Martin: Welcome to the business owners podcast where we throw aside taboos and share strategies for protecting, growing 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 and how are you doing on this episode three?
Martin: I am doing very, very well. I am still basking in the afterglow of the Geoff Green interview which I thought was fantastic.
Ed: Yeah, that was really insightful, I am finding that this format of interviewing guests is a lot more engaging in some ways than the more technical first series of this podcast.
Martin: Yeah, and it is better than your radio based soap opera I might add as well, Ed.
Ed: Leave it alone.
Martin: Listen to that dead air!
Ed: You won’t be saying that when I start my own podcast.
Martin: This is it, I am quaking in my boots, (Ed laughing) as no doubt are our listeners (Ed laughing). As ever, our PI policy is on risk, my partners are nervous, I will get this out of the way quickly, this podcast contains general commentary only and is not a substitute for professional independent advice. Always seek specific advice related to your circumstances before looking to implement any of the strategies referred to in this podcast. I thank you. So hey, this season we are talking about preparing your business for exit which is certainly a topic that is dear to our hearts and dear to the hearts of many of our clients. And I am so pleased today that we have managed to entice Mark Parrow into the studio. Mark Parrow is a long standing client and friend of Mills Oakley and certainly to my knowledge and experience, I would say that Mark is probably the most successful MBI / MBO candidate that Australia has seen in the last decade or so. By which I mean Mark is a Business Manager, he has successfully co-invested with private equity funds to buy, grow and exit businesses, he has done it many, many times, always successfully and he now does so essentially as his own private equity fund on his own account, investing in and growing businesses. So welcome Mark!
Mark: Thanks Martin.
Martin: And hey, I am so excited to speak to you today Mark for a bunch of reasons, not least because many of us advisors, you know we have been there and done that with our clients but we haven’t been the business owner and we haven’t personally bought and grown and exited these businesses and you have done so many, many times. Could you start by telling us a little bit about your background and experience.
Mark: Ok, well my background was working in corporations. I have worked for Dullex, Stan Lee, Quacker Products’, Rossell, some larger companies and I never ever saw myself as a business owner. I think that is the key part of it in some ways and I ended up doing it by accident and I was with Austra Nylex in the early 2000’s when they got into trouble and they had to exit some businesses, it just so happened that I was running a few of those businesses at the time and thought “hey, we are on an upward growth path here, it wouldn’t be a bad idea to buy them”, of course, I knew nothing about how to buy a business and that is really where my journey started and then we acquired Natri in 2003. We exited three years and two months later, we then acquired Sigma Coach Air, in late 2007, and we exited that three years and one month later. I now have a business in the US and we still have Coach Air which was part of the Sigma Coach Air Group.
Martin: And along the journey with both businesses Mark, you did a number of Bolt On’s as well, so you bought other businesses to aggregate them and then ultimately sell the lot.
Mark: We did.
Ed: Mark one of the things that we have touched upon in the first two episodes of this series and one of the things that I think you have done really well is the idea of reducing the dependency upon you personally when it comes to thinking about selling the business. Can you talk about that reduction and also how you do it, why it is so important?
Mark: Well, look it is important for a number of reasons, it is a selfish issue too, in that once you sell a business you don’t really want to stay in that business. You have lost your enthusiasm and drive and if you can you want to move on and you also, if the business is dependant upon you then the value of the business to the purchaser is likely to be less because they know that they are buying someone with reduced enthusiasm. They know that that person probably does not want to stay around and they are very dependent on that person so I learnt this in the first acquisition we made, which was Natra Group. I was the front person and it was only later on once we got into negotiating exits and I started thinking about that I realised I didn’t want to be contracted for two years after the business was sold. I was happy to sell all of my managers down that path, and they all got stuck in the business, but they knew that, we talked about it, they had their eyes wide open. They were a bit younger than I was and they were happy to do that.
Martin: And could I jump in – and they, like you, did very, very well out of this.
Mark: Very well.
Martin: Everyone was a winner out of that transaction.
Mark: Yeah, that is another good point Martin, if you do want key people to stay on after you exit, make sure they do well when the financial transaction goes through because they are happy to stay on if that is the case.
Ed: And when would you raise this then, when would you raise it with them because presumably you don’t want to wait until the buyer says to you “make sure your key people are locked in” before you start negotiating with the key people.
Mark: Yep, with Sigma, which was the second acquisition, I was a lot smarter, I knew what would happen at the end and from day one, it was NBI not an NBO.
Martin: And can you just explain that for our listeners Mark, sorry,
Mark: Ok, so as an NBO I was the CEO of the business and was the CEO and major shareholder after the acquisition. With the NBI, the management buy in, the opportunity was put on the table to me, I had not been in the business prior to that acquisition taking place. So I was going in as a CEO and buying in as a CEO so from day one I made sure that I was not the front person, the business was not dependent upon me in terms of customers, in terms of suppliers, and of course you get involved where you have to, but my deliberate strategy was that upon exit I would be able to move on very quickly and I made that clear really to the executive team right from the very start. And most of those guys were long term employees in that business, they knew the industry and they were happy to stay on. So we had a clear understanding. And again, they all did very, very well when we sold the business and when did we sell it, 2010, some of them are still involved in that business.
Martin: Yeah, and really, even putting aside the business exit strategy, it’s just good business as the CEO isn’t it, to not make it all about you, to spread the responsibility, to spread the dependency across a broader group. And also, I suppose if you are sitting back a little bit from the business it gives you more head space. More thinking time to think about working on the business and not in it.
Mark: You make an excellent point Martin, in that, if you are not running around doing all of the daily things, if you have got people who are taking care of that, then what you are going to do is you are going to work on strategy and you are going to work on exit. And I really was developing the exit strategy from day one. So putting all of those things together, you are trying to increase the value of the business. Identify potential purchasers of the business. And you just couldn’t do that if you had major responsibility for the day to day functions of the business. Of course you get involved. Of course you give guidance. But you have got time to work on increasing the value of the business.
Martin: I think that is such a powerful insight for our listeners and our clients Mark because my experience and Ed chime in, is that most business owners do it quite the other way around.
Mark: Yep, I agree.
Martin: They are like hamsters on the wheel, you know trapped in the day to day running hard and the value that they miss through not taking this kind of helicopter view. It can often be very significant.
Mark: Yeah, and I think we were talking earlier about the difference between an individual and a job and a business. And it is probably because those people see it as a job and they don’t necessarily see it as a business.
Ed: And without wishing to victim blame, do you think there is an element of those who can’t put their trust in others and they can’t allow others to have the relationships; the customer interface. Do you think there is an element of arrogance there, or ego that prevents them, or do you think it is something else?
Mark: I think it is two things. It is arrogance with some people, with others it is just that it is all they have ever done. They have never had responsibility for a team of people who are well educated and they just believed in working and starting their business up from day one, that it is totally dependent upon them. So I think it is maybe arrogance that comes over time, I don’t think that they start out that way but they have just never experienced anything else. Whereas I came from a corporate background, I was a business leader and I understood that intuitively from day one.
Martin: Could we talk a little bit about the private equity industry Mark, because certainly a number of our clients and listeners get approached from time to time by private equity or they consider a private equity exit amongst maybe transition to the children or a trade sale or whatever. If you could give us some guidance as to some of the ups and downs of working with private equity.
Mark: Ok, are you talking about exiting private equity or partnering with private equity?
Ed: Good point.
Martin: Yeah, look I think both. Yeah, maybe start with the partnering side and then move through to selling to private equity funds.
Mark: Ok, look, my experience with private equity is being excellent. Maybe we have been lucky to get good business partners but I think that they key to working well with private equity is not to over promise. To make it clear from day one what the business is all about. Don’t give them surprises, or you will have a very unhappy private equity partner. We didn’t do that. We had some times when things were not going so well but the trust was there so we worked through them. So I think the key, if you are going to partner with private equity is to be really frank with them upfront, if you do that they will trust you and they will work with you. Of course the down side of private equity is that they will not tolerate continued under performance against those promises.
Martin: Yes, and what about the aspect of corporatising the business, I know that probably with your corporate background you wouldn’t have needed so much of this help, but for many of our clients, a benefit they see of partnering with private equity is really to surrounded by a very smart bunch of people who have grown and exited a whole range of businesses and the skills that they can bring in terms of corporatising and moving up the food chain.
Mark: Ok, I think you have just made a good point, they have got great experience in exiting, they have got great experience in acquiring and they have got experience in structuring. What they don’t have is experience in running a business. That is my experience. I think you need to be careful about how much private equity people get involved in your business. They actually don’t want to but sometimes they can over step that mark. But I think the important thing is to let them focus on the things that they are good at and if you partner with private equity you can put up the best business case for generating growth in sales, growth in profit, all of those things, but if you can’t show them that there is a clear exit opportunity somewhere, they will just go to the next opportunity. So having done that, that is what they can work with you on. And they do come back with leads, they can be very useful there.
Martin: And let’s turn to the question now of selling to a private equity fund because I guess a common perception, and I think misconception, that is out there is the whole vulture capital thing whereas, you know, don’t sell to private equity because they are going to screw you down to the last dollar and they are going to stitch you up with a really tight contract and then sue you on it the minute after you complete it. What has your experience been?
Mark: Look, I have never sold to private equity, but I wouldn’t sell to private equity. I only say that, not because of what you said, I don’t think the private equity vulture thing “we are going to sue you” etcetera, etcetera, is right. There are a lot of very good people in the private equity industry so it is not for that reason. But my view is, and reading a bit in Geoff Green’s book as well, that if you want to get value for your business you are far better off getting it through a trade sale because a trade sale, the purchaser is generally going to be able to access some synergies in the business, they are going to be able to hopefully take what you have got and grow it, whereas with the private equity guys, they are pretty well buying it exactly on the profit that you are making then and there, they won’t have the growth opportunities that they can bring to the table. So that is why I am not super keen on selling to private equity.
Martin: Yeah, thank you for that. And on this really important point of the synergies, the one plus one equalling three, without disclosing any confidential information or trade secrets, it strikes me that both of your exits of Natra Group and Sigma Coach Air Group have those features. Are you happy to talk a little bit about that?
Mark: Yeah sure. The first one we sold to our major competitor, which was Natra, so we sold that to Adelaide Radiators, and we had duplication of facilities, we did the same thing, they had marketing people, we had marketing people, they had finance, we had finance, so they were able to pay well for our business because they knew from day one that they could take out a lot of overhead cost. So it really worked for them. And the second company we sold to again, the major competitor, who were German based in this instance, and likewise, when they acquired the business, they weren’t starting from scratch, they knew what our business was, they knew our people and they were able to incorporate that into what they were already doing. So there is a lot of value if you can exit via a trade sale and that is why in both businesses, as the CEO and a major shareholder, I always made sure that I attended trade shows and knew my competitors and just to have a drink and a chat and all of those things, so that I had a relationship with them, which just opens up the possibility that one day, being bigger than you, they might turn around and say “are you guy’s for sale?” so I think having those relationships, if you are looking for a trade exit, are really important.
Ed: I love that point. It is so cleaver as well that anybody listening thinking about to whom would I sell my business and a trade sale may be the best option for them. You are saying that you should in fact genuinely strike up a relationship with your competitors because they may want to buy you.
Mark: Well, with Sigma, which as I said was a management buy in, I went to conference, I think a month after we bought the company, I can’t remember where it was, it might have been in France or Germany, but it was a major rail global conference and I made sure that I met the key senior people in all of the companies that could potentially acquire us one day and one of those people ended up being the acquirer. And I just mentioned that, you know, we were owned by private equity.
Martin: That was enough.
Mark: As soon as you say that, they know that one day you will be on the Market.
Mark: My advice to you, is you are never for sale, obviously, because that reduces the value,
Ed: Quite right.
Mark: But you make sure that a sale, that they understand that a sale is a possibility. Because what they then think is well, these guys are private equity owned, if we don’t buy them, our major competitor might buy them, so it brings a bit, just a natural competition there and I knew the key people. And that is exactly what happened. We had two major competitors, who were not, in the end, vying to buy us, but they had various stages and I got a phone call from the CEO of the company that didn’t buy us towards the end, who we had spoken to about a year and a half earlier but they didn’t follow through, and when I stay “spoken to” they spoke to us, they approached us a year and a half earlier. And he was not happy, and he was threatening all sorts of things, but all they told me was that the competition is the way to go and the trade exit, I think, will always get you more value than anything else.
Martin: Wow, and even more work for the lawyers of course, not only transacting the deal, but also fending off the disgruntled potential acquirers. Everyone is a winner.
Mark: Everyone is a winner.
Ed: And what you are achieving there is almost achieving the impossible of, to some extent, controlling the timing in a positive way.
Mark: I agree with that. I think you really are in control of the transaction when that happens. As long as you have got some saleable, and we had something saleable, and I was always very conscious because we would be exiting, that we had to have a future growth profile, in other words, leave something on the table for the acquirer. I think the mistake a lot of companies make, a lot of owners make, is they think well “I will wring every cent I can out of the business and then I will try and sell it”. Well, it doesn’t work like that, and if someone is going to pay you a multiple for say, current earnings then they need to think that there is going to be some growth opportunities going forward.
Martin: That is just such a huge point, and we would often in our practice sadly see business owners who have done exactly that. They have really kind of squeezed the sponge dry, and not only have they kind of sucked up the up side but maybe they have under invested in cap X over the years in contemplation of the sale, that is not an uncommon story and boy that hurts when you come time to sell.
Mark: Yeah, so what they then say is well “here is my rundown business, would you like to buy it”. Well it doesn’t work like that.
Martin: Yeah, just to go back a step, the point about getting to know your competitors I think is also just so powerful because again the more common way in which business owners operate in my experience is that they have hated those competitors for years! For twenty years they have been aggressively competing against them, it has become in their minds a personal thing and the last thing that they would think about would be selling to the major competitor. So, look I think that is a fantastic insight.
Mark: Yeah, it is ridiculous way to look at things in my opinion. Of course everybody competes, we all hate our competitors while we are out there doing business but it doesn’t mean that as individuals you can’t get along. You know, I think it is critically important that you do that because if you think about optimising the value of the business it is like any transaction, you want to be the pursuer, sorry, the pursued, not the pursuer, and if you do it this way you don’t have to put the business up for sale. As soon as you put the business up for sale, I think you lose a bit of value, whereas if someone is chasing you the value is clearly higher. So always better to be a reluctant seller. And I don’t know how you can be a reluctant seller if you put the business on the market. I don’t know how you can avoid that and pull off a trade sale unless you know the parties that are likely to buy you.
Martin: Wow. I feel like I want to take notes at this point and we will certainly put all of that in the show notes, that is fascinating Mark. Just a final question before we wrap up, talk to us about the process of preparing for sale. That is dear to our hearts and one that we spoke a lot about in the last couple of episodes. What have you done in order to ensure that the businesses are sale ready?
Mark: I don’t think we have done really much, at the end of the process. I think that we always made sure that the business was sale ready so there was not a point in time where we would have said “well, we can’t really talk to these people because it is going to take us six months to get the business in shape”. The other really important thing, and I was advised this during the first acquisition by a man called Andrew Tindle, who you know well Martin, we asked him when we were acquiring Natra, and there were eight of us on the executive team, I was the CEO, whether we were a little bit top heavy and, we were naïve, and his comment was better to be top heavy because you will be exiting within the short term, and we say three to five years for short term, and if you are going to do that you need to have people who are able to focus on the exit but not disrupt the way the business is being run. So as the CEO in both companies, I was able to put significant time in to the exit, with my CFO, and all the guys who were out there, selling product, buying product, making product, doing all those things, they didn’t have to get involved at all. All we did was brief them, we kept them up to date, but we had the people to work on the exit. So I think it is really important that you don’t lose focus on your business by devoting a whole lot of resources to exits, you do need to have a balance when you are going through that.
Martin: And that is again, I think, such an important message and again something that is not common. Much more common is that you have got the business owner and then they find themselves in this process and suddenly they are working two jobs, they are doing the day job and they are also working on selling the business and boy what an unpleasant and stressful process that can be.
Mark: And I think a lot of them do it, but if I look at what you guys offer, that is where you come into play. Particularly in a smaller business that doesn’t have the breadth across a management executive team who can do all of these things. But a lot of owners would think, well I don’t want to spend 50 thousand dollars on the exit, what they don’t see is if they do it properly they might get an extra half a million dollars. It is false economies if you like.
Martin: Thank you for that that is gold Mark. And hey, just a final question without notice; you have read The Strategic Exit by Martin Checketts and you have read The Smart Business Exit by Geoff Green.
Mark: Of course.
Martin: But in your opinion. Which is the better book. (Ed laughing)
Mark: Look, they are both so good Martin, it would be very hard to flip them actually. (Martin and Ed laughing)
Ed: Can I ask one question, a different question, less focused on Martin. How does it feel when you have sold the business?
Mark: Well, I don’t think there is any feeling like it. Business wise that is. There are other feelings in life. (All laughing)
Ed: Like reading The Strategic Exit.
Martin: In one binge session.
Mark: Look, it is like anything. I am a bit of a sporting person, I talk about sporting analogies, but if you want it is like the ultimate victory. So yes, it is fantastic financially if you get it right, but I think the feeling of exiting and having someone willing to pay good money for your business, because they are seeing the value in the business that you have built up, personally, it feels fantastic, it is like you have won a premiership or you have won Wimbledon, you have reached the summit, and it is a wonderful, wonderful feeling.
Ed: I think that is such a great thing to hear because many, many people that think about selling a business, it is very, very stressful for them and in fact they don’t want to, they can’t perceive the feeling, all they know is, well, it feels like this to be in the business, there is an unknown feeling not being in the business and it is almost sort of a sense of, let’s not talk about it. So it is great to hear actually that there is an even better feeling on the other end of this. Mark thank you so much for being so open with us, I think the listeners would have got loads out of this podcast, so thank you again for joining us today.
Martin: Thanks Mark!
Mark: Thanks Martin. Thanks Ed.