technicalities to ensure your deal is successful.
Without such advice, it’s likely any dealmaker will flounder.
It’s why having an M&A lawyer on your team is an essential part of your future success as a dealmaker.
Insolvency Lawyer
If you are interested in buying distressed assets, in other words, assets that are on the verge of insolvency, then you also need an insolvency lawyer who understands the latest regulatory requirements around managing corporate insolvent situations.
In recent years, the rules have been tightened, and it is essential that you have expert guidance in this field otherwise you might fall foul of the law and become personally liable.
It’s why you need an insolvency lawyer on your team.
Due Diligence Expert
A due diligence expert will undertake the checking and assessment of the business that you are buying to help you understand its positive and negative aspects.
Having an expert carry out due diligence on your behalf will allow you the opportunity to review the deal without the emotion.
Accountant/Tax Consultant
An accountant will help you structure your portfolio to minimise your tax exposure and lessen your risk.
Your accountant can help you to compartmentalise your companies to make it easy to sell or close them individually in the future.
For example, if one of your portfolio companies underperforms due to a change in consumer behaviour or the economy, you should be able to close it down without adversely affecting other companies within your portfolio.
Your accountant will also help you to structure your affairs to plan for inheritance tax and allow your descendants to benefit from your hard work.
Finance Broker
If you follow the Dealmaker’s Academy methodology of buying businesses without risking your capital, it’s still likely you will need to raise finance.
This means you need to have access to all of the financing possibilities.
An experienced finance broker will be able to guide and help you to find the best source of funding for your particular situation.
HR Consultant
Whether you buy the shares of a business or the assets of a company, you will encounter TUPE (or Transfer of Undertakings (Protection of Employment) Regulations). It involves the transfer of the staff to you.
Part of your restructuring after an acquisition, whether you merge it into your company or keep it as a standalone business, might be to reduce the staff headcount.
Attempting to do this yourself without proper guidance is likely to end in disaster.
An HR Consultant will help you to manage these potentially difficult situations.
The Benefit of Hindsight
An InterviewWith Neville Wright
Neville Wright sold his company Kiddicare to Morrisons for £70 million. Here he reveals what he would do differently given a chance.
“Morrisons said they wanted our website.
They didn’t want the shop; they wanted the operating system—the online ordering system we used.
In hindsight, I should have sold them the operating system.
As it was, they never used it, and they went to Ocado and rented an old system instead.
“They’d spent £500 million in the previous three years trying to get online. I couldn’t understand why because I’d been able to get online in a day. Three years after they bought Kiddicare and after a £176 million loss, they decided to rent Ocado for £217 million.
I thought then we should have kept the shop and sold them the operating system or licensed it to them. It was a far superior system to anything else that was available.
By the time they bought it from us, we were on our fourth-generation website, and we had our own platform.”
How important were your advisers? Did you feel you had a good team around you?
“Yes, I couldn’t have done without them. I never spoke to any of the people who wanted to buy the business. I didn’t have a single conversation with any of them. My team did it all. Three years beforehand, I hired somebody to act as Chief Financial Officer. He was very good with big businesses. So, with him, and our management team, they dealt with it all. I wasn’t involved.”
Did that frustrate you, or were you happy with that?
“It was frustrating, but I was basically out of the equation. They said, ‘You keep out of it.’ But it was just as well because I’d have probably done the deal at £40 million. I would have felt sorry for somebody and said, ‘Here, take it.’”
Any buyer who’d hoped to take you out for a coffee to build rapport with you would have wasted his or her time because your advisers shielded you?
“Yes. I carried out running the business while the team took care of the deal.”
The Traits Of A Successful Dealmaker
The traits of the dealmaker are probably very different from what you expect.
You might think that you must be brash and aggressive like Gordon Gecko from Wall Street or Jordan Belfort from The Wolf of Wall Street.
That’s far from reality.
One of the most effective traits of a dealmaker is the ability to get along with people.
If you want people to sell you their business, you’ve got to be a nice person, so they want to do the deal with you.
Most successful dealmakers are:
Honest.
- Being a successful dealmaker isn’t about screwing people over on deals.
- It’s about buying or selling a business, so both sides get what they want (or as near to it as possible).
Hard working and focused.
- You will need to work in a very focused way on your business.
- In the beginning, you might put in a 35-hour week as you ensure that costs are cut, and improvements are made.
- The amount you work on the business will decrease as things improve.
- You will also need to spend time finding more deals.
Respectful.
- A great dealmaker won’t patronise or insult other buyers or sellers, but make it clear they respect them.
You might think, ‘Oh come on, if the deal’s right, they’ll snap it up regardless of what I’m like.’ That’s not the case. There’s so much emotion when people sell a business.
They want to sell it to people they like. You’ve got to tell them what a great job they’ve done. Okay, they’ve hit a bit of a hard time because of the recession, but that isn’t their fault. Tell them how you can take the business to the next level. You’ll be amazed at how pleased people are that you’re not intending to asset strip their business and close it down.
Good with people.
- If you’re abrasive or patronising, prospective sellers won’t want to deal with you.
- They want to know that you’re going to look after the businesses they have created from scratch.
Decisive.
- Dealmakers don’t spend months deliberating over a deal.
For example, I have someone who can carry out due diligence on any company I’m considering and report back to me within 24 hours on whether it’s worth proceeding. He’ll call me and say, ‘Jonathan, this is something you should be doing’, or ‘Jonathan, walk away, you’re wasting your time on this one.’ It saves me a lot of time. I’m a decisive person, but when there are multiple deals in the pipeline, it helps to have someone else running the numbers for me.
Quick to act.
- When people decide to sell a business, they want to move fast, so you need to act quickly, which means you need to have the right team around you and have the right documentation prepared.
- You need to be able to move quickly through the purchase process because if you drag the process out, the deal can fall over.
There’s something called ‘deal fatigue’. When negotiations drag on endlessly, both parties begin to get exhausted, frustrated and irritated by the process. They begin to lose hope that they will ever reach an agreement. There’s a risk that the deal will collapse, or the seller will decide to consider other alternatives such as putting a manager in place rather than selling it.
Responsible.
- If you’re buying businesses that have staff, and you will be because there’s no point buying a business without staff unless you’re buying its intellectual property assets (IP), you need to have a sense of responsibility.
- People’s livelihoods are at stake. You have to respect that those people have families and financial obligations like mortgages or rents to pay and endeavour to treat them fairly.
- However, you may need to cut overheads by making some of those employees redundant, and it’s much better to do that quickly and respectfully.
The right way of doing this is to use the services of a great HR person who understands what you’re trying to do.
You need someone to whom you can say, ‘I need to reduce the headcount; we need to get rid of “x” number of people, and we need to do it quickly and painlessly. Could you do all the paperwork and make sure there’s no comeback on me. I don’t want any issues. I want this done professionally, and I don’t want anyone to feel they’ve been short-changed.’
I made 70 people redundant from a company I bought and with the help of my HR person, accomplished almost without any issues. The one issue we had was with someone who’d been to a job interview and been offered the job. Bizarrely, he’d been sent an employment contract to sign before he started working there. I wouldn’t offer anyone an employment contract before they’d been with my company for some weeks. I’d want to see how they performed before offering them a contract. But in this case, we had to pay this man for a job he hadn’t even started.
Capable of letting go and delegating.
- This will get easier as you buy more companies because you’ll come to realise that you have to keep your eye on the big picture and allow other people to take care of the day-to-day running of the business.
The Rule Of Six (The 1-5-1 Rule)
We have a rule at the Dealmaker’s Academy called ‘the Rule of Six’.
The Rule of Six says that over an 18-month or two-year period, you buy six businesses.
You do not manage those businesses on a day-to-day basis.
In a 12-month period, you will sell one business, and you will buy one.
So you have six, and you sell one.
You then have five businesses, and you buy one and sell one.
You then hold five and so you buy one and sell one and so on.
That is your Rule of Six.
You always have six cash-flowing assets, and you have a capital event—the sale of a business—every 12 months.
Remember, most people have an event like that once in a lifetime, if at all. They get to retirement age, and there’s nothing to sell.
It’s so very important that you are constantly replenishing your stock of businesses as well.
Buying one business in the way that we describe is very, very easy.
That is no money down, and the purchase is at a price that’s below market value.
It’s very, very simple indeed.
How To Put The Right Corporate Structure In Place For Acquisitions
Corporate structure is the structure of the ownership of the businesses.
Now depending on where you are in your business journey, you may well have started off as a sole trader.
A sole trader sometimes is recommended by accountants for small businesses because it’s tax efficient.
But you can’t operate as a sole trader if you want to buy other businesses.
That’s simply because you do not want to expose yourself if you’re buying multiple businesses because obviously, the risks multiply as well.
I’m going to show you how to de-risk the acquisition.
Get The Lowest Tax Rate
It allows you to take advantage of Entrepreneurs’ Relief, the lowest rate of tax in the UK. It’s just ten per cent and is available to the owners of businesses that have fulfilled certain criteria. For example, the business has been trading for more than 12 months; that you own five per cent or more of the business; and that you’re a director or an officer of the company and so forth.
I want you to have the best corporate structure so that when you sell the business, you can maximise the amount of money you make by paying the most appropriate and the lowest level of tax in the UK. That’s critical.
The next reason why corporate structure is so important is that when you have multiple assets, some might not perform as well as others, and you might want to close them down. You need to do it in a way that won’t affect the other assets.
Also, when you sell one of the assets, you need to maintain the others. If we’re talking about the Rule of Six, and you sell one, you want to be able to maintain the other five without having to untangle that one business from the others.
Why You Need Multiple Bank Accounts
All your businesses are separate entities and must, therefore, have separate bank accounts. It is very important to minimise your personal liability to zero unless, of course, you do something illegal in which case, you’re not going to be protected. Let’s assume that you’re going to play fair and keep on the right side of the law and you’re going to maximise your exit in terms of cash received by reducing the amount of tax that you’re paying.
Don’t Buy In Your Name
You’re also going to have a structure that will be the most flexible and which will allow you to increase and decrease your portfolio in years to come. The key point, number one, is you never, ever, ever, ever, ever buy in your name. You don’t buy a business as Joe Bloggs. It might be Joe Bloggs Limited, but it’s not Joe Bloggs, the individual.
Likewise, you don’t buy in the name of your existing company. For example, if you own a printing company and you want to buy another printing company the new company will be a separate entity to your existing printing company. Why would this be if you intend to merge them? Well, the one that you’re buying might have some nasty, unpleasant things that you do not want to affect your existing business. Instead, you want to keep it separate until you know exactly what you’ve bought. You might decide to merge the good bits and maybe leave the bad bits out.
Special Purpose Vehicles (SPV’s)
Before buying other businesses, you need to set up a special-purpose vehicle. This is a company that you set up for the sole purposes of acquiring your target companies.
You can go to your accountant to set up an SPV and they might charge you £200 or £300, or you can go to Companies House (www.gov.uk/government/organisations/companies-house) and do it yourself. It will cost you about £12.50. It doesn’t have to be complicated. The articles of association that can be adopted are standard.
You can set up an SPV at any time, but it’s better to do it sooner rather than later because Companies House takes a few days to approve the name of a business. Sometimes the name can be rejected which means you have to begin the whole process again.
That’s why having an SPV in the background as a dormant company, ready to go, is a good idea. You can even have several of them if you intend to get into dealmaking in a big way.
The Ideal Corporate Structure
You are the ultimate beneficial owner, and you own a holding company.
Now a holding company is no different to any other company.
You might own 100 per cent of the shares, or it might be split between you and a partner.
If you do have a partner, you need a shareholders’ agreement for the holding company.
It’s important to have a shareholder’s agreement because that company will be very valuable because it will own all the other companies that sit underneath it.
You need an agreement that enables you to be able to resolve problems with the minimum of fuss.
It should explain what will happen if one of the shareholders wishes to leave or sell, or if one of the shareholders wants to buy the other shareholders out, and what happens if there’s a deadlock scenario and you can’t agree on something.
You need to establish who makes the ultimate decision.
There must be a division of responsibilities so that it’s clear who negotiates the deals, and who takes care of the logistics of the day-to-day operations of businesses.
Underneath the holding company sit your special purpose vehicles, your SPVs.
In the image there are three: SPV one has been set up to acquire target one, SPV two has been set up to acquire target two and so on.
You can have hundreds of SPVs.
The people who do dealmaking in a huge way end up with hundreds of SPVs, hundreds of targets and, over the time, those businesses are sold off or closed down.
The key point here is the SPV buys the target.
So the target company is at the bottom of the structure, the SPV in the level above, the holding company above the SPV and then you.
It means you are separated from the target.
This is important because if you’re buying a distressed business, the target might be toxic in some way.
So distancing yourself from the target is advisable.
Let’s consider the shareholdings.
You own 100 per cent or a percentage of the holding company.
The holding company owns 100 per cent of the SPV, and the SPV holds 100 per cent of the target company.
So the SPV, let’s call it SPV1 Limited has bought 100 per cent of the share capital of the target company. SPV1 Limited is owned 100 per cent by the holding company.
You own the holding company.
You might wonder how this works if you’re buying assets rather than shares.
It’s the same process, and the same rules apply.
The key point to remember is that your holding company can own shares in the SPV and this is important because you the individual are not buying what is potentially toxic and which might go wrong.
Your Personal Liability Should Be Zero
What is your personal liability if your target goes wrong?
Your personal liability is a big fat zero.
You do not need or should be concerned about personal liability unless you do something that is illegal.
You need a good lawyer and a good insolvency practitioner if you do need to close down target one so that everything is done legally and properly.
It ensures you aren’t impacted personally.
Remember, the shares in the SPV can be owned by your holding company.
That’s critical.
You have to have the holding company sitting between you and the SPV.
This distances you from anything that might go wrong, and that is critical.
I’m not saying that things will go wrong, but sometimes they do go wrong.
Sometimes, you’ll find that target one has so much HMRC liability in it, or it’s being sued or something similarly bad.
In that situation, you should acquire the asset of target one, move them up into SPV one and then close target one.
You’ll be in the same position, but you’ve cut the string that connects target one and SPV one.
Target one falls away, and as a result, you have all the good stuff in SPV one, and all of the bad stuff is taken care of by the administrator.
That is critical.
It distances you from anything that might go wrong.
Use A New SPV For Each Acquisition
You need to set up a new SPV for each acquisition.
It might seem a hassle to set up a new SPV for each acquisition, but it’s important that you do it anyway.
If you do it directly through Companies House in the UK, it costs you £12.50.
I’m sure it’s about the same amount in other countries.
You don’t need someone to do it for you.
When you set up a new SPV, you separate every one of your acquisitions so that none of them can impact the others.
Removing Risk
Now let’s look at how target one might impact target two or target three.
Let’s say target two, and target three are great businesses and performing well, but target one is failing for some reason.
In that situation, you don’t want target one to affect target two and target three. In this scenario, it won’t happen.
You can hive the assets into the holding company.
So, you have a negative situation in target one, SPV one buys the assets from target one, target one goes into administration.
You might want to distance those assets even more from target one by moving them up into the holding company.
There’s another reason to do that, and it is something positive rather than negative.
Let’s say you’re buying printing companies and you’ve bought three printing companies in the way that I’ve just described.
You have owned the companies for several months and know exactly what you have.
You know what’s good and what’s bad.
The holding company or the assets in the target can be hived up via the SPVs into the holding company.
Now the holding company has all of the good stuff, and the targets can be closed down. You could even close the SPV down.
The holding company has all the assets and, if you’ve combined and merged the businesses, you now have one big business.
Of course, if the targets are in different sectors, you won’t combine them into one big business.
But if you have targets that are in the same sector, such as the three printing companies, you could combine them into one holding company.
At this stage, you’ve made sure that there aren’t any nasties.
You have removed the liabilities.
You’re only moving the customers, the contracts, the equipment and the employees.
Staff always move up: they are protected by law regardless of whether you’re buying the assets or buying the shares.
So everything moves up into the holding company and, as a result, you now have one big printing company that you know is good and can benefit from economies of scale and so forth.
It’s a very, very good business to sell.
When you are moving assets around, you must do it very, very carefully.
The reason is that there is a tendency among people with entrepreneurial mindsets to undervalue assets.
You don’t want assets to be valued at a high price because it will cost you more to acquire the company.
Let’s look at some examples of how this would work.
Let’s say you buy the shares in target one but realise very quickly that because of certain liabilities, the business is never really going to fly in its current state.
You decide you want to buy the assets of the business. SPV one can buy the assets.
How To Value Assets
How do you value the assets? You shouldn’t value them yourself because that valuation could be called into dispute.
So you need to get a valuation done by a third-party valuer.
This is someone who specialises in valuing assets for banks and finance companies (who often hold a charge over assets. They are very skilled at estimating the value of an asset.
Typically, an asset’s value is somewhere between a fire sale (‘We need to sell this today’) and selling to a willing buyer.
Asset valuers tend to be prudent and cautious. They are a little bit like property surveyors because they’re always erring on the side of caution and the side of prudence.
You’ll know that the valuation is probably going to be a sensible one.
So let’s say that SPV one wishes to buy the assets of target one and the valuation has come out at £25,000.
You can then take that valuation to an administrator.
It’s always helpful if the administrator has a recommended valuer.
It means they know and trust one another and you don’t have to do introductions.
So, the administrator accepts that the value of the assets is £25,000.
You pay £25,000 to target one.
That £25,000 goes to pay the administrator and then anything left over is distributed to the creditors, starting with the secured creditors and then moving down the rankings.
By doing that, you will have achieved two things: you’ve acquired the assets and rid yourself of all the unpleasant stuff which might have ended up costing a lot more than £25,000.
The decision about whether you should do this or not depends on how big the nasty stuff is.
If there’s £500,000 worth of HMRC liabilities, for example, buying the assets for £25,000 makes an awful lot of sense because you’ll be saving yourself £475,000.
You can lend the holding company £25,000.
The holding company lends the SPV £25,000, the SPV pays the £25,000 to the target, and the SPV now owes you £25,000.
So as this is a loan, the £25,000 then needs to move back to you over time.
The key thing is that the valuation is carried out by a third party.
Don’t try and do this yourself; it will always be called into dispute.
Who would call it into dispute?
Well, one of the charge holders. HMRC might say “We’re owed £500,000, the assets have been sold for £25,000.
Is that a correct number?”
The administrator can say, “Yes, it is, because the assets were valued by this valuer who’s been in business for the past ten years and has all these accreditations and belongs to these trade bodies.
Here is the valuer’s report that sets the valuation at £25,000.”
It becomes indisputable.
Without that valuation report, it’s possible for the creditor, in this case, HMRC to demand the administrator unwinds the transaction.
The administrator can force you to give back the assets and then sell them at what is considered fair market value.
That’s why you need to get it right from the start.
Why You Need a Debenture
Debenture
noun
A long-term security yielding a fixed rate of interest, issued by a company and secured against assets.
If you lend money to the company, you need to take a debenture over the company.
Before I explain what I mean, let’s go back to our diagram.
You’ve lent £25,000 to the holding company.
The holding company has lent £25,000 to the SPV, and the SPV has paid £25,000 for the target’s assets.
So there has been a loan to the holding company.
The holding company has made a loan to the SPV. You need a debenture over the holding company.
The holding company, therefore, needs a debenture over the SPV.
It’s an interesting situation because you are entitled to security.
Let’s imagine a worst-case scenario, in which something happens to the holding company.
Example Of A Debenture
You are a debenture, a charge holder.
It’s just like holding a mortgage on the holding company.
Two things can happen as a result.
You can appoint the administrator.
An unsecured creditor, let’s say, British Telecom, can’t appoint the administrator because there is a charge holder in place—in this case, that’s you.
Of course, you will appoint an administrator who isn’t going to be unnecessarily aggressive with you.
You’re going to appoint an administrator that maybe you’ve worked with before.
You have a professional rather than personal relationship with the person you appoint.
The second very important thing about holding a debenture is that when the assets of all of the SPVs are sold, the realisation of those assets comes back to you.
So you get your money back ahead of HMRC, ahead of the unsecured creditors and ahead of a second or a third charge holder who might exist.
You secure your position at the front of the queue.
You can appoint the administrator, and you get your money back.
This is what we call ‘de-risking’ a scenario, and as soon as you lend money, you are entitled to a debenture, and your lawyer can do that for you.
It needs to be registered within 30 days at Companies House.
It needs to be done correctly, and you want to get that fixed, so it covers all of the assets of the holding company.
I do know some people lend money to a holding company to secure that debenture.
They’re setting themselves up for success even if everything else fails.
I know this sounds incredibly negative, but it’s a little bit like getting a prenup before you get married.
You don’t want to exercise the prenup, but it’s better to have it there just in case.
It’s a belt and braces approach.
By securing your position in this way, if something does go wrong, at the very least, the money that you lent the business is secured and will come back to you.
It’s information you won’t find in online articles or books.
You can only learn this from people like me who’ve done it and learned what works.
So as first charge holder, you can appoint the administrator, and that is critical.
You need to avoid a situation where there is no charge, and someone else appoints the administrator, and you get an aggressive administrator who takes everything away from you.
You also want the opportunity to buy the assets back.
If buying the assets back is something you want to do then you need to be in a position where you can buy those assets back at whatever the third-party valuer says they are worth.
Now when you come to selling assets, you can sell the holding company sitting there at the top or the individual SPVs.
You’re more likely to sell the holding company if the holding company owns a series of businesses that are in the same sector.
Take our printing business as an example.
Let’s say the holding company owns three, four, five or six printing businesses, then selling the holding company is a good move.
You can sell the individual SPVs, so if we take our Rule of Six, you own six companies, you sell one every year, and you buy one every year.
So you sell one, hold five, buy one, then using the structure, you can sell these SPVs off individually.
The proceeds from the sale of the SPV move up into the holding company.
So the holding company benefits from the sale.
You can sell SPV two right out of the middle, and it won’t affect SPV one, and it won’t affect SPV three and so on.
You can sell them off or close them down or do whatever you want with them.
This structure helps you maximise your efficiency in your sale.
Likewise, you can close individual SPVs as you merge businesses.
Let’s say you have the printing company and you move all the assets, the contracts, the customers up into the holding company.
You acquire the businesses as going concerns and can then close down the SPVs as they are no longer required.
Why would you do that?
Well, well, why wouldn’t you do that?
You have to pay a filing fee every month, some sort of accountancy fee every year, so you may as well get rid of them and close them down.
BUY A BUSINESS – PART 3
In this part of the guide to successful acquisitions and mergers we’ll be looking at the following:
- What lenders want from buyers
- What to do when deals go bad
- More ways to strengthen your negotiating position
- How Neville Wright, founder of Kiddicare, grew the business and made it so appealing to buyers
- More questions to ask a seller in the first conversation
- How much due diligence is required for a deal
- How many UK businesses get sold?
- Why you should make a site visit to a company you’re considering buying
- When to grab a distressed company
- How to get expert help and be a successful dealmaker
What Do Lenders Look For?
When you want to finance an acquisition by borrowing money, what criteria do lenders use to assess your application?
Our finance expert Neil reveals exactly what lenders are looking for.
If we’re looking at a new-start business, then we’re looking at the people behind it.
We’re covered by certain regulations.
We need to do anti-money laundering checks, for instance.
We need to do what we call ‘know your customer’, so we need to prove and verify that you guys are alive, you’ve got a pulse, you’re not convicted terrorists and so on.
We look for security behind you guys at the start of a new business, so we prefer homeowners with equity, but that’s at the very start.
If you’re buying an existing business, we’ll look to the strength of the business and what you’re bringing to the party.
Right now, we’re considering a seven-year-old trading business.
It’s a very good business.
It’s not distressed.
A family runs it.
They’re looking at it from an entrepreneurial point of view, so they’ve built it to the point that they can, and they want to sell it.
They have a potential buyer who is not a homeowner, so we’re looking at that and the strength of the assets.
There’s a really good asset base.
There are also a really good set of invoices, a ledger, that we can finance against.
The reason that we’re looking at this as part of the agreement is the existing management company, who are the directors and shareholders at the moment, are going to become employees and stay on as the management team for the next three years on deferred payment.
Keeping the existing owner on a consultancy agreement and locked into the business is beneficial.
It allows you to finance off the strength of the existing management team.
As funders, we’re here to lend money, so we’ll try and find a way to do it.
The easier you can make our job the better.
It pays to have all the information we’ll need.
If you’re going to go out to the market, make sure that you can prove who you are.
We always ask for a couple of proofs of address.
When you start getting into the financials, make sure that you have the management accounts, the last set of filed accounts, and a business plan as to where you think you’re going to take the business.
All these things make our life easier because we always go down the path of least resistance.
It will really impress a lender if you have all the details ready.
If you say, “This is the business we’re looking at buying, and these are the assets, this is what’s outstanding, and this is how we’re going to structure it”, we’ll be impressed.
Quite often we receive the information through brokers of one sort or another.
We might be working with an IP practitioner or something like that. But you can just pick up the phone and call.
The other thing is we’re looking for speed of sale in.
If you say, “This is me, here’s my passport and this is my home address” I’d think it was brilliant but only if you also had the accounts and bank statements too.
The sooner we have everything, the faster we can decide.
The seller will have a bit more confidence in you guys as well.
When Deals Go Wrong, Get Back Up
An Interview With Mark Maciak
Mark Maciak is a serial investor and business turnaround expert who’s bought and sold many, many companies over the past 15 years.
It hasn’t always been easy.
In fact, his first investment was a disaster and almost cost him his home and livelihood as he reveals here.
Describe your first deal.
“It wasn’t a deal in the usual sense. About 10 years ago, I bumped into an old friend of mine—I’ll call him Tony, but it’s not his real name.
“Anyway, Tony used to sell to me, from IBM into EDS, IT equipment for global roll-outs. He’d set up an IT services company on the south coast, and we were doing IT services, telecoms in Milton Keynes. and we said, ‘Oh, why don’t we merge?’ So, we did.
“Before the merger, our company was about twice the size of Tony’s company. I was—and still am—working with a business partner, Dave. So, the merged company had a 33/33/33 split. The first quarter started off well. Then Tony decided he’d been doing enough work and disappeared for a little while and stopped picking up the phone. It was then that things began to sour.
“Later, the three of us had a meeting, and everything was okay. It seemed as if we were all coming back together and working nicely but then Tony disappeared again.
“He decided he wanted to go on a honeymoon, so he took £10,000 out of the business bank account to pay for it. We couldn’t pay wages that month because he’d done that. Again, Tony didn’t answer our calls.
“An email arrived from Tony soon afterwards. It said, ‘Oh, I’ve had to take another £2,000, so I can have a pre-honeymoon. But don’t worry, just take that from my salary for the next three months.’
“It left Dave and me really short. We couldn’t pay ourselves that month because we had to pay the staff first, and it got all very tight. We couldn’t pay some suppliers either.
“Dave and I went to see a lawyer, and he said, ‘Well, you’ve got grounds there for gross misconduct, just fire him.’
“‘Can we do that if he’s away on one of his honeymoons?’
“The lawyer said we could, so we did.
“Afterwards, Dave and I thought things were going to improve because Tony was gone.
“Unfortunately, Tony reappeared. He’d forged share documents to show that he was the 100% shareholder in the company. He used the documents to get himself reinstated on the bank account and then withdrew everything.
“We didn’t have any shareholder agreements or anything like that, but, luckily I have always kept all my emails. Right now, for instance, my inbox contains about 7,000 unread emails. I have about nine or 10 companies, and I am sent emails about them all the time. I like to keep everything.
“Anyway, Dave and I went back through all the emails I had from when we were setting up the merger and discussed the 33% split among the three of us. I went to see Tony’s lawyer. As a result, the money was deposited back into our business bank account.
“But then Tony decided that we weren’t directors of the company, and, so, we couldn’t fire him. He went to an employment tribunal. He put us through another legal case at the same time, and in total it cost us £120,000 in legal fees.
“He was making stuff up, but it was very difficult to prove he was lying without agreements. We still had to go through the employment tribunal. Eventually, on the fifth day, his lawyer stopped us on the steps of the tribunal, and said, ‘Okay, we’re willing to do a deal now’. I think he thought he was on rocky ground.
“We had made some mistakes, so we agreed to buy his shares off him, I think it was £21,000, paid over a year, but once we hit certain amounts, he was supposed to transfer shares back across.
“He didn’t do that, so we went back to a lawyer and said, ‘Look, he’s not doing this, what can we do?’
“He advised us to go to an administrator and close the company down then reopen it for business.
“Well, that’s how I understood it: you close it down and reopen it again. We went off and did that. We didn’t bother with the administrator side. We did ask them, and they were going to charge us about £16,000 to do all of it, so we thought we’d do it ourselves.
“Tony complained that we shouldn’t be able to shut the company down, so administrators were called in. They said we’d taken monies as directors, yet they had documents which showed we weren’t actual directors.
“If an administrator says, ‘This is the document I’ve got’, you’ve got to pay up, because, otherwise, you’re in High Court, and then that’s a quarter of a million pounds in legal fees.
“So, we had to pay back another £40,000 into that company. If I’d been attending the Dealmakers Academy, I would have saved myself a few pounds!
“That was my first deal. It was a merger which went horribly wrong.”
Mark’s cautionary tale shows what can happen if you don’t have the right team on board. Don’t be discouraged by what happened however because he has made many successful investments since then as he’ll reveal next time.
How to Strengthen Your Negotiating Position Part II
Over the years, Jonathan Jay, founder of the Dealmaker’s Academy, has learned skills that have been incredibly effective when negotiating the purchase of a business from its owner. Last time, we explored why you need an NDA.
Here are three things you need to know to improve your negotiating position.
What’s the pressure on the other side?
You need to know what pressure the other party is facing. If you don’t know by the time it gets to negotiating the deal then you haven’t asked enough questions in the early stages.
There is always a pressure on the other party. Always.
The pressure might be coming from a business partner or a life partner.
The pressure might be related to a health issue (either their own or someone close to them). The pressure could be one that they’ve invented to get the deal done quickly.
Some will say, “We’d like to do the deal by the end of the financial year.” You have to ask why it needs to be completed then. Perhaps they know they’re about to lose a big client and the business is going to be worth even less in six months’ time.
You need to find out the weakness in the other party’s position because you may be able to resolve it and then turn into a strength. Let’s say you’re considering buying a café bar, but then you discover there are only two years left on its property lease.
What’s the downside of buying a business that occupies leasehold premises?
What’s the weakness in the seller’s position? It’s that the lease might not be renewed.
If it’s not renewed, then essentially the business has only got two years left to run. That puts the owner in a very weak position. But when you as a buyer know that weakness, you can use it as leverage in your negotiations.
It doesn’t mean the expiring lease is an insurmountable problem.
All you’d have to do is approach the company that owns the property and say, “I’m thinking of buying this business, but I would need a new 10-year commercial lease.” If the property owner agrees to give you that new lease, then the value of the business immediately increases. If you want to flip that business and sell it on, you’ll be selling it with a shiny, brand new 10-year lease.
So, you may be able to resolve the weakness and turn it into a strength. Arranging a new lease for the café bar, for instance, would allow you to sell the business for more than you bought it for.
What’s At Stake?
Find out what is at stake for the seller, particularly if the deal doesn’t go through. What do they expect to happen?
Ask, “What will happen if you don’t find a buyer?” Sit back and listen to what they tell you.
They might say, “Well, I suppose we’d just close the business down.”
That just exposes the fact there’s no value in the business.
They might say, “If I don’t find a buyer, I suppose I’d have to keep on running it.”
Ask, “How would that make you feel? I thought you told me you were exhausted.”
“Well, yes I am. It’s not what I want to do…”
You have to find out what’s at stake. You can use what you find out in the negotiations.
Let’s say the negotiations have reached an impasse. You could say, “Look, we seem to have reached a bit of a sticking point. Our two lawyers seem to be knocking heads here. I think 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’ll have to carry on running the business. I know you don’t want to do that.
I’m trying to help you get out, but we need to reach an agreement today. Then we can 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 on something.
What Do You Have That The Buyer Wants?
What can you offer the buyer?
It’s not just about the money.
It could be something else.
It could be that they want the deal to be done quickly.
You could say, “If we buy your business, we’ll do it quickly.
We’re not one of these big corporations where we have to have a committee meeting before we make a decision.
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.
By comparison, we move fast.
If we buy your business, you could be sunning yourself in Barbados in six months’ time.”
Your USP is that you can do deals quickly.
Quite often large companies have a CEO-led growth strategy that’s centred around acquiring businesses.
But then the board changes and a new CEO is appointed who decides on a different strategy.
Suddenly, all acquisition deals are off.
To understand how big companies operate, I recommend you read ‘Barbarians at the Gate: The Fall of RJR Nabisco’ by investigative journalists, Bryan Burrough and John Helyar.
RJR Nabisco was a giant food and cigarette manufacturer.
The book describes the plan by Nabisco’s CEO F. Ross Johnson to buy out the rest of Nabisco’s shareholders during the 1980s.
At that time, it was the biggest buyout in corporate history.
There’s a great phrase in the book in which the buyers wonder if they can even do the deal because they’re not sure if there’s even enough available money in the world to do the buyout!
The book was later made into a film.
I recommend you read the book or watch the film because you will get a great insight into 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 to be part of the deal… we want this to be excluded.”
It will show you why you should highlight the fact you’re not a corporate buyer. Use it to your advantage with prospective sellers.
Let them know that you can make decisions quickly.
If you discover your seller has been let down in the past by a potential buyer, let them know that if the conditions are right, you will be able to take it to completion.
Say something like, “If we decide to do this deal, we’ll do it. We’re not going to mess anyone around. There’s not enough time to mess people around.”
Having said that you should always be in a position where you can walk away from any deal. If you start to feel as if you can’t walk away from a deal, then you’ve become emotionally involved. That will weaken your negotiating position.
The best way to ensure you can always walk away from any deal is to have more than one deal on the go.
Knowing that you will walk away from any deal strengthens your position.
The other side will never imagine you will walk if you don’t get what you want. You can say, “I think we’ve reached a bit of an impasse here. We’re not getting any further along.
If we can’t agree on this by the end of the day, I’m sorry, but I’ve got to move on.
I’ve got so many other deals, and I’ve spent enough time on this already.
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.”
I recommend you practise saying that paragraph aloud until it feels natural.
Don’t be afraid to use it during your negotiations.
Selling A Business For Millions
An Interview With Neville Wright
Neville Wright, who founded Kiddicare and later sold it in a £70 million deal, reveals more about how he grew the business and made it so appealing to buyers.
Could you give us a snapshot of where Kiddicare was to warrant that £70 million price tag? Where was it in terms of size/revenue/profit/number of staff/number of locations?
“We had one location. We’d been down the route before of having multiple locations and my wife and I didn’t like that. One of us would be in one shop, one would be in another, and I’d be going around sorting things out.
“We had, at the exit, 130 people working with us and the turnover was £40 million, but everything was geared up for “200 million. The pick and pack, the warehouse, the systems we had, were geared up to go from £40 million to £200 million, so there was plenty of upside for the buyer.”
Do you feel the fact that it was set up for growth created added value?
“People always say, ‘I’m going to leave the business until it’s at the top, then I’ll sell it’, but that’s not the time to sell it. The time to sell it is before it gets to that top, so there’s plenty in it for the buyer. People make the mistake of leaving pieces of the business out of the sale. They shouldn’t. They should give the buyer more opportunity than they initially thought they would be getting.”
What was the motivation for selling? Can you pinpoint a moment when you said to your wife, ‘This is the time to sell, I think we’re ready’?
“The motivation was this guy from Grant Thornton who rang me about five years beforehand to ask if I wanted to sell the business. He said, ‘I’ve got a buyer,’ and I didn’t want to sell because we were building a new shop and it was too exciting.
“You’ve got to be very, very careful when you say, ‘No’ to somebody because they’re not just going to walk away. They might buy a competitor and do you out of business. They might start up against you. There are lots of things. They’re not going to walk away.
“Three years before we sold, they were ringing about every three months, ‘Do you want to sell your business?’ I said, ‘No because it’s going really, really well and we’re now building the biggest retail nursery business in the UK.’ This was the next one we were building. We’d outgrown the other one in two years.
“He kept ringing, and I was very polite and kept saying, ‘No, we don’t want to sell.’
“One day, I was feeling ill and a bit down, which was so unusual. I should have been in bed. He rang and said, ‘How’s the family?
How’s the business going? Where are you going on holiday? What are you doing for Christmas?’
“I thought, ‘I’ve had enough of you. What a load of shit.’ What I said was, ‘Yes, I’m fine. Okay.’ He said, ‘Don’t forget I’ve got somebody who wants to buy your business.’ I thought, ‘I don’t want to hear from you again’ but I said, ‘Well, actually I’ve got a business for sale.’ There was a long silence on the other end of the phone. Finally, he said, ‘Am I hearing you right?’ and I replied,
‘Yes.’ I thought, ‘I have got a business for sale. This will shut him up, and I’ll never hear from him again.’
“He said, ‘I’ll come in tomorrow. We’ll do the paperwork.’
“He came in, and within just a few weeks he’d received 30 offers.
“It turns out he had been representing a specific buyer for those five years. That buyer didn’t get the company. I didn’t think the company would survive if we joined them because they were loading their own company up with debt. To pay us £70 million they would have had to have loaded their company up with debt, and I didn’t think it was right.”
So, you cared about the survival of the business beyond the sale?
“Oh, definitely. There were certain things we wanted for the business. We wanted it to be left independent. We wanted the name, if possible, to be left. We wanted the staff to have jobs. Another potential buyer had offered us nearly £9.5 million more, but we turned it down because that company just wanted to close the business. That would have meant the loss of 130 jobs. We also wanted the new owner to keep all the suppliers because there were a lot of small suppliers. That was our wish list, and the buyer said, ‘Yes, yes, yes, yes.’ That was after the sale.”
Was that a contractual agreement or it was done on an understanding?
“Well, it was done on an understanding, but they had a billion pounds in the bank, and we thought the chances are that they would honour that, which they did.”
The Questions To Ask A Seller
The first phone call you make to a seller is critical.
It provides you with the opportunity to establish rapport with the seller and to find out whether his or her business is worth pursuing.
The questions you ask are therefore enormously important.
Here are some more of the questions you should ask during that first phone call.
What Is The Trading Situation Right Now?
This is a very broad question.
It’s not something you should ask in the first few minutes.
I realise that ‘trading’ is a bit of an old-fashioned word and feels a little bit dated.
I use it because it’s quite a vague word.
It could mean any number of things to the seller.
They might reply with something like, “Well, it’s been a tough year.”
It’s unlikely that they will say, “Things are taking off like a rocket.”
How Many Staff Do You Have?
Ideally, you want a business in which there is some staff because it means there is some management in the business.
The management might be the office manager.
The office manager probably knows everything about everything and runs the business on a day-to-day basis.
Just because they don’t have the title ‘managing director’ is not a negative.
A managing director might do the same work as an office manager but is just on a higher salary.
If the seller says, “It’s a part-timer and me” it’s highly likely to be a business that provides the owner with a job.
The part-timer is likely to be the support/admin person.
It doesn’t mean you should rule it out if you’re using a strategy of absorbing other people’s clients and contracts into your business.
In fact, you’d be quite happy to see the owner exit; quite happy for the part-timer to come on board, even if it’s for a brief time, to assist with the integration.
But when you hear there is a staff of 30, you know that there’s a degree of management structure in there.
It’s unlikely one person is managing 30 employees.
The general management principle, as you’re probably aware, is that six or seven employees report to one person.
If the business employs 30 people, there could be a management team of five or six people, which is wonderful because you’ll be buying management.
If We Were To Come To An Arrangement What Would Your Ideal Timescale Be?
You don’t say, “If I was to buy your business…” or “If I was to give you money…” or “If you were to sell it to me…” You don’t use those phrases because they will make the business owner think it is a sales process.
You need to convince them it’s not a sales process.
Write down the reply.
If a business seller ever calls you and you don’t have a pen or laptop to hand, arrange to call them back.
You must maintain control of the situation.
The best way to do that is to call them back when they’re on the hop because you will get more honest answers that way.
They won’t have prepared their responses.
This is all about taking the psychological advantage.
Write down the answers to your questions because even though when you meet face to face you’ll probably ask the same questions again, you’re very likely to get different answers.
Let’s say that they’re reasonably savvy.
They’re not going to tell you that their timescale is urgent in that first phone call.
They’re going to say, “Oh, we’re in no hurry.”
When they’ve had a coffee with you, and they’ve got to know you a little bit better, then the truth will come out.
For example, the owner of a nursery school who I spoke with recently told me she was in no hurry to sell.
When we met for a chat over coffee, however, she admitted she wanted to do a deal by September.
That’s when the new academic year starts, and she wanted to retire before then.
Is The Business On The Market?
Now you might think if a seller is calling or contacting you directly, then the sale is not being handled by a broker.
But that might not be the case.
The seller might think the broker hasn’t performed and has simply decided to take matters into their own hands.
That tells you that you’re dealing with a motivated seller.
It’s like when you ask a homeowner, “How long has the property been on the market?” If the property’s been on the market for some time, you know that you’re dealing with a motivated seller.
So, asking if the business is on the market establishes if there’s a broker in the picture.
If there is, the seller should not be talking to you.
He or she will have a contract with the broker.
What’s more, the broker will want a slice of the action.
Of course, a broker will probably be quite pleased if you’re willing to do all the work for them and negotiate a deal because they will still get their slice of the action.
If there’s a broker on the scene, find out who it is then follow up with the question, “How successful have they been?” You know the answer to that: they haven’t been successful.
If they’d been successful, the business would have already sold.
Quite often, people will ask you whether you’ve heard of the broker who is handling the deal.
Always reply that you have never heard of that broker.
It could be a major player, but you must always say you’ve never heard of them.
That’s because you do not want to be drawn into saying anything negative and sounding competitive.
You don’t want to do that because word might get back to the broker and they’ll block you.
By claiming to have never heard of the broker, you will defuse what could be an antagonistic conversation.
How Much Profit Did The Company Make Last Year?
The chances are the seller won’t know the answer.
Or the seller might say something like “Well, at Companies House, it says this, but we did a lot of cash business too.” It’s admittance to tax fraud.
You don’t want to be party to a conversation like that!
It is, however, useful to know because the seller can only negotiate on filed accounts.
The seller can’t add into the equation the bit that never went in the till.
But let’s say that 20% of the turnover wasn’t declared.
It means that if you do buy the business and run it legitimately, you’ll get an automatic 20% uplift!
How Much Due Diligence is Required for a Deal?
An Interview With Our Accountancy Expert
Geoff, the accountancy expert who advises Jonathan Jay, the founder of the Dealmaker’s Academy on his deals, reveals what you need to know about due diligence.
“You need to know what you’re buying. There’s a Latin phrase, ‘Caveat emptor’, which means ‘Let the buyer beware.’ If you’re buying something, it’s up to you to find out what you’re buying. If you make a mistake, so be it.
“The due diligence is vital to see the assets and liabilities of the business. Even if it’s an asset sale, you need to find out what’s going on. You look at the debtors. You might say, ‘Fine, there’s £200,000 worth of debtors.’ Then you might see they’ve just raised invoices in the last month. They’re doing £10,000 a month, and suddenly they’ve done £180,000 in the last month. Those invoices may not be the most quality invoices. You need to check what you’re buying. The amount is required.
“Often with an acquisition, we’ll do what we call a ‘quick and dirty investigation’. I’ll go down or send someone on my team to go down, look at what’s in the filing cabinets. Look at the list. Check the assets.
“Then we compile a quick report of what’s there because often people have no idea. People make a representation, but that can’t be relied upon.
“Remember, you’re buying this. You may not be buying it with your own cash, but even if you’re raising finances, you’re going to have a personal guarantee on that finance. You’ve got to make sure that those assets exist and they’re sensible.
“You don’t need an accountant to do that. Anybody can do that. You do need to spend the time to check the fixed assets and the licences. Check any litigation because often there may be a pending claim on something. You’re not going to know that unless you ask the questions.”
So, you can protect yourself to a certain degree with warranties, but warranty claims can be a long, drawn-out process.
“Yes, and by that stage, you’ve spent money. The sellers will have disappeared. It’s a long, drawn-out process, and especially if you’re not paying very much for it or all they’re doing is using that money to repay back something, they won’t have any assets anyway. I wouldn’t solely rely on a warranty.”
Should buyers accept the seller’s assurances about how wonderful everything is?
“No. Years ago, one of my clients wanted to buy a garage door business. I went down with him to look at the company. What a set-up. It was great. It was a real piece of theatrical art. We’d wanted to see the owner at nine o’clock, but he said, ‘No, don’t come at nine o’clock. I don’t get in until 11.’
“We arrived and went into the owner’s office. His desk was completely clear. There was a TV with the racing on screen. He, meanwhile, was reading a newspaper.
“It was all staged to look as if everything was going so well that he didn’t have to do any work.
“My client said, ‘I want to buy this business.’
“I said, ‘Let’s see what’s there.’
“There were some things in there that I didn’t like, so I recommended my client didn’t buy it. He was furious with me because he wanted to buy it. Someone else bought it, and three months later, the company was in liquidation. There was nothing there. Was it a complete sham? Yes, it probably was.”
Some owners will make a big thing of telling you how they don’t need to visit the office very often. But should you check with the staff to find out what the real story is?
“Yes. Even before the meeting starts, chat with the receptionist. Ask questions like, ‘What’s going on? Does the phone ring a lot?
Is it busy? What’s your job like?’ It’s all part of your due diligence.
“The first part may take two or three days of seeing what’s in there. Sometimes you may need to get more information if it’s quite specialised. You might need to get a specialist valuer in on certain assets within the business, but you’ve got to know what you’re getting.
“I’m very sceptical about people’s assurances because ultimately, they’re trying to sell something. A company purchase is not like a house purchase in that respect. With a house, there’s usually a ready market. If a property is sold at £800 per square foot, you know that with some adjustments of décor, you can probably get that price. With companies, it’s all over the place.”
How Many UK Businesses Get Sold?
An Interview With Helen Moore
As Operations Manager for Business Data, the publisher of the ‘Business Sale Report’ which lists UK companies for sale, Helen Moore has a unique insight into the market. She knows how many UK companies are for sale at any one time and about sale success rates.
“It’s quite surprising that over half of UK business put up for sale don’t sell and businesses can often take well over a year to sell.
In some larger businesses, you can talk four to five years in some cases depending if they want to take them off the market and they might put it back on.
They might do a reshuffle as well.”
What does it mean when a business is taken off the market and then put up for sale again?
“It depends really. There are lots of different reasons.
When people get their businesses valued, sometimes they put a much higher figure on it than it’s perhaps worth and sometimes they’re not getting the offers they want.
So, they take it off, maybe do some more work on it, try and justify that value a little bit more, and put it back on to the market.
“If you’ve seen a business taken off the market and then get re-listed, it’s always worth talking to the seller about the motivation and why specifically they took it off and why they put it back on.”
So, in your estimation, 50 per cent of businesses advertised for sale don’t sell?
“Yes.”
Where is the opportunity for these people?
“One of the main reasons a business doesn’t sell is it’s valued incorrectly. Something you can do, especially if you’ve got financing in place or prior experience, is to go in and say, ‘I can offer you this’, and work out different ways of getting into that business.
What can you give them now that means they’re going to get out of this business? If they’ve decided to sell, they don’t want to run this business anymore!”
So, if someone’s decided to sell, have they mentally checked out of the business?
“Yes, 100 per cent and the business will be affected by that from the day they make that decision. They’re going to take a step back, work fewer hours. They might not be as on the ball as they once would have been.”
Does that mean the seller’s negotiating position diminishes because the business is not performing as well as it did before the decision to sell?
“Yes, and it will probably continue to diminish, not at a huge rate but it will go down the longer it stays on the market. The longer a business has been for sale, the more flexibility you have in coming in and negotiating offers and deals.”
Do you include the date the business was first posted for sale on your website?
“Yes, we always list the date it was first posted, and when it was last updated. Some brokers will update the businesses every two, three months; some won’t.”
If a business sells, do you ask the broker to remove the listing?
“Yes.”
If a business has been up for sale for a year and hasn’t sold, what would you say is the seller’s state of mind?
“They’ll be frustrated, especially when they’ve decided to sell. They thought it was the best time to sell the business and wanted to get the most from it. They want to get out.
“From a buyer’s perspective, the best thing you can do is go in and try to negotiate. The more rapport you can build with the seller, the better relationship, the more likely you are going to get an earn-out deal or something along those lines. The better the relationship, the more likely you are to get a deal that is preferential.”
How many businesses do you have listed at any one time?
“Normally about a thousand.”
How many of those have been on the market for more than a year, more than six months, more than three months?
“I’d say, from knowing our database well, about a third of businesses have been listed for a year or more.”
What a great opportunity! Three hundred or more businesses have been up for sale for more than a year.
“Definitely.”
So, their frustrated owners may have reached a point where they’ll do anything to exit?
“Yes, but, as I said, it’s about building that relationship. That’s especially the case if someone’s built the business from scratch because they are going to be quite emotionally involved in it. It’s their project, they’ve seen it grow, they want to make sure the person they’re selling it to cares and wants to see the business grow and isn’t just going to come in, strip the assets and get rid of the business. So, that relationship is important.”
What’s the motivation for selling a business?
“I’d say there are two main motivations. The first is financial. They think the business has hit its peak point where it’s ready to sell. The best time to sell a business is at the top of the curve, so when you’re doing well, and the business is growing, that’s your best time to get out as a seller. The second is to do with lifestyle. So, someone doesn’t want to work as hard as they have been or they’re retiring, or there might be personal other reasons why they’re ready to sell.
“In both those scenarios, they’re not going to want to wait around more than a year, 18 months to leave that business. For whatever reason, they’ve made the decision, and they’re ready to go.”
Why You Should Make a Site Visit to The Business You Want To Buy
Visiting the premises of the business you want to buy gives you the opportunity to see how things really are and to talk with the owner.
Paying a visit to the premises of the business you’re considering buying gives you the opportunity to see things for yourself and to learn more, but also to address the business owner’s anxieties about the sale.
The business owner will worry that you intend to:
- Make radical changes to the business that will affect the brand, customer service and its reputation.
- Asset strip the business.
- Make widespread layoffs.
Don’t make any promises.
Just state that you will try to do your very best for the business.
You can reassure the business owner by saying something like, ‘In time, I’ll want to put my stamp on things, but I don’t know what that is yet.’
You’re there to listen and observe and not to demonstrate how much cleverer you are than the business owner.
Don’t ask confrontational questions because you’ll make the owner feel defensive and bullied.
Be diplomatic.
- Instead of asking, ‘Why are you employing him?’ ask, ‘What is his role in the business?’.
- Rather than asking, ‘Why did you do that?’ ask, ‘What was the thinking behind that?’.
Keep quiet about how you intend to improve the business.
Why?
Because your prospective seller might decide to try making those improvements rather than selling the business.
When To Grab A Distressed Business
Sometimes you see a business for sale that is in a distressed situation and have to decide whether it’s worth buying.
Our resident experts reveal when a distressed business is an opportunity to grab with both hands.
An insolvency situation is almost always an opportunity.
You have a situation in which there is a core business that is valuable but, for lack of management or bad debt, it’s in a situation it just can’t reverse out of.
That leads to an insolvency practitioner managing the business and looking for someone to acquire it.
Now, there isn’t any real mystery about it.
We’re very keen as insolvency practitioners to offload businesses.
We don’t like trading them.
We transact as anybody else transacts, except we don’t give warranties or guarantees.
It’s very much sold as seen.
That’s why it’s very important when you’re trying to acquire a business from an insolvency practitioner that you have appropriate advice.
Companies facing insolvency are not valueless.
There will be assets within that company that someone in the industry will want to acquire.
Usually, the directors would be looking to acquire it back first, and we can talk about pre-packs and things like that.
If the insolvency practitioner is faced with having to realise assets by taking them to market, it is an excellent opportunity for people in the industry, particularly competitors who know something of the company going into administration.
The administrator isn’t going to give you any warranties.
He’s going to give you an information pack, but you make your own decisions.
If you’re in the industry already, you might know a little bit about the problems facing that company and the industry generally.
You will get a good deal, but you’re taking the risk that what you’re buying is what you think you’re buying.
Speed is of the essence when dealing with insolvency practitioners in this kind of acquisition.
We’re very costly regarding operating business, so offloading them very quickly is critical.
Cash is key.
We’re not particularly interested in deferred consideration.
If you offer that, it will tend to be something that puts you down the list regarding potential purchasers.
We will ascribe more value to cash offers because that gives us some certainty.
Regarding going back to the creditors of the target company, they’ve got certainty as to what they want, what they’re going to see, and that makes my reporting and my agreement to fees far easier.
The important thing is becoming aware of these opportunities.
There are approximately 1000 insolvency practices across the country.
How do you get into each of those?
Some websites provide access to those practices.
But other people will be looking at them too.
It’s why it’s important to develop contacts within the industry who can give you the heads up about potential opportunities.
How quickly will we want to sell a business?
It depends on the type of business it is.
I’m trading one now that I’ve had for some months, but, we’re looking at some weeks, if not a week.
It may be that there are competing bids and the approach to the insolvency practitioner is about showing how quickly you can move.
You want to push the insolvency practitioner, box him into a situation, then put a cash bid forward with a very strict timetable.
You need to be prepared to move quickly by making your offer with evidence of funding.
That’s when we’ll take you seriously.
If we’ve got to keep pushing for further information from you, then we won’t engage with you.
We need people who are serious.
It can be a turnoff if a business investor calls and says they’re interested in any sector.
It makes it less attractive from our perspective.
We do, for example, keep databases of people who are interested in specific industries, but you’re far more likely to have more interest from us if you are focussed on one or two types of industry.
It really is nailing down the IP and saying, “Look, I’m into this area” and pestering them.
I’m not suggesting phone every day, but a phone call every couple of weeks or every month certainly won’t hurt.
It keeps the relationship alive, and opportunities will arise that are appropriate. Then it’s about moving quickly.
BUY A BUSINESS – PART 4
In this part of the guide to successful acquisitions and mergers we’ll be looking at the following:
- Guidelines for raising finance in a hurry
- How to be taken seriously by brokers and sellers
- How to make LinkedIn work for you
- How to strengthen your negotiating position in deals
- How one business turnaround expert recovered from a disastrous merger and is now the owner of eight companies
- More questions to ask a seller in that crucial first conversation
- Terms every dealmaker needs to know
- What to do when you need to make staff redundant
- How experts can help you to become a successful dealmaker
- Guidelines for Raising Finance in a Hurry
Raising Finance
Our finance expert, Neil reveals some of the guidelines you will need to follow if you want to raise funding in a hurry.
Be honest about your financial situation
Integrity in finance is everything. That’s why you should tell a potential funder the truth about your financial situation from the outset. You can tell us one thing, but we’ll go and check it. If you’ve got a bit of a chequered history with your credit file, it’s not a problem, but if you say, “Oh no I’m perfect. I’ve got a 999 score”, and we discover that you have CCJs and you owe 20 grand to someone, we won’t be impressed. The lie will count against you.
Be open and honest, it makes this process smoother and a lot less painful for everyone.
Be Realistic With Your Timings
If you’re looking to raise money out of a business, start the conversation with a funder early on because what nobody wants to do is rush into a sizeable deal and make mistakes. An asset purchase can be fairly simple. If you’re just going to buy a car for yourself, you can pretty much apply online and have the car delivered to you the next day. It’s a very simple process. Funders know the asset, and they will have underwriting policies for individuals and small businesses. It’s a very simple process to go through.
Refinance can take time because funders want to value the equipment. So if it’s slightly unusual, it might take a little bit longer. If it’s a big asset list, it will take longer. If you know that all this work needs to be done in the background, give people warning. If you’re trying to get a deal done within a 48-hour period, no funder’s going to work with you because they won’t be rushed into making a mistake that could leave them with a liability.
Invoice finance and factoring need verification, and that takes time. If you want to buy something on a Friday, don’t tell us on Wednesday. Tell us, hopefully, a couple of weeks before to give us a chance to do the work. It just makes it a lot less painful for everyone. If it’s less painful, then you’ll probably get a better service from the sales guy that you’re dealing with because he’s going to down the path of least resistance.
Provide Plenty Of Information About The Business
If you say to us, “I’m buying a woodworking company. Can you help me?” we will be non-committal. The more information that you can give us, the quicker and easier the process is. There is information we need to be able to make a decision. What asset is involved?
What does it do? What make is it? What’s the model? How old is it? What’s the usage? Usage might be miles on a vehicle. If it’s a packaging machine, it might be the number of sacks it’s filled. It might be hours of usage for a forklift truck. We need to know this kind of detail to be able to do the valuation.
If you say to us “It’s a Toyota, 12-tonne forklift truck”, we’ll still need to know its make and year of manufacture. We’re not going to lend you any money on it because we can’t assess the risk. If you’re buying a business, it’ll be on the asset register, and the business owner should be able to tell you this fairly quickly, assuming the forklift truck does exist.
If it’s a piece of kit that’s being brought in, who’s the supplier? Is the supplier bona fide? If it’s a BMW main dealership, that’s fine.
If you’re buying an asset from another operator or another business, we need to know that because again it affects how we judge the lend. If we don’t know the supplier, we’re going to put a little addendum on there, like a little supply waiver to say that you’re buying it sold as seen so you can’t come back to us and say, ‘We bought a coach in good faith, and it doesn’t work.’
Be Honest About The Business Use
If you’re a coach operator and you’re buying a coach, it’s probably going to be used within your coach business. If you’re a little engineering company and you work out of a small industrial unit in the middle of Shropshire, why would you be spending £80,000 on a luxury motorhome to go to France?
If you want to use it for personal use, we need to know because it will exclude some funders from that market. You won’t be able to get that sort of deal. Other funders will need to know the business use and the rationale for it because essentially, you’re taking £80,000 out of the business. You’re putting stress on the cash flow. Will the business still prosper at the back end?
Provide A Landlord Waiver
A business might operate from a leasehold property. If something goes wrong with the deal, and things do go wrong as we know, we might need to go in and repossess that piece of kit. If it’s bolted to the ground, we need a landlord’s waiver that is going to let us go into the property and get that piece of kit.
So you need to be aware of what you’re buying as a business. Is it a freehold? Is it a leasehold? Who’s the freeholder and can we get a landlord’s waiver? That would be one of the conditions of the deal.
Understand The Company Structure
What’s the legal entity of the company? Is it a sole trader, LLP, limited company, or PLC? It’s basic stuff funders need to know. They will do searches on websites like Experian or Red Flag. You will not get finance without being searched yourself. Funders will always search for your home address because your business might be squeaky clean they want to know about your personal credit history too.
If they discover you have 15 or 16 CCJs for non-payment of your car finance or that you’re not paying your utility bills, that will affect how they look at you as a credit risk.
Be Aware Of Who Controls The Business
You need to know and to be able to tell a funder who controls the business. In terms of finance, the shareholder is who we will go to. Anybody with over 25% shareholding will be looked at.
If it’s over 51%, they’ll be looked at extra hard because they have significant control of the business, even if they don’t work in it on a daily or even monthly basis.
How to Be Taken Seriously By Brokers & Sellers
If you want to be considered a serious player by brokers and sellers, there are steps you need to take.
The first, as the Dealmaker’s Academy founder Jonathan Jay explains here, is to update your LinkedIn profile.
If you don’t have a LinkedIn profile, join LinkedIn today.
It’s free, and it will be a valuable resource for your dealmaking activities.
You might not want to change your LinkedIn profile completely because it features your existing business, but you can add something like ‘investing in businesses in the X, Y, Z sector’.
If you’re not sure which sector you’re interested in, you could instead say something like ‘investor in private businesses’.
Update your LinkedIn profile and start connecting with people who fall into your target market.
Let’s say you have an interest in businesses that specialise in marketing, PR, and advertising.
Search for those kinds of companies and connect with them.
Send a personalised message to the owner.
Say something like, “I’m interested in investing in this sector, so I thought I would get in touch. I hope that you will accept my LinkedIn request.”
It’s a very polite message.
You can copy and paste the same message to send to lots of business owners.
Be aware that not everyone will respond to an approach from a stranger.
Some people on LinkedIn seem to get upset when they receive a message from a stranger.
It’s a very odd attitude because the whole point of LinkedIn is to make connections with people.
If you only connect with people you already know it seems a bit pointless.
Hopefully, you won’t receive that kind of response!
At the same time as you are contacting your target businesses, start posting on your LinkedIn profile status update.
If you’re a member of any groups, post there too.
Say something like, “I’m interested in investing in or acquiring businesses in the [your chosen sector].”
The word ‘investing’ is a great word to use in this case because it has positive connotations.
People’s defences may go up a little bit if you use the word ‘buying’.
Then add, “Please PM me if you know who I should be talking with or if there is someone you think I should be talking with.”
The last time I did this I got 17 responses.
They were different businesses, and some were way outside of what I was interested in.
There were three quite chunky ones.
Now obviously the number of responses you receive will depend on how many contacts you have and the sectors they are involved with.
If you post about a very specific type of business, but you don’t have any contacts who own businesses in that sector, then you’re going to get a very low response rate.
But if you are connected to 1,000 owners of breweries and microbreweries in the UK, and you post about microbreweries, then there will be an obvious connection between your post and the people reading it.
Post something every single week.
You might not get many responses the first and second times you post, but it will probably increase after that.
That’s because people often need to see something several times before they respond.
It’s the reason why advertisements appear not once or twice but many times.
You could use the same wording on each post, or you could change the wording to see if that gets a better response.
You might want to drop the word ‘investing’ and use ‘acquire’ instead, for example.
The response you get will depend upon your market.
What will happen is that people will approach you after reading your posts or being passed your message by someone in their network.
Start engaging with them but remember you do not leave your living room or office. You have a phone conversation with them at a time that suits you.
If they call you, arrange a time to call them back. Don’t go and meet them for that first conversation.
Don’t discuss money during the first conversation.
Talk to them about their business.
Find out how the business was started and about their aspirations.
Say, “Out of curiosity, why did you contact me today?
What was it that made you send me that message last night?
What was it that prompted you to email me?”
How To Make LinkedIn Work For You
An Interview With Andy Gwynn
LinkedIn guru, Andy Gwynn discusses what content you should add to your profile and why.
There are two sides to using LinkedIn effectively. The first is your profile. It has to do three things: it has to get found, it has to give value to the reader, and it has to establish your credibility. We’re in the fastest time of our lives. Your buyers are in the digital age now. Your profile has to give value, and it has to prove your credibility.
I think that’s important if you’re going out to people saying, ‘Sell me your business.’
They’ll think, “Why should I? Who are you?”
The second part of the glue is your strategy: what do you do to go and find, connect in the right way and engage with your ideal contact? I say ‘contact’, but it could be clients, people wanting to sell their business, all sorts of other professionals as well.
There’s no point going out to engage with anyone if your profile is weak. You wouldn’t bowl up to a networking environment looking like you’d been dragged out of bed or hadn’t washed your hair and expect people to want to talk with you. A weak profile works the same way. So, you need to get the profile right.
Then start looking for people with whom you can connect. I can’t believe it when people say, “Oh, I only connect with people that I think I know.” That was the protocol from a decade back. If that’s your mindset now, you’re missing a massive opportunity.
LinkedIn is brilliant at helping you find people from surfing: you can see who has viewed your profile, who has endorsed you, who’s recommended you and who else you’re connected to. LinkedIn throws up suggestions for people you can connect with. It’s beautiful.
You need to position yourself as a professional business buyer. That’s why you need to think about your corporate logo banner at the top. Your photo needs to be corporate. A marketing manager I know, for instance, has a photo of him and someone else at his wedding. I don’t know which one of them is him. It’s too casual and confusing. I recommend you use a head and shoulder shot of you sitting against a plain background. You shouldn’t use a photo of you sitting outside your tent at Glastonbury with your wellies on as my accountant did. When I said to her, “Is that how your clients expect to see you?” she just fell through the floor.
You can use your photo on your email headers, on your website and your business cards.
Let people know the name you like to be known by. For instance, I like to be called ‘Andy’ not ‘Andrew’. The only person who uses
‘Andrew’ is my Mum and that’s only when she’s upset with me.
For me, the bit under your name is the single most important part of any marketing you do on LinkedIn. It’s called your headline.
Your headline needs to stand out and grab attention. It must say what you do. You could say something like, ‘Helping you sell your business smoothly’. Don’t worry if your headline is the same as someone else’s. I use big, thick black stars on my headline to help my headline stand out. I also use a couple of search terms such as ‘LinkedIn trainer keynote speaker’ in my headline.
Use LinkedIn to make contact with potential sellers and to establish rapport with them. If I’m going to see someone, I message them on LinkedIn and say, “Great to speak with you earlier. Looking forward to seeing you. By the way, here’s some information that might give you an idea as to how I’m best placed to buy your business. Look forward to seeing you on Wednesday.” By the time I walk through the door, we have established a level of rapport.
That’s so much better than walking through someone’s door as a stranger, spending the first half an hour trying to create rapport and then the second half, trying to persuade them to sell you their business.
Think about how you can use this in your business. When I coach my clients, I say, “Wear two hats. Think about where else you can apply this philosophy in the rest of your business.”
How To Strengthen Your Negotiating Position
Here are some more skills and tactics that will improve your negotiation position.
Research Your Target Company
Knowledge is power which is why you should ‘mystery shop’ your target company.
Call the business that you’re thinking of buying several times and get other people to phone them up too.
Phone at different times of the day.
Find out as much as you can about the business.
In most companies, there is a person who will tell complete strangers everything there is to know about the business.
You just have to find that person when you’re doing your research.
For instance, you could ask the person who answers the phone, “Are you guys busy at the moment?”
“Oh no, we’re pretty quiet. In fact, they made three people redundant last month.”
“Really?”
You may strike lucky and discover crucial information that an owner wouldn’t reveal.
So mystery shop and let the staff tell you the truth.
Find out about its problems such as poor cash flow, redundancies, trouble with suppliers, and so on.
Call some of their competitors and say, “I’m interested in buying some of your products/services.
I’ve been looking at several companies, and I came across this one on the internet, called [your target company’s name].
They seem to have some nice products. What do you know about them?”
It’s a great way of doing your due diligence with just a few phone calls.
You can pay people lots of money to do due diligence on your behalf.
If the deal’s big enough, you should be paying lots of money to do due diligence because it will be worth every penny.
You can, however, do a little bit of due diligence yourself just by making some phone calls to the company that you intend to acquire.
Make A Low Offer
Take a risk with a cheeky offer.
The worst that will happen is they will say no.
There is nothing worse than putting in an offer, and it being accepted immediately.
That’s when you know you could have gone lower.
My starting point in any negotiation is “I’m not going to pay anything.”
I start from zero and move up.
It’s a mindset thing.
Some brokers put a price next to the business on the website.
If you look in the Sunday Times and The Independent newspapers, you’ll see adverts from some of the large brokers.
There will be an advert featuring maybe 100 or 150 businesses for sale, all with prices.
It’s a terrible negotiating tactic because no one will ever get the asking price.
They will only get a number that’s under the asking price.
Often with retail premises and pubs and bars and shops, you’ll see a price on the website, and it will say, ‘Offers in the region of’ as if they’re properties up for sale rather than leased premises.
When Deals Go Wrong, Get Back Up II
An Interview With Mark Maciak
A disastrous business merger nearly cost Mark Maciak his home and livelihood but as he reveals here he recovered and less than two years later was the owner of a group of eight companies.
Did you lose face with that first deal?
“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 we were able to cross-sell a lot of our services to our partner’s customers.
“Our company had eight service lines behind it, and our partner who I’ll call Tony although it’s not his real name just had one, so we were able to generate more revenue from the existing customers. We were also able to get rid of a load of the costs like office space and things like that, so it was working.
“My partner Dave and I decided we needed to learn more, so we spent time studying. Then about 18 months ago I posted on LinkedIn saying that I was looking for a company to buy.
“One of our friends from the networking groups around the region, said, ‘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 blackmailed him for his biggest contract. It was why he’d lost heart in the whole thing. He just wanted out, but he didn’t know how to get out of the company. There was him, a finance guy and somebody who’d worked there from the start, who had 15% 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 threw it back to me in the meeting. I used it to buy a Sherbet Dip.
“We had looked at the company and found it had never made a profit. The previous year, it had turned over about £485,000.
They’d lost a big contract, which was nearly half of their turnover.
“When the former owner gave up on the company, it started to lose other customers because he wasn’t responding to them. 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.’ There were all these companies who owed the company money which had never been collected.
“I started digging into the suppliers with the financials and then started going after the customers who owed money, and they paid within a couple of weeks.
“So, after buying the company for £1, we straight away got £40,000 in the bank. The previous owner had never had money in the bank before. We had also gotten rid of the office space, and some of the staff so the costs were coming down, too.
“We then started looking at some of the suppliers and who was doing what. I also found this international supplier he had with free call numbers all around the world.
“The previous owner had used that for two years but didn’t know how to bill it, so he’d just never bothered invoicing his customers. 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’ worth.’
“They said, ‘Oh, yes, we wondered when we were going to get billed for that.’
“I went to one of my finance team and said, ‘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.
“The company cost me £1, but Dave and I walked out of there in the first quarter with £80,000 in our pockets. It had made a loss since it started – its previous year result was an £80,000 loss and six months after taking it on, it had a £45,000 profit.
“I thought, ‘This is really, really easy.’ We still have that company.”
Did you find that via a post on LinkedIn?
“Yes.”
Explain how you use LinkedIn to find deals.
“Just recently we closed on another IT services company. It’s only turning over about £130,000. It had a company owner and a couple of part-time employees.
“I had posted on LinkedIn that I was looking for more IT and telecoms companies to be able to purchase or merge and bring into the group.
“At the same time, I posted that I had a new role as the Director of this new company. As soon as you post a new job, LinkedIn bombards everybody in your network with the news. They immediately click on the post to see the details. Quite often people click on your other posts, which was what happened in this case. The views on my original post about looking for IT companies to buy or merge went up just over 3,000% in three days just from doing that.
“I had an enquiry from a recruitment consultant, for instance. The guy wanted to retire because he’s 71. I phoned him the next day, and I got his financials through and set up a meeting with him.”
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’ with sellers?
“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 and it’s feast or famine all the time for him.
“I said to him, ‘Look, I’m putting a group together. I’ve already got a massive base of existing customers who you can approach.
We’ve got about 1,000 customers, and many won’t have web services. Come on board, give me 50%. Here’s £1.’
“He’s on board. He’s going up into the main group. Hopefully, in the next couple of days, I’ll close on a PR company. I’ll approach them and say ‘Look, you’re doing this, there’s only a couple of you there, you’re struggling, and it’s always feast or famine. We’ve got these existing customers, we’re going to do this, and in return, we want 50% of the company.’”
So, you present it as a solution to their problem. You say they’re going to be better off with you than they are by themselves?
“Yes. I think one of the key things which really helps is how we approach the first conversations. I like to get to know people first.
I did timeshare, and if anybody’s ever been to a timeshare pitch, you know that it takes about two and a half to three hours. My longest was six. That’s just about rapport. Getting somebody to like you. When somebody gets to like you, they’re more willing to give you something.
“With the recruitment consultant, I 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. 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 to build rapport before I go and do anything else. Once we have rapport, then we can get into the financials and the nitty-gritty stuff.
“Most of the time that works. I was looking at a scaffolding and event structures company. It was looking promising, and the owner wanted to sell. It had a £2 million turnover.
“I had a meeting with him. He was a nice chap, and we got on well. We knew a lot of the same people in the area. Eventually, I asked him to show me around his business.
“He was like a peacock by then, strutting about and showing how fantastic his business is. We went into a second building next door, which I didn’t know about. It was where he stored all the steel. He had just under £2 million worth of steel stored there, and it wasn’t on his balance sheet.
“He had loads of other value hidden away in this company that he didn’t know about. That’s quite common by the way. Most businesses under £2 million are actually lifestyle businesses, and their owners quite often don’t know much about financials.
Most of them don’t even know how to put a P&L together or read a balance sheet and instead rely on their accountants.
“Later we sat down, and I asked him, ‘What sort of value do you put on your company?’ Bear in mind it had a £2 million turnover.
“He replied, ‘Oh, I’ve seen multiples between three and five, so I’ll be quite happy with [a multiple of] three if we did this.’
“’Oh, what is that, then?’
“’£6 million.’ He thought the multiple was applied to his turnover, not his profit! When I explained that to him, his face dropped a little bit.”
Now that is some turnaround story! It shows that buying and selling businesses really is an opportunity for anyone with the right frame of mind.
The Questions To Ask A Seller
Earlier on in the article, we looked at the questions you should ask a prospective seller during your first phone call. Here are the final questions that you should ask.
What’s The Cash Position Of The Business At The Moment?
You might not get an answer, but you would certainly be able to determine, are we at crunch point?
Do we have an issue here?
If the answer is not very good, then that implies a level of motivation to do something.
If they’re sitting with a lot of money in the bank, then you have a great negotiating point because you can use that money in the bank as part of the acquisition cash which means that they only pay a 10% Entrepreneur’s Relief on that cash.
The advantage to the seller is that they end up with more cash because they only pay 10% on it rather than taking it out as a dividend.
“What’s the cash position” gives you a sense of how urgent the situation is.
Are There Are Pressing Creditors?
You might want to soften this question by saying, “Let me ask you a question.
I know my accountant will want to ask you the same thing, so I want to get in first.
Are there any pressing creditors?”
The buyer might respond with something like, “Yes, there’s a VAT bill due in two weeks.”
You respond, “Okay, so based on what you’ve just said about the cash position of the business, is it going to be hard to pull that money together?” You don’t say, “You can’t pay it” which is a bit blunt and rude. Instead, you respond with, “Are you saying it’s going to be hard to pull that money together?”
What you’ll notice about these questions and statements is that they are designed to be non-confrontational.
You will still get the information you need but without making the seller feel defensive.
You don’t want them to feel judged and as if they’ve screwed up.
If the prospective seller says they might have trouble pulling the money together, you can respond by muttering almost under your breath, “Maybe I can help you with that.” It will seem almost like an afterthought.
So, they are the questions you should ask the first time you speak with a prospective seller.
One of the most important things to remember is that you shouldn’t agree to anything during that first conversation.
Be aware that sellers will try to put pressure on you.
They’ll ask, “What would you offer me?” I’ve had conversations in which sellers have said, “Look, I just want you to know that I won’t take a penny less than…”
How Do You Deal With Questions Or Statements About Money?
This is how I do it. I say, “Okay, I hear what you’re saying but my mother taught me never to discuss money on the phone.”
That will shut the money conversation down.
You shouldn’t be discussing money in that first conversation.
It’s something you should do during a face-to-face conversation further down the line.
Specialist Dealmaking Terms
Every dealmaker needs to know and understand some specialist terms and phrases, so let’s run through a few with our resident experts Michael and Mark.
What’s the definition of fair value?
“It’s something that you can support with a valuation from an independent valuer.
“Let’s say you are approached by someone who is in trouble and is looking to sell his business probably to raise money to pay debts or to get out.
You might also find that there is a secured creditor.
That secured creditor might be a large bank that isn’t necessarily going to agree to appoint the administrator that you, as the buyer, would like.
The secured creditor in a situation like this has to agree to the appointment of the administrator.
“You might think, ‘Well, I want to do this deal but the guy that I want to use as an administrator isn’t going to be approved by the bank so how am I going to do it?’
“What you can do is to a pre-appointment sale and sell the assets with an evaluation that can be backed up, so that when a liquidator is subsequently appointed, they can decide that the shouldn’t be challenged.”
Can You Define ‘Secured Creditors’?
“Generally, they are banks that will lend companies money subject to security.
The security will be in the form of fixed and floating charges.
A fixed charge is very much akin to a mortgage in that it tends to be over property or equipment that’s bolted down amongst other things.
A floating charge by comparison sort of sits over the company’s assets.
With a floating charge, a company can continue trading but keeps the security in place.
A floating charge holder, providing the charge is promptly constituted, can appoint administrators.
That is one of the methods by which I get appointed administrators.
You can either be appointed by the bank directors or creditors in broad terms.
“Now this security gives the charge holders first bite of the assets, and it means that we will realise the assets of the company largely for the benefit of the charge holders and any surplus, which there rarely is in those circumstances, would then go down to the normal creditors.
“It is a big consideration if you’re looking at acquiring a business.
You need to understand the secured creditor position and that information is available on Companies House.
In fact, it’s a requirement that it’s registered with Companies House.
“A secured creditor will affect your strategy if you’re looking to put something through a process to acquire it.”
Would you explain a winding-up petition and a validation order phase?
“There are several types of liquidation. A winding-up petition (WUP) is sent by HM Revenue & Customs or another creditor to the
Court after an insolvent company fails to repay a debt of more than £750 within 21 days of being issued a Claim (an official payment request served after a High Court judgment).
“The petition is filed with the Court and then served on the company, and at some point in the following four to eight weeks, there will be a Court hearing.
At that Court hearing, the company will probably go into liquidation.
“In the period between the presentation of the petition and the hearing, any transaction, disposing of assets, property, or money of the company can be clawed back by any subsequently appointed liquidator.
It stops a rogue director from offloading all the company’s assets.
“Nobody gets a petition knowing that he’s got four weeks to go. Anything that happens in that time can be unwound by yourself.
If you come across a company which has a petition and they’re in a desperate situation and want to sell the company maybe even to pay off the debt, that transaction can take place.
“You have to go to court and get what’s called a ‘validation order’, and you have to prove to a judge that what you’re going to do will be in the best interest of the creditor, so you’re buying it at a price which could be justified.
“It’s worth noting that if someone approaches you and you find during your due diligence there’s a winding-up petition, then you need to deal with that petition.
If the amount involved is too great the easiest way to do it is by way of validation order.”
Does the validation order need to go through a lawyer?
“Yes, you need to see a judge, so I would recommend you get independent advice.”
What To Do When You Need To Make Staff Redundant
An Interview With Our HR Expert
At some point in your dealmaking career, you’ll buy a company that is overstaffed or which has a large population of underperforming employees. Kelly, the HR expert Jonathan Jay uses for many of his acquisitions, explains how to deal with redundancies.
How did you become involved in HR management?
“I’ve been in HR management in some way, shape, or form since 2001, for my sins. I didn’t plan on going into HR; I fell into it. It was called ‘Personnel’ back then. I worked in organisations that were involved in construction or engineering.
“One of my first jobs was TUPE and a redundancy process within gas utilities. TUPE is Transfer Undertaken for Protection of Employment, 2006, and it was amended in 2014. The whole idea is if there is a transfer of an economic entity and there’s people employed, their terms and conditions transfer with that entity. It’s about protecting their terms and conditions and their employment. However, it’s not always protected, if we’ve got an ETO reason not to protect it.”
“I was sent on a one-day TUPE course, and it was assumed I was an expert after that. Off I was sent to deal with 120 people coming in and 50 going out at the same time. I thought it was just holidays and sickness when I first fell into HR but very quickly learnt that it wasn’t.
“Five years ago, I became a consultant and moved away from the large global and national organisations that I was working for. I felt I could work for smaller businesses because they have the same liabilities, potential consequences and challenges as the large organisations, but don’t necessarily have the budget to be able to employ somebody to manage that for them. Now I help people like Jonathan to help their businesses to grow. Usually, the biggest asset is their people. Sometimes they can be their hardest asset to manage. It’s about helping them to grow their business through their people.”
Sometimes that involves getting rid of some people along the way as well?
“Absolutely, yes. You know you’ve got to do that for the sake of the business if the business isn’t turning a profit, or it’s not where it needs to be, or it’s changing direction. There are lots of reasons why you have to remove people from the business.”
Talk us through the process we’d need to follow if we bought a business that is overstaffed, or where some staff aren’t performing, or in which their roles are about to become redundant because we already have similar people in another business that we own.
“There’s a redundancy process, and there are statutory rules that you have to follow. It does depend on the number of staff that are in the company and the number that you’re potentially going to be removing. You’ve got a minimum period of how long you must take to implement the process.
“You will have done your due diligence before buying the organisation and looked at the employee liability information. That is, what salary are they on? How long have they been there? What pensions do they get? What benefits do they receive? You would do your calculations beforehand to understand what it will cost you to either retain these people or exit them.
“If you have to exit more than 20 people from the business then you have to do a 90-day consultation period. If it’s less than 20, then there’s no minimum period. That’s a key point.”
The consultation can be one day if there are less than 20 people?
“Yes, if you’ve got an ETO (Economic or Technical or Organisational) reason as to why you’re doing this, which you will have, particularly if there’s a financial situation and you have to make these changes very quickly then you could have the process completed very quickly.”
How many days do you need to make it look right?
“I would say a week minimum.”
You take over the business on a Monday morning, and by Friday, people can be going out the door?
“Potentially, because where there’s a TUPE situation, and you know that there will be redundancies. The redundancy can’t be because of the TUPE, just as a side quote. It has to be an ECO reason.”
If we’re buying assets, TUPE still applies, doesn’t it?
“Yes.”
Even if you buy the assets of the business and there are a dozen staff, those employees are transferred with the assets?
“Yes. Also, if you’ve applied for a contract to provide a particular service within an organisation, then, if you’re taking that service from another company then their staff and their terms and conditions will transfer to you.”
BUY A BUSINESS – PART 5
In this final section we’ll be learning about the following areas of how to buy a business:
- Where one serial business turnaround expert sources new deals
- How to be taken seriously by brokers and sellers
- Why one investor decided to use a broker for the sale of his business
- What you need to know about TUPE
- How to prepare for the sale of your business
- How to fund redundancies even if the pot is empty
- How to make LinkedIn work for you
- Raising finance case studies
- How our experts can help you to become a successful dealmaker
When Deals Go Wrong, Get Back Up III
An Interview With Mark Maciak
Mark Maciak, a serial investor and business turnaround expert, reveals how he and his business partner Dave source their deals.
Where do you find new target companies?
“I’ve got a few places. LinkedIn’s always very good. Dave, my business partner, and I constantly post on there. We do some on Twitter as well because other people share our Tweets. We explain what sort of companies we’re looking for.
“I think we have six companies that have come to us as a direct result of posts that Dave and I have published in the past two weeks. Five of them are IT, or telecoms-based companies, and one is a recruitment company.
“I’ve just been having a CRM module written into Microsoft Dynamics so that we can start proactively looking for companies. We’re looking for certain points in companies. We’ll look at their financials, at the directors, and what other companies they’re linked to as well. We are starting to record all this information, as well as the directors of the companies and their ages into the CRM app.
“One of the reasons we record their age is that when they get quite old and start thinking of retirement, we can hit them with, ‘You can retire now.’
“I’m going to meet with a 71-year-old guy who owns a recruitment business, and I will say to him, ‘Rather than getting a little pot of cash which you’re going to burn through, why don’t I just give you some money each month?’”
That’s a nice way of phrasing it. You’re helping sellers by offering them a retirement plan.
“They will receive some of the value in the company. They can maintain some relationships with their customers even when they’re sitting on a beach. You can do that anywhere these days. We can keep them around if we ever need them, but they will no longer be shareholders. We have an agreement that says, ‘We’re going to pay you some money until this point in time.’”
Knowing what you know now, with the last year and a half of experience, what would you have done differently right from the start?
“I would have been on your course, which I’m sure you love to hear!”
Naturally! Apart from that, what else would you do differently?
“I’m constantly learning anyway. I’ve been reading Richard Branson’s book, and I found out he suffered the same things I suffered as a business owner. It was feast and famine for him, quite often, although his scale and his aspirations were a lot bigger because his starting point was different.
“My life was very working class. My idea of a good wage, at the time, was £20,000 a year. So at 18, when I was running one of the largest kitchens in Milton Keynes and earning £25,000 a year, I was in the nightclubs and drinking champagne all the time, living the life. That’s my level, that’s the way I think.
“Richard Branson went to school just around the corner from me in Stowe [an independent school where the term fees are about £11,000]. A lot of the guys from my local rugby club went to Stowe as well and their aspirations and the way they perceive things are much higher than mine. Instead of talking about tens of thousands of pounds, they talk about millions of pounds. They think on a much bigger scale. It’s that which inspired me to start looking at Maplin, the electronics retailer, which is in administration.
“I’d been taking a very close look at Maplin. It has a turnover of £250 million. I was looking at that and thinking of making a cheeky bid for £1. Its assets, once they were liquidated would be worth about £9 million. I thought ‘Right, I can do this and if I put in a bid in with the administrators for £9 million, they should go for it.’
“Maplin had 126 stores around the UK, but when I looked more closely, they were too far gone. The leases had been given up, especially the core sites. All the really good sites had already gone so that I would have been left with the bad stuff. It’s the stores which drive the online business as well, so it probably just wasn’t worth it in the end.”
“The Maplin idea came about because I’ve changed my mindset about the scale of these things. I no longer think of flipping companies for a few hundred thousand quickly. I’m now more interested in being able to float these.
“If you own a company, it’s not really liquidity. It’s only liquidity when it goes on the stock market, and that’s when people start getting interested in it. So, I know that I can then go to the massive investment banks and if I need cash for anything, I can say,
‘Look I’ve got these shares here, and I’ll put that up in security’, and they’ll lend me multiple times of the value of my shares, so I can then go on and do multi-million-pound deals. That’s my goal. I will flip a few.”
So, you could have been thinking bigger right from the start?
“Yes. Our core business Infologic has been quite key to be able to do all of the things we’ve done because we’ve got an office, we’ve got staff, and we’ve got something we can move roles in.
“I used to do global rollouts for EDS, the big IT outsourcer, so when we won the BP contract, I was in charge of IT rollouts over the 10-year contract which was worth £2.5 billion, so I’m used to big numbers. They don’t scare me.
“I’m used to being able to try to resolve tricky situations, like shipping equipment into Angola and places where you’re not supposed to.”
If you were to give one piece of advice, based upon your experience, what would it be?
“Just do it. One night about 14 years ago, not long after we’d set the company up, I was driving home. It was after midnight, and I was exhausted. I’d been slogging my guts out trying to get everything sorted. As I was driving up the A5, a sheep ran out in front of me, and I swerved to avoid it, and the rear wheel of my car clipped the island in the middle of the road and then went sideways before barrel-rolling down the road. The car flipped up onto its nose and rolled down then burst into flames with me inside it.
“I died twice and was in a coma for six weeks. They said I probably wouldn’t be able to walk again or to use my hands. I was on a 100% respirator and had kidney and pancreas failure. It’s fair to say I’ve been on both sides of death’s door.
“That’s why I say, ‘Life’s too short, so you’ve just got to go out there and do it.’ I’m always thinking of what I need to do next. I don’t stop.”
How to Be Taken Seriously by Brokers and Sellers II
If you want to be considered a serious player by brokers and sellers, there are steps you need to take.
So says Jonathan Jay, the founder of the Dealmaker’s Academy.
Here he reveals three more steps you must take.
Compile a target list
Put together a list of at least 100 companies that fall into your target market.
We did this when we were looking to sell a digital marketing business, and my receptionist used Google to find web design or digital marketing businesses. She found about 1000 of them.
You can do it yourself or delegate/outsource the task to someone else.
You need more than an email address. You need physical addresses because you will be sending each of the 100 business owners what we call a ‘seller’s letter’.
This is a prospecting letter.
Done right, they can be remarkably effective at getting business owners to pick up the phone and call to say they have an interest in selling their business.
Once you’ve compiled your list, created the letters and placed them in envelopes, send them off.
The response you receive will vary.
One of our Mastermind Programme delegates received a 9% response rate.
You might receive a 3% or 4% response rate.
Three or four people will contact you to say, “Yes, I’d like to have a conversation with you about selling my business.” One or two of those will be of interest to you.
You can arrange to call those people.
The ones you’re not interested in you can share with other dealmakers on our LinkedIn group.
Although they might not fall into your target category, they might be perfect for someone else.
Get New Business Cards
Go to a printing company like Vistaprint.com or moo.com and order your dealmaker business cards.
These two, in particular, are cheap, and you don’t need to use a graphic designer.
You fill in the form on a website, and, two or three days later, a box of business cards will appear on your doorstep.
There is no reason not to have business cards.
Everywhere I go, I talk to people. I tell them, “I invest in businesses where maybe the owner wants to exit their business but doesn’t know how to do it.
Maybe they’ve become tired and frustrated with their business.
By the way, let me give you a card, because, if you come across anyone like that, would you give them my card?”
When I do this at a networking event, the person I’m speaking with will often say, “I’ll pass that on to someone I know who I think will be interested” and then put my business card in a pocket.
You need to give people something with your contact details.
It’s not good enough to tell them, “Oh, you’ll find me on LinkedIn.”
The chances are, they will have forgotten your name by the end of the networking event so your opportunity to connect with a potential seller will have been lost.
Do ask the people you meet for their business cards too.
If you don’t hear anything from them after a week, get back in touch.
Contact Six Brokers
If you know the sector you are interested in, contact six business brokers and ask them to let you know when any businesses in that sector come up for sale.
Don’t say, “I’m interested in any business” because you won’t be taken seriously.
You could instead say, “I’m looking for businesses of a certain size in the [your target] sector.”
If you only want companies that located in a specific geographic area let them know.
They will probably ask, “Do you have proof of funds?”
When I’m asked that question, I reply, “Well, it’s a bit hard to do that without knowing what sort of business we’re looking at, but, if the numbers stack up, then funds are always available.”
Where do you find business brokers?
Google businesses for sale, or business brokers. Register with six of them. This will help you to create a deal flow.
After I sold my digital marketing business, I forgot to remove my details from the brokers I’d signed up with.
I kept being sent details of other digital marketing agencies and so I just forwarded them to the company that had bought my company and said, “If you’re still acquisitive, here are some opportunities for you.”
Why One Dealmaker Chose to Sell Through a Broker
An Interview With Paul Green
Paul Green left a career in PR and journalism and turned to business investment. He explains why he decided to work with a broker for his first business sale, and what that relationship involved. Tell us about your background.
“I started my life as a journalist and newspaper reporter and went into radio, and I did that for 10 years.
At the age of 29, I quit my £40,000-a-year job and started a bedroom-based business.
It was awesome for two years until I remembered holidays, time off, time with my wife, all that kind of stuff.
“I think it was about three years in when I met you, Jonathan. I would describe myself at the time as a ‘business owner stuck in mediocrity’. I’m sure there’s a parallel universe somewhere where that version of me is probably still sitting at a desk waiting for a stroke or a heart attack to take him out of that life.
“Jonathan helped to re-programme my brain into what was important, things like holidays, time off, systemising your business, all of that kind of stuff.
“We ended up dumping the PR agency, which I wasn’t very good at and went down the route of becoming a specialist marketing agency. Through a process of elimination and opportunities and meeting some of the right people, I ended up with a business that was delivering specialist marketing and growth consulting to opticians, vets, and dentists. Those three sectors are very linked. They do different things to different species, but they’re all essentially the same business when you think about it.
“We started off in optics which is a terrible, terrible market to work with. The people themselves are lovely, but the market has been disseminated by Specsavers.” That company has 1750 stores across 10 countries and is run as a joint venture.
“It’s one of the best marketing companies in the world. Specsavers’ billionaire owners, Dame Mary and Doug Perkins, deserve all the rewards because the company is tremendous at marketing and sales and owning their own supply chain.
“So the money ran out of optics, and we followed that money into veterinary. Veterinary is a very, very exciting market. We made a lot of money in veterinary and then followed that into dentistry.
“We sold that company on March 24, 2016, at about 10:50 in the morning. It was the day before Good Friday. Jonathan had said to me a few months before, ‘You never forget your first sale.’ I remember sitting on the sofa and getting the texts from my solicitor saying, ‘Thank God, it’s all done. The money will be in your bank on Tuesday morning,’ because it was the bank holiday.
“My wife and I celebrated with a special bottle of Prosecco that we’d been saving up. We didn’t quite want to go down the champagne route. I was so exhausted when it went through, but I woke up the next morning and felt that an enormous weight had lifted off my shoulders.
“It was the effort of building the business, getting it systemised, and ensuring we had a good net profit, and great cash flow and all the things that a buyer wants then finding a buyer.
“I don’t think I’ll feel that pressure when I sell the next business.”
How did you find a buyer?
“I decided to sell it a year before, almost a year to the day before it sold. I’d been to a seminar held by BCMS business brokers about two years before that. They’re pretty good at marketing.
“I rang up and said, ‘Hi, I want to sell my business.’ The person on the other end said, ‘Hang on, we’ll put you straight through!’
“I was on the phone to one of the partners within seconds! He asked me some basic pre-qualifying questions, turnover, EBITDA although I didn’t really understand the acronym of EBITDA at the time and then he put me through to the appropriate person.
We arranged a meeting, and he told me their fee up front as well. I think that was the final qualifying question, is, ‘You do know you’re going to have to give us X thousand to get you started, don’t you?’”
How Much Was That?
“Well, I did a deal with them because they had a new division selling what they call ‘light’. They initially quoted £45,000 as the upfront fee plus a success fee on top of that, which was a little out of my range. That would have been pretty much half a month’s turnover, which was too much.
“I said, ‘Look, I’m not that client, perhaps I should go elsewhere?’ At which point the guy said, ‘Well, hang on, we have just launched a new division’ which they called ‘light’. It has a new name now. It was for what they classed as smaller businesses. I think the fee was around £10,000.
“We signed the paperwork and did all the interviewing. The thing with BCMS and there are other brokers like this, is they don’t publicly put the business up for sale. That has a massive advantage because your competitors don’t know you’re up for sale, and neither do your staff. At this point, the business was running really well. I’d got a fantastic work-life balance; it was highly systemised, everything was ticking along well. The key staff were all locked in.
“I’d told two of my team we’d be putting the company up for sale, but no one else knew. I wanted to keep it like that. My accountant at the time, said to me, ‘If you put this up for sale, you’re going to see it in Dalton’s Weekly, next week, aren’t you?’
“BCMS essentially just did the basic thing of saying, ‘Who would buy a business like this? Who could do something with this business that I couldn’t if I continued as the owner?’
“We did a three or four-hour brainstorming session. We looked at all the companies that did the kind of thing that I did, so marketing companies, general companies, or companies that marketed within those three niches.
“They then looked sideways and said, ‘What about big accountancy firms? Or, big consulting firms? Who wants access to the audience you’ve got?’ One of the assets I had to sell was a database of 12,000 practice owners. They were vets, dentists and opticians who’d all opted into our marketing. It was all GDPR compliant before GDPR was even agreed. We decided that, apart from the cash that was generated by the business, the database was one of the assets of that business.
“We started to think sideways about who would want access to that market? What could they sell to that market that I couldn’t? We ended up with thousands of companies. BCMS went into their database. They would say, for example, ‘An accountancy business turning over more than £2 million’ and up would come a thousand of those, and they would target them. There were the marketing businesses. Then, they’d look within our sector.
“They wrote to all of our competitors apart from a few idiots that I didn’t want them to talk to. They built a sales funnel for the selling of the business and sent out a whole series of letters. They followed those up with phone calls. They started with this big bunch of people and narrowed the funnel down.
“I did about 12 introductory meetings. Some of them were fishing trips. You knew when they were fishing trips because everyone was very keen and asking lots of questions and writing everything down. I remember the first meeting with the company that went on to buy it and the owner was almost disinterested. Halfway through the meeting, he looked at his phone and put it down.
“BCMS can get away with charging £45,000 or £10,000 or whatever they charge now because they do a lot of research. It’s a big marketing exercise to reach out to a whole bunch of people and say, ‘We’ve got this company, do you want to sign the NDA? Do you want the full information memorandum?’ Then, they work it down to a series of meetings.
“Off the back of those meetings we had three offers, two of which were not right, because they would have involved me going to work for someone. Those of you who are business owners will know the worst thing that could happen to you is not death, it’s having to get a job. The thought of having to work for someone for two years was off the cards. Then, we got down to the offer that we accepted.”
What You Need to Know About TUPE
An Interview With Our Resident HR Expert
Kelly, Jonathan Jay’s HR specialist, reveals what you need to know about TUPE. It’s designed to protect employees’ terms and conditions when a business or undertaking or part of one is transferred to a new employer. TUPE itself is an acronym for ’Transfer of Undertakings (Protection of Employment) Regulations 1981’.
People tell me that they’re very scared of the whole TUPE process. Should they be?
“They shouldn’t be scared of it, no because actually, it can be very helpful. But there are things you need to be aware of with TUPE before you even put in a bid to purchase a company or a contract.
“You’ve got the employee costs that quite often are not really considered before – or at the point of purchase. You wouldn’t know that without TUPE. The transferrer, the outgoing company, must provide you with that information. It’s very useful from that point and to be able to furnish yourself with some information. You can plan, also, for what you’re going to do with that organisation once it’s joined your group. Or, if it’s your first purchase, it helps you to plan.
“If you are buying a company that you need to shrink, then it’s a whole other programme that you’ve got to embark on to get it to where you need it to be.
“The key for TUPE is not to be scared but be prepared for it. It’s getting your facts straight, it’s getting your numbers in line and just being organised with it.”
What if a member of staff has a benefit that’s not in their employment contract? Maybe it was verbally agreed between the staff member and the owner, but there’s no written evidence of it. What’s your position as the new owner in that case?
“It still stands; even if it’s verbal, it’s a contract. So, therefore, it’s part of their terms and conditions. You’d have to look at each one on a case-by-case basis.”
Can there be a warranty to protect against situations like that occurring? Can you do anything to ensure the employment contracts supplied in the schedule are current?
“Yes, because it’s an obligation on the outgoing owner to provide that information. So absolutely, yes.”
Let’s look at the upside of this; if they haven’t provided you with the fact that John Smith has been with the company for 12 years… In fact, even though the employment contract says he earns £15,000, is now on £35,000, and your due diligence hasn’t checked payroll, and you didn’t know this. Then you could make a claim? Could you have a right of offset under the warranties?
“Potentially, yes.”
So, therefore, the next two deferred consideration payments aren’t made, because you’re offsetting the additional costs that you have now incurred; because they didn’t disclose fully to you against the payments that you’ve been making to them for the company?
“Potentially, yes. If you get all of that sorted out beforehand.”
So again, this is de-risking the transaction.
“There’s also another point on that. Sometimes if you’re purchasing a part of a large organisation, and you make them aware that there could potentially be some redundancies they will sometimes contribute to that cost as well. I’ve had that within the gas industry, where they finance the redundancies.”
When we sold one company, we agreed on a split of the redundancy costs to sweeten the deal.
“Yes.”
So, at what point should someone bring you into the conversation?
“As soon as you’re looking at a particular organisation and you’re in talks, I would say get somebody in to start looking at the due diligence on the employee liability side.”
I don’t want to tie you down to a specific figure; but what are we talking about here? Are we talking hundreds or thousands for someone looking at the employee liability situation?“
It depends on the size of the organisation that you’re purchasing or the part that you’re purchasing, really; because it does depend on the amount of time that’s going to be spent.”
Let’s say it’s an SME with a dozen employees, and the buyer needs someone to look over the contracts, look at the liability, and to give an estimate of what it would cost to get rid of people.
“You’re probably looking at £1200 to £1500 to do all of that.”
How would you have a conversation with members of staff about the fact that they were about to lose their job?
“You initially send a notification to people to say, ‘Right, okay, this is what’s happening,’ and invite everybody in for a meeting.
Then you explain what’s potentially going to happen, what the process is and what the timelines are.
“It’s easier to do it by letter first and then bring everybody in so it’s not a shock. If they come into a room and it’s a shock: that’s when everybody goes quiet; everybody just walks out of the room, and they go away and have their own private conversations.
They don’t talk to you, and they don’t ask you questions.
“If you inform them before they come in, then it’s a bit tougher for the person standing at the front telling them what’s going on; because you’ll get lots of questions. But the outcome is that the employees feel informed. A huge part of TUPE, for example, and redundancies is information and consultation. That’s a big obligation on the employer’s side, in that you must inform them, and you have to consult with them. So, where possible, tell them as much as you can and answer as many questions as you can.
“If there are questions to which you don’t know the answers then be honest. Say, ‘We haven’t got to that point yet, but as soon as we know more, we’ll let you know.’ If we have just a week, it’s slightly different, and the conversations go slightly differently. If you have a 90-day period because you’re exiting 20 people, then you’ve plenty of time to be furnishing people.”
What if I did 19 people now; how long have I got to wait before I do it?
“Six months.”
I’ve got to wait six months?
“Yes.”
So, in fact, you’re better off doing the whole lot in one go and cutting deep but cutting once?
“Yes. From a business perspective, yes.”
Let’s say we buy a business and know we need to shed some staff. What is the fastest, most cost-effective way of doing this with zero comeback? We offered people a voluntary redundancy, didn’t we? There’s always someone who’s going for a job interview or looking at the job ads. Is that a good way of doing it?
“First of all, you’ve got natural wastage; if people want to leave, let them go and don’t replace. As soon as there are rumblings that somebody else is taking over, there will be people who will leave because they don’t like change. Let them go.
“There’s always going to be a cost unless there are employees who have completed less than two years’ service in which case, they’re not entitled to redundancy payment. There’s still notice pay associated with that. With voluntary redundancy, there’s no comeback because you’re asking people to volunteer. You may enhance their redundancy a little bit. You don’t have to, but you may enhance it to make the idea of leaving more attractive.”
Are you saying that you should encourage people to accept voluntary redundancy, and make that feel a more attractive option for them? Because if they’re going to be made redundant anyway, they might as well go voluntarily?
“Yes.”
Like an extra £100 or something?
“You could do whatever you want. Some people will try to negotiate with you, but we work out a maximum amount that we would be willing to pay then negotiate. Quite often, if you say, ‘We’ll give you an extra two weeks’ money’ people will bite your arm off for that because they’re not going to have to pay tax on that. That’s tax-free.
It’s a good selling point: it’s tax-free. So anything up to £30,000 is tax-free, isn’t it, in a redundancy?
“Yes. So that’s the redundancy payment. Notice pay is taxable as per their usual salary, but the redundancy is tax-free. It can be quite attractive, because suddenly, that two weeks turns into three and a half, four weeks’ money.”
And they can walk out the door immediately if they sign a piece of paper saying they accept a voluntary redundancy package?
“Yes.”
Do you have that piece of paper ready to go?
“Yes. You get employees to apply. You say, ‘We’re opening up the door for voluntary redundancy. Please let us know if you would like to be considered’. You don’t have to accept all the applications. For example, one of your best members of staff might apply, and you won’t want them to leave.”
If they want to go, then you can’t persuade them to stay.
“There are ways and means.”
Well, yes; but I think that if someone wants to go even if you offer them a £5,000 pay rise, they’re like the seller of a business in that they’ve already mentally left the building.
“They’ve gone, yes.”
I don’t think you even want that person hanging around.
“Well, you’d make that decision. So, if somebody says, ‘I want to go,’ you’ll say, ‘Yes’ or ‘No’. If you say, ‘No;’ what will that do to the person who had his eyes on the prize and was going to go and live in Spain for the rest of his life. You’ve just shattered his dreams.”
So if you offer voluntary redundancy and then decide some of the employees can’t have it, you’ve created a negative atmosphere.
“It happens. I’m sure everybody’s heard of situations particularly in the public sector of people being declined and end up having to work there for the next 10 years until the next round of redundancy comes up.”
How To Fund Redundancies When The Pot Is Empty
An Interview With Our HR Specialist Kelly
Where do you find the funds to pay redundancies at your target company? HR specialist Kelly reveals the answer to Jonathan Jay, founder of the Dealmaker’s Academy, and explains what to do when your target business doesn’t have sufficient funds to finance the redundancy payments.
The question I get asked a lot is, where do you find the money to pay redundancies? The glib answer is, “Well, you don’t have to find the money because the money’s there anyway because you’re paying them regardless. They’re on the payroll.” When we were in this position, we said to every single person, “We don’t have the money to give it to you today. We’re going to pay it to you every month for the next three months as if you were working here. The advantage to you is you don’t have to work here.” No one created an issue, did they?
“No, there weren’t any issues. Again, it’s communicating and being fair. I think in the end people realised this is going to happen regardless and actually I’m getting quite a good deal out of this so let’s go with it.”
Now there are staff that are on PAYE standard employment contracts, and then there are staff who are on different types of contracts like service agreements. Is there a difference legally when it comes to redundancies?
“Generally not, no. You’ve got your statutory redundancy rules which apply to everybody on a contract. Now a service agreement may have wording in it, so we’d have to check that out, and it could be that there are particular exit arrangements already agreed as part of the terms. There’s a golden handshake or something to exit, but we’d have a look at that.”
If someone has a grievance and feels that this is going to protect them in some way, what happens then?
“All through the process, you’re confirming what’s happened and telling people they have the right to appeal, Some people see that as an instruction and will appeal. So you’ve got your grievance process, and you have to hear their grievance or their appeal, whichever the route that they’re going down. Just going back to TUPE, people have the right to refuse to transfer. If they refuse, their employment stops and is terminated.
They could then potentially go on to say it was an unfair dismissal, etcetera. So they can refuse to transfer. Some people will complain about transferring, and you need to listen to their grievances. If they’re appealing against redundancy, you need to find what grounds they are appealing on. You have to hear it. You have to sit down and have a meeting with them and then decide what the outcome’s going to be.
“Now if it’s a transfer under TUPE, employees either want a job, or they don’t. If it’s an appeal against redundancy, they need to be appealing on the reasons they’re being made redundant. If they feel aggrieved that someone else in a similar position is being kept on, they need to explain why they feel they should be retained.
You have to listen to them. If you can’t say, ‘Well yes actually you’re right,’ then you will just say, ‘Well sorry your appeal is unfounded,’ and continue with the process. Some people do appeal to delay the redundancy process because they will then try and get another couple of weeks’ money and keep their job.”
Maybe they’ve been through a redundancy process before and realise they’re on to a good thing to try to prolong it for as long as possible.
“Exactly, yes.”
As a dealmaker, you don’t want to have to think about these things. It can be a minefield for anyone not experienced in HR. It’s why the process should be outsourced to an HR expert. It is not something that should you do yourself. You want to distance yourself from it because of the time and effort involved as well as the need to protect your reputation.
How to make LinkedIn Work for You II
An Interview With Andy Gwynn
LinkedIn guru Andy Gwynn reveals what content you should add to your LinkedIn profile and how it will help you source more deals.
Your Profile
When it comes to creating your profile ‘headline’ you need to invest some time to think about telling your audience what you do for them not what job you do. ‘MD of ABC Business Buyers Limited’ doesn’t tell me anything. The moment you change your headline, you’ll attract more people.
You need to keep it simple so that anyone, not just business owners, can understand it. Think of the six degrees of separation.
We’re no more than six people from anybody in the world who wants to sell you their business. If Google is six degrees of separation then with LinkedIn it’s nearer three degrees, which is why my business is called 3Degrees Social.
So you need to think about your headline. If it were me, I’d create something and then brainstorm to work out how I could make it more powerful.
Your Summary
Your summary is like your home page to the world – your landing page. LinkedIn’s changed it so now only the first two lines are visible without clicking down through. For that reason, you need to make the first two lines very engaging to encourage people to read on.
Your summary is where you tell people how they will benefit from doing business with you. Don’t just tell them “I’ve had 50 years in business” or “I’ve bought and sold this many businesses” because people won’t care. Instead, say something like, “Here’s how I can help you get the price or the deal that you want and move away quickly and achieve the lifestyle that you want.” Tell people what you do for them.
Let them know who you’re looking to connect with. “I’m looking to connect with physiotherapists who realise that they’d just rather treat people than run a business.” If people are skimming along and see your headline and it grabs their attention, they’re likely to look at your summary. They’re likely to contact you then.
Your Experience
Your experience section is not your CV. It’s where you can expand on your sales section and on what you do. Here’s a tip, if you’ve got a business that has multiple products or services, or you’re buying businesses and also investing in property or whatever else you’re doing you can split your experience sections. Same rules: space it out, so it’s easy to read, make things stand out, and talk about the things you offer.
You can expand on your summary. The headline only has room for 120 characters, including spaces, so you’ve got to be creative.
But with the summary, you have 2,000 characters including spaces.
Make your experience section relevant. I have five or six experience sections under the ‘Experience’ heading; it’s all the same business, and I’ve split them. Why? I’ve franchised my LinkedIn training, coaching. I have three franchisees who have bought in to become LinkedIn trainers and coaches.
I was making great revenue. I have coaching clients in Australia and Germany – it’s highly leveraged. But no one wants to read about me being a franchisor if all they’re interested in is how to get more business from LinkedIn. So I’ve got sections: LinkedIn trainer, franchiser, software re-seller, property investor. That’s all designed to make it easier for people to find the part they’re most interested in.
I coached a guy who had spent 25 years in the RAF, and he’d listed every single role he’d done in the RAF. I said, “What do you do now?”
He said, “I’m a leadership and management trainer.”
I said, “Who cares you were packing bullets in RAF Cosford? It’s not relevant. Talk about how you were a leader and how you managed big budgets and whatever’s relevant to today.”
Mine only goes back to 1990. I haven’t listed the warehouse jobs, van driving jobs, the fact I was packing gloves in a warehouse at 17 because no-one cares. They want to know how much money and sales stuff I can help them with. You’ve got to shift your mindset to a marketing perspective; that’s how you’re going to get found.
Your Content
You also want to upload value content. I offer content like ‘The 11 things you need to know to book a great keynote speaker’. You need to offer value to the audience.
If you don’t think you’ve got lots of value, think about a tips booklet. Someone like Jonathon will read my content and think, “Well, those make sense. I may as well book him because he’d be an idiot not to deliver on that now, wouldn’t he?”
I’ve had someone say, “Can I book you? I’ve read your booklet.”
“Well, how many other people are you contacting?”
“None. Why?”
“Oh, no reason. Let’s talk.”
Give value to the reader and educate them on things to avoid. For example, ‘The biggest mistakes people make when selling their business’ or ‘How you can sell your business for the price you want’. You can educate your audience, and that not only builds your credibility but gives value to the reader.
Your Testimonials
Use video testimonials from your clients saying how good you are. I’m now getting found on Google and YouTube because of what I’m doing on my LinkedIn profile. I dare you to do the same.
Create a YouTube video and link it to your LinkedIn profile. I’ve got a great client who’s sat on these stairs going, “Here’s the property I bought before, and here’s what I’ve done with it: here’s the leather settee and the big TV, and here’s why my students like to pay top dollar. If you’d like me to show you how to do that, give me a call.” You can do the same.
Raising Finance – Case Studies
Our resident finance expert, Neil, presents some real-life examples of how dealmakers were able to raise finance from within the business they were buying.
Example 1
The first deal was a refinance where we were buying the asset from the company, raising some cash, and maybe restructuring finance that they’ve already got.
A lot of deals come to us via a broker, so that might be a specialist asset finance broker, or a specialist invoice finance broker.
It might be a commercial broker, who’s looking to help somebody sell or buy a business.
They come to us for help in raising the money.
In this case, it was a very good company.
They would have normally have gone to one of the high street banks, like HSBC, or Barclays.
However, because of the type of refinance, those funders wouldn’t have been particularly interested in this deal, so it came to us.
There were five printing machines of various ages.
Some funders will only look at a refinance if you’ve bought the asset within the previous three months, but, if you’ve owned it for 10, 15 years or the business has, then it reduces your market.
So, they came to us, we pretty much turned it around within about 12 hours and raised the funds.
Essentially, we were able to identify the asset, get a valuation on it, assess the information, and turn around and say, ‘Yes, we want to do this.’
This is a very simple one, take the assets, pay off a load of finance, and put money back into the business.
But if you’re buying a digital agency or an online business, this isn’t going to apply to you.
Example 2
The next case study involved an advance of just £14,000.
If you buy into a business that’s got seasonal payments, the cash flow might be hit hard during off-months.
In this case, it was a grain-tipper for a farmer.
We were able to structure the deal so that he made bigger payments when he had more cash coming in, and smaller payments in the lean times.
So, when you’re considering a business, and you’re looking at the cash flow, and you’re thinking about refinancing, see if there are times of the year when cash flow is under pressure.
Let’s say you produce Easter eggs.
You’ve only got one busy period when the cash is going to come in.
For the rest of the year, you’ve got to find a way to keep the premises running, the machines running, and keep staff employed.
We can look to do very specific, structured deals to help with that.
Most funders should be able to help you with that, but it depends whether they like the industries.
Example 3
For our third example, we needed £25,000 to refinance, so we bought assets from the business.
It’s a way of putting money into the business, and, in this case, it was to buy out an existing shareholder.
This wasn’t an MBI, it was an MBO, so it was internal, paying off a shareholder.
You might take over a distressed business, take it for £1, turn the business around, and, six months later, you might want to buy out other people by raising money.
It’s the same thing.
The rationale for refinancing is quite important, so, what we’re saying is, funders will not just lend money to pay off HMRC, or PAYE, or whatever the stress is.
There needs to be a legitimate business reason as to why you’re doing this.
Example 4
Our fourth example is a taxi company.
The director had a fairly decent property portfolio, and he wanted to renovate some of the properties but didn’t have the cash.
He wanted to raise the money from a separate business.
The only way we could do this was to take cross-company guarantees and directors’ PGs.
Essentially, we bought a fleet of taxis from him then rented them back to him, and he used the money in his property portfolio.
It was a little unusual because the money was passing from one company to another.
To make it secure for us, we have to make sure that everything’s tied together.
That one was easy, there was net worth of £4,500,000, and it had been around for 25 years.
From a covenant point of view, it was fairly low-risk.
What we had to do was a tie up and make sure that the money didn’t disappear, and the company wasn’t put into administration or receivership.
Our fifth example was a company that owned oil drilling rigs and was based in Scotland.
The company was a little bit stressed, due to the non-payment of debts.
We took their entire asset base.
The legalities of trading in Scotland are slightly different to England and Wales, but they’d been around for a long time within the sector.
To raise the money, we took security over pretty much everything, but we didn’t pay out the full amount those assets were worth.
We wanted to make sure that we were very secure.
We ended up at something like £1 million worth of assets to raise the £500,000.
Now, normally when it comes to raising finance, we go to maybe 80% to 85%.
This was one of those occasions where it didn’t make sense to do that, because the risk to us would have been too great.
Instead, we restructured the deal and came up with an agreement in which we could limit the personal guarantees the directors were being asked to give by taking more security.
Quite often, funders will look for some security, whether it be a director’s personal guarantee, or a cross-company guarantee, or a deliver-up guarantee.
If you’re asked for security, look to limit the guarantee.
You can say, “Okay, I’m not going to pay the full amount. I’ll limit it to an amount.”
That could be your way of putting some money into the deal without actually putting some money into the deal.
WHAT YOU SHOULD DO NEXT
There it is, the ultimate guide to growing your business via acquisition in 2019. If you want to keep learning, there are 2 things you can do.
Grab A Copy Of My Book On How To Buy A Business
“How To Buy & Sell Great Businesses Without Risking Your Own Money”.
It’s £12.99 on Amazon but with this link you can claim your free copy and we’ll even cover the cost of postage.
Join Us At Our Next Buy A Business Discovery Event
If you’re ready to start buying and selling businesses then why not attend The Dealmaker’s Academy discovery event.
