[EP 027] On Your Terms: The Commercial and Legal Elements of Preparing a Business for Sale (Part 2)

Hi, it’s Joanna Oakey here and welcome back to The Deal Room Podcast, brought to you by Aspect Legal.

Welcome to the second half of our exciting two-part series with Andrew Cassin of Acquisiti.

In part one, we introduced you to Andrew and the story behind his new book – “On Your Terms.” And we also talked about the legal elements of preparing a business for market. And just as a quick reminder, if you would like a copy of our e-book  The Top 7 Legal Considerations in Preparing for the Sale of a Business, for either you, or your clients, check out the show notes.

In this episode, as promised, we get into the content of Andrew’s book. We’ll talk about the usual suspects for business sale disappointments and go through some key considerations when preparing to sell your business. And finally, we close this series with Andrew’s tips for advisors, brokers and accountants working in the M&A space.

So don’t go anywhere! Here we go!  

The Usual Suspects for Business Sale Disappointments

Joanna: So how about we get into some of the content then, Andrew. You’ve got 101 ways. We probably can’t talk about all of those today.

But what do you think out of those hundred and one ways. I don’t know. Are there any, I’m sure it’s hard to pick like picking a favourite child, but out of those hundred and one ways which do you think are sort of the key ones that we could talk about here today that are really the top priorities?

Andrew: I’ve listened to a few of your podcasts before so I don’t want to rehash old material. I will echo the usual suspects. So there’s always the – what’s really important is to know what you’re going to do next. So having a post exit plan.

The vendors who don’t tend to either get cold feet toward the end of the sale process and decide to hang on to the business have no idea what they are going to do next. Or they just suffer from vendor’s remorse and just kick around for six months and don’t really know what to do with themselves so it’s really important to have a plan.

Joanna: And I think that’s worth really emphasising because that’s a more soft element in terms of preparing for business sale that many people really don’t think of because it’s not hard data driven. But it’s such a good point because the process of a sale itself involves, can involve a lot of emotion. It can involve a bit of flexibility as well. If someone isn’t clear enough on the why and what they want to do next, it can really create a problem in getting to that outcome and perhaps lead to the outcome that they’re just not as satisfied when the deal is done at the end of the day.

Andrew: It could also cause problems in the marketing of the business because when a potential buyer is saying why do they want to sell, you really need to have a good reason for it.

You can’t just say “Oh, you know they’re just a bit sick of the business.

Joanna: Yeah.

Andrew: It doesn’t really sell very well.

Joanna: Absolutely.

Andrew: It’s a good idea to have a plan.

Joanna: Okay. Well, I like that one.

Andrew: The next one that’s important is of course become independent of the business and the business not dependent on the owner. I mean that’s been spoken about before.

Avoiding dependence on specific clients so that you don’t have a very close concentration of your business lumped in with large volume of one client which is pretty typical unfortunately in the SME market. That’s definitely something to be avoided.

Joanna: Let’s drill into that one a little bit more. So avoiding dependence on, having too many eggs in one basket basically for the organisation. What are some strategies that organisations use that you’ve seen that helps? Have you worked with any businesses through the process of helping them create greater diversification or less reliance?

Andrew: The old the answer to that is yes. It is difficult in some businesses. I have one client that was a state government consultancy. Effectively they consulted to state government in New South Wales. Their client was state government. So when state government took a hit, their business suffered.

They have many clients within state government, all these different government departments. But it was all under this one contract. When there was a change of government from labor to liberal, a lot of spending on consultants was put on hold for a good 12 months and my client’s business devalued by about half almost overnight.

Joanna: Gosh!

Andrew: But that’s their business. At what point do you say we need to do private sector as well. Well that’s just reinventing the business. So you’ve got to be a little bit careful there.

But most clients I deal with early enough understand that there’s a threshold limit of 15 to 20 percent that is to be your largest client. You shouldn’t have any more of your revenue than that coming from one particular customer.

Joanna: Yeah. Right.

Andrew: You shouldn’t have more than 70 percent of your revenue coming from foreign customers as a group.

Joanna: Good. All right. I think that’s a good point. What’s our next one?

Andrew: Get the best advice from people who’ve done it before. It’s a really important one and that’s making sure you surround yourself with the right advisors – a good tax accountant, a good lawyer, a good broker. If you’ve got a mentor, make sure you’ve got one that’s actually been through a sale process before, not someone who just worked in a corporate organisation.

Well, we would certainly agree with this one, Andrew.

Get the best advice from people who've done it before. - Andrew Cassin #TheDealRoomPodcast Share on X

Andrew: As you would! And most of your listeners would as well.

Joanna: That’s right.

Andrew: Systematise the business. Make sure you have good systems.  mean I’m actually to Michael there was this concept way back when they actually got good systems mean. Effectively the business needs to be able to survive a complete change of staff.

So assuming that under the transition the principal is going to leave, their key people are going to leave because they have been here for seven years and they go “I’ll go and do something different now.” There are some under-performers there that need to get turned over. If you’ve got good systems in place, the buyer can manage that turnover of staff. If you don’t have any good systems in place, then the business basically disappears. So make sure every document is systematised as much as possible.

I guess the final one there, and again I’m pretty sure this has been spoken about before, is getting your ducks lined up so that everything is clean. So your financials are clean. You’re compliant with all your statutory obligations, regulatory obligations so that the business is going to do well in a due diligence process when the forensic accounts come poking around.

So they’re sort of the ones that I would call the usual suspects that most talk about. But for me, the most important gem you really get out of the book or even just from my experience is being able to view your business through the lens of a buyer. To be able to take a step back and say “Okay. It’s not about me anymore.”

Someone’s going to come along. It’s either going to be an external buyer or it’s going to be a management buy out or it’s going to be some sort of employee ownership program. I need to be able to look at my business from that perspective.

That is often one of the best piece of advice you can give to any vendor. Because more often than not, all they’re concerned about. They go into work everyday. They see their business from the inside out. That’s all. They never stand to look back and look at it from the outside in. It can be a very valuable approach.

But what I communicate to clients now when we’re starting to work on getting prepped for sale (two, three, four years down the track however long it’s going to be) is profiling who is actually going to buy the business. Because what most business owners don’t get is this is not like selling a house.

You can’t just advertise a business expect a thousand people to come through the opens. A couple will be there for the auction. They’ll fight it out. You’ll walk away with half million dollars above reserve. Wonderful!

It’s not how it works in selling a business. You’ve actually got to know who’s going to be buying it.

Is it going to be an owner operator? Is it a lifestyle business? Is it going to sell to somebody who is going to come in and take it on as a lifestyle? Is it going to be selling to a competitor? Is it going to be a strategic sale to someone who’s aligned to your business but not necessarily a competitor? Is it a financial sale? You can sell to private equity or a family office. What do they look like?

I’m dealing with a company at the moment in the marketing communications space and of late the Big Four consultancy firms have started investing heavily in the advertising marketing space.

We looked at her business and said “Well, it sort of makes sense given your clients and the type of work you do that they would be an ideal fit for your business.” They’d be the ones who should be looking at your business going “We can get the best value out of that.”

And so we have got to make sure that your remuneration systems are aligned, that the way that you work is very similar to the way these professional firms operate so that the transition to new ownership, if that is your ideal buyer, is going to be as sweet as possible. It’s going to be basically a no brainer for them.

If you can go to your ideal buyer and say “We’ve got this asset here that is going to increase in value because of the fact that you’re going to be buying it and integrating it and doing all this fancy stuff with it”, it makes it really easy.

But if you just go to someone with a white label information and then say “Here, have a look at this.” It’s a very different conversation and they can quite easily just say no. The best thing to do with a broker is to be able to make it an unavoidable yes.

Practical Changes Your Business Can Do Today

Joanna: I think that’s a really great example of how this works in practice. In that example, you touched on one or two of the changes but maybe if we can just drill into those a little bit more.

What are the practical changes that a business could make or did make that could make a difference now in light of the fact that they’re looking from the position of the buyer, the potential buyer?

Andrew: I think the main thing is understanding how and why that ideal buyer buys. So what sort of transactions do they do? Do they expect an earn out? Do they expect walk-in walk-out sort of deals? Is it all cash or shares? What is the transaction likely to look like? What’s their expectation for how long it’s going to stay in place?

Because if you’ve got a five year plan to be out of your business and you find out that your ideal buyer is going to require the principal stay for two years, then you’ve got to subtract that from the five years and say “Well, we’ve got to be in the deal in three. It’s gonna take 12 months to sell it. So we’ve actually got to be exit-ready in two years.” That gives you the timeframe and you can work backwards from there. So that’s one – understanding who to talk to.

As an advisor, if you’re able to work with a client over that sort of timeframe, you can do that groundwork and find out who are the people that actually make the decisions within those organisations. Then start building your database so that when you’re ready to go, you’re not working it up somewhere or you’re not just making cold call after cold call and getting nowhere. You’ve already cultivated relationships with these people and these organisations. So it’s sort of a team effort there.

Understanding for example in the recruitment sector there are some very commonly used software applications. So if you’ve got the opportunity to convert your data across and your systems across to something that’s more common rather than a proprietary system or something that’s been used for 10 years and it hasn’t been changed. Then again it makes it so much easier for someone to make that purchase decision because they say “Well we use X system and this buy uses the X system. It’s going to be really easy to integrate the data.” But if you’ve got something completely different, you know “We speak English. They speak French.” well that’s going to be very difficult.

Joanna: This is a really interesting point you make because I get the feeling that as businesses are looking towards that close to sale, they like to start investing less in the business from the perspective of things that might occur as costs in the business because obviously it impacts the sale value from a cost perspective.

But here’s an interesting point of view on the flip side for ways that an organisation can cleverly spend money that whilst it creates an expense on one side, but also on the flip side can create a much stronger pool of buyers if done correctly, if spent correctly.

Andrew: If you’re going to be spending that money anyway, spend it in the right area. But I think the overarching philosophy there is stepping back and saying “Well. This isn’t just a business. This is actually a financial asset.” And it’s out there competing with hundreds of thousands, if not millions of other financial assets that investors and buyers have the opportunity to invest in.

Because the investor and the buyer has got cash to invest. They’re getting 2 percent in the bank. So they’re saying “Well. I’m going to invest in a privately owned business. I want to get a 25 30 40 50 percent return”, whatever the case may be, on their money. And they’re out there looking at all these different assets, all these different asset classes, in order to get the best return on their money.

So as a business owner you need to be looking at the business and saying “For too long I’ve been looking at what the business produces (in terms of the product or service I’m selling), I need to now step back and say my business is now the product. My business is what I’m out there selling.”

I guess that’s the key difference between what I would consider an entrepreneur and a business owner. An entrepreneur tends to focus on creating assets that they can sell or create wealth. They build businesses that they can then IPO or they can trade sale or whatever the case may be. A business owner tends to be much more insular and they are only focusing on the products and services they’re selling.

Then we hear about serial entrepreneurs. You hear that term quite a lot. They will build a business. They will sell it. They will have a bit of gardening leave and then they will go and do it again. And then they’ll do it again and again and again.

In fact, I was listening to an interview recently of a guy who had done it eight times and he’s just done a one point three billion dollar exit.

Joanna: Wow!

Andrew: That’s his most recent. He’s obviously learned. He started small like everyone does. He made mistakes along the way. But he was able to exit. And he has done it eight times.

I can’t remember his name, but he is a Canadian fellow.

Joanna: Well he’ll be interesting to talk to as well, wouldn’t he?

Andrew: He would be.

Joanna: We’ll see if we can line that up.

Andrew: That’s a really key thing. For any business owner who understand that they’re in a competitive marketplace. There’s only so many buyers and investors out there. There might be a lot of money because private equity is sitting on something like seven billion dollars of uninvested income at the moment or uninvested capital at the moment in Australia. That’s a ridiculous amount. But of course they’ve only got a mandate to invest a certain size and certain return profile and things like that. But individually there’s only so many buyers to go around. There might be one for every hundred business owners.

So if you’re going to be successful in selling your business, you need to understand what your buyer is going to be and how you’re going to be as most appealing as possible for that buyer when the time comes to finally go on the market. Otherwise you’re just going to get lost.

Build Your Advisory Team Early

Joanna: Yeah. For the people who are sitting out there, and now I guess I’m talking about the business owners themselves who might be listening to this podcast or managers in organisations that are looking to build themselves for sale in the future, how do they know?

Obviously the issue is they probably don’t have access to the information to be able to make this assessment of who it is that might be out in the market that might be the real pool of buyers that they could be preparing themselves for. So what’s the answer? How do people get across this and get educated in this area?

Andrew: Build your advisory team early, because each of us being accountants or lawyers or tax people or whoever they are have a network of people. We all have our different insights and different reach into the marketplace. We know different people doing different things. And together, as an advisory team and I say team. You don’t keep everyone in isolation, you’re actually bringing them together early so we can all work toward the common goal.

Build your advisory team early. - Andrew Cassin #TheDealRoomPodcast Share on X

Joanna: And I have to say Andrew, because we’ve worked together for a number of years now and I really love your approach in working with you. I think from the very first time we met, this is an area that we were absolutely aligned on. This concept of the benefit of the power in team and the uniting of your broker or advisor together with your lawyers and your accountants all together with the business owners working together as partners rather than just on a transactional basis.

Andrew: I was working on a transaction a few years ago where the clients appointed a lawyer late in the process because they didn’t have one and I offered to bring them one. It might have even been you actually. But no, they said “No, no. We know this guy. We’ll bring him in.

He was a litigation lawyer. No experience in M&A. So we had a very adversarial approach all of a sudden between the client’s lawyer and the buyer’s lawyer. It all fell apart just because of that lack of experience and lack of an alignment. That was the main thing we’re trying to achieve here is alignment.

Joanna: Yeah. And this is one area of law where an adversarial approach I believe really is a deal killer.

Andrew: I have to agree with you there. It just doesn’t work.

Let’s Take A Break

Let’s take a short break. When we get back, we ask Andrew what it is that surprises businesses when they’re approaching a business sale. And of course, we never end a series without leaving you with some actionable tips – and these ones are especially directed to our listeners who work as advisors in the mergers and acquisitions space.

And that’s next! This is Joanna Oakey, and you’re listening to The Deal Room – a podcast brought to you by Aspect Legal.

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Welcome Back

Welcome back! Earlier, we identified the usual suspects for business sale disappointments that you ought to watch out for. But on the flip side, Andrew also introduced some practical changes you can do for your business (or for your clients’ business if you’re an accountant or business advisor), which will make a whole heap of difference when you finally decide to go to market.

Let’s keep the conversation going and dive into what Andrew sees as the biggest surprise for vendors who are selling for the first time — and what you can do to avoid this unpleasant jolt!

The Biggest Surprise for Sellers

Joanna: I’ve got an off the wall sort of question here, but I’m always particularly interested in what it is that surprises businesses when they’re approaching a business sales base. And I guess from this perspective we’re particularly talking about vendors here, sellers. But I’m also interested in your comments on buyers as well. What have you seen in your experience? What part of the sale process do you think most often surprises sellers or buyers who haven’t bought or sold before?

Andrew: I’ll talk about vendors. I won’t talk about buyers much because most of them tend to be much better advised particularly in the market I’ve dealt with. I’m not dealing with small businesses. I deal with 2 million to 20 million dollar value type of businesses so buyers tend to be a little bit more professional in their approach.

I think the biggest surprise for vendors is that their business is more valuable to them than it is to anybody else. Particularly those who have got more of a lifestyle business where they are the principal. They’re pretty key to the business.

They have these expectations because they have read books out there. There’s some genius author out there who put a book out recently which they have then read. They get evaluation done by their accountant or by someone or they speak to John down the road who sold his business for 10 times earnings and they go “Well, my business is worth that then.

Then reality check comes in. They find out the hard way that it’s just not worth what they think it is and they just haven’t been able to make that transition from the internal focus to the external awareness. So that’s probably the key thing, the biggest surprise.

Joanna: Yeah. I quite often come across the comment that’s thrown out there. I think quite often business owners who are too inwardly focused often leave their businesses in the situation where they see it as their pot of gold at the end. And quite often that’s also often paired then with business owners who are too integrated into the business in a way that impacts the sale potential and value.

Perhaps that’s almost a warning sign for businesses that are looking at their business in and of itself as the pot of gold. They’re the people that I personally think seem to be most surprised because they’re the ones who think they’re about to cash in at this point. They’ve built it for all these years and they go to cash in and think it’s going to be worth so much. And of course they’re the ones who are most susceptible to the jolt at the end of the day if their concept has been misplaced.

Andrew: So it’s like they’re expecting a lottery win.

Joanna: Yeah.

Tips for Advisors, Brokers and Accountants

Joanna: So my very last question here then is what tips do you have? And maybe let’s talk about tips perhaps for our advisors that might be listening in here, maybe for our accountants that are dealing with these businesses on a regular basis. What tips do you have for them in terms of how they can most assist their clients? I mean obviously one we’ll throw out there is grab a box of Andrew’s books. That’s tip number one.

Andrew: I think the main thing is that switching mindsets. So have that conversation with the client and say “You’ve really got to step away and look at it through the buyers lens.” So understand what a would be buyer sees.

If I was doing due diligence on your business what would they find? Would they really appreciate seeing a big tax debt or would they really appreciate the bloated nature of the balance sheet or the fact that your receivables are stretching out and out now which means the working capital requirement is higher and higher and higher? That’s something definitely to be avoided.

In fact I’ve had that conversation with a number of transactions recently as well around working capital and that’s a thorny issue.

Joanna: Yeah. You should come back and talk to us about that. You know what I was actually just thinking about the podcast as a whole just yesterday and I was thinking “You know what, we need to particularly talk about working capital.” We’ll make that a discussion another day.

Andrew: 2018 probably.

Joanna: Yeah. But we could do many podcasts about that I think.

Andrew: I guess the main thing is just trying to get that mindset. Being able to get the vendors to start thinking about their business, about how sustainable the business will be once the vendor is out.

What would be the impact on the business if the vendor was to leave tomorrow or in six months or 12 months? What would actually have to happen to ensure a smooth transition? That’s pretty key.

I know it’s not really in the auspices of what an accountant really does, but it’s a conversation that can be had over coffee or something. When you’re having that conversation, say “So what’s your plan? Are you planning on selling at some stage?” Because you really need to be having a conversation with clients as often as you can really, to get ahead. Because as accountants, you can help them get very well-prepared just by making sure that they’re compliant and that they’ll stand up to due diligence because it’s going to be the accountant who is going to be answering all the questions all the time so it’s better if it’s clean.

Joanna: Yeah. Absolutely. From what you’ve been talking about today as well, one thing that occurs to me that is potentially very useful for all advisors in this space whether it’s accountants or whoever it is. It’s getting people who might be part of that team ready together early.

Accountants are in the situation where often they might be approached when they’re not ready for it, asking where their clients sort of say “Well look. I’m thinking about sale now. What do I do? Who do I talk to?” And of course if accountants have got their head around this and they’ve got their team together, it’s very easy for them to put the team together quickly for their client or make the introductions.

Andrew: I think it probably helps also just to have a good relationship with a broker that you like and trust so that you feel comfortable referring (not even referring your clients) but also having those conversations where you got a relationship where you can pick up the phone and say “Hey, look I’ve got this client who is in this situation. What do you think? What do you think they should do?” And a good broker would be able to answer those questions and actually provide some valuable insights.

There is often a bit of an adversarial relationship between the brokers and the accountants. I don’t know why that is. It seems to be across purposes, but embrace it. You’re going to be working with these people anyway so get proactive with them.

I know that there are a lot of accountants who do have relationships with brokers, which is fantastic. But then a lot don’t.

Joanna: Yeah. This is a really good point you make. I’ve actually had this discussion quite a few times recently strangely about the fact that sometimes there is this adversarial relationship between accountants and brokers or even lawyers and brokers. I think that’s a shame, reflecting on the discussion we were having earlier about the benefits of a cohesive team for an end customer.

I think if accountants and lawyers can understand the benefit of deeply involving the brokers or other M&A consultants in the deal as a whole rather than seeing themselves as sitting in their own silo, I think we lead to better outcomes.

Andrew: There’s also help with setting expectations. I spoke earlier about someone having been given the expectation of five or seven times a bit. It’s just not achievable.

If you’re going to be advising one of your clients as an accountant about what their business is probably worth, you need to understand what the market reality is for that type of business in that sector at that point in time.

They might have been out to get five or seven times for their business back in 2006. Maybe that was the last comparable sale that the accountant had access to. I don’t know. But it sets a very unrealistic and unachievable expectation if it’s not in alignment with current reality. So you need to have a relationship where you can pick up the phone and say “Hey look, what do you think a business this is likely to achieve at this point in time if it were to go to market today.”

So you can then set the right expectations with clients. If you give them false expectations, no one’s going to be happy.

Joanna: It’s really doing the clients themselves a disservice, isn’t it?

Well look Andrew thank you so much for coming on the podcast today. I’ve really enjoyed our discussion. I think we covered some really critical areas. And obviously if anyone is interested in contacting you, they can do so through your website at acquisiti.com. How do we spell that Andrew?

Andrew: That is acquisiti.com. Acquisiti is basically “acquisition” without the “on”.

Joanna: There you go.

Andrew: You will remember that one.

Joanna: I don’t think I’ve ever even heard you explain it that way before. That’s perfect! I like it.

Andrew: The problem of course is when people can’t spell anyway. That’s just way too hard.

Joanna: It never occurred to me. Of course it is!

Good. Okay, wonderful. Thanks for coming on, Andrew!

Andrew: It’s been an absolute pleasure Joanna.

Joanna: Fabulous. Have you got another book in the making there or is it one and done?

Andrew: No. It’s not a one and done. I do have a couple other concepts. I won’t start bragging about them just in case someone steals them. But no, there’s some other options there.

Joanna: Well, we will watch this space Andrew. Great!

Set the right expectations with clients. If you give them false expectations, no one's going to be happy. - Andrew Cassin #TheDealRoomPodcast Share on X

Legal Wrap Up

Joanna: Okay. Well that’s it for this episode 27 of the Deal Room Podcast which was the second part of our two-part series where we talked about Andrew Cassin’s book “On Your Terms: 101 ways to prepare a business for sale.”

If you want to hear more about the legal elements of preparing a business for sale, then make sure you skip back to episode 26 which is the episode just before this one, where at the end of the discussion with Andrew I talk about the legal elements that you should be considering.

If you’d like a bit more information, then head over to our website at thedealroompodcast.com or via Aspect Legal’s website at aspectlegal.com.au. There you can find this episode page at episode 27 and skip back also to episode 26. At episode 26, we’ll include links for downloading a free e-book all about the legal elements of preparing for the sale of the business.

Thanks again for listening in to these two-part series. I hope you’ve found it useful and I hope to have you back for our next episode.

Our next episode is another two-part series episodes 28 and 29 where we speak to Greg Savage and I tell you what that is a fabulous interview that you will not want to miss. So make sure you subscribe, if you’re not already subscribed, and come back and check out our next episodes 28 and 29 with Greg Savage.

Thanks again for listening in! You’ve been listening to Joanna Oakey and the Deal Room Podcast brought to you by the commercial legal practice Aspect Legal.