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 back Ed!
Ed: Thanks Martin, how are things with you?
Martin: I am very good. We are here already at Episode 2, Season 2.
Ed: Well done on Episode 1. I thought that went great, the interview of you and some of the feedback that I have received, people were surprised at how interested they were in your thoughts.
Martin: And also in my book “The Strategic Exit”.
Ed: “The Strategic Exit”…Great.
Martin: Yeah, certainly I did see a bit of a spike in sales after that last performance which was very, very pleasing to my agent and publisher.
Ed: Coming off a low base, presumably? (Martin laughing)
Martin: Well, that’s right, they did tell me that I shouldn’t expect that kind of spike every week but look, I’ll hang onto it.
Ed: Good for you.
Martin: So hey, as you know, we are talking about business exits in this season and in particular, preparing for sale. I think we might do some subsequent ones which are more granular around things like negotiating a sale agreement, but certainly this series is about preparation.
But hey, before we get into that Ed, as always I do feel the need to protect the firm and to mitigate the risk of claims. That is why I do not give any advice until I get this out of the way. 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.
Well I am delighted that’s out of the way. So hey, everybody, we have got a very special treat for you today, we have business exit guru Geoff Green joining us. Now, Geoff has worked with the Mills Oakley team for many, many years, we have crossed swords on the other side of transactions for the past decade or so, but more recently Geoff’s been consulting to our business, and in particular helping us to help our clients with business succession planning. Geoff also has written a book…
Ed: He has written a great book Martin.
Martin: Thanks for that, you know, these “Johnny come lately’s”, you know, he has jumped on the gravy train, two or three years after the seminal work was published…
Ed: Yours was called, what was yours called again Martin?
Martin: Well, mine is called “The Strategic Exit.”
Ed: Yeah, well strategic, and Geoff’s book?
Martin: Geoff’s is, “The Smart Business Exit”.
Ed: I like that.
Martin: It really depends if you want to be smart or if you want to be strategic, that is your choice.
Ed: Oh, ok, well the other thing I noticed about the book, we will get to Geoff in a minute, but what I noticed about the book, you had those five key principles, those five steps, Geoff’s got seven.
Martin: I know, I mean that’s just showing off isn’t it?
Ed: Amazing, another two.
Martin: Clearly he trumps me.
Ed: I think so, I think so.
Martin: Although I did openly confess that Geoff’s book was better in the last podcast.
Ed It is different, it’s different.
Martin: Yeah, what I really like about Geoff’s book is that it is a very high level and strategic tome. I think there’s been a number of good publications around nuts and bolts issues, around how you sell your business. Geoff’s is at I think, another level, and it really, I think, addresses not only strategy but also what I would call some of the emotional and psychological issues around selling a business really well. So everybody, please Google or do an Amazon Kindle search for ‘The Smart Business Exit’ by Geoff Green.
Ok, well Geoff is with us here in the studio, so welcome Geoff.
Geoff: Thanks very much guys and thanks for that big intro it’s great to be on the podcast with you today.
Martin: Absolutely, we are delighted to have you Geoff and I will probably make Geoff blush a bit, but he really is one of Australia’s foremost experts in this area. He has advised on many, many successful business exits and unlike most consultants, Geoff’s a bit different because he has also done it himself. So he really does have the runs on the board. Geoff was one of the founders of BSX, the Bendigo Stock Exchange, which he grew from nothing and then very successfully exited in a strategic exit to NSX. And I think that that kind of real life practical experience of having been there and done that, and that flowing through into Geoff’s consulting processes is extremely powerful. So Geoff, before I guess we have done the intro, in your own words, anything else that will be useful for our listeners to hear about your background before we launch into some of the detail?
Geoff: Yeah, sure, probably one of the key things is what really led me to write the book, and as you said Martin, I’ve worked for many years as a Corporate Lawyer, as an Adviser and also in my own businesses.
Probably one of the key themes has been working with private business owners and particularly during that period when they move on from their business, and having worked with them in lots of different ways. One of the things that really troubled me years ago was just seeing so many people get bad exits. They might be bad financially, they might be bad because they didn’t feel good after their exit, they weren’t sure what to do. So a key driver for writing my book really was to try and draw on a lot of my experience and look at whether we could get more information out there about how you can actually go about getting a much more satisfactory business exit. And probably the BSX experience for me was pivotal because it was my business, I was going through the sort of stuff that most of my clients were going through and just actually seeing what you could achieve by applying some different sort of principles, so that was really the driver for my book and I have been really pleased, it has already helped a lot of people.
Martin: That’s great Geoff, and certainly, you have always had some strong views about what I would call the “public policy benefits” or the “society benefits” of getting business exits right, could you tell us about that?
Geoff: Yeah, I think that is absolutely right Martin and it is one thing I have been actually focusing on a lot since the book came out, that if we look at the number of businesses out there in the private sector. I mean in Australia it’s over two million businesses, we’re talking probably 1.5 trillion plus in value out there, and it is really important as we move through the baby boomer stage that all of that value is actually passed onto new owners, you know, new people running those businesses, because if people aren’t exiting well we are going to lose jobs, we are going to lose innovation, we lose services, all sorts of things. So it is not just about the business owner, it’s about the employees, it’s about the services to the community, and I think we are going to go through a really challenging period over the next ten to fifteen years dealing with those issues.
Martin: And Geoff, you’ve also commented around the benefits of business owners, you know, driven, bright, entrepreneurial people, unshackling themselves if you like, from their businesses and going on to the next big adventure.
Geoff: Yeah, look, I see running a business and exiting it as really part of, both your business and your personal journey, and I think a lot of older business owners, their business is so much a part of who they are that moving on from their business is often very difficult and I am sure we will talk about that more as we go through this podcast. The one thing I am seeing with a lot of younger entrepreneurs is that, I think they have actually got a more balanced approach to life, they go really hard at their business but they don’t necessarily see it as being everything and they do see it as something that has a finite period, where they are going to be involved, and then they will move onto something bigger and better, or more interesting, or different. And I think that is actually a really positive development and I love talking to younger entrepreneurs about that.
Ed: Geoff, I think one of the things related to that point is the understanding that there will be some money at the end of this to go on and do those other things as well, but, in your book you talk about some uncomfortable truths and one of the uncomfortable truths that you mention is sort of an over estimation of the value of a business. Some of the others relate to assumptions I suppose, some assumptions about who will take over this business. But talk about these uncomfortable truths, how do you come up with these, or do you think these are well known and how important do you think that one is – the estimation of the value?
Geoff: Yeah, look I think they’re all really important and I would probably bundle the uncomfortable truths under this sort of idea of an elephant in the room. And I mean, you guys experience this to when you talk to business owners, that you will often be there talking to them and you just know there is a business exit issue that just needs to be talked about and it just sits in the corner, and I think one of the key things we can help business owners with is to say: we need to talk about this issue let’s just start to unravel it a little bit and get it on the table.
Because so often we see business owners who have never actually asked their kids “do you want to take over the business or not?” And there could be wild assumptions one way or the other, so I came up with this concept of the uncomfortable truths in my book and just to run through them very quickly.
- Most business owners are actually unprepared and as I said before, all of the surveys say 70% actually have no plan to get out of their business.
- Most people don’t have a lot of control over their timing. The two key reasons why you exit is that the business owner or a close family member has a serious health issue or suddenly someone lobs up at your doorstep and says we’d like to buy your business and bang you are straight into business exit mode and you totally unready for it.
- Overvaluing what their business is worth. Most business owners are actually a bit scared to go and find out what their business might actually be worth and generally speaking, businesses are worth less than people actually think they are. You really have got to understand that.
- It takes longer than you think, and I think you guys in your last podcast talked about the fact that if the business is built a lot around the owner, you are not going to be leaving the business the day after you sell. The new owner’s going to want to have you around and driving it and making sure they are actually getting the value out of you if you are, at that point, a large part of the business.
- Things are changing. The kid’s aren’t taking businesses over anymore. It is more the exception than the rule these days and latest surveys I have seen showed that that stat is actually falling away quite quickly. And the world has changed, we have had the GFC, we have a lot of change in a lot of industries, so just assuming you are going to be able to sell it easily when the time comes, in a lot of industries that is not the case anymore.
Martin: This concept about the period of time or the length of time it takes to sell the business, it is fascinating how you talk about that in the book Geoff because I think this really is a common misconception. People think that they are going to quickly negotiate a contract, get a cheque and kind of, you know waltz off hand in hand into the sunset. But you describe it differently; can you talk to us about that journey?
Geoff: Yeah, absolutely Martin. As you know I have got a concept in the book of what I call the business exit timer and it really looks at, from the time you start thinking about selling, how long will it be before you are actually out? And this really applies probably in larger businesses in particular, so you might be forty-five, you’ve decided you want to exit, might take you a year to get your business ready, might take you a year to do the deal, by the time you push the button, get the information memorandum out there, negotiate the deal, settle the deal. But then you might be stuck in the business for another two or three years under a performance earn out, you also may have warranties running for another three or four years. So add all of those up and you can easily be talking a four or five year exit period, before you are absolutely out of the business. And you know if you are exhausted at the point you push the button that is another five years, you know, which I think a lot of people do not get their heads around.
Martin: That is such an important point Geoff and I think the catch cry of many ill-informed vendors is: “I want to get out clean, you have got to get me out clean”. But reality is often very different to that and you are right, particularly the long tail exposure under the warranties, your money really isn’t safe until you’ve been through that significant period, it might be one, two or three years following completion.
Geoff: Yeah, and again I think we’re seeing trends of more and more claims being made under warranties. If you look at it now compared to twenty years ago, I think it is much more common to have warranty claims at some stage. It won’t always happen, but there is certainly a trend towards more warranty claims from what I can see.
Martin: Yeah, yeah yeah. Hey Geoff, tell us about the emotional or psychological side of selling a business.
Geoff: Yeah this is, I think a fascinating area, because one of the things that I have always felt in this whole business exit area is, that there is all this emotion bubbling along underneath the surface and it doesn’t get talked about because most people that you’re working with on a business exit, they’re your lawyers, your accountants, your business brokers, your investment bankers, your banks, the hard numbers people and sort of the hard side of the transaction. And quite often there is no one round who is talking about things like “so how do you feel about the exit”, and “what do you want to do after the exit”, “what does your partner think about the exit”, “what are their views about it”, and often those conversations never take place. I am sure you guys see it a lot, every now and again there will be this huge eruption during negotiations and everyone is going “where did that come from”? And it will be the underlying emotions, you know, playing part. One of the first questions I always ask business owners, when they say they want to exit is “so what are you going to do after you exit”, and usually they have no idea. But if you can start to address those issues early on and people, by the time they leave their business actually have a really good idea what they want to do, then it is not just a financial transaction, it’s a whole change of life transaction. And people who do it well often move on and do fantastic stuff afterwards because you know often they are cashed up, they have time, often they are very, very talented people and it is great to see them go and do other things.
Martin: Yeah, and when you spoke about the eruption in the board room when negotiating a deal, boy that struck a chord with me. I mean it happens all the time doesn’t it? You can be negotiating a $50 million dollar sale transaction, we’ve locked in the price, we’ve locked in the warranties, the terms, and then suddenly out of nowhere, you know there is a tiny little argument about the stock adjustment that is going to leave ten thousand dollars on the table and somebody gets very upset. Or maybe their son works in the business and they are proposing paying them you know ninety thousand dollars not one hundred thousand dollars, and again all hell breaks loose and you are right, it is symptomatic of this deep emotional undercurrent.
Geoff: Yeah. And the thing is, I do this a lot in my workshops, I actually say to business owners, “tell me how you feel about your business” and people start saying stuff like “it’s my baby”, “it’s my purpose in life”, “it’s a rollercoaster”, “I love it”, you know, there is all this emotional stuff going on. But when you, particularly if you sell to a larger business or a larger company, for them it is just another deal, and it’s just numbers so you get this real disconnect between somebody who is selling something that they are very passionate about and somebody who is buying it, who is just running all the numbers, looking at the integration issues, looking at, you know, what sort of staff are we going to cut, and it is a very unemotional process on the other side of the table.
Martin: We are doing one at the moment, we act for the business owner, vendor, and we are against private equity and um, yeah, those two kind of camps generally don’t talk well to each other at all, and so much is kind of lost in translation between the two. I often kind of think if you can have a C3PO translator droid in the middle that it could kind of go between the two, it would very, very much help with some of those issues.
Geoff: Well one of the really interesting bits of feedback I have had on my book, because I wrote it primarily for business owners and their advisers, but I have had a couple of people out of the private equity space in particular, who I think are, you know, very switched on people, and they’ve said you know, all private equity guys and bigger corporate M&A guys should read this book so they actually understand private business owners better, because you would actually get better deals.
Ed: Good point.
Geoff: And one of the things that I try and emphasise in the book, is you know, a good deal is actually a deal that is a really good deal for everybody. So you know, you should expect, if you have built a great business you should actually expect that business to go on and become even better after it is in the hands of somebody else. You have created something that has its own life and the worst thing would be to have your business looking half as good in five years’ time, you actually want it to be three times as good, and that’s where the whole society gets the benefit out of good businesses being built and then being taken to the next level by new owners.
Ed: Geoff, one of the things that I really like about the way that you work and the way that you have written the book, is, and maybe this just appeals to the way that I learn, you have great systems. And observing you in your work and the way you go about things, it provides a lot of comfort, I think to clients, to know that you have great systems. Because one of the difficulties in advising clients on value and increasing value, which is something that you do really well, is to explain to clients at the outset of the relationship what it is you are really doing to add this value, and bear with me, as I go on this little journey.
Martin: We’ll indulge you Ed.
Ed: We don’t have a soap opera anymore so indulge me. I remember being a teenager and buying my first car and you are looking around and you just want a great car and all these things, and I remember talking to my dad about it as you do and I said, “Dad I like this car, I like that car”, and he said to me, “Eddy, just remember it is very easy to buy a car, it is not as easy to sell a car”.
It is very true of businesses too, and that’s why I think your workshops that you mentioned are so valuable, because you set out how it is the value is going to be increased in this business and there is going to be something for someone to buy and they are going to be able to increase the value of this business. Can you talk through how you do this, how to create value and how to realise that value?
Geoff: Yeah sure. I think that is a great example Ed, and I think it is really, really similar to what it is like in a business, because if most people look back, if you’ve created the business from scratch, often you just tumbled into it. You know you came up with a product or service, you got a bank account, you got a business card and a phone and off you started.
It is very easy at the beginning, but you know, you get to a business where you have got, you know 50 employees and you have got factories and you have got cars and you have got bank debt and all the rest of it, it is very complicated by that stage to get out. And I don’t think, as an advisory community, even though we do a lot of the transactional, sort of nuts and bolts stuff really well, what we don’t do is really look at, have we built great value here for a buyer, do we understand what value looks like to a buyer as opposed to a seller? And have we set the business up in a way where we can really realise that value? And probably if you had to sum up my book in a nutshell, it would be how do we create value and then how do we realise it through a great business exit? And that’s really is what it’s about in a nutshell. And I think that there are a couple of other concepts that flow from that, and one is to stand back from your business and look at what actually is that business when you come to sell it? Because when you own it, it is an income stream, when you sell it you are realising an asset, and from a buyer’s point of view, three buyers will look at your business totally differently and see different value and risks and rewards in your business. If you can start thinking about those things, then the way you approach your exit is completely different.
Martin: Thanks Geoff. I’ll put you on the spot, what are the top three features that create value in a business?
Geoff: I think the top three things, and we’re probably talking here about businesses when you get really, really good outcomes. And as you know Martin I am a big fan of strategic exits, which have quite unique features to them.
I think that the first one is having growth drivers in your business, and when I say growth drivers, it is elements of your business that a buyer can pick up and rapidly increase the value of your business as a result. So a really good example of that might be a product or service that a larger company doesn’t have or has been struggling to put in place for a while. And if they can take your product and service and know that they can immediately sell it to one hundred times more customers that makes your business highly valuable. So that is the first point.
The second point is a business that is not depended on you. So really, structuring your business so that you’re not fundamental to the business going forward because the biggest issue most buyers have is, what am I actually buying, am I buying you or your business? And the more they are buying your business rather than you, you know, that’s really the key point.
And the third one would be probably a mixture of, thinking like a buyer, and I’ve a concept in my book, about always think like a buyer, look at your business always from a buyer’s perspective; and build it so that it is attractive for a buyer to build it. So always be working on your businesses if you are building it for somebody else to take it forward. So I think those have been my top three.
Martin: That’s wonderful Geoff, thank you. Yeah, I saw an interesting documentary with Janine Allis the other week and she spoke about her business and how she always approaches it from the other side of the counter, from the customer’s side and not from the cash register side. And she says that when she thinks in that zone, yeah, that is when she succeeds.
Well look thank you so much for coming in Geoff, we have really enjoyed the discussion and we hope all of our listeners have as well. If anybody’s interested they can check out Geoff’s book at “thesmartbusinessexit.com.au” that’s a fantastic website, I have got to say. There is a blog there and all kinds of goodies that I enjoy. So you can go there and you can sign up to the blog and of course buy a copy of the book. Geoff is also involved in the sellability score. Just before we wrap up do you want to give us a minute on that Geoff?
Geoff: Yeah sure, the sellability score is a program developed by a guy called John Warrillow in Canada who I was actually speaking with this morning. John wrote a great book called “Built to Sell” and his sellability score looks at eight key drivers in businesses that make them more valuable. So on my website, people can go on and do the sellability score questionnaire, it takes 15-20 minutes. It will give you a really quick snapshot of your business value and how you measure up against the eight key value drivers in your business. So if people are interested in that jump on, it is complimentary, and if people want to take it further I am happy to talk to them after they have done it.
Martin: That is great Geoff, and we’ll put links to all of those things in the show notes.
Ed: Look, just to echo that about the sellability score, I have run a demo on this, just sort of pretending, had this business, just to go through the process and get the report back and read the report and these different drivers. It is really, if anyone is listening that owns a business and is interested to know what’s it worth and how does it compare? Just jump on line and do it, go to Geoff’s website, take the fifteen minutes out of your day, just to populate that information, get the report back, it is very interesting to read about your own business.
Martin: And what was your hypothetical business Ed that you plugged in?
Ed: Well, parts of it weren’t legal so I would rather not talk about it (all laughing). It was more of a futuristic sort of thing.
Martin: Well I hope some dire kind of warnings flashed up about,
Ed: Geoff offered to buy into it.
Martin: So this is it, you plug in the details and then Geoff knows which one to pick up on the other end!
Ed: That definitely didn’t happen (all laughing).
Martin: Hey, thanks so much Geoff and thank you everybody for listening, we will look forward to you tuning in next time.
Geoff: Thanks guys, great to be on the podcast.