In this episode we are talking to business exit expert Stuart Goodfellow of Small Business Big Exit to walk us through his simple 5-step process to preparing a business for sale, and getting more money out of it.
- Filling in a gap in knowledge
- Step 1: Be clear about your purpose for selling
- Step 2: Take a peek at what your business is worth
- Step 3: Prime your business for sale
- Prepare a secret source document
- Most business that are listed for sale don’t sell
- Step 4: Promote your business in the right areas
- Step 5: Keep the business performing during the sale process
- How to get a copy of Stuart’s book
- A quick recap of the five steps
Joanna: Hi it’s Joanna Oakey here and welcome back to the Deal Room Podcast, brought to you by our commercial legal practice Aspect Legal.
Today we’re joined by Stuart Goodfellow, the partner of Small Business Big Exit and the author of “Small Business Big Exit: How to make more money selling your business than running it.” So today we are talking about optimising businesses for sale and hopefully a little bit about why a business owner might make most money selling rather than running a business, which you know personally I think is a very interesting proposition.
So don’t go anywhere, here we go!
Joanna: Hi Stuart, welcome to the Deal Room!
Stuart: Hi Joanna, how are you? Thanks very much for inviting me to come along today. I’m looking forward to this conversation.
Filling in a gap in knowledge
Joanna: Fabulous! Me too, Stuart. Me too. Let’s kick off perhaps by just talking briefly about who this book is aimed at. Who should be reading it? Who is your target here?
Stuart: Yes. There’s a lot of people in business. Majority of businesses are owned by small business owners and medium-sized business owners and for us, what we found is an area of those businesses who are doing somewhere between 5 to 20 million dollars in turnover. They’ve been in business for a few years and they’ve got some questions and some challenges around what is it that they want to do next. The key questions we get is what’s my business is worth, who’s gonna buy my business. I don’t know what the price is. We heard a lot of it. It is complicated. I don’t know who to turn to. I don’t know where to go, where to get that information from so we put together the book to answer some of those questions.
Joanna: The book seems also to be talking to the owners who have built their business and are probably selling their business in order to retire. Is that the general type of business that you guys deal with and that you see in the market?
Stuart: Well, there’s two areas. One is a transition to retirement and the other area is someone who is actually built a business and have reached that goal, their own level of competency if you like and they’re looking to go and do something else.
It’s those business owners who are proactively looking at moving on to the next phase rather than a forced sort of sale through you know, gets divorced or some sort of disability, something like that so it’s those ones who are proactive, they’ve got a grasp on their business. They want to go and do something else. The business is in good shape.
Joanna: Got it. And then I guess still sticking on the background a bit here before we delve into the detail of what you cover in the book. Why did you write the book? What drove you to it? What were you thinking about? What were the gaps that you were seeing?
Stuart: Well, my business partner and I – Sam Harris. Sam and I have been working in the consulting area for a lot of years now. We’ve worked with hundreds of business owners and a lot of them get to the point of my business is good, but what do I do next? And we used to say “well, I don’t know. Go and see a broker, or go and see somebody else.” What we realised was that whilst they had a great business, it wasn’t set up for sale.
We had a lot of questions from our clients saying what do I need to do before I go and see the broker, what do I need to do before I go and list the thing for sale. First of all, why are you selling. It actually started from our clients who are going “I’ve got a good business now. How do I move it on?” And they just didn’t know.
Joanna: And so that’s when you started I guess providing services in this area. Where did the book fit into that? Why the idea of writing a book? I mean a book is a big undertaking, right?
I’ve never written a full book. It seems to me that it’s something that would take a while to do so. What were your ideas behind that? Was it about education for your clients or were you seeing some gaps in knowledge in the marketplace that you thought a book could meet?
Stuart: Yeah. There’s a lot of gaps in that area. If you just went to Google “how do you start a business,” there is millions of pages on the Internet about that. 71% of information around businesses are all about starting a business. 28% of all the information on Google is all about growing business. But there is only 1% of the information available which works on exiting a business properly. There’s not much information out there.
Joanna: Well, we’re looking to try and deal with that with The Deal Room podcast as well so we’re all fighting the good fight here I guess, right?
Stuart: And this is the thing and there are a lot of business owners who are searching for this information and they’re not getting good advice or the advice that they are getting they may not quite be ready for. So what we hacked was looking at what are the key questions that people are looking at and that’s where the book came from.
Step 1: Be clear about your purpose for selling
Stuart: For us there were five main areas, so those five areas are purpose – what’s the purpose of your ability to run a business and what do you want to go and do next. What’s your why, if you like, and part of that is to look at when is the right time to sell a business, why are you selling it, why would someone buy it, who would buy it, how much do you need. Get that stuff sorted early so if you know what your goals are, then it’s easy to get a target. You can’t hit a target you don’t see so if you actually know what you need to actually sell your business that’s going to give you an idea about okay now I’ve got some clarity around my goals and it’s going to help me in my direction.
What we also find is that once people actually get very very clear about what they need in their business to actually sell it, the business performs. It actually moves ahead, sales increases, profitability increases and the time that they actually take running the business decreases because they spend more time operating on how to sell their business. So that’s the first area, it is purpose.
Step 2: Take a peek at what your business is worth
Stuart: The second area is peek and there’s five P’s – purpose, peek, prime, promote, perform – so the second area is peek. Take a peek at your business, what is your business worth? Who would value your business? Is it a valuer? Is it a broker? Is it your accountant? Is it, sometimes what happens, a nextdoor neighbor you meet somebody at a party who just sold their business. Oh I sold my business for you know, whatever it is. You should be able to get the same amount of money. We really look at how would you actually value your business and you go and talk to three accountants and you’re going to get five different valuations so you really got to get educated and understand how your business will be valued.
Joanna: And so, how do you suggest doing that then? You’ve talked about a number of avenues and they are certainly all the different various avenues that I see business owners using in terms of valuing their business. What’s your conclusion on you know ultimate, best ways for valuation of a business?
Stuart: Well, there’s a valuation and there’s an appraisal so you can go and get a certified valuator to value your business and they are going to be looking at benchmark data and that sort of stuff and so is a business broker or an advisor.
The first thing that we would suggest is actually go back and have a look at what’s happening in your industry, so industry benchmarking is generally the best, and your accountant or a certified accountant or somebody who is actually very familiar in your industry and your industry type is going to be the best person to actually help you. They’re not going to give you a dollar figure. They’ll give you a range.
If you are in the landscaping business, the person you go and talk to, your accountant or your broker, have they sold other landscaping businesses? Or if I’m into the daycare area, do you do that?
We’ve got a lead into a really good contact in financial planning, and all they do is focus on selling and buying financial planning practices and putting those things together. So if you’re a financial planner, you go and talk to this guy. If you’re a daycare center, you probably wouldn’t want to talk to them. You’ve got to find the right person in that industry.
Joanna: Effectively you’re saying let’s find the industry specialists to help us with a valuation.
Stuart: Yeah, and then there’s lots and lots of businesses for sale. You’ve just got to find the right person or the right people to advise you to get the right valuation for your business.
Joanna: Great. So that’s peek and then what was next? I think you said prime.
Step 3: Prime your business for sale
Stuart: Prime, so purpose is understanding what you need for your business, what you want for your business. Peek is actually having a look at what your business is actually worth, and if the valuation comes in in line with what you want then it’s great, you can miss step 3.
But if there’s a gap, and typically there is, then we need to prime our business for sale. Priming your business for sale is really about rapidly increasing the value your business to make sure that the valuation can increase which is going to be in line with the amount of money that you want and the time as well, right?
The way we look at prime is putting on the buyer’s hat. Not the vendor’s hat, but putting on the buyer’s hat. The whole idea of the objective is to PACIFI the buyer.
PACIFI is a term that we’ve come up with and PACIFI stands for Profits, Assets, Cash flow, Independence, and First Impressions. So to PACIFI the buyer, the buyer’s looking for the profits in your business. How do you make money? What’s the model of your business? How does it make money from the day that somebody knocks on the door, how do they knock on the door, all the way through to delivering the product, and the service and follow up and billing, invoice and everything else down the backend, and is there actually profits in the business, and profits in the product, and is this sustainable, so have you got three years of good financials.
I was talking with a restaurant owner only this morning who came to us about 12 months ago and he said “Oh I think I might be selling my business in about five years’ time,” and we said “Okay, great.” A year later and he had some interesting figures. He was taking a lot of money out of the business and we said well okay let’s not do that. Let’s inject it back into the business because no one’s going to buy a business with you know profits taken out of the business.
He’s just ran a year. He’s had a record year. His sales have gone up a little bit, but his profits have increased 3 fold because we did some other things as well about stopping some of the costs and that sort of stuff. So he’s got another two years to go and he’s going to be fine if he just keeps doing what he’s doing. It’s great. So that’s about profits.
Joanna: And I think that’s an interesting, this whole concept of PRIME and I know we’re just at the beginning of the detail of this PRIME area and we’ll continue with it, but I think it’s worth saying that this area is something that a lot of people on this podcast talk about, the benefits of preparing a business for sale.
But I see the practical issues of working with business is in priming them for sale is often when business owners have decided they want to sell. They are the kind of people that want to get into it straight away and it’s very hard for them to stay emotionally connected whilst also looking down the barrel of you know putting themselves in the position as though their business is being sold. Do you know what I mean?
Stuart: Yeah, absolutely. I guess that’s where we’re a little bit different to everybody else in that the main focus of what we do is to help people PACIFI the buyers and prime the business for sale, whereas you’ve got yourselves and accountants and financial planners and business brokers, they’re all in the moment. I want it to happen now and it’s all about compliance.
What we say to business owners, look if you go and do that then that’s great and you might be lucky. You might get the one and a half times multiple that most businesses owners get, or you actually spend some time to get this thing into the right form which is going to be more attractive to the buyer. Because the buyer is looking at if I’m going to go and invest some money, I want to know how this thing works. That’s what I’m buying. I’m not buying the compliance. I’m not buying dotting the I’s and crossing the T’s. Yes I know I have to do that, but what is it that I’m buying? I’m actually buying part of the PACIFI. I’m buying the profits, so we do that.
Then what we also need to look at is the A side or the assets, so there are tangible and intangible aspects to your business. Tangible assets mainly equipment, what makes the thing work. But with the intangible stuff is all the secret source. It’s the points of difference. It’s you know what’s your staff levels, and what are their roles, what’s their performance, what’s in the marketing strategies, what works and what doesn’t work, what’s your sales process, do I have some sort of installation secret or a hack that will be or production hack that’s going to differentiate your business from somebody else. How do you do your pricing? How do you do your quoting? That’s the stuff that we really want to know – what works and what doesn’t work and why. That’s what I’m buying, and if you’ve got some good ideas around that and you can actually write it down in your secret source document, that’s what’s going to justify a higher multiple if you like when you sell your business.
Prepare a secret source document
Joanna:] Okay, so let’s drill into this a little bit more so you’re suggesting that the owner prepares a secret source document. I like the name of this document, and there are actually in this document inputting all of this information sort of to underpin their justification for the value of the business.
Stuart: Absolutely. That’s what an investor or a buyer is buying. They’re not just buying the address and the factory and whatever else it is and the staff. But like that’s important too. We still need to have to make sure have we got customer contracts, have we got supplier contracts, have we got employment engagement contracts and that sort of stuff because I want to make sure that if I come in and buy your business today, this businesses is going to continue tomorrow and for the next 2 to 5 years or whatever it is until I can take it to the next level. That’s really really important and that alone is, that’s where the multiple comes in.
We worked with a café owner. He actually has a restaurant and then he started a cafe just down the road, did really well. Time came to sell, the reason he wanted to sell was because he actually wanted to do more of the fine dining stuff rather than the cafe stuff. He realised that wasn’t where his passion was. The interesting thing is that we didn’t sell it for one and a half times earnings. We actually sold it for six times.
Joanna: Wow. And how did you get that?
Stuart: Well we got that because we sold as a strategic sale to one of the employees of the business. They knew the skeletons in the closet. They knew the marketing, what worked, what didn’t work, the sales processes, the pricing, they had all their suppliers lined up, we had contracts in place. They just bought it with one lump sum and they were over the moon. The purchase was over the moon because they knew what was going on and they took the business. It didn’t take long to actually dot the i’s and cross the t’s from the compliance perspective, and the business ran full head steam and the vendor was happy because he could go back to his fine dining restaurant stuff that he loved to do.
Joanna: He was very happy. He got a six times multiple.
Stuart: He did. But why is that? There was no secret. The secret was that he actually had all this stuff written down. But this didn’t take two or three months to write down. He had to really, had a lot of business and he had to get all this stuff in place, the systems and the processes that was going to help these people, help the new person come along.
The other little thing that helped as well is we created a bit of competitive tension so we had another prospective purchaser come along as well. It only takes two people to put the price up. The employee really wanted it and actually got it.
Joanna: I presume in this instance you’re talking about there was a secret source document as well driven out of the systems and processes that the business owner had been building. How long are these documents generally speaking that you have your clients prepare and how long does it take for them to put it together?
Stuart: Well for this particular case, it wasn’t that long because the employee worked in the business and she was actually on the floor so she knew how these stuff worked. But she didn’t have in place the agreements with the staff. She didn’t have contracts with performance management, documents around that nor did she have in place contracts with suppliers so we had to work hard on that. What she also didn’t have in place was a sales process because there was a lot of events that happened and she didn’t know how that worked so we mapped all that out and we had percentage of successes and different bottlenecks in the area and we also had to show her the marketing that we’ve done for the last 12 months, what worked, what didn’t work and why.
So it really depends on what is actually needed. If you get somebody from within the industry, they may know some of this stuff, if they don’t, it’s completely a separate set of hooks as well. So the answer to your question is it depends on what’s actually required.
But the way you look at PACIFI so the I in PACIFI is indepence. We know a business is worth more if the business owner is not there, if the business owner can delegate the tasks and then get out the gate and actually not be there. If the business owner is independent of the organisation, then the business value is worth a lot more.
Part of this particular process with the cafe was to make sure can this business run without him. At the end of the day, it was forward and set. Yep, it’s ready to launch. He knew that he didn’t have to be there at all, so the whole independence is really about systems and processes.
So PACIFI, if you go back to that, so P-A-C – C is cash flow. Making sure that debtors, creditors and inventory levels are right. Have you got a dashboard around that because I want to know if there is a cash gap. Do I as an investor have to bring working capital to the business and how much is that investment once that happens.
Joanna: And how do you find business owners are placed you know generally when they come to you in that area, in the C, in the cash?
Stuart: When they start with us, they don’t really know and there are you know there are debtors owing and there are creditors that may have lined out a little bit and they say Stuart we’ve made some money but there’s no money in the bank and I walk into their business and look at the shelves and you go hmm where are you stocks trying to flow.
That’s where your profit is and so we do spend a bit of time getting that stuff sorted out and sometimes they don’t actually have systems around their inventory. What’s all this stock doing here? Oh it’s dead stock, it’s been here for a couple of years. So what’s this stock over here? Well that stuff didn’t sell so we had to go and buy more stuff, more stock and try and sell that.
We had to get some strategies and sales and marketing strategies around putting that inventory levels down to a reasonable level that someone would come in and go yup there’s a clean set of books and inventory, there’s no dead stock. We know the stock is moving through the works.
There’s this thing called the Pareto principle, the 80/20 rule – 80% of your business comes from 20% of your products – what are those products? 80% of your business comes from 20% of your customers – who are those customers? Do your top customers buy your top selling products? Typically no, okay how do we drive that? So that’s the sort of intelligence, the little tips and tricks that the investor wants to know about.
We’ve got one customer in the flooring business, he knows that his customers live within in two postcodes, then a bulk of those customers are females aged 35-45 years of age. We know what school their kids go to, no – we don’t actually know them, but we generally know where they are and so they don’t do big broadcast marketing. We’ve halved his marketing budget, but we’re now being very clever about where we do the marketing and the sales have increased 28%.
Most business that are listed for sale don’t sell
Joanna: Yeah. And I mean what you’re talking about here makes a lot of sense but I can feel the pain of some of the people who might be listening here in terms of thinking wow there’s a lot to do.
I guess this is what I was talking about earlier about the difficulty sometimes in getting business owners across that line of slowing down the process. They’re coming in with a transaction mindset and here we are as advisors saying well hold on a moment. The business isn’t ready. You could be getting a lot more out of this business.
And us as lawyers looking at it and saying okay well hold on, slow down. Your structure isn’t great from the tax side, but your structure isn’t great in terms of what you’re going to get out of the sale at the end of the day. You haven’t got your key contracts lined in. You’ve got these issues brewing that we need to deal with and if you hit due diligence now you’re just going to, whatever you’ve negotiated you’re going to get a buyer who’s going to push down the price.
But it’s still a very difficult conversation to get business owners who have their mind set in a transaction already, in a transaction state, to slow down and say okay we’re going to take a big breath, take a step back and we’re going to review the business and put in all of this time and effort to build it up so that it’s in the best sale ready state. So what’s the tips that you have for how you work your clients through that I guess that process, that mental process.
Stuart: Well I think it comes down to are they educated enough about how to sell a business and generally the answer is no because they then react. We go back to first principle, what’s the purpose, why are you selling. Are you selling because you’re tired? Yes, why are you are tired? I’m working 100 hours a week in my business. So who is going to buy a business where they’ve got to work a 100 hours a week in your business?
It’s not really worth anything. But what do you need? Oh I need X. Okay, so for somebody to actually go and pay that amount of money, what is it that we need to do to be able to have a business that effectively works? So let’s just take you out, put somebody in place. Take some of the key other people out. Put other people in place so the business can run without you. What’s that mean? Oh there’s going to be a commercial wage. Okay, we’re going to take some time to get those people up to speed. Okay, that’s great.
Just by having these conversations, by educating people about the process because they’re not used to it. They’re used to selling their products and their services, but they’ve never sold a business before. They don’t know the process.
When they come to us, we spend a lot of time just holding their hands saying where are you now, where do you want to get to and then try and build that bridge to get there. Now if they’re hell bent on selling the business today, great. Go and find somebody to help you sell your business.
We’re not brokers. We don’t do that. We believe there would be a conflict if we were trying to set a business up for sale and be a broker. But we do utilise a number of brokers that actually help those people who just want a quick sale. If you want to go, just go. It’s usually because they are burnt out number one. They can’t work another day in their life or they’re sick, there’s something going on and it becomes a reactive forced sale.
We know that 84% of businesses don’t sell. 84% of businesses that have been listed for sale, don’t sell. They’re not set up for sale. They’re not worth anything. In fact, only last week I sat with a client and we worked out, we mapped out how much he was making per hour and how much his employees were making per hour. He was paying his employees more than he would make for himself.
Joanna: Wow. Yeah, that’s a figure that’s got to hurt.
Stuart: It does, but what he also realised was that okay what is that we need to do to change that around and then we build a road map to get there and he just knows. This is a marathon. Just because you want your business selling, and you’re only 10 meters into the race, and this is a 42K run. This is going to take a long time.
Every professional I’ve spoken to in this business exit space all say the same thing. They don’t know what their business is worth, and they don’t realise it takes a lot longer than what it should. And they say okay, that’s what it is. Oh but I’ve heard some say they sold their business within 3 months. Okay great, and that happens but it happens on very small percentage of times.
If you’re prepared to go on the long run, part of that comes down to you’ve got to work on your business as well work on selling your business. There aren’t too many business owners out there now sitting on their hands with nothing to do. They’re actually actively working in the business. So when they go and sell their business, it does take a bit of time. But if you want to do everything in 3 months, you’re going to miss something.
If you give yourself a good couple of years, then you’re actually going to be better. And what we also know is that most good businesses get bought, they don’t get sold. So if you’re in that environment where you’re actually building your business up for sale, someone is going to come along and have a look at it before you’re actually ready for it. There’s been countless of our clients who have been building their business up, getting their secret source, getting their books sorted, where somebody has come in and say I want to buy your business and we’ve turned around and said you know what, no. We’re not ready for sale.
What does it do to the price? Price goes up. And what happens, and we’ve been in some situations where the business owner turns around and says no I’m not ready for sale when it is ready for sale, they turn around and go I actually have a better business now than what I had in the first place. I don’t want to sell, so all of a sudden now they are controlling the business rather than the business controlling them.
Joanna: Can I am drill into this statistic you talked about a little bit more this 84% of businesses don’t sell. Where does this come from and what businesses are we talking about here?
Stuart: Yes, so there’s different studies that have come up now globally. In Australia it’s really hard to get the stats. In fact, I was only talking with a broker yesterday and saying to him these are the figures that we looked at. Oh that’s an interesting figure, we’ve heard you know 67%, we’ve heard 80%.
So there was a study done in the US, that’s high that figures higher. The reality is most businesses that are listed for sale don’t sell, whether it’s 70%, 80%, 67%. We know as a fact most businesses listed for sale don’t sell. They’re not really for sale. They’re not making a profit.
Look one of the things we find a lot is businesses will come to us and say Oh look I made whatever 200,000 dollars last year. Okay, great. What did you pay yourself? Oh no, that’s what it paid itself. So your business isn’t really worth anything because you didn’t make any money.
That’s the thing. They’re not paying themselves a commercial wage. All they’ve got is mum and dad and a business and they’ve got a 5 million dollar business and they pull 500,000 or 600,000 dollars out of it. Great, that’s good. Well, what did you pay yourself? What did you pay the other shareholders? Oh well, we didn’t pay ourselves commercial wages.
Or they go and sell the business and the business has got a lot of debt associated with it too so who’s going to pay for that? Or they’ve got employees that got long service leave, holiday pay, and all that sort of stuff so where does that happen, where does that actually fit into the business?
A lot of it is about we don’t really understand what my financials are, what my figures are, and we hear all the time how much do you want to sell your business for? It’s either 1 million or 5. Really? Where did that come from? I don’t know. Just a good amount or figure. But it happens. And it’s like okay, go and substantiate it. Find out why that’s worth that 5 million dollars.
It goes back to that cafe we mentioned before. A reasonable running cafe could probably sell for one half. We got six. Why? Because they just knew what was going on. They didn’t have any debt associated with it and if that business owner wanted to sell that particular business without any of the secret source, he would have gotten one and a half or two, whatever it was. But because he spent that time developing up his secret source stuff, he managed to get more.
Joanna: And how long did he spend developing the secret source stuff?
Stuart: Well for him, it was less than 12 months. It was about 9 months.
Joanna: All right. Well that’s you know that’s not too long a period for a business owner to hold on if they think they could increase their multiple from a 1.5 to a 6 there’s a lot of good reason to hold on for that period of time.
Stuart: And the reason why is because you already had a lot of that stuff anyway. He had both businesses effectively running without him so he could spend 4 out of the 5 days working out what was actually, why was his business ticking along so nicely, what was going on and he was still testing and measuring his market.
For him, an interesting story, I said oh where do you get most of your leads from? He said Oh probably about 50% of my leads from TV advertising. I said Oh great, where do you spend most of your money? Oh 50% of my money I spend on marketing I spend on TV. So well how do you actually know? He said well, because I spend 50% of my money on TV that’s where I think I get most of my customers.
The next question was can we go and measure it for the next three or four weeks. So everybody who came in, rang up, made an inquiry, let’s find out where they found us. And we went back and we actually tested and measured this and came back to the table and I said so what impact does TV have on your business? He said I don’t want to tell you. I said I know but you’re going to. I’m right here to be your friend. I’m here to help you, and he said 3%. I said that’s fantastic, and he said what are you talking about? I said mate, we have just saved you so much money number one. Number two we worked out where his leads were coming from. He knew his secret source.
Joanna: Yeah, that’s great. I mean that’s a really good example of working out where you can pull costs.
Stuart: Well, it’s about investing. I think this is the thing. Marketing is math. You don’t go and spend a dollar unless you know if you can measure where that’s dollar been, where you’re getting your clients from.
They actually don’t know how much money they spent from a marketing perspective. They don’t know their sales process and other people go well look, if I just did more marketing I’ll have a bigger business. We turn around and say well, what are your conversion rate strategies? How do you onboard your new client? Where do you get them from? How do you address them and treat them all the way through from an enquiry to a sale? If you got there at selling, and selling is just helping people buy that’s all it is, if you got there at selling, you would never spend your money on marketing.
Joanna: Yeah yeah. And in everything that you’re talking about here it’s quite clear that someone who’s coming in to buy a business when they’re looking at two similar types of businesses side by side I guess you know maybe even making the same returns, the business that has got a clear template of how they are doing it versus the other business is obviously going to have a higher value you know because it’s far more a dependable asset I guess in terms of the business owner feeling that they can come in and continue or improve the way it’s running.
Step 4: Promote
Stuart: And that’s important too. The fourth P is promote, so what we need to understand is we have to set the business up for sale in the right areas. When we go back to purpose and say who do we want to sell the business to, part of that is identifying it might be a competitor or somebody else like a supplier who wants to buy the business and set it up. What is it that they want? Do they want our customers? Do they want our products? Do they want our systems? And therefore we set the business up to really drive that.
We had a client of ours who was a wholesaler. We had two major wholesalers who were basically our competitors. We analyzed both of these major competitors. We worked out what they were great at and what they were weak at, so we then went into a niche area where they were weaker. We also looked at our client base and we reselected our clients, so we really focused on our A-class clients. Our B and C class clients, they actually went to our competitors which overloaded them and therefore our competitors were losing sales, losing their A-class customers because their A-class customers weren’t getting the service that they wanted. And where do those A-class customers come to? They came to us.
Stuart: So one of our competitors, so our competitor wanted our customers and our products and that took, that process took about 20 months to work through and we got a knock on the door. They said, one of them came to us and said we want buy you out. Yep, that’s fine, and we worked out a figure and because it was a fairly significant organisation who were buying us, their due diligence took a long time at which point, well over which period of time, our profits continued to increase and they paid a higher amount of money based on a singular multiple because we had greater profits.
Joanna: Well, that’s almost unheard of, right? After DD, buyer paying more rather than less. I love it!
Stuart: Yeah. Because we already worked out what the deal was. The deal was based on a profitability ratio and our profits went through the roof so that’s what happened. It was interesting because the CEO came to us and said we should have bought that, we should have given you that check 9 months ago. You cost us a lot of money. It was like, whatever! That’s fine. It was a good outcome.
Joanna: I love it. That’s a really good story. That’s a great story. It’s very unusual from what I see.
Stuart: And that’s the thing I guess that’s why we are a little bit differently. We enjoy taking people through a journey and helping them achieve their lifelong goals so they can go do other things.
Joanna: Yeah, it’s a nice way to put it as well right. And so we’ve done promote, so the last one I guess is perform. Is that right?
Step 5: Keep the business performing during the sale process
Stuart: Well, yeah. It is perform and perform is about okay so I know what I’m doing. I know what my business is worth. I’ve primed my business or PACIFIed my buyers and promoted it the right way, and the last one is perform and we’ve sort of touched on it. It’s really about how are you going to manage to run your business and also run the sale at the some time, so that’s one area. You got to make sure you’ve got the resources and procedures to do that as well.
We also know that as emotion goes up, intelligence goes down. So if you set a figure and you get all tied up in that particular figure or it gets down to the nitty gritty and you know, their accountants are playing ball or something’s going on or you know you take offense then you’re quite likely to go look that’s enough, I’m going to walk away from the deal. What we say is no no no, stick to your guns, stick to your number. Keep calm and a little bit of humility goes a long way in this deal.
We’ve seen deals fall over at the eleventh hour time and time again. Why? Because either the vendor or purchaser just gets out of sorts a little bit. It’s really important to have somebody on your side, in your corner to go no no, it’s fine. You got to give a little. You get it a little. It’s okay. It’s going to take a bit of time, but we’ll get there. Hey at the moment, we’re still making some profit so it’s going okay. It’s fine. Again, it’s a marathon.
Joanna: I think you’re absolutely right. I completely agree with you. I’ve seen this happen in an amazingly high number of times when you’re just at the point, that finish line we can all see it. It’s in sight. To the people involved it’s not the smallest things, but we get to a point where there’s gridlock. We can’t make it through and it really takes the advisors to understand the emotions that are at play.
I think as well to make sure you can talk both parties down into a more sensible and less emotional view of the transaction. And because these are big transactions, because particularly as you say the sorts of business owners you’re talking about in these scenarios we’re going through are business owners who are either retiring or going onto something completely new. It’s a massive change for them. So that can often be, that reality can almost hit, sometimes hit right at the end, finishing line as well, so we have all these things to grapple with.
Stuart: Yeah, and you’re absolutely right. And one of the things that we do is we then go full circle. Okay, so you’re feeling a bit upset. Someone has upset you, whatever it is. Go back to the first P, purpose. Why is it that you’re selling? What do you want to do next?
And it’s not doing the trophy stuff. It’s not playing golf in every golf course around the world, or going on a cruise or doing a couple of laps of Australia or Europe or US. Okay, go and do all this stuff then what are you going to do? Oh, I really want to do, I really want to give back. Okay, so how does that work? Oh, I really want to go and build a new business or buy a new business or I want to go and spend more time with my grandkids or take them on a holiday or do something with them.
Today when we usually retire, you not really sit around on your hands doing nothing. What’s the big picture? And when we go back to that first principle, that first P – purpose and keep that as your goal, your target, this is just one of the things to tick the boxes on the way to get to that big target and that’s where we’ll just keep going back to that and that’s why purpose is number one.
Work out what your target is. Work out where you want to be, what you want to do, who you want to do with it. That’s the thing you want to get. This is just a transaction. It’ll happen.
Joanna: I absolutely have really enjoyed our discussion today Stuart. A lot of our listening audience among business owners are also accountants and are brokers and M&A advisors. I think a lot of the things that we’ve talked about here today are incredibly important for all advisors who are engaged in the process to be aware of just like the business owners.
The importance of not just being reactive perhaps to the issues that our clients are coming to us with. Our clients are coming and saying I’ve had it with this business. I want out because I want to go and do whatever it is that’s the next thing or retire.
I think the the whole theme of what we’ve been talking about today is slow down, step back and make sure your business really is ready because in putting that time and effort in before the sale you reap a massive return on your investment of time, if only you can slow down, step back and take these practical applications of working out your purpose, looking at the value of the business, priming the business for sale, promoting it correctly and performing which I think that last one was running a business role readying it for sale and that in itself sounds like the issue that our business owners have to get their minds across. But you’ve really demonstrated well Stuart the benefit if they can just step back and do that.
Stuart: Hopefully it’s been helpful, because it does take a little bit of time. It just takes a bit more time than what people think. But you speak to any advisor in this space and they’ll say it’s going to take longer than what you think so just slow down to speed up and you will get the return. You will get the rewards from all those years of hard work if you just do it the right way, and get good people around you.
How to get a copy of Stuart’s book
Joanna: We wholeheartedly agree with that one as well. I think the other element is as you said when you’re looking at valuation making sure you’re dealing with people who have dealt in this type of transaction, in your industry and I think also when appointing advisers once again it’s about appointing advisors who understand what they’re doing in this space.
We’ve got your book Small Business Big Exit: How to make more money selling your business than running it, so Stuart how do our listeners get a copy of that and how did they get in contact with you?
Stuart: They can get in contact with me through Linkedin. I’m on Linkedin if they want to jump through that. Alternatively, if they do want a copy of the book, just send me an e-mail and I’ll make sure that they get one. My email address is [email protected] and just happy for any of your listeners Joanna to get their hands on the book.
Joanna: Okay, we’ll put some links to all of that in the show notes as well so if you’re at the gym, driving along, taking the dog for a walk, don’t worry. When you’re finished, you can just click through to our show notes and you’ll get all of those links through to Stuart and get a copy of his book.
Stuart, where do your clients normally come in from? I mean is this the sort of thing you talk to accountants about because they’re out there identifying businesses that really need this sort of help?
Stuart: Yes, sometimes accountants will refer to us or one of the financial planners will refer to us as well because typically a business owner has spoken to a financial planner about transitioning into retirement. Part of that is going to be what are you going to do with your business. We get brokers actually giving us a call as well saying listen I’ve got a business. Look, we believe there’s something there. It’s not quite ready for sale, can you help them? And I say, yep absolutely. Let’s sit down and have a chat with them.
Joanna: What a big step for a broker to make because of course at that point they’re staring down the barrel of a transaction that they can be involved in, but they make the call in the client’s best interests and probably in their best interests in the future as well in cultivating the right relationships with their clients to tell their clients to slow down and build up the business first before they put it to market.
Stuart: And we’ve got some great relationships with some fantastic brokers where they see the value in helping the business get ready for sale, because in their eyes they just want a quick sale.
A quick sale can happen when the businesses is ready for sale. But if the business is not ready for sale, they’re going to struggle. The owners are going to struggle, the brokers are going to struggle. Yes, they want the listing. Sure they can list it. But if there is not much to sell, then they’re not going to get a result.
It takes then less time in the end because there’s somebody else out there helping the business owner making sure it’s a viable enterprise and it’s giving the vendor a lot more as an asset to sell, but it’s also giving the buyer something better to buy as well.
Joanna: Yeah, it’s a really good point. It’s a really good point. Okay. Well look Stuart thank you so much for your time today. I think it will be really valuable to our listeners as I said to check out our show notes if you want link through to Stuart and grab yourself a copy of the book. Thanks for your time Stuart. We’ve enjoyed having you on the Deal Room.
Stuart: Thanks Joanna. It’s been great talking to you. Thanks very much. I had a lot of fun.
A quick recap of the five steps
Joanna: That concludes our episode with Stuart Goodfellow where we ran through his 5-step process to preparing your business for sale. These are steps from his book “Small Business Big Exit: How to make more money selling your business than running it.”
As a quick recap, which is just as relevant for advisers out there to get a recap on, as well as business owners themselves, those five steps are:
Step 1 is the owners being clear about their purpose, their “why” power. Part of this is identifying why the owners are selling, wand how they need out of this sale. Having clarity around goal helps a seller to have direction, but it also might create a situation where it becomes apparent that the best outcome for the sellers might be to pause, work on the business building it for sale for a while, and then to come back to market. Obviously that can cause issues sometimes if you are an advisor that is remunerated at sale. But in many instances, dealing with a seller who has a business that isn’t ready for sale, and who has lofty requirements from the sale that don’t match the likely response from the market, is doomed to waste you and them time. I think it’s really important to ensure that everyone is clear about the seller’s purpose and about whether or not this can be met by a sale in the current market environment.
Step 2 is getting serious about working out the present business value. This really needs to be done by finding industry specialists to help work on a valuation that correctly reflects the industry and the market in that time. Also, about understanding what the value of a business might be if the business owner was to pause, step back and take time to build the value of the business.
Step 3 is all about priming the business for sale. This is filling in the gap between the first step, the purpose of the seller, and the second step, what the owner is actually sitting on in terms of the realistic market value at this point. Priming can take time, and it really requires work on rapidly increasing the value of a business by putting on the buyer’s hat, and working at it from the buyer’s perspective to then create a situation in which the sale is much easier and much more likely to yield the results that the sellers are after.
Step 4 is to promotion, which involves understanding the market in relation to competitors and the industry as a whole, knowing the businesses’ strengths, making sure the business is set up to really communicate that in the marketing strategy.
And finally, step 5 that we covered is perform, which is really about making sure that someone has a keen eye on how the business will be managed to continue increasing (or at least maintaining but ideally increasing) profit and performance during the sale process.
Well that’s it for today. I hope you enjoyed this discussion just as much as I did.
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