[EP 283] Buy-Side Strategies for Business Expansion: Perspectives for Brokers & Buyers

Transcript below!

Note: This has been automatically transcribed so will be full of errors! We are not providing it to you as a word-perfect version of the podcast but just as an easy way to provide you with a different way to be able to scan for information that might be relevant to you.

Joanna Oakey [00:00:24]:
Hi, it’s Joanna Oakey here. Welcome back to the Deal Room podcast, a podcast proudly brought to you by our commercial legal practice aspect, legal. Now, in today’s chat, you’re going to hear from Dru Morgan, the director of Morgan business sales. Dru brings to the table more than 25 years of rich experience in selling businesses across a variety of sectors and regions. Now, in this discussion today, Dru walks us through some of the perks of scaling through acquisition and of course, the ultimate payoff in selling. He also walks us through the innovative practices he’s developed over the years as he’s grown his own brokerage, Morgan business sales. Now, let’s jump right in. Okay, Dru, huge thank you for coming onto the Deal Room podcast today.

Joanna Oakey [00:01:17]:
I am super excited for today’s discussion.

Dru Morgan [00:01:21]:
Thanks, Jo. Thanks for having me again.

Joanna Oakey [00:01:23]:
My absolute pleasure. Okay, now, today we’re talking about one of my absolute favourite topics, and that is growth through acquisition. Now, the reason that I love this topic is because I’m a lawyer. Everyone who listens to this probably has gotten on to the fact that I’m a lawyer by now. The problem is with being a lawyer. Most of the stuff that you do as a lawyer that’s outside of this area is all about risk and risk management. Right. But in acquisitions and the opportunity of growth through acquisitions, I feel it’s the one way that we as lawyers are actually able to add real value to businesses.

Joanna Oakey [00:02:02]:
And this idea, this conceptual point that acquisitions can be such a powerful way to grow a business is something that I just think I’m so grateful to have seen and understood in industry and be able to bring this insight. And I just think it’s such a huge opportunity for businesses who are cranking through those old methods of organic growth that have got a really good base, but just haven’t thought about this as an opportunity. So I’d love your thoughts. Dru, what are your thoughts on this?

Dru Morgan [00:02:39]:
It’s businesses and it’s business brokers. I think, as a whole, a lot of them traditionally haven’t thought it that way moving forward. So there’s a lot of businesses out there that we get in contact with and suggest the idea to them as a way to grow, and they’ve never had it suggested to them before. And it’s just something that we do and it’s something that we embrace wholeheartedly. But it’s not common as an industry business. Brokers traditionally work on the sell side, so it’s unusual for them, I’m speaking in general terms, but unusual for most business brokers to work on the buyer side. Most of them probably haven’t done it or I’ve done it a small amount, but it’s something that we do quite a bit and it’s something that if you unlock and really focus on, you can do it really well and you can make really good money. And it’s an enjoyable experience.

Dru Morgan [00:03:25]:
It just takes a bit of thought on how to do it. And there are clients out there and we’re talking earlier about a deal we did together last year where we’re on the buy side with a client. And that was a decent sized deal. It was around 5 million or thereabouts, but that client had a line of credit and about $50 million or a larger company that established with the pure intent of acquiring different businesses in Australia. So we worked with that client over a period, I think it was about twelve months to identify the types of businesses that they wanted to buy. They paid us a regular monthly retainer throughout that period and we did the transaction for them and it was really enjoyable to do and it’s somewhat easier to do that as an agent. You’re really dealing with one client as opposed to when you’re working on the sell side. You could have 40 or 50 inquiries on a business.

Dru Morgan [00:04:11]:
You’ve got all sorts of things going in this area, in all sorts of notes, different buyers on the inspections, and it can be a little chaotic when you’re on the buy side. It can be more relaxed, you can be dealing with a number of sellers, but it’s just an easier conversation to have because when you talk to the sellers, they know that you’ve got a legitimate buyer in your hand and you explain what the buyer is looking for, whether they’d be interested. And they’re really good conversations to have. And it can be a really enjoyable field if you take the time to understand it. And that buyer that we dealt with is fantastic person.

Joanna Oakey [00:04:42]:
He absolutely is. Oh, look, it was a fantastic transaction for many reasons. I got to work with you, Dru, so that was obviously fantastic. We had a fantastic client, but it’s also like, it just, it also feeds all of these things that I really love, which is the finding good deals. Yeah, I really enjoy being in what I feel are good deals that will lead to outcomes that, you know, ultimately are these business growth. And I think this is the thing, I guess this client that we’re talking about here, he had cottoned on at some point, probably many years ago, to this opportunity of growth through acquisition. And he’s on fire, right? He’s out there. And the classic things, when I deal with a first time seller or a first time buyer, there’s always that, that hesitance as they get close to the line of completing or exchanging where these things come up from them.

Joanna Oakey [00:05:40]:
And what they’re dealing with is their own emotion of not, of dealing with an area that they haven’t dealt with before. It’s so lovely sometimes to deal with people who know what they’re doing, understand that there’s risk, but that’s not the driving thing for them because they can see the larger opportunity of value that outweighs. What is that sort of conservative risk approach for those, for people who are new into this area? What’s your thoughts on that?

Dru Morgan [00:06:09]:
You’re making life easy for them at the end of the day. Like that particular buyer, he had a couple hundred million dollar company offshore that he established, obviously as an intelligent person. But trying to acquire a business in Australia on your own and going through a variety of different business brokers and just calling and emailing, it’s a big task and daunting having to review information. Whereas when that client engaged us and said, could you do this for me? Could you do some initial due diligence on these types of businesses and get your head around what you think would suit me and then just deliver me the ones that you think would suit me. So it’s obviously a huge time saving for him. So it makes life a lot easier for them. It simplifies the process. And also when you get to questions like, particularly people offshore aren’t fae with some of the laws in Australia and different states, there’s a lot of questions in that transaction.

Dru Morgan [00:07:01]:
When we got to the point in a lot of times where that client would just phone me and say, is this normal? Is this how this should work? Yeah, that’s exactly how it should work. It’s okay, you’re in good hands with Joe and yeah, that’s how it works. But it’s made their life simpler because they just had somebody to talk to. We’re going into it on your own, it can be daunting, particularly if you’re spending. The plan for him, for that client is to spend $50 million over the next twelve months. So there’s a lot of transactional work there and it just gives him comfort to do it. Yeah, good service to product.

Joanna Oakey [00:07:31]:
Yeah, yeah, yeah. And as I say, I love it. I love that opportunity building side of legal work as opposed to just this sort of focus on risk and it’s fantastic to help make good deals happen. But what got you into. So firstly, what got you into buy side? And then secondly can you answer me like having a lot of brokers in buyside is quite common overseas in many other countries, but not at all common here in Australia. Like really rare. Why?

Dru Morgan [00:08:05]:
Why?

Joanna Oakey [00:08:06]:
I don’t understand. Talk me through it.

Dru Morgan [00:08:08]:
It’s just not tradition here. To be fair though, we don’t have maybe as many big businesses in Australia as you would in the US or something like that. There’s a lot of small business in Australia so maybe like you want to be paid to be engaged, maybe that’s not common in small businesses. It just isn’t. It’s just I think historically not a place where business brokers have put a lot of energy into in Australia for whatever reason. But moving forward, you asked me about what’s ahead in business broker. I think it’s a side that business brokers don’t have to be scared of. They’re just going to learn to embrace it as part of what we do.

Dru Morgan [00:08:40]:
We should be working on both sides. That client and the way we started doing it was we always year in, year out had requests, people looking for things. And like most business brokers originally, years ago, we paid them very little interest and we started paying them attention. Okay, let’s put some effort into this client. It’s going to take time, so we’ll charge them a fee and then you realise clients are happy to pay it, they’re happy to pay you a fee. I want the retainer to do the work because it’s saving them a lot of time and energy, particularly if you deliver a really good result. So we charge them a monthly fee and if they buy something we revaded that fee off the cost of the transaction anyway. So essentially it cost them nothing.

Dru Morgan [00:09:18]:
It was only if they didn’t find something, it would cost them something, cover our expenses. But that ended up being a terrific relationship with the client and that client will go on to buy the things and I’m sure he’ll refer us to other clients. And if you’re not doing that work as a business broker, it’s just a field you should really take a good look at because you’re cutting off half your business if you don’t do that?

Joanna Oakey [00:09:40]:
Yeah, I just find it fascinating. I’ll tell you the other sort of fascinating thing. It makes absolute sense to me to have a business model as a broker where you can charge a monthly retainers along the way. And I’ve seen many business brokers do that successfully, but the vast majority don’t and are scared of that approach, whether you’re talking buy side or sell side. When did you get started in that? Did you find that was a big scary leap? Because the argument I hear is they’ll go to a number of other business brokers down the road who aren’t charging them. So obviously you have to prove that you’re better than the competition that are.

Dru Morgan [00:10:26]:
Yeah, it’s a great question. I guess it just comes to backing yourself a little bit is the only way to answer that. You have to draw a line in the sand somewhere, because the issue is that in this industry it can be viewed as a free service. Like you can charge somebody an initial fee to put their information together. But from that point on, if you don’t do that, you’re just a free service. You’re bringing them offers, you’re marketing the business, you’re doing all this stuff free and it doesn’t work. The business brokers end up providing that free service over and over again on 20 or 30 or 40 listings, how many they carry, and they get burnt out. They don’t earn any money, it doesn’t work.

Dru Morgan [00:11:05]:
A lot of those sellers are just using them as that free service and genuinely wasting business brokers time. They’re like, oh, if you think you can get me $3 million for the business, great list. It’s just see what happens if you can’t. I think the business brokers don’t realize what they’re doing. They’re really just providing that service for nothing and for no result. But what I find did happen when we started doing that, which was a few years ago, that all it did really was sort the hay from the chaff. Like all the clients that were serious had no issue with it at all. And then the clients that said, oh no, actually I just want a free service, they didn’t list with us.

Dru Morgan [00:11:41]:
So we certainly lost those listings retrospectively, that is okay. They went and listed with other firms, which we were happy for them to do because we retained the good clients and clients who really just wanted to waste someone’s time. They wasted other people’s time. It’s actually worked out quite well because we’re not a company. The whole sort of thesis with this company is not to be a company that trades on high volume of stock, which is important to some companies, but it’s not to us. The whole idea and philosophy on this company is really just to trade on good stock with good clients and provide good businesses to good buyers. And we don’t need quantity and we don’t want quantity. So if somebody wants to use a free service, that’s okay.

Dru Morgan [00:12:25]:
It just won’t be with us. They can list it with. There are companies who take it on that way. I think you’ve got to draw a line in the sand somewhere. I’m just lucky enough to be in the game for such a long time that you’re like, okay, we’re not doing this prefer anymore. That’s a silly way of doing it with brokers. It just enhances their life because they’re dealing with less clients who pay them properly as opposed to more clients that don’t pay them properly. And if you spoke to any broker and asked them which bucket they would rather be, it’s a no brainer.

Dru Morgan [00:12:54]:
It’s just mentally making that mind shift from one to the other sometimes takes a little bit of work.

Joanna Oakey [00:12:59]:
Yeah, absolutely. And one other thing that I wanted to talk about, and actually with moving back in our discussion point a bit, but one thing that I just recalled that I wanted to talk about, we talked about that, the acting buy side and just more generally that sort of experience in the acting for buyers who are multiple buyers who have bought multiple businesses and who are acquiring because they completely understand now the benefit in growth through acquisition. What is the sell? I just want to talk about the benefits for a seller in selling to that sort of buyer because I think there are a lot of benefits and we’ve, I’ve acted on both sides of the table in that type of transaction with that acquirer who has bought lots of businesses. We’ve acted for acquirers who. Lots of acquirers who buy lots of businesses. So I see it from their perspective. I’ve also acted for many sellers to aggregators or sophisticated buyers. And I see lots and lots of benefits.

Joanna Oakey [00:14:08]:
And I’ll talk about mine in a moment, but I’d like to hear from your side, what is that benefit? What do you talk about when you approach?

Dru Morgan [00:14:17]:
I could go either way with that. To be fair. I think to a point, the downside with dealing with one buyer, if you’re a seller, is that you don’t know if you’re extracting maximum price. That is the downside because you’re not going to market. So you’re not going out there to 30 different buyers saying, here’s what I have, how much you’re going to pay me. And you get multiple offers and make sure you’re extracting the best one, so you’re not going to do that if you have one buyer. The upside is when you’re having 30 different conversations and doing all these negotiations and it can get crazy. And as a seller, it can become really stressful.

Dru Morgan [00:14:53]:
And when you’re dealing with one buyer, that alleviates all that. It’s a much simpler one way conversation. And if that buyer’s got genuine intent or a good buyer, it becomes a far simpler way to transact your sale. But I think there’s fours and against either way in most respects.

Joanna Oakey [00:15:10]:
Well, I think there’s a good point that you make, and I’ll come back to my point a little bit later. I want to drill into this more, this issue. If you’re approaching a seller so you’re the only buyer on the table for them at the time, how do you get a seller comfortable with costs without them going to market?

Dru Morgan [00:15:30]:
It’s really difficult, to be honest with you. You can do an appraisal and give them a fair bit of data. But I think the difficulty in business sales is if you compare it to real estate, for example, there’s an enormous amount of data that sellers can look at. If they’ve got a four bedroom house in Sydney or wherever it is, they can quite easily get some good comparables and understand at least a range they’re in. In business sales, they’re more or less going off our word. We say, look, here’s some results that we’ve done of different sales or in civil or whatever industry you’re in. But no two businesses are ever the same. So if we’ve sold an engineering company in Melbourne, it may be drastically different combined in Brisbane engineering, a different product.

Dru Morgan [00:16:10]:
So that seller really has to take over. They’re never really genuinely sure. And I think that’s why you’ll find once you hit a certain price point in business sales, say $10 million or over, most of the deals we do, over $10 million, don’t have a price. They’re nearly all expression of interest. And the reason that’s done, and that’s nearly an industry norm, whether in the US or Australia or wherever it is, the reason those transactions are done that way, they’re nearly all expressive of interest with a closing day. And that the reason for that is you want to extract as many offers as you can out of the marketplace and you let the marketplace dictate the price to a certain extent, what they will pay, what private equity will pay, and what industry groups will pay and what private buyers would pay. With smaller businesses, it’s a bit easier. Businesses under a million dollars, for example, you’ve got a lot more data and you can be a lot more specific.

Dru Morgan [00:17:01]:
For us, transacting mostly larger businesses, it gets tricky to get a lot of data and a lot of time. That’s the great unknown for a seller just to come back to answer the question, if they look us in the eye and say, you’ve got me an offer here of $8 million or whatever, is that genuinely the best offer in the marketplace? I just have to genuinely look them back and say, look, I don’t know. From everything that we’ve put forward, it seems like it’s certainly within the ballpark, or it seems like a good buyer to deal with. You can certainly take that. It’s an easy transaction. It’s a cash buyer. The alternative is to not take it and go to market and invite that buyer to be part of the expression of interest. But the issue you may have then is that buyer may just completely get turned up and walk away and you may have lost the best offer that you have.

Dru Morgan [00:17:42]:
It’s not an easy decision for a seller. No easy way to answer that. There’s certainly pluses and minuses either way.

Joanna Oakey [00:17:50]:
It’s a fantastic sort of discussion point as well, from the perspective that the best deals are done between not just a willing and enthusiastic buyer and an enthusiastic seller. Right. But I guess the problem with going to and headhunting our sellers is that they haven’t necessarily come to the view independently that this is now their time. And it can be an emotional process. We all know for someone selling their business, sometimes they really need time. Notwithstanding, they might have someone externally saying, this is time to retire from the business or whatever. It’s just that the idea sometimes is a lot more enticing than as they get closer to that reality. So do you find when you’ve got a buy side mandate and you’re out there approaching businesses that haven’t gone to market yet, that there’s a higher attrition rate of sellers, a higher rate of them pulling out, or how do you assess who the right sellers are rather than those sellers?

Dru Morgan [00:19:02]:
That other thing to consider, Joe, is that demographic. So most of our clients that have established businesses, particularly larger ones, five to $15 million sort of companies that we approach and say, look, I’ve got a buyer that would like to do something. Most of those clients are probably in their seventies, they’re not in their twenties. And some of the decisions that they weigh up is, if I got an offer today of $8 million, am I better off taking that and doing a nice, easy, simple, discreet transaction that no one would know about, or am I better off going to market in that? In the hope that I might get eight and a half or 9 million? Sometimes that’s actually a far easier question for them to answer. Like they’ll just say, look, give me the simple option. At this stage of my life, I don’t actually care whether I get half a million dollars more or not. So sometimes it’s an easier personal decision. It’s not always about money.

Dru Morgan [00:19:52]:
Sometimes it is. And sometimes they have that conversation with sales. I’ve got a buyer and he’s happy to pay you x amount what you’ve got based on what you’ve given me. And they say, should we go to market? And I said, I just say that possibly you could get a million dollars more if you went to market for this. We don’t know. Yep, let’s do that. Let’s go to market. And sometimes money is important, but I do find in that demographic, more often than not, simplicity is more important than money.

Dru Morgan [00:20:16]:
And it’s a really important factor. And something that’s stress free, as opposed to something with a lot of stress and a lot of different parties and information going to places they’re not sure of and information going to competitors. And the key management finding out that they’ve spent ten years setting up, it’s just a real consideration. So sometimes it makes a lot of sense for them to not concentrate on the end dollar value and concentrate on the simplicity of dealing with one buyer.

Joanna Oakey [00:20:41]:
Okay, fantastic. And one thing that I wanted to round back on, which I foreshadowed as well, was some of the benefits that I think are there for sellers in dealing with that buyer that has approached them, or a sophisticated buyer, not even just a buyer that’s approached, because in many instances, our clients who are selling to a multiple acquirer, it won’t necessarily have been headhunted. They might actually be on the market. So they may have other buyers that they are also considering at the same time. And I think, bye. Selection is very important, and particularly if you’re in the size of market or the type of deal. That means there’s some relationship post completion, and it’s going to be a relationship post completion if you’ve got an earn out, for example, or if there’s equity that you’re leaving in the business equity.

Dru Morgan [00:21:38]:
Actually, that year we had, they actually left some equity on the table, which is really interesting. That large group wanted the owner. They offered 100% buyer. Or they said, if you like, we’re a huge group, you can be part of us moving forward and retain 10%. It’s up to you. And I think that that’s a great example of a bit of upside for a seller. Hands are out of it, but you’ve retained something that could be part of something bigger that you can. It’s purely a minority shareholding that you can leave to somebody in time or whatever it is.

Dru Morgan [00:22:06]:
So there’s certainly some upside to dealing with those larger groups if there’s for a seller that you wouldn’t get just in a private transaction.

Joanna Oakey [00:22:13]:
I totally agree and I 100% agree. And I think some sellers just want to sell out and be done. But a lot of sellers, they love that idea of just keeping a bit of, a bit of skin in the game, a bit of connection, a bit of, you know, their business, baby. But just the one caution that I always give to sellers in that situation is just understand that the buyer will deal with your business differently to what.

Dru Morgan [00:22:41]:
You can be stressed for you. They will unstitch every stitch that you put in place. They will change.

Joanna Oakey [00:22:46]:
Yeah, that’s right.

Dru Morgan [00:22:48]:
Not always going to be straightforward. And there’s also the personality side of things, Joe, like you don’t, as much as you deal with someone over a period of months, you really don’t know who you’re getting in bed with until such time as you worked with them for a long period. So you never really know how that’s going to work. From a personality perspective, they can be great to deal with through the transaction. Who knows?

Joanna Oakey [00:23:09]:
We’ve had a number of transactions, interestingly, where we’ve acted for sellers who are selling to same entities. And what’s fantastic in those instances when we can say to our clients who are coming in and a bit nervous about dealing with the buyer, hey, we know people that have sold to them in the past, why don’t you go have a chat to them? And I think if you’re a buyer who has bought multiple businesses, I think that’s a stellar move having, number one, you need to be a good buyer in order to use that, that approach, because you don’t want to tell your sellers to go speak to the previous sellers and who have a negative story. Right. So we’re presuming here that you’re a good buyer, but if you’re a good buyer. There’s a lot of don’t underestimate the power of testimonial of previous sellers, even.

Dru Morgan [00:24:02]:
From a broker’s perspective. If you’re a broker, and we’ve had that conversation numerous times, where I can re a company and say, look, we’ve done a transaction with this buyer before, they’re excellent to deal with, they’re really honest, they make it easy for you, and that’s really reassuring, as opposed to bringing someone, we don’t know what they’re going to be like to deal with. So if you do have a quality buyer and you’re working on the buy side, you can tell a story of deals that you’ve done with this buyer in the past and other things that they’ve acquired and how that transaction went. It becomes easy. It becomes really a good, it gives the sellers a lot of comfort.

Joanna Oakey [00:24:36]:
Certainly does. I completely agree with you, Dru. I just want to say a huge thank you for coming onto the show today. If we’ve got any businesses out there who are thinking of growth through acquisition and need someone to help them, or indeed, if we’ve got sellers who want someone to guide them through the process, how do they get in contact with you?

Dru Morgan [00:24:57]:
Just on morganbusinessales.com if you see all our contact details there. Happy to chat to anyone.

Joanna Oakey [00:25:02]:
Dru, thank you so much for a fascinating discussion today. I loved it. I thought we covered some areas that are very close to my heart.

Dru Morgan [00:25:11]:
Thanks for having me. It’s great to chat. Good to see you again.