How not to leave money on the table when you sell your Business: Tony Brown from Divest Merge Acquire

[00:00:07] Welcome to the Owner To Owner Podcast. I'm Michael Kerr, your host, and I'm also the founder of Kerr Capital, where for 22 years now I've worked alongside business owners. Owner To Owner is a business podcast to empower the owners of Australia's small and medium enterprises. Forget the slick stories of tech titans and unicorns. At Owner To Owner we get raw and we get real. Every Owner To Owner episode is a personal conversation with another business owner just like you.

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[00:01:20] So what does it take to sell a business really well? Not just to get a deal done, but to walk away feeling like you've had a win. The honest answer is for a lot of business owners they don't find out until it's too late. As founder of Divest Merge Acquire, Tony Brown has advised on some of Australia's largest and most significant mid-market transactions and we'll get into what is mid-market transactions.

[00:01:42] But he really knows what separates the owners who win from those that leave money on the table. So for SME owners listening, there's a lot to learn here from the way they go about it in the mid-market. Tony's got decades of experience advising owners, doing acquisitions, mergers, and sales. So welcome into the Owner To Owner podcast, Tony Brown. Thanks, Michael. Pleased to be here.

[00:02:08] I'm going to start with tapping into your direct experience. You've sat across the table from hundreds of owners over the years, probably at their most pivotal moment in their business life journey when they're thinking about selling. So from that experience, what has been one thing that has constantly surprised you about the way the owners thought about the sale process and it's something that they should have really cottoned onto a bit earlier?

[00:03:05] Yeah, yeah. Businesses are valued generally. Yeah. And the equation, you know, the effect of the balance sheet and they've run it from an internal perspective and they don't understand that from an outsider's perspective, it looks quite different. People treat things like stock as a bank, you know, and their P&L is their own and they're not really prepared for scrutiny.

[00:03:27] But I think we challenge them to look at their business from an outsider's perspective. And sometimes the penny drops then, but we also have a quest to educate their accountants and other advisors to make sure that they're regularly talking to them about the market value of their business in case they have a transaction to come either forced on them or because of some illness or some other family event.

[00:03:50] So we really want people to be educated well ahead of the time that it comes to say, I'm ready to sell, what do I do? But we want people to know what they're doing from the get-go.

[00:04:01] And you said that, or you inferred that it's a new experience for a lot of owners. Have you found that some owners might compare it to selling their house, which I certainly hear from a lot. I think they're at a very abstract level similar, but any granular level, just so much more complex. And is that part of the feedback you might get sometimes?

[00:04:27] I think where it manifests is that they quite often think that their conveyancing lawyer is going to be the right one to handle a process. And that's an obvious giveaway to that. They don't understand the process. If somebody has done all their property transactions for them, it's quite a different skill. But you are right. People do underestimate. Most people who are smart and at top of their game, they still say, we had no clue. We had no idea. They don't know what they don't know, basically.

[00:04:55] No, and it's mostly, and particularly in the mid-market, which I'll get you to define in a minute. It's still new ground. You can be very successful. You can spend 20, 30, 40 years running a business, be really very good at it. But when it comes time to sell and who to talk to, what advice to get, when to start, how to prepare, it's entirely new ground.

[00:05:17] Sometimes it leads to owners not doing what they need to do to prepare. In other cases, they just go in very startled almost about when they get some advice from someone like you about what they've got to start doing all of a sudden to get their business sold. It's been good to them, but there's a lot of work to do to make it good for somebody else.

[00:05:41] A lot of them go into probably a shock when they realize that due diligence is turning their business upside down, opening up everything that they just didn't understand the level of scrutiny. Monthly accounts are something that they've never had to do. And all of a sudden, everyone wants their P&Ls every month while they're in a due diligence process. There's such a thing that you know of, deal fatigue, where clients tire after being peppered with hundreds of questions.

[00:06:09] We've got data rooms running now, I think 12. You know, there's some of them with 70 or 100 advisors from leading accountants and legal firms in there, all peppering questions. Our clients just get completely overwhelmed if they're not assisted properly and prepared. It's probably a good time just to explain the scrutiny in mid-market is so much higher.

[00:06:30] Let's, for the sake of the exercise, say SMEs that I deal with day-to-day might be worth somewhere up to $10 or $20 million. Where's mid-market? I imagine that goes a hell of a lot higher than that. Yeah, we really work from probably 5 mil, which is pretty low end for a mid-market, probably to 100, 150. If you were talking to an investment banker, they would see that as small.

[00:06:58] So everyone's got an echelon. Probably 95% of businesses in Australia are sub, say, 2 mil, and they are really the buyer job market, which is one of the items that we'll discuss. And they are really selling businesses to the next owner who's going to work in it. Whereas the mid-market is the B2B market, where we're looking for strategic players to buy them. And the whole, you know, the dynamics are quite different.

[00:07:27] It's just a different whole setup. For example, we talk about, you know, coming back to your earlier question about real estate and how it works. When you're buying a house, 90% of what you're buying you see when you walk through. And what you can't see, you get a building inspection, pest inspection, and some legal checks. With a business, you could walk in and out of a dozen businesses and not understand whether they make a profit, whether they've got one location or 50, whether they have one client or thousands. You have no idea.

[00:07:57] And so that's why an information memorandum is that virtual walkthrough. And then, of course, everything that's been represented in there needs to be validated because you still can't take anything at face value, which is what the whole due diligence process is about. And there's thousands of moving parts that you don't have in a house sale that are in a business. It's just, you know yourself. There's so many variables and so many potential risk points for anyone coming in and filling someone else's shoes.

[00:08:23] That's an excellent way to look at it because a lot of it is visible when you look at a house and you act on, I like the location, I like the look and feel, the styling, but that's very good. And it's also, you pointed to the information memorandum of data room. These are all kind of commonplace in mid-market where there's a lot lighter touch for the sale of SMEs.

[00:08:48] I mean, I use data rooms all the time, which is a password protected website where everything related to the deal is housed. And I'm just explaining that, you know, someone hasn't heard of a data room, but you, you know, you're in and out of them every day. And as you said, the scrutiny that comes if you're selling your business for 10, 20, 40, 100 million dollars, those buyers and sellers can afford to have multiple advisors interrogating each other in the data.

[00:09:16] That's why that shock can happen to an owner when they're so in tune with their business. So they kind of know how it works and know what it delivers to them at a, you know, a salary dividend level. And they've got their hands on the controls, neat key relationships. Ask somebody to spend 10, 20, 40 million dollars and they're going to dig a lot deeper than they used to. Yeah, that's exactly right.

[00:09:42] And one of the things that's a big difference with small businesses, owner operators are running the business and working at it. And they quite often don't differentiate between the work, the money they get for the work they do versus the profit of the business. They quite often is, you know, a profit to working owners or proprietors owners. Whereas in the mid-market, the job that comes with that business is a liability because somebody needs to be replaced. And so there's a full market salary having to be allowed.

[00:10:11] And then the business profit is standalone after paying those costs of all working owners who have to ultimately, who ultimately will want to withdraw their labor as well as their capital. Yeah. I mean, it gets interrogated much more as a investment. I mean, I know, you know, bigger buyers will bolt on other businesses to make them more competitive or to access new technology. But, you know, they do look at it very much like the return on investment.

[00:10:38] So take your point there about, you know, comparison with a small business where the owner so often doesn't pay themselves what they would have to pay somebody else to replace them and doing as good a job. When you're first engaged, just to give someone an insight into a mid-market transaction, what does the preparation process look like for the owner of the business? So they've usually been referred.

[00:11:06] Probably most of our clients are referred by their accountants. So they've been fairly well qualified in terms of being ready. But we need to make sure that their price expectation is, I guess, within the ballpark of what we think is going to be achievable for the business. We need to then, so we can come up with it, we do a pricing strategy. We call it that, not a everything except call it evaluation because of our chartered accounting qualifications. As you know, you do it one way or you do it another way.

[00:11:35] But we need basically an indication of what the price range is likely to be and how we should, how we anticipate marketing that business, whether it's also going to be the sale of assets or shares, which is going to get a little technical. But we also then want to make sure that within that price range that we can strike and estimate that the owner has then had, is going to get specialist tax advice to make sure that the after-tax outcome is going to work for them.

[00:12:02] We don't want to go any further without making sure that everybody is on the same page and that there are no surprises that are going to take the owners out of the market. And it has happened. They're all hard-learned lessons, as you know. So you want to make sure that, yeah, that's an interesting thing. Yeah, so you're basically translating, you're saying the owner comes with expectations a lot of the time about what price they might get for the business.

[00:12:28] For you, for DMA to be the advisor, you want to make sure that's achievable. But then you go on to say X dollars achieved as a sale price translates to Y dollars in your pocket after-tax. It's an interesting mix of clients. At one end, the business is the home run for the owners to retire and they need a certain amount, so they're fairly price sensitive.

[00:12:54] And further along, there are people that have made all their money, they've got other investments and the business now, they could walk away from it financially and still be okay. But they want to see a good outcome for the business, the other people in the business, the other employees, customers, suppliers. The local community even. So it's not just price, it's finding a good incoming investor to the business. They don't always say, I need the best price.

[00:13:20] In fact, quite often we let people know they can probably get more than they were expecting. So it's not always one way. But we do want to make sure that that's going to be okay. And then we look at things like, what's the client concentration? Is there one customer or is there a good distribution? If one customer is more than 20%, it starts to get a little hairy. You know, it starts to mean that we're going to have to address that risk.

[00:13:44] And then we look at what security there is for that client, what provisions are going to have to be in the contract by way of securing the migration of those clients. That sort of thing that you can, and you're looking ahead saying, what are the showstoppers here? What does the client need to go back and fix as low-hanging fruit to make sure that this is going to go smoothly down the track? Yeah. Can I just go back to, there's a really interesting observation that you made about the owners coming in and for advisors,

[00:14:12] just to assume that everything's about achieving max dollars every time is not right. You're saying you get owners coming to you and they're clear up front, there are other criteria, whatever they might be. But maybe it's a legacy thing. Maybe it's about saying, I want all the employees to be looked after. Yeah. The price is not the main driver for most clients, actually.

[00:14:36] We give them about a seven or eight criteria and say, rank these in order of priority. And quite often it's certainty. And, you know, they don't want a process that falls over at the last minute. So they want certainty speed sometimes because they don't want to be messed around for too long. The brief, and it goes into the information memorandum as a signal to people who are receiving it. This is what the drivers are and prices is up there, but it's not usually just sitting at number one, only price, price, price.

[00:15:04] But it could, is in that set of choices, employees, customers, legacy, or those kinds of issues are also there as well? Yes. Strategic and cultural fit, very high. Right. Yeah. Yeah. Most of our target buyers are the strategics. In other words, people from the same industry. The theory and the practice is the people who will pay the most are the people with the most to gain and the least to risk,

[00:15:30] which is usually someone who's already in that industry, not necessarily a competitor, but it could be in a different location or in an adjacent industry that they understand the industry enough to say it's not a high risk business to buy. And they will value it more highly than someone who's a general investor, who's agnostic to the sectors that they buy in and they're, you know, that's purely about price. And so the cheaper they pay, the less they pay up front, the better the return on investment, which can be for an investor in a property, let's say.

[00:16:01] Yeah. There's a lot more to it for a business. Yeah. And is that a really significant proportion of the deals you do within industry? Yeah. Does that cover investors or private equity that are focused on a particular vertical or industry, or is it just company to company in the industry? So it's almost always strategic buyers. We target those as a priority.

[00:16:28] We'd probably sell less than 10% of our clients' businesses to purely financial buyers, like an agnostic private equity business. Hi there. Just a short interruption and a message from Kerr Capital. Kerr Capital specialise in advising business owners who want to get sale ready, or as is increasingly common, get approached out of the blue by a potential buyer.

[00:16:56] If this is you, I know there'll be plenty of big questions and a lot of uncertainty. We're expert at supporting owners in making significant personal and business decisions, and then helping create a really strong plan of action. If you want to find out more, contact us at the Kerr Capital website, and then we can book a 45-minute no-obligation discovery call. Now let's head back to the podcast.

[00:17:26] You mentioned speed, so uncertainty. If someone came in and said, like, I can pay you more, but it's subject to finance, and I need six months to pull the investors together with you, it's a real red flag, isn't it? Look, another big differentiator between the small market and the mid-market, Michael, is that in the small market, quite often the sellers are more sophisticated than the buyers that are going to replace them. In the mid-market, it's the other way around. The buyers are probably serial acquirers.

[00:17:55] They're corporate players. They understand it all. They've got very good advice, and they're very capable of performing a transaction, whereas, as we know, most business owners only sell their business once. Yeah. So the sophistication's reversed. Yeah, and there's often departments or a team within a larger business that their sole role is to identify potential acquisitions, and they know exactly what they're after.

[00:18:23] They know how the process works, where their financial boundaries are. So, yeah, that's like, again, the fresh-faced owner who knows the business incredibly well, been at it, very successful, but that's another potential mismatch when you've got professional acquirers. Yeah, and we've got one client, a French client, that we're just doing transaction number nine for them in Australia. And, you know, they've got an M&A team based in Paris, but they need someone local on the ground,

[00:18:53] current time zones, and also to be able to build the confidence with the sellers who are one-timers. So we have to basically give them all of the advice we can. They know we're acting for the buyer, but they also start to learn that they can trust what we tell them and how we can help them. So is that then, I'm imagining sometimes you might work for the acquirer, so you're actually going out hunting, and other times you're working for the seller,

[00:19:22] in which case you're going to position the business to get acquired. So you see both, you know, you work, you don't work the same transaction on both sides, but you've worked on both sides often enough to know how buyers think, how sellers think. Probably 80% are sell-side clients and 20% are buy-side, and they're usually European or, you know, US or some foreign country business

[00:19:51] that's wanting to expand in here from the scratch, or to expand their current foothold in the current market, the local market. Yes, that's definitely where we can help them by being the local interface with the targets that they're interested in, and quite often we actually produce the targets for them. And those acquirers, when they see an owner who's got, call it non-financial considerations,

[00:20:18] cultural employee, grounded in wanting to keep employees, how do acquirers see that? Is that a red flag or sometimes a strength, because I feel like the business has got a pretty tight-knit group of people that are running it? They want to know who's staying, the owner group, and who's prepared to stay for a handover and a decent handover period, and who's leaving, because they usually don't have direct replacement people for the working owners.

[00:20:47] You know, a lot of people spend, or provide a lot of coaching advice to say, oh, to sell your business, you need to have general management in place to replace you, and they spend a couple of years putting in a whole lot of, probably risk points from our perspective. We say to clients, so if you haven't already done that successfully, don't do it now, the last minute, where you could have value destroyed, you take on a whole lot of risk of handing your business over to new general managers,

[00:21:17] but the owners themselves need to be that transition. So the focus is on how long people are prepared to stay, and it's another reason why they need to have a bit more in the tank, rather than say, I'm totally exhausted, I need to walk out the door, I want three months and I've got it. So we need to say to them, you could be hanging around for up to a year, working on some agreed basis with the new owners, whether they retain a minority share of the business, and they could keep that for free for a period of time with a put and call option, you know, all the variables. So we need to,

[00:21:47] one of the early discussions we have with the owners is, what are your plans beyond the sale? How long are you prepared to be that go-between and that transition? Because that massively de-risks any acquisition for a new owner. It can be the difference between having no buyers or, you know, a whole host five or six of them because they know the owners are prepared to stay. Yeah, that is such an interesting observation again,

[00:22:14] you make about the context or situation is often the owner has left it till the last minute. And there is a lot of advice around and it, to put in the manager, if the thinking behind that is, you know, makes the business easy to sell, as you say, it's better question that if it's, some buyers are going to bring their own team and they, and they'll want, I want the owner, their inbuilt knowledge of the business is pretty hard to transfer to somebody else quickly,

[00:22:43] or even in a year or two, right? So yeah, as you say, it becomes a risk point. The only thing it's good that the owners are getting this advice, but that one is, that's a really pertinent example of what, over what time frame you're trying to do is because you create more of a negative situation, build bad culture with the team because they've got somebody in there that's not a good fit. The only potential, one of the potential upsides is where the owner themselves thinks,

[00:23:14] if I could run it under management and keep ownership myself rather than selling it, I think that's got some merit. The business is worth more when the owners don't mind whether they sell it or not. It's ironic, but that's the case. When they can, when they're not working in it anymore, when they've taken most of their labor out and they've only got capital left, because those are the two things that the owners, working owners have in there. When they've taken their labor out and they, you can't delegate, but you can't abdicate as an owner. It's an active asset.

[00:23:43] You can't just walk away and leave someone to run it for you and without running a big risk, but bringing someone in at the 11th hour after all those years that you know your business, it's a very high risks thing to do and you could destroy much more value than you think you're going to create by having a management in place. Yeah, very, very practical and interesting. If you were to rank the issues that acquirers see as the biggest ones in any given acquisition, is that the biggest one? The owner dependence?

[00:24:13] Yes, it is. And it's one we face nearly every, with every client. And that's our go-to. We have those discussions from, from the start. What are your plans? How flexible are you? And we say, not only if you're prepared to leave some labor for a period of time, which massively de-risks the transaction for the incoming owners, owners by agreeing to, that's when we say, and I said earlier, put this into perspective of someone coming into your business.

[00:24:42] If you're prepared to leave some labor for a period of time, then if you agree also to say, I could be open to retaining a minority share, and there's a certain number of new owners that would want that, then by de-risking further, it changes a whole lot of things. It changes the transaction from being one where owners are pulling things out, to say, well, I'm still going to be around for a period of time. I'll still be an owner, even though it might be only 20%. 80-20 is a good mix.

[00:25:11] And the buyers will see this as a much safer acquisition, will therefore be happier with a higher multiple, and therefore pay more money. And to the point where you could say, people will pay as much, buyers will pay as much for 80% of the business, than they would for 100%, just simply by you agreeing to keep the other 20%. And it's not worthless, because you can have put and call options, or you can have a put option, so that you could say to them, if you haven't bought it in three years,

[00:25:41] you have to buy it, based on the multiple of the most recent profit. So there's protections you can have in there, and drag along, tag along rights. There's a whole structure around that, which means that the transaction is a much stronger one, and ultimately the owner can do much better financially, by agreeing to be that piece on the way through. And I know you get it, but probably many of your listeners aren't aware of those options and nuances. And a lot of people think it's all binary,

[00:26:08] whether or not you have to be 100% in or 100% out of your business. There's a lot more value in being flexible, and so how do you exit? Well, I think it's also, if you really define what that outgoing owner could do, when they own it, they do a lot of things. If you look at what they do most effectively, and some are natural rainmakers, and some are natural technicians, or whatever it is, if you can really focus in, take away the stuff that's not best use of their time, it actually creates a pathway.

[00:26:38] I think owners, when they look across the other side, some of them realize they're going to be a bit lost without being part of a business. So I genuinely think that's one of those things, later people go, I didn't really think about what else I was going to do, and I was a bit, I got bored playing golf, or walking the dog, or whatever it was. Yeah. I mean, it probably then swings the due diligence process to a two-way thing, where the outgoing owner, if he's going to stay in,

[00:27:07] as a minority shareholder, as a executive, you really want to make sure you're working with a bigger organization, where you've got some alignment around what you do, but also the way you do it. I think the owner's role is going to change, with an incoming new owner, the old outgoing owner. They don't have to do the things that they hated doing, like all the admin, usually the admin stuff. Yeah. They become more project-based, and business development-based, and more mentoring. So they really have,

[00:27:35] many of them have the best time ever, because they're spending someone else's money, they're not doing all the things that they know, that they didn't enjoy, and they're adding the most value, and having the most fun. Yeah. Yeah. And I think, by nature, the owners and entrepreneurs that have successfully done something like that, I've met many, and a lot of them, I think, really do struggle just to not do much. So it's a good use of intellectual property, and of experience,

[00:28:04] and you can't bottle all of that, even if you try it, can you? There's things that go on, and people that you need to get to know, and things happening in the industry that no one else like the owner will know, or the old owner. And one of the big changes is to move from process work to project work. An owner who's working in their business day-to-day is doing process work. Now, many of them have found themselves interesting projects, and that's where they spend their time. But bearing in mind, if you look at this and say, I've sold the business,

[00:28:33] and I'm working in it with the new owners for a period of time, then you'll end up inevitably in project work for the new owner. And at the same time, you can combine that with your own personal projects outside of the business, whether it's to do some development, or help a family member build a business. All of those projects, and then projects are what they can do, and then they can go and have a holiday, and come back and start another project. So projects have a beginning and an end and outcome, and you can turn your whole career

[00:29:02] beyond owning your own business into a series of projects. Yeah. Yeah. There's been a lot of activity around advisory boards. I'm sure you've bumped into that. It goes against an old hierarchical structure into project-based, like an advisory board to get the business ready to sell, or an advisory board to go to market in a new segment or a new industry. It's really interesting. With my small business owner clients,

[00:29:30] I always ask about who they think should buy their business, because to get back to that analogy of selling a house, you don't just, well, you shouldn't just get to the time when you're already in, so I'm going to sell my business, so I'm going to put it on one of the business for sale, exchanges and wait for the phone to ring. If it's a cafe, it's okay. Small retail businesses, it works really well. But asking them about who's their natural buyer, sometimes they haven't thought about it before, but it's the same thing as you're talking about,

[00:30:00] within industries, there's a lot of activity to roll up and consolidate. Is that your experience of what's going on across lots of sectors that you work in? Yeah. So it's an interesting thing that you just reminded me of. In the smaller end of the bigger businesses, a lot of people think that the new buyer, when we ask that question, a lot of them think it's going to be how they were 20 years ago when they started. But because their business has grown so much,

[00:30:29] we say to them, but you 20 years ago can't afford your business today. It's too big and too expensive to someone like you 20 years ago. And if you're wanting to, if you see someone else coming in and doing what you do, and we have to explain to them that the buyer now is a strategic, it's an industry player, it's going to be someone bigger than your business. So, you know, bigger fish are constantly buying smaller ones out. Once they realise that they're out of the little league and then they have to basically,

[00:30:57] it's going to be a player that doesn't value the job. And because if you can afford a $3 million business, you don't need to buy yourself a job usually. If you can fund a $3 million business, you're out of the buyer job market, clearly. What's your experience? Do you think the same? Yeah, those businesses are very owner-centric, probably aren't the right fit for those bigger organisations anyway. If you're putting down 3, 5, 10, 15 million,

[00:31:26] the finance for the deal is a given because you're dealing with companies that can tap into funding or they've got their own balance sheet. So it's much more about the return on investment in the smaller. And that's good if you're somebody who's working in that industry, you know that industry, you can go and replace the owner and be the new working owner. But yeah, when you get to the, when you've got 3, 5, 10, 20, 40 million dollars, money's there. And money's always been there for,

[00:31:52] you know, well-performed, larger businesses, particularly those that are growing through acquisition. Yeah. There's one thing that's probably an early discussion we have with owners because they don't want anyone, they want the business sold, but they don't want anyone to know it's for sale. So they're paranoid about getting out and having their employees and others come along and say, is your business, is our business for sale? And we say to business owners, don't think about what you're looking to take out because it's not all about you.

[00:32:22] Your business now is big enough. It has a life of its own. You're now looking, if you really look at what you're trying to do, you're trying to find a new owner to invest in the business and take it forward for, and it'll be a great thing for your customers, a great thing for your staff, because our job is to bring you the choices among those strategic buyers and people who are going to go in and give it a new lease on life or have it part of the bigger group that's going to add a lot more for the customers, a lot more opportunity for the employees,

[00:32:52] a lot more product and a lot more basically geographic dimension. So a lot more headroom for everybody. So we say to business owners, you need to get your head right about this because if you're paranoid and paralyzed, you know, by worrying about anyone finding out you're thinking of selling your business or you're going to, people will find out. People have a sixth sense about these things, little changes, little nuances, extra meetings. You know, and if someone comes along and says, you know, is your business, is our business for sale?

[00:33:21] And you cross your arms, fold your legs, all the body language, you've already answered the question. So we say to owners, get your head right. Think about what you're looking to do. There's nothing wrong with you taking some capital out of your business. If you combine it with the fact that you could be amenable to keeping some minority for a period of time and slowly fade into the bushes as Wycombe Simpson does when no one really cares anymore, then it's really about looking at what you're looking to bring into the business. And when it finally does get to the point

[00:33:51] where your team does need to know, you'll be excited to tell them because it'll be such an awesome outcome for them. And I think you can see that. That's what we're trying to engineer for everybody. I think the one thing that's really important there is that you as owner do control that conversation or that timeline. The worst thing that can happen is the staff find out from somebody else. And that's your bad mistake. Everybody at some point will have that decision

[00:34:20] about how long do I want to be in the business and go back from there? When do I really start preparing? How do I prepare? But one of the key things, if like in a lot of businesses, your team are really important to the business, don't let them find out it's for sale from somebody else. Because as you say, it does get out and you can have NDAs and you can have data rooms and you can have whatever, but it's chatter. It's cool. And that's why the old protection is to be on the front foot and say there's nothing wrong with it

[00:34:49] if it does happen because I've got some explaining to say what we're looking to do and that's about bringing new owners in, not me leaving. That's the ultimate protection. And you know, some clients actually announce it to their staff. We don't recommend it, but some people tell them up front and then they've got to deal with that prematurely. The key is to basically keep, you know, there might be, but you do need to tell your key managers because ultimately they're going to be your ticket out if you do want to make an earlier exit. So there's going to be a group of key managers that do need to know

[00:35:18] because the new owner wants to see who's going to be behind the new owner, the old owner as well. Yeah. Well, maybe even those, that management team all of a sudden thinks about them becoming the new owner. It's happened and it does happen. Surprisingly, they could be minority shareholders in the new lineup. Yeah. To dig into this, within industry, managers and acquisitions, a lot of, a lot of, and there's,

[00:35:48] I think around particular industries and particular sizes, there's the process of you going to market, preparing your business and trying to sell it is, is gazump when you get an approach out of the blue. And I just feel like this is happening more and more because the way the economy is structured with massive, you know, some really massive businesses and then, you know, we've funneled down to a whole, whole lot of really small businesses and a pretty modest middle bit.

[00:36:18] Is that, is that, is that a trigger for people to come to you saying I've had a, an approach, I wasn't ready? It probably happens about 25% of the time. If the owners have been approached out of the blue, they usually realise that they're underprepared or just don't know what to do or they realise they're going to be putty in the hands of somebody who might take advantage of their lack of knowledge because as we said, the buyers are usually more sophisticated and more geared up and experienced with transactions or they've been in one of those processes

[00:36:48] and especially if they got hung out to dry and it didn't work and they might have lost two or three years even. Worst case, they're a little bit scarred from that but the best thing they could do is get some professional advice as soon as they're approached and then do it once and do it right and then, you know, people like us will help them un-on-one with that buyer and then be prepared to go straight to stage two and those buyers know that the business then is ready to go to the open market

[00:37:17] if they do basically mess around and do the wrong thing. It is very easy for two or three years to go by with the allure of selling out to some larger company on some basis that sounds attractive but the more straight up, you know, commercial operators, you know, they just wear you down. There's a lot of money left on the table by people thinking they can do it themselves and save some fees. I mean, there's so many points in negotiation that you're aware of and that we are and that's things like

[00:37:47] the working capital calculations. Whether there is working cap, what is the average working capital, whether it includes employee entitlements or whether they're going to be deducted by the buyer's debt. There's a whole lot of points that could cost thousands and on a bigger business millions of dollars and usually we know all of those variables and know how to tip the tables in favour of whoever our client is and it's usually the sellers. Yeah. It's that leap from my business makes a million dollars a year to I should get five times

[00:38:16] to what did you not explicitly talk about in the deal that's going to get taken away from you and what are you left with at the end? And I said, look, so you can't scrimp on that stuff and I think often the more sophisticated buyers would rather see some quality support for the buyer as well, for the seller as well. You're right, 100% right. The ethical buyers want somebody on the sell side. They need at least one M&A advisor if there's not already one on the buy side like as we usually

[00:38:46] in fact in almost all cases there isn't one that comes up on the sell side. They rely on us to be a go-between and to provide impartial advice. The same, but we don't, you know, we don't really go out there and say you need to engage an M&A advisor but we make sure there are accountants on the ball and that they're getting the right tax advice. We always tell sellers that if we're on the buy side make sure you get all that stuff sorted out. We don't want to find a problem with you or have to, you know, all take time out while you do that later on.

[00:39:15] Do that up front. Yeah, yeah. Alright, so look, what I'd really like to bring this back to for the small business owners listening in here, the, some of you are going to have to go to market to sell your business. Some of you will get a call out of the blue but what are your top two or three things? Your process with owners who want to sell is exhaustive. It's designed

[00:39:45] around being more bulletproof when you know what's coming from the sophisticated acquirers. So at a small business level, what do you think are the main things someone ought to do and how long out from a ideal exit would you, would you recommend they start? The general sort of thought is two years out, start getting some understand, start getting educated on how your business is likely to be valued in terms of what's in it. For example, we both know that the balance sheet is the waistline of a business.

[00:40:15] You can have a very fat waistline in a business and leave a lot of money on the table locked up in working capital, in debtors that aren't being collected, in stock that's excessive to requirements and you can tidy up or more properties than the business needs and it's coming off in rent. So there's a whole lot of ways that you can really tighten up the business and look at it from a corporate perspective and rather than leave that money on the table and let someone else go and do that and reap the benefits, you could take

[00:40:44] significant dollars out of your balance sheet, take it off the table as cash and still get as much for the business and sometimes more because it's a leaner, more efficient machine. That's one of the basic things to do up front to really start thinking about your business from a corporate perspective and cleaning it up and getting rid of excess plant and equipment. Think of how many equipment hire businesses or plant and equipment businesses that go to trade in old vehicles. They get nothing for them so they'll keep

[00:41:14] them parked up out the back and use them once in a while and when it comes to selling the business that's all part of the plant equipment, it's all included when you're valuing a business on a multiple of profit. Everything required to generate that profit is part of the business so the more you can take out by way of net tangible assets, the more goodwill effectively you're getting as a component of the price. So yeah, clean it up, clean up your business, get rid of anything that's not performing

[00:41:41] and have a critical look and say, do I need all those assets? Do I need to? That's a big one, Michael. Yeah, the balance sheet doesn't get much of a look in particularly. It's not all about just P&L, it's balance sheet as well. So get a valuation like you are about to sell tomorrow and it might give you a bit of a shock, it might give you a wake up call, that's all good if you've got a bit of time to do something about it. I think you

[00:42:11] mentioned the owner thinking about what they want to do. I think that's a critical one, isn't it? Just imagine you are two years out and it goes perfectly to plan, you get a check and you go off and do whatever you think you want to do, just check in, make sure that's actually what you want to do. You have to have a go-to, you don't want to be pushing that supermarket trolley around for too many years afterwards. There's plenty of people that you know, we know, that have sold their business and then three years later they're coming and looking

[00:42:40] to buy another one because they're bored at home. Indeed, indeed. I think the other one that really rung true for me was where you've got employees that are important, you've got to have a plan for that. Yeah, there are a lot of the cashers there and your friends as well and you want to make sure people who are important. Just a couple of things to close, Tony, a really great deal, just a really, really terrible deal that we laid awake at night worrying about the poor owner in one situation or where they

[00:43:11] actually cleaned up or got a stellar result. Is there anything that comes to mind? You don't have to name names. I think what surprises us sometimes is how often new owners stuff it up to be honest. They say they're not going to change anything and they are very well-meaning but they can't help themselves in many cases. Probably a lot of sellers spend time on things that don't matter. For example, they are building a new system or putting certain more software in and quite often we say to them, the new

[00:43:41] owners are probably going to put their own software in anyway. Don't go and spend that money on a great new system that you're getting so attached to that it's going to be all and end all. It's most likely not going to work with the new owner's system. That's an example where if you look forward a bit you'd say in some industries the operating platform or the practice management software if you can bolt that in because the buyer's got the same one it's just you advance five steps. Exactly. If you're going to choose software

[00:44:10] choose something that's already generic in your industry and widely used. But I think the biggest problem new owners have is ego and so as a seller you want to make sure that your systems are strong. The things that you read about make sure your business is as resilient as possible as possible. It's as low it's as least fragile as possible. In other words there's no key employees that are going to hold you to ransom. There's no one customer that could be the one that turns the business from a

[00:44:41] great outcome to a very high risk one for new people. deal with the new owner coming in that's always a risk. So make your business as solid and consistent and I guess bulletproof as possible right across the board of every aspect. Yeah. Look at it like a corporate would look at it hey? Exactly. And get some outside eyes on it because you do become shot blind. You don't see stuff. You need someone else looking at it.

[00:45:10] Yeah and I think there's also a positive thing to that which is you don't actually necessarily understand how valuable some of your things are to a potential buyer because it's just day to day ho-hum for you and like you need another set of eyes and ears. So that's interesting. That's a negative. That's a positive. Get all that because yeah what do you call it blindness or something? Yeah shop blind. You live in your shop every day you don't see all the problems. Yeah. Yeah. I mean there's so much and

[00:45:40] there's intellectual property that's probably undervalued and we're talking informal IP. There's a lot of IP in businesses that people just take for granted but there's designs, drawings, know-how, you know that's the sort of stuff that needs to be really brought to recognize and brought to the fore. In fact I think there's a lot of stuff just gets written off again to the P&L and it could be a $30 domain name but it should be on the balance sheet because it is underpins the brand of the

[00:46:10] business and it just gets having it there even if it's got a historical value of $29.95 from your domain name it says something about business when eventually you get to the balance sheet you go there's a domain name or there's a registered business name anyway. Every business should have an IP register and it's got formal IP informal all the domain names everything in it that they recognize as intellectual property should be sitting in that IP register.

[00:46:39] And then on the balance sheet there's so much stuff that just doesn't get there but anyway that's true. Tony one final question if you were suddenly plucked to run Australia's small business department and you land in Canberra it was a shock appointment Tony Brown from up north and he's here on next Monday we're going to bring SMEs to the fore in the Australian economy much more than they are everyone talks

[00:47:09] about it but we're going to put a bit of meat on the backbone what would some of your priorities be? You're into a pet topic of mine I'd be saying cut out as much government regulation as possible because it's currently killing transactions and killing businesses. Get rid of unnecessary regulation. Reintroduce tax incentives for CapEx so you get basically instant tax write-offs that's a very positive and growth oriented encourage new innovation and growth. I'd be removing

[00:47:39] payroll taxes which are anti-employment anti-growth we've even seen businesses where they've said I'm stock growing because I don't want to pay payroll tax. It's a bit of an own goal. There's people who just hate because they see what's wasted and how much fraud there is in certain things NDIS and all this stuff and they say I'm just paying I'm working for the government you know primarily you know half my tax income then I've got to work on the weekends or other to pay the things and if you're late today

[00:48:08] you know there's a fine. It's just horrendous. Small business has become sort of the whipping target a whipping post for government and because they're not voters so I'd be getting in there and getting rid of most of the impediment to running a good small business. All right. Sounds fine by me Tony I reckon. I don't know if you're going to get that offer. We might have just put a few Depsecs and you know bonds up there off. Maybe that's my next project. Maybe that's my next project Michael.

[00:48:39] All right. Tony thanks so much for spending time on Owner to Owner Podcast. It's fantastic to have someone who's in the mid market as we define. People may not have heard that term before but I think they're going to come away and realize that the way you go about preparing businesses there's a lot of lessons to be learned there. It costs but you need to invest in the best advice to get a better outcome or not even a better outcome to get an outcome particularly at the smaller end of the

[00:49:09] market. So thank you so much for your time and insight. Great to see you. Great to catch up again. All right. All right. And if someone wants to reach out just quickly we'll put in notes but Tony Brown at DMA. The website is? Yeah. DivestMA.com. Yeah. Tony. Brown at DivestMA.com. Happy to talk with you. And the website is thebestmergerquire.com. All right. I'll both go in the notes. Thanks Michael. Good to catch up. Thank you so much.

[00:49:39] All right. Cheers. So thank you very much for listening. I hope you enjoyed this episode of Owner to Owner and got some helpful advice and maybe some more clarity on how to make your business work better for you. To subscribe or to listen back or to access any of the resources or information we talked about in this episode, head

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