Shane Cheek owns Continua Software and shares his deep experience from starting, selling, buying and operating multiple software businesses.

[00:00:00] Welcome to the Small Business Banta Podcast. I'm Michael Kerr. I'm your host and I'm also

[00:00:11] the founder of Kerr Capital where I work day to day with business owners. The Small Business

[00:00:17] Banta Podcast is built for business owners and their trusted advisors at what I see

[00:00:22] is three different key stages of ownership in a business. Could be when you're looking

[00:00:28] to sell, it could be when you've been approached by a potential buyer unexpectedly or it could

[00:00:35] be when you're an aspiring owner about to buy a new business. There's a lot on the line

[00:00:40] personally and financially at each of these three stages. It's stressful, it's emotional

[00:00:46] and it's usually in new territory. So to help, each episode of Small Business Banta

[00:00:51] is a discussion between me and another business owner or experienced small business advisor

[00:00:56] and they will have personally been through a business sale. What you'll get is practical

[00:01:01] advice, new ideas and motivation to help you when making a really important decision about

[00:01:07] what to do with your business.

[00:01:12] Welcome in to edition number 134 of Small Business Banta Podcast. Shane cheek joins me

[00:01:22] today. Welcome in firstly, Shane. It's really great to have you in. Shane is the CEO of

[00:01:32] Continuous Software based out of Adelaide and it's continuous software is a holding company

[00:01:39] that acquires software companies, B2B software companies. Shane will tell you a little bit

[00:01:44] about that. The reason for the discussion and thanks again for making time, Shane, is

[00:01:49] really want to talk about the activity search funds by us making their own approaches direct

[00:01:57] to owners of particular kinds of businesses. It's not a new thing, but it seems to be very

[00:02:03] alive at the moment. And I'm particularly interested from the point of view of the owner of a

[00:02:10] business that gets an approach or thinks they might get an approach. How might you prepare

[00:02:15] better for when someone like Shane gives you a call? We'll get into that a little bit

[00:02:21] more. Shane, what's continuous software all about and what's your background?

[00:02:26] Thanks for having me on today. My background, most of my career has been spent in British

[00:02:34] Capital C probability for about 15 years. Prior to that I was a software founder, built

[00:02:42] a B2B business that I actually took into the US but then spent the next decade in the

[00:02:51] VCP sector. I grew tired of the business model that required me to run around and networking

[00:03:01] and also chasing the elusive unicorn that would pop up and drive investment returns. During

[00:03:16] that kind of journey as a fund manager, I'd also been investing personally into software

[00:03:23] companies. Obviously, it was a space that I knew and felt comfortable with. I found myself

[00:03:30] being approached more and more by business owners of software companies, that they weren't

[00:03:38] start-ups. They didn't really know what start-up was. They had simply built a business through

[00:03:43] the company over multiple years and had reached a point where they had been operating for

[00:03:50] decades in some cases and had grown to $5, $10, $15 million in revenue and then plateaued.

[00:04:01] They were really unsure about what to do next. They would often come to be talking about

[00:04:09] wanting to raise capital or growth capital, but often when I would sit down with them,

[00:04:16] the conversation often became more of a conversation around exit or succession transition for the

[00:04:23] ownership of the business. That really sort of planted the idea in my mind, and I thought

[00:04:30] there was an opportunity to acquire more of those sorts of companies. I decided to pursue

[00:04:39] that in earnest in 2019, 2020, just as COVID decides to hit. I partnered with one other

[00:04:52] family office based here in Adelaide to do that. That's what continuous software has

[00:05:01] become. We invest off of our own balance sheet. We don't have any external investors. We don't

[00:05:10] run it as a fund. That gives us more of a medium to long-term perspective on owning

[00:05:18] and operating companies. That's really the background, I guess.

[00:05:27] You're very much focused on software in B2B.

[00:05:33] Yeah, absolutely. We've got, privately, since some other investments in companies outside

[00:05:41] of that sector, but software, particularly business to business-based software companies,

[00:05:49] are the bread and butter of what I know and what I've done in the last 20 years in my

[00:05:53] career. That's where we've decided to focus. Stick to the knitting.

[00:06:00] We're going to get into your advice for an owner across the board on getting ready because

[00:06:07] I feel like there's more and more of these incoming calls are going to be received by

[00:06:13] more and more owners, not just software, but across a lot of different sectors. We're

[00:06:20] going to get to how you talk about how you might handle the call, how you might start

[00:06:24] to think about an exit, and how you get ready for what kind of information you shouldn't

[00:06:32] share. We'll get into the woods on that.

[00:06:36] Can I just start with, for you and continuous software, why outreach? That is making contact

[00:06:45] directly with business owners. It is your model. Are there not marketplaces where you can go

[00:06:53] and find businesses that are suitable for investment or acquisition? Can you talk about

[00:07:00] that?

[00:07:02] Well, I guess one of the first things we did was sit down and try and understand what

[00:07:06] was the size of the market that we were wanting to focus on here in Australia and New Zealand

[00:07:13] is outside the market. So we went away and did some research, started to build out a

[00:07:20] bit of a database of companies. We came to the conclusion that there were about 10,000

[00:07:29] software companies in Australia and New Zealand that were privately owned, had not raised

[00:07:38] external capital, and had less than 50 employees. So that was sort of the addressable market

[00:07:49] I guess for us of potential acquisition opportunities. We're speaking to several hundred of those

[00:07:57] each year, and then of course we build relationships with investment bankers, business brokers,

[00:08:08] corporate advisors, accountants and lawyers who might already have relationships with

[00:08:13] the owners who can introduce opportunities to us. But overwhelmingly what we do find is

[00:08:21] that most owners don't have a plan for the exit or for suddenly business. They'll have

[00:08:30] a loose idea. They might want to sell at some point in the future. But more often than not,

[00:08:38] have not really put full into it. So therefore, we have to prepare I guess the ground to enable

[00:08:47] a sale of a transaction to occur. So that's really encouraged us to do more and more outreach

[00:08:53] directly to owners, introducing ourselves and telling them our story. And more often

[00:09:02] than not, the owners aren't ready at that point to sell, but it's simply about beginning

[00:09:08] to build that relationship and connection to them. So that when they are putting more

[00:09:16] effort to fill into the selling, then they're there.

[00:09:20] So it's a very continuous software is there. Is it a name that they know?

[00:09:24] Yeah. Interesting. Again, across the board, a lot of owners haven't prepared formally.

[00:09:32] And that's why I think there's so much, you've gone to point of researching your, you've

[00:09:38] got your addressable market, which is, which is a real statement in itself that they know

[00:09:45] that you're after and probably reflects back into conversations you have with those owners.

[00:09:50] We're only interested in these kinds of businesses. So it gives you some credibility. But why

[00:09:57] do you think a lot of those owners don't get to the point of having a formal exit plan?

[00:10:02] Is it expensive? Do they not know who to talk to? Are they just too busy in running

[00:10:08] the business? Yeah, I think it's a combination of things Michael. I think that a lot of owners

[00:10:14] are busy with the day-to-day. And I'm sure we'll get to this later in the conversation

[00:10:21] just around how the owners have structured their business and how easy is it going to

[00:10:32] be for that business to be transferred, separated from the owner, often they're so

[00:10:38] integral to the operations that you had to spread them. But yeah, I think they're busy.

[00:10:45] I also think it's something that they often don't want to put a lot of thought into because

[00:10:51] whether they want to be a bit of an or not, and I can speak from personal experience here

[00:10:55] as well. You attach so much of your own self identity to your business. The idea of what

[00:11:05] you're doing next is a scary thought. And it makes a whole lot of sense because

[00:11:13] when you put so much of yourself into a business to get it to wherever it is, it's pretty hard

[00:11:22] to step away, to contemplate something other, because it does as you say, define identity

[00:11:27] and purpose for many. So I think in the material on your website, it's something about people

[00:11:40] first, when you're looking at investments. You've got to back people anyway. It's got

[00:11:51] to be a centerpiece of this kind of role of finding and acquiring and harvesting leads

[00:11:59] over many, many years, building that confidence and trust in a business owner who might eventually

[00:12:04] come back and say, "Yeah, let's do it."

[00:12:08] Overwhelmingly, it's about the people. And I think it's even more important for small businesses

[00:12:16] that might not have put as much process, sense of systems into the business. You fall back

[00:12:27] on the line on the quality and the people to upgrade the business. That's where we spend

[00:12:32] most of our time standing, who the people are in the business. And also, our own values

[00:12:43] are about wanting to enjoy what we do, making sure that we have fun, which is, it seems

[00:12:53] like we've not allowed to actually say it these days. But we definitely want to enjoy

[00:13:01] working with people and working with the companies that we require. That's why we can say, "People

[00:13:06] first." And we need to be willing to have conversations with the owners, with the shareholders,

[00:13:13] and often understanding what they really want to achieve out of the business or helping

[00:13:18] them start to understand them. Yeah, look, I'm sure you've ruled a few out, purely on

[00:13:25] that first pass. You get to a point where you've got to feel for someone to go, "I'm

[00:13:31] not sure I want to be in business or do business." Yeah, surprisingly, it actually happens more

[00:13:39] than I would have thought that we will look at the business fundamentals and it will take

[00:13:43] much to the boxes, but we'll say no because we just don't feel like there's alignment

[00:13:49] of values between us and the seller or the tape. Yeah, look, you talked about owners

[00:14:01] often coming via accountants or whoever, and the story is they're looking for capital.

[00:14:08] And you said really what they're contemplating is an exit at some time. So what else do you

[00:14:16] hear as reasons for an owner thinking about doing something?

[00:14:22] So I think what we hear from owners is that they often reach a point with their business

[00:14:34] where they as I said before, they've plateaued. They don't feel like they can necessarily

[00:14:41] just the next level to the next stage. And of course, there are ways that they could

[00:14:50] choose to address that by bringing in talent, by building an advisory board or bringing

[00:14:58] assistance in to help with the growth of the business. But sometimes they just feel like,

[00:15:03] I've put 40 years into this business, I feel tired, my significant other is telling me

[00:15:13] that the round world holiday that I promised them needs to happen very soon or I could

[00:15:19] be getting divorced. And so the confluence of factors that all could come to a head

[00:15:31] that lead them to want to sell the interestingly, money is often not the biggest factor. And

[00:15:42] particularly because we want to buy good businesses, we want to buy good operating

[00:15:45] businesses with good solid cash flows. And so what I often say to the owner is you'll

[00:15:54] never make more money than when you've actually been only operating the business. Yes, you'll

[00:16:00] get a very nice check for all at once from a suddenly company. But of course, it then

[00:16:06] means that that value generation is finite and stops when you sell it.

[00:16:11] Yeah. So we were chatting about, yeah, that if that's a conscious choice by an owner to

[00:16:19] run the business hard and make as much as they can while they're there and in it, that's

[00:16:23] okay. But I think you and I both would probably agree this. Once you get past, if you can

[00:16:31] build a bit of rapport and some relationship where you can show a pathway to the business

[00:16:40] being bigger, better, whatever you might be able to do together is, it can often just

[00:16:50] fulfilling the vision that the owners had originally is, as you say, it's not always

[00:16:56] about money. And so is that is that a part of your operating model where you go in to

[00:17:07] the business? Do you buy tomorrow and start operating, or do you typically have a period

[00:17:13] where you're working with the owner to transition the business, but also potentially position

[00:17:20] it for more growth or for greater output, however, measure it?

[00:17:29] A really key part of our model is that we look for businesses that have good fundamentals

[00:17:40] to begin with, and we underwrite our acquisition of those businesses based on their current

[00:17:48] operating model, not on some potential, not a forecast about what a business could look

[00:17:56] like in two or three or five years time. So the first thing we try and do with the businesses

[00:18:04] is first is do no harm, so not stuff them up. And we can be quite flexible with, again,

[00:18:14] understanding what the owner wants to do. Do they want to sell 100% of the company today

[00:18:21] and essentially throw the keys at us and run? If they want to do that, then we can accommodate

[00:18:32] that. So long as either we can put one of our people into the business to run it, or

[00:18:39] there is someone at the second level within management that can step up into the general

[00:18:46] manager or CEO, so we can be flexible that way. Or the owner might want to step away

[00:18:54] from doing all the things that a CEO needs these to do and just get back to doing what

[00:19:00] they love and what they're passionate about, which maybe that's focusing on products, maybe

[00:19:04] that's sales or business development, we can coordinate that. Or perhaps they want to

[00:19:11] just take a consulting role with the business and still work for a day or two a week.

[00:19:17] And so in that, it's a partnership of sorts, and so you're also bringing objectivity about

[00:19:25] what you think the owner might actually be good at versus what they think they might

[00:19:29] be good at all. It very much then needs to be a conversation about, okay, that's fine

[00:19:37] if they want to still maintain some type of development, but the conversation needs to

[00:19:42] be about what does the business need going forward rather than how would a business satisfy

[00:19:49] their needs or their sense of fulfillment or self-identity. Flexibility? Yeah, yeah.

[00:19:59] And that's where, again, it comes down to, again, being people first and having very

[00:20:04] honest conversations with the owners around what they want and where we then think that

[00:20:11] they would best be suited for the business. It's important that everyone understands that

[00:20:18] if we are acquiring the business, that we are the owners of the business from that point

[00:20:21] on. And so that can create some tensions or some challenges around new decisions being

[00:20:28] made, taking business in new directions can, for some sellers, that can be threatening

[00:20:37] or hard to accept, hopefully this won't fit, but we know what we're doing, or I'll know

[00:20:43] that we'll make the best decisions. It's very, it's a challenge, particularly when someone

[00:20:51] has built a business to $2, $5, $10, $15 million. And in a lot of ways, they're already

[00:20:58] key milestones to have gotten there. There's something that they've done incredibly well

[00:21:04] with the team or whoever is part of it. But to then, you know, doubly think about getting

[00:21:12] out of the business and also letting go if it is an interim period where you come in

[00:21:20] and you're running, you're owning and running the business while they're still there. They're

[00:21:25] big challenges at a personal level to let go or to trust.

[00:21:31] Yeah, so there's actually trust is key. So, there is a large

[00:21:43] community, both parties, bought, buy and sell up to go to work well together post acquisition.

[00:21:56] So, when you're people, very important in your evaluation, and I guess you get to work

[00:22:00] with some of your successful acquisitions over many years, because typically they're

[00:22:05] not going to drop, everything's not going to line up tomorrow so you can take the keys.

[00:22:10] So, what are you looking for in the business? I think we can hinted at that earlier. I mean,

[00:22:15] obviously, separation of owner and business, but what are some of the hallmarks of a good

[00:22:22] opportunity for you as a business?

[00:22:25] I can get into some specifics in it, just a minute. But I think broadly, it's about consistency

[00:22:31] and predictability in the business. So, when we're first looking at an opportunity, it's

[00:22:39] about looking into the history of the business and understanding. Well, it has there been

[00:22:43] consistency in how it has been operated. Can you sort of, can you join the dots in a company's

[00:22:51] journey over time and understand how decisions have been made in the past and what has led

[00:23:02] from those decisions? Because if you have confidence in what's been done in the past,

[00:23:09] then you should be able to project into the future. So long as we keep doing roughly

[00:23:15] the same things, this good business should continue to be good in the future as well.

[00:23:21] So that's kind of the overarching thing. Then we come down to what's going on. Okay, what

[00:23:29] can create that consistency and predictability? And I think there are some key things. Having

[00:23:39] real clarity around roles as fostering things in the business.

[00:23:43] Yeah, for the team and the owner themselves. Yeah, yeah. For that team being very clear

[00:23:54] around who was doing what and when and who has accountability for decisions in the

[00:24:01] business. And then that can often be captured or managed through a quality assurance

[00:24:12] process. And, of course, the other arrangement, ISO or quality standards.

[00:24:20] transition with the company or the business invite implemented to read professional eyes and

[00:24:26] system of tires, those types of parts and operations that gives us some confidence around consistency.

[00:24:37] That goes across all businesses if you can aspire to have standard operating procedures

[00:24:43] and well-defined org charts. Understanding whether the business is how much key person

[00:24:55] risk is there in the business so if the owner does suddenly leave or unfortunately, if

[00:25:05] the proverbial bus didn't happen to catch them as they were about to cross the street,

[00:25:10] how easy is it for another team member to set a role, or someone can put a new come

[00:25:18] into the business and be able to get out to see quite quickly?

[00:25:25] How do you go about evaluating that when you're putting your own money into a business?

[00:25:32] It can be a sense of, I deal with a lot owners and what they view as their key attributes

[00:25:42] or influences on the business, sometimes it's some things that are really understated that

[00:25:49] are so important. How do you go about going, we can back this business because we understand

[00:25:56] the role of the owner?

[00:26:05] That can be a challenge as well in a sale process, often if there is an advisor or broker

[00:26:12] or intermediary standing between us and the owner, and we often want to spend as much

[00:26:19] time as possible with the owner, and for some of those very good reasons, the advisor might

[00:26:25] want to strictly control the level of interaction. We are building a relationship and it is

[00:26:38] like a marriage, we are going to be attached to this business and to the team in that business

[00:26:43] for a long time. We want to be able to go on a few dates first.

[00:26:48] For sure. It is such a great analogy, I use it all the time, the dating, marriage thing.

[00:26:56] The advisors, this is where having a really good advisor is so important for an owner.

[00:27:03] That means you've got to understand the business and understand what the owner wants. It's

[00:27:11] not always about maxing out the dollars. It's a big part of it. To step away and say it's

[00:27:20] time for the buyer and the seller to get together and have their own discussion. I do that regularly

[00:27:29] and it's like you have a bit of a script for it. I understand why you want to get together,

[00:27:38] but you are not going to talk about the deal price or the technical or legal thing. It's

[00:27:47] a place for a discussion to get to know each other and I think it's vitally important and

[00:27:52] in the end can be quite pivotal in getting the deal done or not. If you keep them apart

[00:27:58] and try to orchestrate, it's counterproductive or can be.

[00:28:02] It can be. Absolutely. I think you can move very quickly to understand whether or not the

[00:28:09] party is going to be close in terms of pricing and value. Then the price is the pricing. That

[00:28:17] can be put aside for a while. Then you want to focus actually on having conversations

[00:28:25] more about what their values actually are as a team. I can appreciate that from the seller's

[00:28:36] perspective. Again, having been in that position myself several times before, it's all well

[00:28:43] and good to have that conversation with one potential buyer. If you're entertaining three

[00:28:47] or four potential buyers, then that can be a huge drain on time and resources. That's

[00:28:53] where a good advisor can really play a very important part in focusing those conversations

[00:29:00] and helping the seller to understand where they should be putting time in and where they

[00:29:05] should perhaps be pushing back, not the potential acquirer waste too much at the time.

[00:29:13] If you're in the fortunate position to have a few potential buyers, you've got to closely

[00:29:21] manage that. It's an opportunity to explore the whole deal, all of the parameters of the

[00:29:28] deal and what it means for you personally before and after as well. As you hinted at,

[00:29:34] it can also be incredibly disruptive for the owner in terms of trying to keep their foot

[00:29:42] on the accelerator. It feeds down to staff. If staff haven't been communicated to it the

[00:29:49] right time in the right way about seeing the owner distracted or seeing people turn up

[00:29:56] to the office and close the door, you've got to handle that properly.

[00:30:05] We do tell most owners that we would be speaking to if they don't already have an advisor that

[00:30:11] they should bring around. There's a higher certainty of closing the deal if there is an

[00:30:21] advisor on the seller's side. That's interesting. One of the biggest risks to us is we invest

[00:30:30] a huge amount of time and effort into a potential seller and we get down to conducting deep

[00:30:38] diligence on them. There'll be a real investment of capital at that point as well. We'd hate

[00:30:51] to see if the deal falls over just because the seller is a super requiring concern on

[00:30:58] shore and then to proceed on. Having an advisor to help guide along the way is a real help.

[00:31:05] At the right time for the advisor to be able to say, "This is not perfect, but it's pretty

[00:31:13] good. Pretty close. The advisor has mostly got an incentive at that point to get something

[00:31:20] done." If it's the right deal and they've invested in understanding what a good deal

[00:31:25] is for the owner, you can feel besieged. You've been through it as a seller. I've seen sellers

[00:31:35] feel under siege because they might react and say, "It's not enough money or I've got a

[00:31:44] really great project in the wins. Give me 12 months and we'll." That's an interesting

[00:31:51] take to have. Not any advisor, but an advisor who can help the owner pursue something that

[00:31:59] is very rare to get perfect. It's almost impossible to get perfect. If you get pretty good and

[00:32:08] you've got something ... Again, we opened up talking about identity and purpose. It's

[00:32:15] so vital to have the next phase post business mapped out because then there's something

[00:32:23] to latch onto. Whether it's travel or whatever it is, it's important that it's clear in your

[00:32:31] mind that there is something else to take over. The way we think about it is that when

[00:32:40] that business has been such a large part of the owner's life and identity for decades

[00:32:45] and decades, just because they sell, it doesn't mean that they're going to suddenly lose that

[00:32:52] connection to the business so that when they're at a dinner party or at a barbecue or playing

[00:32:59] around a golf with their mates, they're often going to talk about, "Oh yeah, I was an owner

[00:33:05] of company X, Y, and Z." We want them to be able to say, "Since I've sold it, the company

[00:33:13] has now achieved this and this and this, and it's gone on to bigger and better things and

[00:33:19] to be proud of that journey and proud of that evolution of the business."

[00:33:24] That's very important part from our perspective.

[00:33:28] I refer to it often as being an ambassador for the business and where there's both sides

[00:33:36] that want to see the owner whenever they have the ex owner, past owner, he talks about

[00:33:45] sold to a good home and they're doing great things. Whatever the deal was based on it,

[00:33:52] it's much better that everyone's largely on the same page about this is a good thing.

[00:33:59] This is the right time for me and it's good for the staff and good for the buyers, and

[00:34:03] you should, yeah.

[00:34:04] Of course, the best marketing we can have is owners who sold to us who are then willing

[00:34:13] to speak to other potential sellers about their experience with us.

[00:34:19] Yeah, you start to get a reputation as a good buyer.

[00:34:24] You do, absolutely. It is a surprisingly small world and your reputation is incredible,

[00:34:31] it is everything that's market.

[00:34:34] You're operating in such 10,000 to pretty big arguably a big niche but you know who

[00:34:40] you're after and everybody can find out about good or about experience.

[00:34:47] We talked about, you mentioned you had a couple of exits yourself.

[00:34:53] I don't want to forget at the end to come back to what you might have done differently.

[00:34:59] I'm kind of putting this in here, so I remember.

[00:35:03] When you make these approaches, how do you make these approaches and what are, is it

[00:35:09] protocols, emails, is it through a third party, how do you actually, what can an owner expect

[00:35:14] and how, what are some of the things that you would get immediate feedback on that could

[00:35:20] be quite important in the way that the future conversation unfolds?

[00:35:25] So, firstly, we are looking to build out our own list or database of potential pipeline.

[00:35:39] Yeah, opportunities.

[00:35:41] So, you know, we are quickly trying to get to a point where we can understand how large

[00:35:51] the company in terms of revenue is a growing and shrinking and we can usually, we can

[00:35:58] usually estimate that obviously through jumping onto LinkedIn, for example, and simply looking

[00:36:05] at the number of employees, and, you know, applying some rough rule of thumbs around

[00:36:10] revenue per employee to estimate size.

[00:36:15] So, that's a 10,000 companies number that I've spoken about, yeah, that soon narrows

[00:36:22] down to only a couple of thousand that might actually fit all of our fundamentals criteria.

[00:36:32] And then when we are reaching out to the owners, if we can get a soft referral or introduction

[00:36:41] from a professional, from a, you know, from a, or a business colleague, we'll get in that

[00:36:48] path.

[00:36:49] But often it is simply a cold phone call or email introduction.

[00:36:57] We want to do that on a very confidential basis though, so making sure that we are reaching

[00:37:03] out to the right person in the business.

[00:37:05] We don't want to be, yeah, we don't want to be reaching out to an employee.

[00:37:10] Yeah.

[00:37:11] He might not be able to share a holder.

[00:37:16] Yeah, yeah.

[00:37:17] And more often than not, it's just about posing the question to the iron around it.

[00:37:23] Have they contemplated a sale, telling them who we are and what we look for.

[00:37:31] And then we'd invite a conversation to begin.

[00:37:36] And very often the owners will say not interested or close down the conversation quite quickly,

[00:37:46] which I understand, is they're busy.

[00:37:48] I don't think that necessarily serves them on their interests in the best way.

[00:37:52] You could talk about that a bit if you like as well.

[00:37:56] Please do, because it's so, it's so, you know, timing as an owner is hard to control.

[00:38:05] And I, there's a more of this inbound, the prospects for an inbound call are increasing

[00:38:12] all the time.

[00:38:13] So the old sort of, no, mate, should be right or I got a plan or I don't need anybody, that's

[00:38:22] not the way, you've got to, you've got to establish that there's some credibility on

[00:38:26] the other side of the email or the phone call, but, you know, I think a lot of this activity

[00:38:33] is going to be let's have a conversation, let's understand each other and we're not rushing

[00:38:38] to do anything either side, but it's very much worth harvesting genuine interest if you establish

[00:38:45] that it is somebody from the sector, somebody with a track record, and you don't have to

[00:38:50] give away the farm and you don't just sign an NDA and give them all this information,

[00:38:55] but you do that, you know, the pipeline is there for you as well too, because things

[00:39:00] can change rapidly in a business and you might need, but also, you know, you can phase it

[00:39:07] over a few years or even more if, yeah, so I've kind of, I get excited about that because

[00:39:14] you know, I see that it's managed badly.

[00:39:18] I think to your point about the increase in inquiries to owners is definitely going up.

[00:39:29] If we look at our space, you know, for these, you know, probably health software businesses,

[00:39:35] you're getting obviously private equity firms, you know, reaching out to companies, you've

[00:39:41] got software consolidators or aggregators like us that are reaching out, you've got

[00:39:48] strategics coming from, from the industry that might be looking to bolt on in other

[00:39:55] capabilities, and then you've got independent searches as well and that's, that's the entire

[00:40:02] movement of its own right as beginning to pick up pace.

[00:40:06] So you've got three or four different inquiry sources coming in to the owner.

[00:40:14] So the owner does need to be able to validate the quality and capability, I guess, and those

[00:40:23] inquiries quite quickly.

[00:40:25] And their intentions, you know, they're, what are they doing this for?

[00:40:30] They're not wasting, they're good ones aren't wasting their own time.

[00:40:34] Yep.

[00:40:35] So I think that, you know, there's probably three things that the owner should be asking,

[00:40:39] quite quickly, if they want to try and qualify these inbound inquiries.

[00:40:45] The first is simply why do you want to buy my business?

[00:40:51] You don't want to just feel like you're part of an outbound email campaign where the buyer

[00:40:58] has just, you know, bought a list of 500 businesses that are selling our engineering

[00:41:02] email.

[00:41:03] Does the buyer actually put some thought that has done some work to understand your business,

[00:41:10] your market, your industry, what's their, what's their thesis around to buy you?

[00:41:17] What is their capital source?

[00:41:19] So you know, actually do they have the balance sheet or the funds available to be able to

[00:41:24] purchase you, or are they trying to lock you into some level that's too simply around

[00:41:32] a transaction?

[00:41:33] And then having to go out and find capital to do the deal?

[00:41:41] And then the third is back to my point around values and alignment.

[00:41:46] So again, just having a conversation with them around what's important to them for a

[00:41:50] values, what a perspective, you know, those three things, I think, they're capital source

[00:41:55] values and why, why me?

[00:41:58] And I think, yeah, vital those three and I probably add, you know, what's track record

[00:42:04] have you done this before?

[00:42:07] There's plenty of explorers and tire kickers.

[00:42:12] But if you've got those three or four things sorted, that's why I imagine in some of your

[00:42:17] approaches you catch people off guard or you know, it's a really nuanced conversation

[00:42:22] to say, hey, this is Shane, I'm from Continua Software, yeah, yeah.

[00:42:30] Please tell me your business and can I sell you a vacuum cleaner or a laser car on the

[00:42:35] way as well?

[00:42:36] Yeah, the message, the strong message is, you know, there's a way for owners to take

[00:42:42] those calls and but quickly establish whether or not you know, you're, you know, this idea

[00:42:48] you, your time, your exit, I'm ready now to go in three years, it, it just doesn't happen.

[00:42:54] So you've, you've got to, if it's a legit incoming inquiry, harvest it like you would

[00:43:02] a long-term sales prospect, you know, if you've got a relationship, you're going to

[00:43:07] kind of fundamentally change your business with, yeah.

[00:43:11] It's also really, and I found this as a seller, it's, it's really confronting to have somebody

[00:43:18] come in and analyze and question everything that you've done and everything that you've

[00:43:25] built and, and to ask you why, why, you know, why have you built this product, why have

[00:43:32] you gone after these types of customers in that market, why have you built your team

[00:43:37] this way.

[00:43:38] And often you actually don't have very good answers to that, it's, it's because sometimes

[00:43:45] I've, I've just, I've reacted and I've made the best judgement call I could on this

[00:43:50] all on the day and to then go back and have to reflect or, you know, and explain why you've

[00:43:57] made the decisions, can be, can be fronting.

[00:43:59] So that's again why I think it's, it can be challenging for the owner of the seller

[00:44:05] to start to even take these, these inquiries from, from buyers.

[00:44:10] Yeah, and that's, yeah, and I'm sure you'd be saying or thinking it's, it's, it's not

[00:44:16] a negative that it was a reaction to an opportunity or a proactive search for a, for a particular

[00:44:23] opportunity or a particular problem to solve.

[00:44:26] So, but it's probably for you very key to get a, an insight to the way that owner thinks

[00:44:32] and whether you, you would want to then partner with them over a few years to, to exit them

[00:44:39] out of the business.

[00:44:40] Yeah, 100 percent.

[00:44:41] And also the way they think and the way they operate is usually reflected very highly

[00:44:47] than in the types of people that they've built around them in the team that I've built and

[00:44:51] the way that team operates.

[00:44:53] So the team is usually a reflection of the quality of the founder or reflect the qualities

[00:45:04] of the founder, so again, it's where the values become, become so important.

[00:45:11] Hey there, it's just a quick interruption to the podcast.

[00:45:15] And it's a message from Curt Capital, a supporter of the podcast.

[00:45:21] If you're a business owner thinking about selling, the worst thing it can do is jump

[00:45:26] into a sale process, advertise, and hope for the best.

[00:45:30] If you want to get a sense of what your business is worth today, what your options

[00:45:36] are to make it more sellable, then head on over to the Curt Capital website and check

[00:45:41] out the value and sellability diagnostic.

[00:45:44] Now, let's head back to the podcast.

[00:45:51] So just on a mechanical level, how do you, you know, we get to, in the end you might get

[00:45:59] to a contract after you do due diligence.

[00:46:01] But what, like, what are the first few steps, is it adaptive because someone is really reluctant

[00:46:09] to share too much or do you have a fairly standardised way of like we want to know turnover,

[00:46:16] then we're going to have an interview, what's your kind of key steps?

[00:46:20] So after an initial conversation, whether that be in person or on the phone, of course

[00:46:26] we would like to be able to then say, well, send us three years of historical P&L, your

[00:46:35] customer list, de-identified, broken down by a segment, and staff list.

[00:46:43] But of course, those things are usually very rarely immediately available.

[00:46:50] So we're often, and again, this is a good point around having advisors helping the seller

[00:46:59] come and prepare the information for the business and to clean up, you know, I don't

[00:47:04] also clean up, but make sure that the business has access to the data that's going to need

[00:47:10] to be at the professional seller is important.

[00:47:13] If the advisor, or if there's not an advisor involved, then it means that we are going

[00:47:18] to probably have to roll our sleeves up and almost help the seller put that information

[00:47:24] together, which again is a big, a big investment of time on our part, particularly if a deal

[00:47:29] isn't going to get done.

[00:47:32] But of course, we are trying to assess as quickly as possible whether or not we actually

[00:47:38] think the business is going to be worth putting that amount of time in there to help them

[00:47:43] prepare those, prepare that information.

[00:47:48] The analogy of the dating game, you know, you do have to get to know each other in stages,

[00:47:55] perhaps.

[00:47:56] I mean, I'm sure there's plenty to do it differently, but, you know, when I'm working more and

[00:48:04] more with owners, that's why I said this is the search, the inbound thing is happening

[00:48:11] at a much greater pace.

[00:48:12] And I'm working with owners and it's been a really key part of my advisory work for the

[00:48:19] last 12, 18 months where someone gets an approach, and what do I do and what information do

[00:48:28] I give and when.

[00:48:29] So, yeah, it's, you know, I'm not a fan at any stage before a formal due diligence of

[00:48:37] giving someone a tax return.

[00:48:39] because it can be so.

[00:48:41] It's personal, it's confidential, but it's also can be quite misleading as to what really goes on in the business. So you've got to go back a few steps and summarise that and identify key information but show a potential by it right stage.

[00:49:00] We've got seven clients that have sort of got a good spread. We're not going to tell you who they are, but at least the interested party gets a feel that it's not just one client company because that could very well be a big cross.

[00:49:20] Yeah, 100%. That's why one of our fundamental criteria is that it will be hard for us to get excited about business if the top five customers represent more than 25% of the revenue.

[00:49:38] So, we want businesses that don't have any customer concentration risk. So that's something we want to look at quite quickly.

[00:49:51] We're not encouraging people to waste anybody's time, but if you're sitting there in a business and you haven't had any exit, you haven't given thought to exit plan or you don't know what to involve,

[00:50:03] that some of these discussions without giving away too much can be quite formative in jelling you to do something because someone's feedback is you've got great profitability.

[00:50:16] You're so central to the business that is too risky. You've got one company, you've got some market feedback and some motivation to think about what you might do at least, if not fundamentally change the business.

[00:50:32] But you're sitting there in isolation, wondering about what might happen and I have no doubt that it causes internal stress with an owner.

[00:50:49] It's pretty hard to tell yourself, you can have a mask on that everything's great and I'll go and get some capital and grow the business. But you're deep down.

[00:51:02] I suspect it's troubling for a lot more. But I also, I'm really sympathetic that a lot of owners don't know where to turn to don't have that trusted relationship with a good accountant, a good business coach.

[00:51:18] However, a good M&A advisor or business broker. And that's a lot of the reason why I like to get owners and advisors in the small business space to talk about the stuff we're talking about, to encourage owners to do something to alleviate the big questions,

[00:51:40] the big stresses that come from not answering those fundamental questions.

[00:51:47] I think a lot of the questions that you'd ask yourself and ask of your own business in preparing for an exit are good questions to ask annually, if you were going to continue to operate the business.

[00:52:03] So I think whether you actually then choose to sell or not. I think a lot of them work that you can put into preparing and reflecting on the business.

[00:52:14] It will help you in sitting and making an angular clarity going forward.

[00:52:20] Yeah, I think that's why the coaches, there's some excellent business coaches. I think there's been a big void in for owners about they go to their excellent accountants and excellent lawyers.

[00:52:31] It can be compliance driven. I've got to get this done this quarter.

[00:52:38] The last interview on Small Business Band I had representing from Judo Bank and I'm talking about, and they're really doing an excellent job of funding small businesses.

[00:52:50] We were chatting about this to your point, the annual review.

[00:52:56] With a – you do see your accountant annually, but what are you – other than getting your tax return done, what else could you get done by way of reflecting on what you did for the last year or three years and what you might do to change that?

[00:53:12] In the same way as an annual banking review can be a trigger to – we have done some forecasting or some business planning and we're going to get busy and we need some funding.

[00:53:25] There's got to be – exit planning is a big ticket item, but you break it down and as you say that reflection on some of those questions you might get asked is one of the ways you could start to break that big – what do they call it?

[00:53:47] There's a big hairy – what – audacious – I don't know.

[00:53:55] The BHAG.

[00:53:57] This thing looks like a monster, but you break it down into some doable bits and you're making progress.

[00:54:03] And I'm very much a believer in the – the 1% improvements in the business are important and they add up very quickly to making substantial difference over time and to be able to make those kinds of 1% improvements in the business, you need to have a granular new on –

[00:54:16] how it's performing, how it's operating and that's – that comes from having a good financials, having data, having KPIs.

[00:54:26] A bit of a dashboard of what really drives your business.

[00:54:31] I was just thinking about – so we asked for the P&Ls, of course, and the financials for the business.

[00:54:37] Of course, for a privately – closely held, privately held business, it's often – the financials are prepared in a way that are focused more on tax planning for the owner, rather than necessarily showing the true operating camp of performance or potential of the business.

[00:54:57] So, again, whether you go to your accountants or to an advisor to help you think about that and then perhaps you know, re-forecast or prepare a pro forma that actually shows the real potential.

[00:55:13] I think it's going to be very helpful.

[00:55:15] It's the core – it's the start of any work I do on any engagement, and it kind of can create a few concerns and questions when they're not just going – and I'm not being critical.

[00:55:32] They go from year to year and there's all this – they're watching some certain parameters or KPIs in their business but I put – so our tax returns mostly don't tell the story.

[00:55:44] So, it's not about not even giving you access as a potential buy.

[00:55:48] It's just saying, let's be honest, most businesses have ad backs because they're not business expenses.

[00:55:57] Or maybe they have revenue that's not even business revenue.

[00:56:00] So, the first piece of the puzzle, for me, is getting four or five years' worth of financial returns on one – it's not rocket science –

[00:56:10] on one XL, reorder the expenses from high to low, and then what's not a true ongoing business expense.

[00:56:18] And obviously, if you've got pure and clean financials, it's a lot easier but that's not how it works.

[00:56:25] And then it does – you know, you see some fundamental trends over a few years and you know that that summary at the right time is what I'll ship off to an interested party.

[00:56:38] And it's enough for them to say, well, you know, top line, it's of the size that we're interested in, bottom line adjusted.

[00:56:48] Yeah, maybe we'd talk about some of those ad backs and adjustments, but, you know, they start to get a sense of it's stable or it's growing, or it's all over the shop in terms of bottom line.

[00:57:01] And then, from there, the first probe on all those things is for me. Why that?

[00:57:08] That doesn't, you know, that looks inconsistent or high or whatever.

[00:57:13] So that's when they, you know, start to, you know, really appreciate that there's another perspective on their numbers and the numbers do tell the story, a good one or a bad one, depending.

[00:57:25] Yeah, and particularly for a smaller business that, you know, let's say, if it's turning over, say, 3 million in revenue, and it's operating on a 20, 25% margin.

[00:57:43] Yeah, a couple of decisions around account, or investing in the product can very quickly evaporate the earnings of the business.

[00:57:59] Yeah, chunking the expenses.

[00:58:03] Yeah, yeah, so again, just understanding why decisions have been made, you're going to cut your comments back to that consistency and productivity.

[00:58:13] Yeah, I just want to, I do now want to go to your own experience as an Exeter, from the perspective of what, what are some of the things, I don't want to talk out of school, but, and I'm aware that you're in the business of acquiring businesses and so you bring capital,

[00:58:31] but you also bring some rich experience, I'm guessing, you know, from having done it yourself.

[00:58:38] What are the things that you would advise based on your own experience at a known, what are the top things you would do, the top things you wouldn't do again?

[00:58:53] Yeah, if it was 10 out of 10, that's fine, just so you go all right.

[00:59:01] It was all perfect.

[00:59:02] Yeah, I wish.

[00:59:05] I think it does come down to, yeah, understanding exactly who is buying the business, and how they operate, what are their motivations.

[00:59:15] For example, I've sold quite a few businesses to private equity firms, and they have a very particular playbook and approach to how they will usually do a transaction, particularly if they're out of the US.

[00:59:34] So the private equity playbook is, they'll make an approach, they will ask them initial questions, if you kind of fit their criteria, they'll come back with what's probably a very attractive evaluation for your business.

[00:59:54] Yeah, it's the owner selling them, very excited about an asking number.

[01:00:00] They'll then lock you into a period of exclusivity to deal with them.

[01:00:05] It could be 90 days or longer.

[01:00:09] And they'll almost always try and retrain with you, meaning that they will come back and say, well, yes, we said that you were worth 30 million.

[01:00:26] But we've now learned x, y and z about your business.

[01:00:30] And we have to reevaluate the basis upon which we set the price.

[01:00:37] That can feel like you are being hoodwinked, that can feel that obviously annoy the seller.

[01:00:48] I think you just need to be prepared for that to occur if you go down that path and sell to that type of buyer.

[01:00:55] They have a very strict due diligence process that is going to always take more time and require more effort than you ever thought.

[01:01:10] And when you try and over estimate how much time you think it's going to take, you've got to be surprised.

[01:01:18] Yeah, it's an invasive wearing down, watering down kind of process.

[01:01:25] Yeah, absolutely.

[01:01:28] So I think that's important about understanding what type of buyer is talking to you and how they operate.

[01:01:39] Going back to what we said earlier as well, just around for us, you as a seller,

[01:01:46] very clear, but having a reasonable idea in your mind about what you're going to do next,

[01:01:52] yes, you go through this, you go through this washing machine type of experience for several months.

[01:02:05] And then you look at your bank account and there are some nice numbers in there after the sale has gone through.

[01:02:14] And you've had the farewell dinner with your team and shed some tears and share some stories.

[01:02:22] But then you wake up next day and you're not doing what you've done for the past 20 years, 30 years.

[01:02:30] It's a gaping hole.

[01:02:31] It is. It is absolutely a gaping hole.

[01:02:34] And you can feel that with good things or bad things.

[01:02:39] I think if you don't put effort into thinking about that up front, you'll often fill up that gavicle with bad things.

[01:02:50] Yeah, no, it is on the money.

[01:02:56] So, yeah, we're saying have a good sense of what's after.

[01:03:03] It might be.

[01:03:05] You can feel your time. I think entrepreneurs and business owners have built.

[01:03:10] They just don't go about their own way, but they are wired to work hard, to take on the impossible,

[01:03:18] and that when there's nothing to go to, and play, comes up all the time on this podcast,

[01:03:27] but playing golf all of a sudden, five days a week, or famously walking the dog

[01:03:34] is not much as I have my dog or playing golf, it doesn't fulfill.

[01:03:39] So, that is vitally important.

[01:03:42] And I think the other thing I just wanted to pick up on, these calls come in.

[01:03:48] Offers sometimes come in, beware the high offer because there's usually a lot of ground to cover beef

[01:03:56] and a downward pressure through due diligence and through all sorts of other processes.

[01:04:02] I think it's also vital that you have in your own mind what a walk away number is.

[01:04:10] You don't have to necessarily share that.

[01:04:13] It doesn't necessarily have to be based on maybe fundamental, you know, the more traditional fundamentals,

[01:04:19] but it is important for you to be able to say, and you might, you mostly need good advisors

[01:04:25] who can help you understand that.

[01:04:28] You need to be able to say, that is a ridiculous thing.

[01:04:31] I'm going to treat that with a degree of skepticism, but if it's close,

[01:04:39] and you start to see it unwind and you walk away because where it's headed,

[01:04:45] it's not within your range.

[01:04:48] I think if you've gotten out and you've just listened to two or three offers

[01:04:55] and they've come in at a number that's so far removed from that magic number you've got in your head,

[01:05:04] then it is worth reflecting on what why is that.

[01:05:09] If those offers have come in from what you would consider to be reasonably experienced buyers,

[01:05:15] if the market is saying that you are biased at this point, then, okay,

[01:05:21] so how do I bridge that gap, what do I need to do to be able to actually achieve

[01:05:26] the magic number that I've got in mind?

[01:05:30] Back on that comment about the higher value for the highest offer or higher price that's off what front,

[01:05:37] I think it's also really important to understand what portion of that's going to actually be cash

[01:05:42] that hits my bank account on closing up for the sale of my business versus how much you're going to have to roll

[01:05:49] in, or how much is going to be a sell or no export, feeling an underlying payment.

[01:05:57] There are all sorts of ways to structure those duels so that the big number that gets thrown out front

[01:06:03] doesn't certainly represent how much cash lands on that account.

[01:06:09] Yeah, you can do all your calcs and look at that.

[01:06:14] I think we're both seen where the thing that gets everyone excited is the headline number but until you see an overview

[01:06:22] like a non-binding indicative offer, and this is later in the process,

[01:06:26] but that talks about the picture, what's in, what's out, what is the owner expected to do,

[01:06:34] there's been deals I've seen where there's a really attractive headline number but the owner's got to stay in

[01:06:41] and work for five years, and that wasn't, that might suit, it might not, but, and it's, you know, as you say,

[01:06:48] you earn outs and all sorts of other ways to get clear on that.

[01:06:52] I think, you know, we're at a point where it's very much, we can expect more owners to get more approaches

[01:07:01] and therefore I think it's going to bring on the need to do something a bit more proactive if you are,

[01:07:09] and it could be how, you've given plenty of great advice today on how to deal with that call,

[01:07:16] but also to have the reflective conversations with whoever your trusted adviser is about what do I really want to do

[01:07:25] with the business and most importantly what I want to do after that if I can strike a deal.

[01:07:32] And also, I think doing that you can think through, do I actually need to sell to a third party,

[01:07:39] or can I, can I sell to my employees or other ways that I can, I can create a session or transition plan?

[01:07:48] Yeah, that management buy and employee buy out is, is another significant area of opportunity for owners,

[01:08:01] it's a very delicate conversation, but it's also, it's also true that the staff often have a lot more power than they might, you know, understand,

[01:08:13] and the owner has lot less options in, you know, dealing with a buyer that doesn't appeal to the staff necessarily,

[01:08:20] so yeah, it can be a, you know, a natural pathway and, but it could be handled well like everything.

[01:08:28] Yes, yep.

[01:08:30] Shane, it's been an excellent discussion, it's so valuable that you're out there acquiring, but you've sold,

[01:08:39] you've exited and, and you've shared some really highly valuable information and advice,

[01:08:45] so I really do appreciate that.

[01:08:47] I wish you well with continuous software and any closing comments before I ask you to kind of shout out where people can get a hold of you.

[01:08:58] Thanks Michael, I've really enjoyed the conversation as well.

[01:09:02] I think just my closing comments are that people are messy, businesses are messy, people are imperfect,

[01:09:13] and businesses are imperfect as well, and I think acknowledging that and then approaching any potential transaction or sale with,

[01:09:24] that as a kind of a realization, I think makes things smoother, and hopefully actually more enjoyable and fun along the way as well.

[01:09:35] You know, we are buying businesses that we know are imperfect and we are going to be imperfect owners of those businesses as well in the future.

[01:09:43] Rather than trying to hide from that, actually knowing where the imperfections are, where the skeletons in the closet apply.

[01:09:51] They aren't reasons to kill or deal, they just, they're just issues that we need to be able to understand, and then we can do our best to manage them.

[01:10:02] And so I think that's very important when we again come back to that point around consistency and irredibility and for owners.

[01:10:10] If they can be honest and upfront with us and to share those skeletons in the closet,

[01:10:18] then they usually, they won't be the deal, because we like to solve problems.

[01:10:24] So we actually want to understand where those problems might lay in the business.

[01:10:28] Yeah, it's not the first line on the cheque sheet to say they've made one mistake in past deals off.

[01:10:34] Well, I've started off with some good news.

[01:10:42] Things are going to make or break. Not one good, like exceptional, lucky result is also going to be something that you would filter in.

[01:10:49] So, well, maybe you're not going to get lucky again, but yeah.

[01:10:53] Yeah.

[01:10:54] All right. So you're happy for people to reach out to you to continue, or do you want to work on?

[01:11:01] Yeah, absolutely. So PIM can go to our website, which is ContinuousSoftware.com, and I'm happy to share out my in my address as well, which is simply to change.

[01:11:11] If you want to talk to the software at ContinuousSoftware.com, always happy to connect to owners, to operators, or to advisors who want to talk business,

[01:11:20] obviously in the software technology space.

[01:11:25] We are focused on businesses that have revenues of between $2,000,000 and $15,000,000, an Australian and Zealand.

[01:11:34] If there are granted in that segment, then we'd like to speak to them.

[01:11:40] I'll put those details in the show notes as well.

[01:11:45] So, yeah, we can have a pathway for someone to reach out.

[01:11:50] Again, Shane, really appreciate your time. Thanks so much for being so open and generous. It's great.

[01:11:57] Oh, God, God, God.

[01:11:58] Jot it.

[01:11:59] Well, I hope you enjoyed that episode of Small Business Banta, and I hope it was helpful in helping you make the most of it.

[01:12:09] And helping you make the most of your small business ownership.

[01:12:13] To subscribe, to listen back, or to check out any of the resources or information we talked about on the show today,

[01:12:19] head over to the website, smallbusinessbanta.com.au.

[01:12:23] We can search up Small Business Banta on your favorite podcast player.

[01:12:28] Don't forget to subscribe, and if it was helpful, tell another business owner about the podcast.

[01:12:34] If you think I can help you personally, please reach out to Michael Curver via the website.

[01:12:39] There's a new episode out every couple of weeks. I'll see you then.

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