Martin: Welcome to the business owners podcast where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts, I am here with my colleague Ed Skilton and together we represent Mills Oakley’s Private Advisory Team. Welcome Ed!
Ed: Thanks Martin. How are you?
Martin: I am very good today and I am very excited to be back for Season 2 of the Podcast.
Ed: Awe, the awkward second album. But it is exciting; it is going to be a really interesting topic this time, preparing for sale, exiting a business.
Martin: Absolutely, and it is a topic that is very close to my heart Ed, I think that there is so much value for business owners in doing this right from the beginning. We see a lot of business owners who do not spend as much time and resources on the preparation phase and then when they appoint a business broker all kinds of problems come out of the woodwork and they often do not get the best result.
Ed: Yeah, absolutely, so we are going to dedicate this whole season to business exits, the first season Asset Protection was really well received, but we are going to do things a little bit differently over the next few episodes.
Martin: Yes we are and unfortunately Ed, I do have to report to you, and sorry to just kind of tell you this on air, we have canned the soap opera.
Ed: Is it going to get its own Podcast, or…?
Martin: Look, that is not in the plan at this point, I have some received some metadata from our marketing people, it did seem Ed, and this might be a coincidence, but a lot of people did stop listening to the last season about two minutes before the end, in fact, just when you are doing your radio soap opera.
Ed: Ok, well look, I’ll tell you, let’s just talk about that later. Let’s just crack on with this episode any way and we will pick this up off line (Martin is laughing).
Martin: I can see you are wounded. I am sure we can resolve it (Ed is laughing). Maybe if there is some popular demand, and listeners are very welcome to call in, email in, if there is some popular demand, how about we reinstate it for Season 3.
Ed: Let’s just not talk about it.
Martin: Poor Ed, I am sorry, we might lose some of this is in the edit I suppose. Anyway, let’s crack on.
So another way in which we are shaking it up for this season is that we wondered if there was a bit too much of myself and Ed talking last time, so we have brought in some guest speakers and we have some real treats for you this season. We have got Mark Parow who is a very seasoned entrepreneur, he has bought and sold more businesses than I have had hot breakfasts; he is an absolute expert in this area and I am looking forward to hearing Mark’s comments on this subject.
We have also got Business Exit Guru Geoff Green who has written a very good book called the ‘Smart Business Exit’. Geoff works very closely with our team at Mills Oakley and brings a wealth of experience to this area, both as an advisor but also as somebody who has been there and done that and sold their own business.
And finally, Greg Johnson, who is a succession planning expert. Really I think part of a new wave of professionals. You go back ten years ago; you might have had a miscellany of professional advisors leading succession projects. I think it is interesting that in the last couple of years people like Greg have come on the scene who have got a really good skill base in this area and are focusing solely on helping baby boomer business owners with their exits. So yeah, I think we are going to get a lot of value out of all of those interviews.
Ed: Well I am really keen to crack on with interview one, but before we do, I can see you are awkward because you have not yet been able to give your disclaimer.
Martin: Thank you Ed and boy I nearly forgot that and our firm’s PI insurers are going to be very, very toey until I get this out of the way. So I would like to say to our listeners that this podcast contains general commentary only and is not a substitute for independent professional advice. Always seek specific advice related to your circumstances before looking to implement any of the strategies referred to in this podcast. And hey, on that Ed, just from a liability perspective, because we have got guest speakers, I mean we could defray the liability onto them do you think? I mean, if they give some poor advice, I mean clearly we could just kind of flow it through and bring a claim against our guests.
Ed: Look, if we can get it past them, let’s just put it in the show notes.
Martin: Yeah, I think that is right. Liability mitigated. I am happy about that.
Ed: You mentioned these great guests Martin, but I think that the listeners would like to know a little bit more about the man, Martin Checketts (Martin laughing).
Martin: Well, Ed, how about that for a segue or an entrée because yes, we couldn’t find a fourth speaker, or at least we couldn’t afford the ones we spoke with. And so, as a poor substitute, as the building block for episode one, Ed is going to interview me on business succession planning,
Ed: And whilst I do like to make fun of you Martin, to your face and behind your back, what I will say is that before I joined the firm I got my hands on a copy of your book, ‘The Strategic Exit’, published in 2010, and I’ve got to say it is a great book and it is going to form the basis of my interview of you.
Martin: Is that the reason you joined Mills Oakley Ed, on the strength of my little publication?
Ed: Ah, it was actually on the strength of the photo of you.
Martin: Ah, well, I am delighted to hear that (Ed and Martin laugh). Yes, we joke sometimes in relation to my book, it did come out in 2010 and if I might say so myself, I think it was pretty much the first Australian book on this subject. There was very, very little out there on Business Exit Planning at that time, now, of course; different story.
Ed: Yeah, I guess in some ways, you invented the Seed Drill and others have come by with a Combine Harvester. (Martin laughs)
Martin: Well, yes and particularly Geoff Green’s book I have got to say, on the same subject, I mean let’s not beat around the bush, it is better.
Ed: No, they are different books, different books. Geoff’s is very focused on these high value exits. Yours is really useful for a business owner, in particular, who doesn’t understand how to exit at all, it is really useful because it talks through the process, it talks through some of the documentation and it has five great steps, and to make this interview easy to listen to, I want to focus on the five, or the takeaway points that people need to think about. In your book you go through this in detail. What are the five key things, and I want to focus on those five takeaway points, starting with….
Martin: Ed, sorry, you haven’t named or plugged the book yet, I am disappointed.
Ed: Yeah, I named it, “The Strategic Exit”, you want the subtitle as well?
Martin: Yeah, yeah, yes please, and you might talk about where the book is available, you know, Amazon, our business owner’s podcast website, etcetera, etcetera.
Ed: Ok, well you know, you can find it in the show notes; Amazon, “The Strategic Exit” by Martin Checketts, “how to maximise value on the sale or transition of your business”.
Martin: Wonderful (Martin laughing).
Ed: Now Martin, I have got these five key points but I was very interested reading the foreword and also just looking through your preface here, not just what is this book about, but about you. I think that is quite interesting, your background, in terms of your family, but also your legal career leading up to when you wrote this book.
Martin: Well I commend you on doing your research Ed, thank you.
Ed: Really, it is, you have learned, not just from your professional experience but also from your family.
Martin: Yeah thank you and certainly owner-managed business has always been in my blood and in my family.
My grandfather and his entire generation in fact were butchers and farmers back in the UK and it certainly was very interesting growing up around their businesses which were often, frankly, highly dysfunctional it seemed. I was often hearing stories when I grew up about squabbles over land and cousins that my father had never met because there was some litigation claim around the family business many, many years ago. That certainly gave me an insight for things that can go wrong and some of the risks, financial and non-financial, of being a family in business. And then my dad was also a business owner. He was a teacher for the early part of his career but in his mid-thirties he had, I guess you could call it a mid-life crisis, and became a financial planner, which back at that time, which would have been the very early 1980s, that was a very new and embryonic kind of a profession but he certainly did very, very well in that game.
I spent a lot of my youth and particularly my teens hanging around his business and I learned an awful lot from him both in terms of running and managing a business, but also in terms of his own exit strategy. But also I think it really gave me an impression for the financial planning profession and just how important a planner is as part of the multidisciplinary team when we are advising business owners on their most important issues, and by that I particularly mean in relation to superannuating yourself outside the business, de-risking your wealth in that way, and also underwriting your succession plan with a Plan B that might include things like Key Man insurance and ownership protection insurance.
Ed: Look, it is fantastic to hear that Martin and I think that you took this background knowledge when you started your career, you obviously worked extremely hard and continue to work very hard. One thing as lawyers we can see though is the building up of this experience, how it helps us negotiate deals. You worked for a very large firm and as a consequence you were often on the side of a very large client negotiating a deal and that is something that we do not always appreciate in the negotiations, the different power the parties have. And when you are a lawyer for the bigger client it affords you certain luxuries that the lawyer doesn’t have when they are negotiating for a smaller client, unless the planning was done very, very well and at an early stage. Why don’t you tell us briefly about what that meant for you, being able to work for a large powerful client.
Martin: Look, absolutely, and I think you put that really well Ed. I spent the first probably at least ten years of my career on the “other side of the fence” if you like, acting for private equity companies, or for big listed acquirers of businesses and you are quite right, we often saw this real inequality of bargaining power and inequality of knowledge across the table.
We would be there with these sophisticated M& A executives from a big company, there might be the investment banker there, there would be the top level legal team, the tax advisor, etcetera, etcetera. Often facing off across the table with a business owner who might have their long term trusted advisors around them; who may be very, very good at what they do but perhaps not specialists in transactions.
Or, sometimes, indeed, they were virtually not advised at all. So, yes we are able to kind of “monster” the sellers in those negotiations, in a whole range of different ways, but it did really make me think, what if I could take that knowledge and empower the business owners, empower the sellers and help them come to the table with some more knowledge about how these things work and hopefully therefore to get a better outcome.
Ed: And that really leads us onto the first of the five key principles that I wanted to touch on Martin, principle number one, you state in your book “The Strategic Exit” (Martin and Ed Laugh).
Martin: That’s “The Strategic Exit” (Laughing).
Ed: We will put an echo around that.
Martin: Available on Amazon, Kobo and a select number of bricks and mortar book stores.
Martin: All good ones.
Ed: Yeah, at the back, somewhere, (Martin laughing). A successful exit plan, that is key principle number one; a successful exit is planned but that is a pretty broad thing to say, what does that really mean for a business owner who is thinking one day, maybe they will sell their business?
Martin: Okey dokey. What it really means Ed, is that you can’t just give it a lick of paint before you put it on the market. Some people often use the analogy, and it is a fairly trite and tired analogy, of selling your house. You would never sell your house before you would get in the painter and decorate it and before you get some new furniture and you know, de-clutter the kids rooms etcetera, etcetera. And yes, that analogy is good to a certain extent, but the preparation process for a business I think, is much longer and much more involved, and in fact, the best practice is really to start preparing for exit from the very first day that you buy it.
We spoke earlier on about how the big companies do it, that is exactly the philosophy of private equity investors. If you are a business owner and you go and see private equity, almost the first question they are going to ask is how are we going to exit this, who is the buyer, how is this business going to make a lot of money in the hands of a trade player or how are we going to IPO it, etcetera, etcetera. So you have really got to start thinking about these things from day one. As a general rule of thumb, if we as the advisory team have a couple of years to work with the business owner to get this right, that can really make so much difference.
Ed: As the lawyers, often the lawyers will be brought in later in the piece, which I think is a mistake because there is a lot of value that could be added up front. It is very difficult for business owners if the preparation is not performed well in advance because part of the sale process or the exit process is, there are certain contractual agreements, there are warranties for example and we can talk more specifically for another podcast, but just generally speaking, there are some warranties that need to be agreed. That is made a lot easier through the planning process, why don’t we talk about that.
Martin: Yeah, absolutely, so, in terms of the sale agreement and maybe I will jump to that end point, this is the point where most lawyers get involved. We have now negotiated a deal in principle, we have got some key terms of price etcetera and now we roll in Mr Lawyer to draft and negotiate the sale agreement.
Now a large part of that agreement is the section that we call the warranties, so in other words if you are selling a business, the buyer is going to expect that you will give a whole bunch of contractual promises or warranties in relation to the history of that business. So for example, warranties in relation to the accounts and that they are accurate, warranties that there are no claims against the business, warranties that there are no employee issues, that you have complied with laws, etcetera, etcetera, and these warranties schedules often go on for many pages.
So, when confronted with that it can often be very, very challenging for a business owner who then has to madly scramble to assimilate these warranties, think about their business and think about the exposure that they have got. Far better, in a measured way, in the months and years before the transaction, to put together all of the information that you are going to give to the buyer, which is essentially going to qualify those warranties, and what that means is that there is a very fundamental principle when you are negotiating private company or business sales which is if the Vendor discloses the matter to the purchaser before the contract is signed, and if they can prove that they have disclosed it, then they have qualified the warranties and the purchaser cannot bring a claim.
So a large part of the job that you should be doing in the months and years before you sell is getting all of that information, that due diligence information together, preparing a list of everything you are disclosing to the buyer and in that way having a very strong and robust basis to qualify the warranties and mitigate your risk.
Ed: I think that is a massive point, if you have disclosed it in the due diligence stage even though there is a warranty in relation to a matter, it is to some extent, you are still protected by the disclosure in the due diligence, that is on the topic of a successful exit is planned.
Martin the next principle that I think is relates to this is, operate your business as a steward for the next owner. This is very important because we tend to categorise exits in terms of sale or transitioning to somebody else, maybe management or family. The idea of stewardship, normally, I think our brains make a connection here, you say, well you could sell it, or you could be a steward for the next generation.
I hear clients say this a lot to me, they say I need to talk to Martin for example because I think I am going to sell the business, or I want to speak to Ed because I think I am going to hold on to this business for my kids, and the two of us will get involved with most of these client objectives because it might be one it might be the other and we bring slightly different but complementary skills to those conversations. The stewardship of a business is not about looking after it for the next generation, is it?
Martin: Well, as you say Ed it may or may not be, but it is really this concept of if you want a business that is worth something. If you want to sell the goodwill of an enterprise, you must invest in that enterprise. And in fact, if you look at businesses that aren’t traditionally deemed to be sellable, like little consulting businesses, law firms for example, these are businesses which don’t reinvest in brand infrastructure, people, etcetera, etcetera. And of course, I am being a little bit glib here when I refer to law firms, but these businesses are not sellable businesses.
What you need if you want to sell and particularly if you want to sell for a premium, is not to behave like that. It is to have, as you say, this attitude of stewardship, appropriate reinvestment, building the business for the long term. And if you do that then absolutely, you will be best positioned to command a premium.
Ed: The concept of stewardship links in with the idea, almost counter intuitively, of reducing dependence upon yourself. Principle 2 is operating the business as a steward for the next owner; that doesn’t mean that you have to take all the responsibility on yourself and then hand responsibility onto somebody else, one of the linked themes is principle three reducing dependence on yourself.
Martin: Yeah, and look this is a massive one Ed, I would say and this is a bit of a finger in the wind number of the private businesses that we work with, I would say over 50% have a problem with key person dependency. So in other words what is good about the business is the very thing that is going to walk out of the door when you sell it, being the owner or maybe a couple of key people who surround the owner. And reducing that key person dependency it is simply not something that you can do in a couple of weeks before you sell. This is often a very long process which involves your organisation structure, your governance, bringing key people through, getting over mindset issues around delegation, etcetera, etcetera.
When we do sell businesses that are dependent on their owner, and unfortunately, many business owners simply are in that position, the results are just never that good, or at least it is never optimal. So for example, every business owner is going to give a restraint of trade obligation, an obligation not to compete with the business, solicit customers, etcetera. But, the biggest and baddest restraints are always reserved for those businesses where there is some key man dependency. Big earn outs are often a feature of these kind of businesses, so putting a significant part of the price at risk and only receiving it if the business continues to perform post Completion, as it did under your watch. And also, hand over periods. And I do think that a lot of business owners have this mistaken kind of utopian vision that they are going to complete on the sale, receive a big fat cheque in their hand and then the next day they will be sitting on the beach in Thailand. It so rarely happens like that, and particularly not when you are the business, when you are the key person. So things like lengthy transition periods, handover periods, are very common for business owners who have that problem with key person dependency.
Ed: One of the ways to think about this maybe Martin, I like one of the quotations in your book, you quote a client and you say, this concept first dawned on one of your business owner clients and you remember him saying to you “I don’t have a business, I just have a job”. And it is almost, you can feel that sinking feeling when somebody realises this: “I want to sell this business but it is not a business, it is really a job, I am kind of trying to sell my job but only I know how to do it”. And I think that is a useful quotation, or to rephrase it slightly, do I have a business or do I have a job, because I can sell a business.
Martin: Yeah, that is a great way to put it Ed.
Ed: But, of course, it’s not just about these three principles, a successful exit is planned: operate your business as a steward for the next owner and reduce dependence on yourself, as we know as much in life as in business – timing is everything.
Martin: Yeah, timing is another really important one and another pet subject of mine in the context of selling your business. And the really important thing is that if you are a business owner, you must ensure that the timing is within your control and we do see a lot of business owners for whom, sadly, that is not the case. They might have a health issue for example, they might be of a certain age where they feel they need to do something, maybe they are getting tired, or maybe there is some particular issue in the economy or with their business which means they have to sell now, and as you can imagine these are very rarely happy outcomes, because you have an anxious or even kind of distressed seller at that point.
So making sure that the exit is within your control and mitigating the risk of it not being so, you know, by having appropriate working capital in the business, by constantly exploring new revenue streams, ways to disrupt yourself, by mitigating the risk of a health issue through insurance. All of these things ensure that you can sell the business at the right time, so when the business is humming along, when it is the right time in the economy, you know we have been through the GFC, etcetera, etcetera. The sellers that get that right make so much more money than they sellers that get that wrong.
Ed: That is an excellent point; you have got to think about all four of these principles when considering exits. The fifth and final principle I would like you to explain Martin is, “Ensure that your business and life goals are clear and aligned”. And, you know, look, we are not martyrs to our businesses, the business is a part of what we do in life, but it is not the only thing we do, and I know a lot of people listening are probably thinking well right now it is the only thing I do, because you know, to an extent that can be the life of a business owner for a period of time, hopefully not for too long. But what does that mean, to ensure that the business and life goals are clear and aligned?
Martin: Yeah, and look I don’t want to get too zen or hippy dippy with you and our listeners Ed, but this is such an important one. I actually would go as far as to say it is a real problem with most advisory processes, in that I think that professional advisors are very good at looking at the business and advising you on the business, its profitability, its assets, its liabilities, etcetera, etcetera and negotiating the contracts. Most advisors can do that very competently, but the more I see of family business or private business, I almost see the personal side of things and the business side as being the same thing. And, if the personal side is not right for the business owner, or if the personal timing is not right then the risk of the sale not happening or the risk of the sale happening sub-optimally is really big. And it is such a common thing I think, to see business owners talk the right language around succession because of course, it is just so obvious isn’t it, it is logical, everybody has got to exit their business at some point, you need to prepare for it, you need to sell when the time is right, you need to reduce dependence on yourself etcetera, etcetera.
But when it comes time to doing it, often business owners vacillate and they say “oh, no look, we just had the GFC so I need to put this off for a few years”, or “my son isn’t ready to take it over”, many, many excuses start coming out of the woodwork and the goal posts shift. And the reason for that I think is often about the psychological readiness of the business owner to move on, and often that means having something to move on to. Because if the business is our life and if we have defined ourselves solely by reference to this asset that we have successfully built over many years, of course it is bloody scary to hand that over, and you know go and sit in the park or play bowls or whatever. So for me, the best exits have been where the business owner has something to leave to; they are passionate about something, it may be another business, it may be a philanthropic endeavour, it could be family, whatever. But I think until that is clear, until the business owner is actually excited about that next step and maybe incidentally, the sales proceeds are going to be crucial in helping them with whatever that next step may be, it can be very, very hard to move on and to complete a successful transaction.
Ed: That is great and I know that Geoff Green is particularly interested in this idea of why try to exit well, why try to do this well, and one of the reasons why is because it is going to afford you the somewhat luxurious position of being able to do the other things in life that are very important to you and to others.
On a linked theme, life goals, they include not just us, or the business owner, they include lots of other people. There are lots of other people on that journey as well, the spouse, the children, other people; you have got to be really careful with these goals and business goals and life goals to make sure they are aligned not just for ourselves but for the other more supportive people in our family. It is very dangerous when you see a business owner who is only focused on the business and probably a bit burnt out, not ready for sale, not ready to transition in any way. I always like to ask the question, what is really going on, what are the other pressures here? Because there is no point in you dedicating everything to build up value in a business only to find, to be quite crude, half of that business is going to walk out the door when your marriage fails. When you put it like that, you know, deliberately crude, but there is no point to that, there is no point to trying to double the value of the business and wrecking your marriage. There have got to be smarter goals around how to achieve these things.
Martin: Oh look, absolutely Ed, and again I think a great example of this holistic approach, you must take into account the personal side of things, hand in hand with the business side.
Ed: Martin it has been great talking about these five principles. Once again, a successful exit is planned, operate your business as steward for next owner, reduce dependence on yourself, timing is everything, ensure that your business and life goals are clear and aligned.
Martin: And if you want to know more, having been excited by that little snippet, visit Amazon, Kobo, etcetera, etcetera.
Ed: The Strategic Exit.
Martin: The Strategic Exit (Martin and Ed laughing).
Ed: Thanks so much Martin, that has been great and we have managed to sandwich in a lot of information to a short period of time. We could talk about you all day, I know you could (Martin is laughing), but look, thanks for being open for this first session for the second season.
Martin: Thanks Ed.