BUSINESS MENTOR UK PODCAST: PROFITS FIRST
I was pleased to guest on the fantastic GROW MY ACCOUNTING PRACTICE PODCAST with Mike and Ron.
Mike Michalowicz is the Co-Founder of Profit First Professionals and the author of Profit First. By his 35th birthday, Mike had founded and sold two multi-million-dollar companies. Confident that he had the formula to success, he became an angel investor…and proceeded to lose his entire fortune. Then he started all over again, driven to find better ways to grow healthy, strong companies.
Ron Saharyan is the Co-Founder and Managing Partner of Profit First Professionals. Ron has over 15 years of experience in managing organizational growth and built multiple companies in the staffing industry prior to launching Profit First Professionals.
Together they are a force of nature and a very entertaining and informative podcast. For all their podcasts, here’s the link: listen here
For those who read rather than listen, here’s the magic questions and, of course, the answers:
GMAP: With no further ado we’re going to talk about building your business so you can sell it with Christie Nicholson. Christine welcome to our show.
CHRISTINE: Hi Ron, thank you so much for having me.
GMAP: What inspired you to write your book SELL IT in the first place?
CHRISTINE: I’ve been working in the exit in succession planning for about 30 years and most of that is coming from helping one of my early clients when I was baby accountant to sell their business. Over the years working with number of clients I came to realise that most business owners do not know how to sell their business. They don’t know how to get ready and what that’s doing is leaving many of them disadvantaged. Fundamentally they’re working their entire lives and then leaving money in value on the table that they are entitled to take with them into the next phase of their life. SELL IT is a kind of self-help manual for people getting the value that they’ve worked for into their own retirement pockets and not leaving it for the next person who comes and buys. Their business.
GMAP: Before the show started you were sharing some pretty startling statistics about businesses failing to be sold. Can you elaborate a little bit more on that?
CHRISTINE: It’s tragic that most people don’t recognise that as business owners if they were to die or become incapacitated or just unable to work in their business what the impact on their business would be. There is a very, very high percentage of those businesses, where the owner is still working in the business, but if they became unable to work, that their business would go into insolvency within 12 months. I mean it’s a phenomenally high percentage. And the majority of businesses where this happens are in that either small medium or low mid-tier sector (so I’m talking about under 20 million turnover).
GMAP: And why is that?
CHRISTINE: It is because they just don’t plan for themselves not being in control. They have surrounding themselves with people working IN their business but not equipped them to run it without the business owner.
GMAP: What are some of the symptoms so maybe our listeners can identify that there is this potential insolvent state? What’s the behaviour of a business owner? How can listeners in accounting practices help here?
CHRISTINE: Your listeners can help their clients through this AND help their practise generating more fees by looking at their clients and seeing which ones typically are business owners who founded the business and are still actually actively engaged in the day-to-day management of the business. For example, where the accounting practise is engaging with the business owner and nobody else in that business. So there no finance person in the business that they can talk to and everything comes back to the business owner is one of the key symptoms. This is the principal characteristic that every single accounting practise that is listening to this could use to generate more fees within the next three months. Simply by looking at the business owners that they engage with where they do not have access to anybody else in that business.
GMAP: What is an indicator of the insolvency in those businesses? What are the red flags accountants should look for?
CHRISTINE: Just to be clear the businesses are usually currently solvent but it would become insolvent within 12 months of the business owner being unable to work IN the business.
GMAP: thank you that’s right. What was the key indicator for accountants?
CHRISTINE: Apart from only dealing with the business owner, generally the business may have stopped growing. So, they should look at businesses that have previously grown fairly aggressively over a couple of years. Then all of a sudden, they stopped growing and plateaued or they grow and recede then grow again – they’ve got this yo-yo effect. On their annual accounts This is typically showing that the span of control of the business owner is being stretched to his limits. So, they pull it back in then grow again. I use “he” because my clients are male, probably because of tech engineering manufacturing field and typically my clients are of a certain age. I wish there was more women but sadly not.
GMAP: I thought you’re going to say you use he because women don’t have this problem, they just keep growing the business healthily?
CHRISTINE: The truth is women do tend to address succession planning and delegation a bit more. Though it’s not unique to men. They have the same problems but generally if they’ve had kids, means they kind of know that they can be pushed their limits and then they either move through it or they move on.
GMAP: What are the steps we can take to make our business run itself ? Without the business owners’ input, which is what makes the business highly saleable. Am I hearing that criterion? What’s the steps we should take?
CHRISTINE: Most businesses are actually in an unsalable state. The first thing they need to get a grip of is having the business valued. Get at least a decent understanding of the realistic value of their business. Many business owners have this idea in their head of how much to value is and then, when they come to sell, their expectation is way outside the reality. There’s just such a misalignment of what they think and what the market value is so having it valued is one thing. Getting a senior management team that can make that business run without business owner. Then getting that senior management team to make that business work like clockwork
GMAP: great choice of words!
CHRISTINE: It’s a good book!! The key things which are basically (1) getting the value of your business (2) understanding succession and (3) starting the delegation that gets you out of the day to day as the business owner and then (4) understanding what the exit journey is. Most importantly understanding what your options are because most business owners think that the only options, they have is closing the door or selling to a third party. There’s so much more on the table than that.
GMAP: What does the exit journey look like?
CHRISTINE: Firstly, decide what YOU (personally) want. Just deciding that you are fed up and you want to sell your business can often lead to some kind of regret. You hand the keys over and then you go (leave your business). That’s like driving to the middle of the desert to sell your car, handing the keys over and then wondering how I’m going to get home. Often business owners haven’t thought about what they’ll do. Having a good idea about what it is that you’re going to do next is a really good idea.
GMAP: I’ve never thought about that. I mean you hear about it when people retire out of corporate, they find themselves saying “So what am I going to do now”. I never looked at it as through succession planning that the business owner is going to say, “what am I going to do now?” My thought was “hey I’m going to sell my business I’m going to make a lot of money and I’m going to paint coconuts you know for a living”
CHRISTINE: Most of them really haven’t given it that much thought. They might have thought about the fact that the wife has been nagging them for ages to go on a long cruise or a decent holiday without being attached to their phone.
GMAP: did I hear a chime perfectly placed? [a text alert came through at exactly the right time] When is the ideal time to start preparing for the sale of your business?
CHRISTINE: The day you start it!
GMAP: okay, so yesterday was the best day that therefore today is the next best day I assume? What shall I start doing today?
CHRISTINE: For anybody listening to this, if you only do one thing, the one thing to do is to start thinking about it then at least you’re taking the first step. Remember that there are 3 elements to this. The business is a legal entity. It’s an inanimate object. It’s not you and you are not it. Your identity is not connected to your business but overtime it will have been fused. There’s something called “role identity fusion” where a business owners identity becomes so trapped with their business and that they can’t actually think of their lives without their business. Start thinking “if my business didn’t exist what would my life be like?” At some point you are going to leave your business. 100% of business owners leave their businesses.
GMAP: Unfortunately for some just in the grave. You talked about starting off with the valuation. What confuses me is if I get a valuation today but I’m considering selling it down the road, wouldn’t I get the valuation as I’m approaching the sale? Why would I do that first?
CHRISTINE: It’s about setting expectation because if you know what the business is worth now and then know where you are. One of the things I also do is I look at the non-financial aspects of business. Let’s say your business is worth 10 million today and there are all these other issues in various aspects of your business (lack of consistent operations, processes, succession, management team). Overall if you think of business as a dashboard, it’s a bit like a graphic equaliser. Somethings are going to be higher (scoring / performing) than others. Start looking at the weaknesses in your business. The first thing is identifying the weaknesses. Knowing them means that you’re one step ahead when the buyer comes in because even if you choose to do nothing about the weaknesses in your business just being aware of them before a buyer does due diligence i.e., looks under your bonnet and has a good dig around, then you’re going to be one step ahead. If you’re on the front foot you can at least respond to questions by saying “yeah I’m aware this is a weakness” without being defensive and you can say “but when you buy the business, that’s built into the price and you can add value there and that’s where you’re going to get higher return (on your investment)”
Identifying the weaknesses in your business means you are one step ahead and can be on the front foot.
GMAP: What are buyers looking for? I hear they are looking for cash flow or predictable cash flows. Is that still true I mean what would generate a higher multiple on a sale of a company?
CHRISTINE: Recurring revenues is a big one. But actually, when you think about it you know recurring revenue is a bit of a “pat” (frequently used and misunderstood) phrase these days. Everybody’s looking for it. A bit like passive income is the Nirvana that everyone’s looking for. Buyers / investors are really looking for certainty so they’re looking to derisk the money that they’re putting in. Investors really only ask two questions: (1) how much we are going put in and (2) how much (and when) I can get out at the end of it. So how much risk am I taking here and what is the opportunity. What they’re looking for in the first instance they’re looking to make sure that they derisk their investment and then they’re looking for the opportunities that they have to add value. Not so different from playing stocks being a day trader looking at a slightly longer timeline.
GMAP: How do I find buyers?
CHRISTINE: That’s the magic question! What I always say to my clients is if you wanted to sell your business tomorrow, it’s guaranteed that you already know who potential buyers are. They’re already in your rolodex (showing my age there). They might be a client. They might be customer. They might be a supplier. They are in your network already. They might be a peer competitor et cetera. In most cases that is exactly where they are. With some industries it’s much easier to buy to find buyers just by making general inquiries that whether people are looking. It’s a bit like dating. You find out many people are single in a bar by making gentle enquiries. You don’t just jump up to the bar going “yo Babes, who’s single?” Because nobody wants to do business with anybody who’s desperate. I’ve only really sold businesses through private invitation and that’s usually using brokers who go out investigate market look for those indicators to see who’s looking for acquisition. Who’s got the money to invest and who’s looking for growth. And then signing NDA’s and making invitations to buy.
GMAP: What about the influx of investors looking to buy a bunch of accounting firms and looking to bundle them all in. Are you seeing that type of outside investors coming on in and looking to do that?
CHRISTINE: Yes, it’s in every market and every sector.
GMAP: I mean in every sector the venture capitalists are coming in. Has that been a factor in the accounting landscaping at all?
CHRISTINE: I know that there have been, over the years, been number of people who tried to do consolidations (in the accounting industry). I think mainly people have tried to do it because they looked at other sectors. So, you look at ICT / IT sector and managed service provider sector in technology or buying up companies that have got particular apps that can then work together. People from the accounting side have actually seen that, but my understanding from within the accounting profession is that it tends not to work too well. I think there’s been some quite famous failures on that front.
GMAP: When looking for outside experts, you mentioned a broker. Should I go this alone? Are there instances I should (use an outside expert)? And if I’m looking for an outside expert, is it a broker only? Are there alternatives?
CHRISTINE: I don’t know what it’s like in the states I’ve been remiss it at looking at this but in the UK there’s a couple of what we call volume brokers. Unfortunately, they are very disreputable. They’ve got really slick sales functions where they’ll say, “we will get your business ready for sale and will market it”. But you pay them a sizable fee upfront, and you’ll continue to pay them additional monthly fees. Then if there’s a success at the end of it, you’ll also pay as a percentage of the sale price. They’ll market themselves as “we’ve sold more businesses in the UK than anybody else”. But how big a percentage of all the businesses you’ve had listed have you sold?
Unfortunately, business owners don’t know to ask that question so they get taken in. Then 18 months go by, their businesses still not sold. In fact, it’s now in a worse state because the business owners checked out (in anticipation of the sale) and the business owner is still No clearer on the exit journey. They’ve done nothing really to improve the value of the business. In fact, what the business owner has probably done is readjusted the amount of money that they are now expecting to much lower level. And then they’ll sell for less than they should. That’s GGRRRRRRR – multiple expletives and the POO emoji.
GMAP: So, who are the reputable people to go with?
CHRISTINE: Well, I only work with brokers have an 80% or higher success rate. I know those guys have filtered possible clients and won’t do business with people they can’t help. A couple of my partners have 90% or higher success rates. Nobody has 100%. I’ve actually been with a client where we walked into the office when all he has to do is sign the paper. He’s got there, he’s got the pen in his hand and he’s looked at the document and then he looked me then at the lawyer and he said “Sorry, I can’t do it, I just can’t do it”. And he’s put pen down and walked out, after 9 months of due diligence slog.
GMAP: yeah, the story of Cliff Bar which I don’t know if they were present in the UK but it’s a mere 300 to $500 million turnover here in the US. The owner went to the final deal where all they had to do, cheque in hand, was slide it across the table and sign one more piece paper. He said, “can’t do it” and he walked away from hundreds of millions of dollars. So, it sounds like the sale isn’t necessarily only about the money it’s about the quality of life before and after I presume.
CHRISTINE: If the business owner is very clear about what they want to do next. And they clear about what they’re going to spend the money on. If they are also generally really comfortable and clear with what the next owner is going to do with their business and their employees (because its family) then with that level of clarity usually the sale will go through. And it will be relatively easy, or as easy as any sale because it’s always a war of attrition. But if the business owner has any levels of uncertainty, then it’s always going to be a more difficult journey – a more difficult journey for the owner and the buyer and for the exit team.
GMAP: Christine isn’t fantastic we need to roll on but I want people to get your books SELL IT – where is the place to go and if they want additional information
CHRISTINE: SELL IT is available on Amazon
GMAP: And what’s your website for your business
CHRISTINE: www.businessmentoruk.com and my book will also be available in print from there as well
GMAP: What we learn today. Christine really talked about preparing to sell from the day one, it’s really getting in that mindset, understanding, and putting in place the proper systems and processes and in essence being able to operate the business-like clockwork without the business owner. That’s also how you scale an organisation. Remove yourself from the organisation. The planning for a sale is great but following Christine’s advice will also help you grow your business while you’re preparing . So, for me the raw shock was that if there’s any dependency on the owner and the owner it becomes unavailable, the business enters insolvency on average 12 months.
To hear the show here’s the link again – enjoy:
Are you ready to sell”? Click here to contact Christine by email alternatively you can book a call with the Business Mentor of the Year 2020, author and speaker. Who helps business founders get their businesses exit ready so they can enjoy a happier, richer future. She saves them THOUSANDS and increases the value of their businesses by MILLIONS.