Today we take a look at the issues with the traditional transactional model of business broking with our guest John FitzGerald of Your Enterprise Strategy and Link Business. In this episode, John and I talk about a better way of funding business sale transactions and we identify some platforms you can use to facilitate deals into the future. We also talk about how business brokers, accountants who are advising businesses on a sale or acquisition, and even business owners themselves can jump on this opportunity now. Then we wrap up this episode with a discussion on why acquisition is a more viable path for entrepreneurs compared to a startup. All these and more!
- Current issue in business broking
- Facilitation Model vs Transactional Model
- Search Funder and the syndication model
- Opportunities for business brokers and accountants
- Entrepreneurship through acquisition
- Tip for the day
Joanna: John, thank you so much for joining us today to talk about this transactional model for business broking. And before we started we actually talked a little bit about our previous podcasts that we have had on the show where we have been focusing on the business model for brokers having problems.
But I think it’s worth pointing out that today’s episode is quite different to that in that we’re not necessarily talking about how to structure a business for exit and prepare for exit and the remuneration model for exit. We’re actually talking about the opportunity here going into the future for how business purchases and sales and acquisitions can be made. The model that can work in terms of how businesses are sold and purchased. Is that right John?
John: Correct Joanna, yeah it is. That’s for sure. To explain to you now. I’m looking at the business broking model from a different perspective as Simon. Simon is looking at it from the exit planning perspective. I have been an exit planner and that’s how I became a business broker. But I’m looking at it from a facilitation model where the best outcome is engineered for both the buyer and seller and also through search funder and some other things I’m doing, looking to bring investors in to give different options on how the business transition can be funded because that’s one of the significant issues that’s coming up.
And I think we can we talk about a month or so back to one of the significant issues is you’ve got to have increasing supply because of the baby boomer situation. The next on dynamic is the millennials don’t have the collateral to actually buy businesses out. That’s just the standard fact. So you have to look outside the square to actually get the transaction over the line plus educate both the buyer and the seller on better ways to make it happen. I’m in that space.
Another comment is the businesses under about 500,000 mark the transactional model still has to be there because they’re not an investment, buy a job type of business. They really need the transactional model. But the businesses that are more significant and are actually investments that’s where the business broking transactional model is definitely fractured.
Current issue in business broking
Joanna: So let’s step back a little bit first. Let’s talk about what the issue is: What’s the problem at the moment? Why is it broken? What’s the issue that you’re identifying that you think needs to be fixed for the future?
John: Okay. The traditional business broking model has been transactional. That’s been on for the past. Particularly the banking system, the transactional model relied on traditional funding methods to operate. But with the changes that are happening in that sphere, people have to look outside the square and look at different ways of funding the transaction because that’s going to be one of the biggest problems in the future. I won’t talk too much about the banks but they are going to change. They’re going to tighten up.
Joanna: Drilling into it a bit more. We started off number one our issue is that we’re heading into a period of our baby boomer business owners selling, and this risk that we’ve talked about many times on this podcast of a wave of businesses for sale into the future. So we’ve got this as an issue.
Then the second component of the issue, I hear you saying is this traditional model of financing through bank funds for an individual or a group of individuals or a small group of individuals purchasing a business might be stressed more into the future as both business values potentially dilute on the basis of a flood into the market. And number two, the tightening bank regulations.
So you’re saying here, okay so we’ve got an issue, we might have a lot of businesses on the market, so we’ve got a need by sellers. And from a buyer’s perspective, we’ve got a need for some potentially different way of viewing this because we might have issues accessing the sort of funding that we may have been able to access in the past. Is that right? Have I captured it correctly?
John: Pretty well, Joanna. There are a few other dynamics there and to talk about them from the seller’s perspective, They’re not going to get the money unless they’re prepared to do things a bit differently. The buyer’s perspective, the banks are tight. They’re not going to get the money because they look at a different number of areas, and unless that collateral is there, they won’t get the transaction over the line.
I think business sellers have to look more at using what they have in the business, their equity and the strength of that business. And I believe begin with partner, with buyers I know that’s not going to be perfect for every situation. But when I say partner, help someone to get into their business, show them the ropes, use vendor finance, use other methods like buyouts, be prepared to be a little bit expansive and think outside the square to to allow it to occur.
But also, what I’m seeing at the moment, there’s a bit of money around and it seems like the real estate market is backing off. Investors want homes for their money and one of the great investments that you can make is actually in a good strong solid business. Bring those into the operation. So although you can still use traditional financial methods and the banks to get into a business, back it off a bit so the proportion of that funds is not as great, and therefore there are a number of different ways you can do it and make it win-win.
I believe the business broking model should go from transactional to a facilitation model, so the best outcome is achieved for both the buyer and the seller, and also to give opportunities to investors to come in and have a party of it so that they can have a good aim for their funds and make money as well. Make it as close to a win-win scenario as you possibly can. That’s how I feel about it.
Facilitation Model vs Transactional Model
Joanna: Okay so drilling into a little bit more, if we’re talking about well let’s move this to a facilitation model than a transaction model, and I guess by that what you mean is that our advisors might look to the future to be more facilitators of grouping of investments and financing together with entrepreneurs who might want to buy an organization to run it rather than simply the broking transactional model, which is I’ve got a seller and I want to match up with a buyer and there we go transaction, we’re off. Is that what you mean by facilitation model?
John: Exactly. Bring people into the business that it needs to make it stronger. And then after you bring the people in, make the business stronger, which the exit planners are really doing a superb job in educating business owners to look at the strength of their business. Bring different people in and provide more value for not only the buyer but potential investors and make sure it can happen.
I’m also working with an organization called Search Funder, who facilitate investors coming in to buy out businesses and developing a Harvard program called Entrepreneurship through Acquisition. It’s a pretty boring model. All it does is teach people how to buy strong stable businesses that have been in business for a long time, have good history, have good cash flow and plenty of strength so that you can make a solid investment in those business opportunities.
Search Funder and the syndication model
Joanna: Yeah okay. And tell us a little bit more about Search Funder. I think that’s an interesting element that I’d like to talk about a little bit more.
John: Search Funder is just another opportunity to be able to fund the business transaction and give more investors opportunity to come into the business, be party to the deal. But also, it allows people who are committed buyers to buy good strong businesses. It doesn’t operate within the traditional financial system, so there’s much more flexibility in how the deal can be structured. And obviously that flexibility means the outcome can be more long term and looked at in different ways than just a bank wanting to get a repayment every month, every fortnight, or every year, whatever it may be, which if a business isn’t going all that well or there’s a bit of a tightening of the economy, they struggle and we’ve seen a lot of that over the last number of years particularly since 2008 in the global financial crisis. But that’s also giving them the opportunity to bring other people in.
Joanna: Okay. So here we are talking about searchfunder.com. Anyone who is interested in this website and check out our show notes we’ll have a link through the searchfunder.com. And so John, have you have you used search funder before? Talk us through how it actually works.
John: Search funders hasn’t actually been in operation that long. It came off some business programs in the US. It’s becoming quite big in the US and in Europe. I’m the first or maybe the second business broker that’s actually on the system. There’s only a couple other people. But it’s a global platform that provides the opportunity to acquire funds and investors and also buyers from around the globe, not just Australia, which is an incredible aspect to bring into the sale of a business. It’s really quite amazing. And it’s private funds. It comes from different areas as well. But it’s totally different, which is great.
Joanna: And how are you expecting that you might be able to utilize this type of technology into the future, this type of platform?
John: For me, selling some good businesses, it gives the opportunity to do it in different ways. Another thing, I’m promoting is business syndication where instead of one buyer buys a business, get a syndicate of buyers to buy a business. Again, do something like an earn out with the owner, different things like that.
Search Funder allows more people to see a deal, more opportunity to get a good deal going and then obviously access to the many more funds, traditionally, just going to a bank or a couple banks or a finance broker which is great and they have access to a broad range of funds. This gives a different dynamic where an investor can partner with a buyer to actually acquire a good business. We’re talking about businesses that are worth a million, two million and more. The big problem with businesses is the gap between a million dollars and 10 million dollars. Above ten, you’re looking at merger and acquisition work. This is different. You could basically say it’s quasi-business acquisition, and I know you were in that space as well.
Joanna: Absolutely we are. Yeah that’s right.
John: I see this as more towards quasi-merger and acquisition with the businesses between 1 million and 10 million and giving them more opportunity. Put a good team of people together to structure good deals and ensure it’s win-win for both parties, which really is the way it should be. I mean a transactional model is adversarial. The buyer wants to get as much money as they can and the seller wants to get a business for as little money as they can pay. That doesn’t set up a good situation in this day and age, I believe.
Our business sales and acquisitions services
Aspect Legal has a number of great services that help businesses prepare for a sale or acquisition to help them prepare in advance and to get transaction ready. And we’ve also got a range of services to help guide businesses through the sale and acquisitions process.
We work with clients both big and small and have different types of services depending on size and complexity. We provide a free consultation to discuss your proposed sale or acquisition – so see our show notes on how to book a time to speak with us, or head over to our website at Aspectlegal.com.au
Opportunities for business brokers and accountants
Joanna: I think it’s fascinating, this discussion. We’ve had a number of podcasts in the past. Most recently we had Craig Rispin who’s a futurist talking about the future of sales and acquisition activity, and so I really enjoy this looking into what are the new opportunities, what does the future look like, but also bringing it back to so what can we do now. So my question to you then, John, is how can business brokers and accountants that are advising businesses in sales and acquisitions and businesses themselves, how can we jump on this now? What’s the opportunity now do you think?
John: I think the opportunity is be open to partnering with specialists in various areas of the transaction. I mean partner with accountants, partner with solicitors, partner with other finance brokers and the various people that need to come together to put a good solid deal on the table and make it work. And as a business broker, I’m getting together groups of people that I can access to be able to do this. Because I think from our training the thing we understand is the value of the business. We also understand the holes that are in a business because if we’re trying to sell a business that’s not quite up to scratch again you’re trying to work with that and get the best results you can. But now I think it’s a matter of no no, bring it all together and make it happen.
I think too that business owners tend to keep their business from between two to five years too long. So by the time they’ve gone the five years, there they mind to sell. No that’s wrong because that means it has to be a transactional approach.
Go back to when you want to think about, okay I’ve got to sell this business in two three four five years. Let’s make sure it is really a valuable business, an enduring business that can be passed on rather than sold, because if you have a good business, your job doesn’t finish when you sell it. You want to give a legacy, leave a legacy of a good strong business that someone else can take advantage of and do well out of this world.
Entrepreneurship through acquisition
Joanna: That’s fascinating, John. Thank you so much for walking us through all of this information. There is one other area that I just wanted to delve into a little bit. This concept of entrepreneurship through acquisition. In previous discussions we’d had, you’d suggested that instead of businesses or an entrepreneur who is thinking of creating a new business creating a startup, maybe the acquisition of businesses is a much more sensible starting point than starting from ground up. I thought it might be useful to delve into that a little bit further. Why do you think startups fail? I have a lot of conclusions and ideas about this but interested in your thoughts, John.
John: There’s plenty of conclusions. I think startups struggle for three reasons. The first is history. No business history and if they go try to have a startup and you say you’ve got to have a business plan well how do you present a business plan when the whole thing is absolutely a guess.
The second one is cash flow. Generally, a business when you start it up whatever the case may be, if you can become cash flow positive within two and a half to three years you’re doing well. But also cash flow positive, you’ve still got to get the break-even point, and if you’ve been investing money for two and a half through the years, your break-even point is a lot higher than what the break-even point for the business may be.
And the last one is collateral. A start up, well, how many start up entrepreneurs actually have the collateral to go to a bank or financial institution, and say okay I want to do this, here’s my collateral, let me go. Those things aren’t there. An actual fact when you go to a bank to get a business loan, in a sense, they’re three things they look at a business history, business profitability or cash flow, and also the collateral you can offer to reduce their risk. I see they’re the core reasons why startups fail.
But entrepreneurship through acquisition, if you work with a business owner, you’ve got the history of the business, so effectively you can do a proper business plan because there might be 10,15, 20 years of history there and with cash flow you know what the business is doing at the moment. Also, if you assess the risk and the opportunity, you can see where the business can be taken to, with the right systems and processes plugged in.
And of course, you can use collateral of the business owners through the finance they have and what they leave in the business. But then if you can access outside investors who have an appetite for risk and they know enough about business that they’re prepared to invest in the acquisition, then you’ve got all those aspects covered. And a stable set boring business, that’s really what investors want. They want to see what returns they can get and entrepreneurship through acquisition is really a good thing.
Another way to look at it is that, okay a startup can use that business to finance their start up, because once they get that business stabilized. They know what they’re doing. They have good management in place. They’re getting their a bit of return off the business. Well if they wanted to start up then, why not because they’re using their own resources to fund the startup not going to an outside resource like a financial institution who really don’t want to know you unless you’ve been in business for three years and now it’s profitable. Use that resource they have behind them to actually fund their startup. It’s just I suppose you could say it’s getting from point A to point B in a little bit of a different way, but it’s much more viable than the startup because we all know what the history of startups are.
Tip for the day
Joanna: You have made some very interesting points today, John. And thank you so much for coming onto the show. Are there any last minute tips that you want to leave our audience with?
John: I think one of the biggest problems with Australian business people is the fact that they are resilient and self-reliant. I think the big shift that’s got to be made from not only people in business but people want to want to come in the business, use the massive resources that are around you to make sure you can be a success and be a success much quicker than you could if you tried to go it alone and do it yourself and learn by your mistakes.
Joanna: That’s a really good point, John. Okay. Well look thank you so much for coming onto the show, and if you’d like to contact John and discuss his syndicated model idea, or if you are interested potentially in looking to sell or buy a business using a syndicated model like that described by John as an alternative to the transactional model, then use the contact details that we’ll set out in our show notes in order to get through to him or John where else can they contact you?
John: Well, I’m a business broker with Link Business, so you can contact me through Link. You can also contact me through my website, which is yestrategy.com.au. and submit a contract request through that and I’ll answer that as soon as possible.
Joanna: Good work. Okay wonderful. Thanks John. Thanks for your time today and for the insights into how we can look at a new model for business broking rather than the transactional model. What did you call it, John? The facilitation model.
John: Facilitation model.
Joanna: Great. Okay, thanks John!
That’s a wrap!
Joanna: Now that’s a wrap for this episode with John Fitzgerald of Your Enterprise Strategy and Link Business.
As a quick recap, in this episode we investigate the issues with the traditional transactional model of business broking from the perspective of how the business transaction and transition is funded. John then introduced us to the facilitation model of business broking, how it offers more flexibility in structuring deals and making it more beneficial to both parties to the deal. We also talked about Search Funder and other platforms you may utilise in bringing more people into the deal and make this happen.
After the break, we drilled into the opportunities for more collaborative work as business broking transitions into a facilitation model and the importance building connections with various professionals that need to come together for a solid deal. We also talked about how acquisition is a much better and more viable path for entrepreneurs compared to a startup.
And of course, if you enjoyed what you heard today, please subscribe to The Deal Room on your favorite podcast player. If you’re already a subscriber, please consider leaving an honest review on iTunes to help us reach more people.
Thanks again for listening in. This has been Joanna Oakey and The Deal Room, a podcast brought to you by our commercial legal practice Aspect Legal. See you next time!
Disclaimer: The material contained on this website is provided for general information purposes only and does not constitute legal advice. You should not depend upon any information appearing on this website without seeking legal advice. We do not guarantee that the contents of this website will be accurate, complete or up-to-date. Liability limited by a scheme approved under Professional Standards Legislation