Plan Your Exit

by John Ratliff | Scaling Up Melbourne July 2022

00:00:00 Speaker 1 

Thank you, thank you very much and Peter, I’m here to be a resource for everyone so I’m happy to be interactive and and any Q&A as as we go along if. 

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Things come up. 

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I’m happy to take questions along the way. 

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Yeah, as as way of. 

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A brief background, I guess that’s probably a good place to start. 

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Started a call centre company from scratch in 1995, fresh out of college. 

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Uh, probably two years out I had a little cellular phone store and grew that and then sold that and. 

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Then started the call centre company. 

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So I was 23 years old and and then it took about seven or eight years to really get that business to start to see some success and and and get some momentum. 

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And a friend of mine, a good friend of mine. He was my CPA and and I ended up being the best man in his wedding. 

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Came by and said, hey, have you thought about doing acquisitions and I didn’t think we had any CAPA. 

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Ability to buy other companies. We were. We were still getting going ourselves and and when I say we I. 

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Really mean me ’cause it was. 

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Just it was just me and and he said, hey, I’ve got a great bank relationship. I think you know, I think we could. 

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You know, we could probably do some acquisitions, so I gave him a little bit of equity. He introduced the bank. 

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We started to buy companies in 2003. We bought 24 companies between 2003 and 2011 and then exited that business to a strategic buyer in 2012. And just to give you a little sense of kind of strategic versus. 

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Financial buyer we were paying between 3:00 and sometimes four times EBIT, da, or or profit when we bought companies and we sold for close to 15 about 14.7 times so five times the industry average in our industry for a for an exit and. 

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I really through the process. 

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Had the unique opportunity to sit at all seats at the table so you know I was a buyer. As the entrepreneur, I was the seller as. 

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The entrepreneur I worked. 

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With an investment bank called SDS Cap. 

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When we sold the company and then about two years after the sale, the founder of Tests asked me to come on as a Managing director. So I’ve also worked the investment bank inside the you know, kind of the. 

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The brokerage or or sort of you know, M&A advisor side. So I’ve sat at every seat at. 

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The table and. 

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Over the years, I’ve, you know, had the opportunity to watch people have amazingly good exits. I, I think our exit was, by all measures of a real success, and I’ve watched. 

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Friends and friends of friends. 

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Have really bad exits that you know potentially we weren’t involved in and the analogy that that we give so you know you guys are in the room today and you’re talking about scaling. 

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Up and there’s there’s. 

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Thousands of books written every year on leadership and management and. 

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How to you know marketing and sales process and how to run your company. 

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In a better way, but there’s only a handful if any books written. 

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Every year on how to properly exit your business and the leadership and management books are really written for incremental gains, so you know if you’ve got 17% income, you might be trying to get to 19 or 20% net income, which is great, and it’s very important, and I think it’s. 

00:03:41 Speaker 1 

It’s something that we we should study, but those are the income creating events. So if your income and your business goes up, it drives the income. 

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For you as a as a CEO, entrepreneur. But the wealth creation event the real. 

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Multiplier event is when you can sell your business for multiples of the income SO5710 we’ve worked on deals just in the last 18 months. One was 27 and one was 35 times EBITDA. So those are the wealth creators. 

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And in our opinion, they get totally underserved in the business education market. And you know our our kind of purpose in the world is to help entrepreneurs. 

00:04:31 Speaker 1 

Really navigate this kind of tricky sort of landmine infused world of the exit, and whether you’re thinking about selling your company tomorrow or 10 years or or some point down the road, every entrepreneur is going to have their exit and. 

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You get the opportunity to choose that exit and design it in a in a way that best suits you or your family or your employees, or you get to have that exit chosen for you. 

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And I’ve talked to countless entrepreneurs that all say, well, I’m never going to sell my company, so I don’t think this really matters to me. 

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And really, every entrepreneur, unless you’ve cracked the code on immortality, we’ll have your exit event at some point. 

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And it’s in your best interest, and more importantly, probably in your family and your air’s best interest to be really clear and thoughtful about what that means. And if you plan on having a multi generational company. 

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It’s still your responsibility to craft, kind of the excellent strategy, but the exit strategy we’re going to talk about today is more about. 

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Taking the company to market and finding a buyer that will value the company kind of over and above its traditional financial. 

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Valuation, so any company that produces cash flow can be valued on the basis. 

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Of that cash flow. 

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Any decent CPA with with a background in valuation can say here’s the cash flow of the business. You know, we’ll we’ll apply some discount rate to that cash flow. 

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And here’s what that is worth. 

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And we’re here to say that that is probably one of the worst ways to think about. 

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The value of a company, because if you’re going to sell it for the discount of the cash flow. 

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You might as well. 

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Hold on to it and enjoy the benefits. 

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Of that discount discounted. 

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Cash flow, but there are buyers and lots of buyers that will value companies. 

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Over and above that, discounted cash flow, and that’s really what we want. 

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To talk about. 

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Today, now we’ve all heard of private equity and venture capital, and there’s obviously lots of M&A activity going on in the world. 

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And unfortunately for the entrepreneur and Peter, I think I can see most of the attendees just a quick show of hands. How many of you in the room have sold a company before? 

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So we have one hand, how many in the room have sold five or more companies before? 

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So a good private equity firm. 

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And whether it’s in Oceana, whether it’s in the US, whether it’s in Europe, but it, but a decent size upper, middle market private equity firm might do 20 or 30 or 50 transactions in a single year. 

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And most entrepreneurs sell a handful of companies in their lifetime. So what’s happened is? 

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The playing field. 

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Has gotten incredibly unleveled. 

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So there’s really sophisticated buyers. 

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And there’s, you know, I won’t say unsophisticated, but maybe inexperienced. 

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Sellers and it’s created this massive mismatch. 

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In the world and it’s it’s our mission to help entrepreneurs kind of bridge the gap between that mismatch. And I can now say this again because he’s backed on the world stage and golf. The equivalent is. 

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You got your grandfather golf clubs out of the attic. You’ve never been on a golf course before. 

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And you step up to the first tee and you’re and you’re you’re going to play against Tiger Woods. There’s a really good chance that Tiger Woods is going to win on that day, and the same things happening now in the M&A space. 

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And you know, it’s it’s unfortunate that we’re going that way, but I could probably do another show of hands. 

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Cool, how many of you in the room have appear or a friend or no of an entrepreneur that’s sold to a buyer and maybe didn’t get a great out? 

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Yeah, more often I see most of the hands in the room go up when we ask that question so you know it’s it’s really become kind of a an unlevel field. 

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The good news is there are some great things. 

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You can do and. 

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You know there’s a a Chinese proverb that says. 

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And I always get it wrong, but. 

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The best data plan an oak tree was 100 years. 

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Ago, but the next best day to plant an oak. 

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Tree was today. 

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And it’s the same. 

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Thing with getting ready to sell your company we we believe deeply. 

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That the process of getting ready to sell a company, that the mindset and the activities and all the things that you know you should think about doing the best time to start thinking about your exit is probably the day that you started the company. Because ultimately all companies get exited weather. 

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For the entrepreneur closes the business gives it to the next generation of family, sells it to a buyer, sells it to employees. 

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Ultimately, a company, even if you close it down, that’s an exit event, so every business gets exited. The best day to start thinking about that really is today. 

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And that’s kind of our our mental challenge to everyone is are we thinking about exit strategy properly? Now? What we love about the scaling up methodology is a lot of the things that you’re going to work. 

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On in scaling. 

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And a lot of things you heard from burn, UM are the same things that drive exit value. 

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Of a company so you know first on our list and at what I’ll what I’ll say is the most important. 

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On our list. 

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The entrepreneur is redundant in the business, so I want you to think about yourselves. You have you have some spare capital. You have some spare money and you’re going to go out and buy a company. 

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And you’re going to. 

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Look at two companies, company A and Company B. 

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And their financial performance is identical. Their growth is identical. They’re in the same industry they’re serving similar customers. 

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And Co a. 

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The entrepreneurs working 70 or 80 hours a week and they’re super critical to the business and they’re filling three of the seats on the accountability chart. 

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And then Company B. The entrepreneurs put an amazing leadership team in place. They’ve got systems and process and and. 

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Documentation on how things work, and they’re working 15. 

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Hours a week. 

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And really kind of the strategist of the business. 

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And in a short period of time, you’re going to evaluate both companies, and you’re going to choose A or B to put your capital. 

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To work, most people want to invest in Company B. 

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Where the entrepreneurs redundant in the business where the proverbial if he gets hit by her, she gets hit by a bus. 

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We’re totally in trouble versus they really don’t do much day today the the bus would be sad, but it wouldn’t be the end of the company. If you’re in the key. 

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Leadership roles you want to be thinking about that? 

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Again, to drive your exit value. 

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In the same kind of mindset, so the number one value driver that you can take away from scaling up is use the methodology to make yourself redundant in the business. Now the great news there is. 

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That’s also a great way to get quality of life. That’s a great way to be able to spend your time more strategically, like there’s so many other side benefits. 

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That come from. 

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Scaling up and making yourselves redundant in the business that it’s really just a good strategy anyway, to be redundant, but it also deeply drives the exit value. 

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Of a company. 

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Same thing with strategic planning. I’m I’m gonna give you a company a Company B again. 

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They’ve had the exact same performance company a runs by the seat of their pants. Company B has a very disciplined and focus. 

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Quarterly annual three to five year strategic planning process. Maybe they work with a coach. Maybe they do it internally, but they’re very disciplined about how they do their plan. 

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You have to put your capital work. Which business do you want to invest? 

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In so and. 

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I can go, you know, I can go down. 

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Through the list there’s. 

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There’s some some other. 

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Things that we think about that really drive. 

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Company valuation and they’re obvious, but I think they’re. 

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Worth repeating here. Third on our list is customer concentration. I’ll give you the same A&B analysis, one has. Company A has 6 customers and the top two represent 80% of their revenue. 

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Company B, with the exact same performance, has 200 customers and the biggest customer is 3% of the revenue. Which one do you want to buy? 

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So customer concentration is another thing that can increase or decrease the relative valuation of companies. Companies are not just valued on their cash flow. 

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Recurring versus periodic revenue. Same thing company A. Their revenue is all project based and they have to chase it around and they’ve got unbelievable sales people. 

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But they don’t know two quarters from now. Are they going to be 0 or 10 million in revenue Company B? 

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Longstanding recurring contract based customer revenue, and they’re going to do the same exact numbers. Company B is going to look a lot more attractive than company it. 

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Another scaling up kind of dyed in the wool premise systems and process. 

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Systems and process space. This is how we do it here. Companies tend to trade at much higher multiples than we show up on Monday, and we make it up every day and try and figure out what we’re doing and another reason to go really deep on the scaling up methodology, visibility, KPI so. 

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And again, you’ve you’ve built the systems and process. You have the visibility systems so that the leadership team really can assess what’s going on. They can make short term valid decisions that are based on data and facts versus. 

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Speculation, anecdotal ideas, all those things Dr. Valuation, but I think the most important thing we talked about and and really where we’ve kind of made. 

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This whole premise for. 

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The how to drive exit value in companies and. And again this doesn’t mean you’re going to sell tomorrow, next week or next year, but this is how to think about building long term value in a business so that one day when the day comes. 

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Teams that you’ve maximised the opportunity to extract value from the company. 

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Is an idea we call Rembrandts in the attic and I we stole it from someone else. We think the the originator is a friend of mine and Andrew Sherman. 

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He’s an attorney out of DC. It’s not. It’s not our idea, but it’s one that I love to talk about. Probably talk about. 

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The most so I want you to imagine. 

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You’re buying a new home and you’re on the market. And obviously, home prices. And it’s been super competitive these days, so you’re on the search for a new home and you know you look around and and you find one that you like. 

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And it’s listed for $1,000,000 and you’re like I think this is it. This is our home. 

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And there’s two other bidders that are going to. 

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Bid on that home. 

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And it’s a tight. 

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Market and you gotta act fast. 

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So the three of you line up and and maybe maybe I’m one of the bidders and Peter is one of the bidders and. 

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Near one of the bidders. 

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And maybe you love the kitchen and the homes listed for a million. You know it’s going to be competitive. 

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Maybe you’ll pay 1.05 million maybe? I don’t like the front yard like it’s not exactly what we wanted and. 

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We can get the house for 950,000 will buy it, but I don’t know. I don’t love the front yard so I’ll bid 950 and maybe Peters right down the middle at a million, but we all know that the home is worth about $1,000,000. That’s the financial value. 

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Of the home and the seller knows that the home is worth about $1,000,000, which is why they listed it for $1,000,000. But then in the process of looking at that house. 

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I wander around and I go up into the attic. 

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And in the attic behind a corner that nobody can see, there’s an original Rembrandt that’s worth millions of dollars. Now I know it’s in the attic. The seller doesn’t know, and the other two bidders don’t know. 

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Do you think I will get out? Bid on that home absolutely. 

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Not because I know. 

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If we buy the house, I get the Rembrandt. 

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That comes with it. 

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And then we can sell that and make back millions of dollars even more than we paid. 

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For the house. 

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Every company. 

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Has Rembrandts in their attic. Oftentimes that they don’t know that they have. 

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That buyers would value over and above the financial value of a business. 

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And there’s a tremendously wide range of what these Rembrandts can be. I’ll run through some examples, and more importantly, what’s a Rembrandt to buyer a? 

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Might be irrelevant to buy or be, but they may value something else. 

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So water, water, Rembrandt. 

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It’s in the attic of business is one thing could be your customer list. So think about your customers who you do business with, the relationships that you have and I’m a potential buyer of your company. 

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And I know that with my products and services, if I could just get access to a customer list like yours, I could sell so much more of my products and services. So I will value your company. 

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Well over and above the financial value because I know I can unlock the value of selling more stuff. 

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To your customers, maybe it’s a piece of IP or software that you’ve developed, and I know if I. 

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Buy your business. 

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I can use that software in my company and maybe that can unlock value, so I’ll tell you a story about a company that we took to market. 

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There are company based in Detroit, MI in the UI. 

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They were a very boring. 

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Middle of the road plain Jane professional services company. 

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They helped big organisations manage their real estate portfolios so they there was some software products, one built by IBM and some other ones. 

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And for instance, Bank of America was one of their customers. So Bank of America manages hundreds of millions of. 

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Square feet of real state. 

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Every year they were doing it on spreadsheets and by accident and these guys came along and said, hey, IBM’s got this software suite that can manager real estate will help you get it. 

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Implemented and they helped Bank of America implement and the VA hospital and countless Fortune Ten 5000 sized companies. So they were about $25 million business you. 

00:21:29 Speaker 1 

Yes, about $3 million in Ibdah in professional services. They were worth somewhere between 18 and on the high end, $24 million. That’s 6 to 8 times EBITDA. 

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We had lots of buyers that were happy to pay that we had investment banks that told us that’s what they were worth, so we took them to market with this idea that we wanted to find a strategic buyer. 

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Someone that would value one of the Rembrandts in their attic versus a financial buyer. 

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So we ran a process and ultimately, and there was way more to it than this. But ultimately we got two buyers in a bidding war. 

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Because, and this is one of the, this is one of the things you want to think about when you sell or position your company to exit. 

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A buyer that would like to own your business is an OK buyer. A buyer that would love to own your business is better. 

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But uh, buyer that has to own your business must own your business. 

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Is the best buyer, and if you can get two buyers that have to own your business to bid against each other, then that’s the story that I’m about to tell. So in this case, one of the buyers was a big institutional. 

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Real estate brokerage firm that lacked the capability to do the implementation of big software and they had customers that have been asking for it for years. 

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They tried and failed three times to set that capability up and they just couldn’t get it done. They were about to lose. 

00:23:11 Speaker 1 

One of their biggest customers, a bank that you’ve all heard of. Not Bank of America, but another one they were about to lose that customer in the next six months if they couldn’t add this capability that they’ve tried and failed so many times to do just that, one customer would have meant 15 million in March. 

00:23:31 Speaker 1 

A year in Los now remember my clients doing 25 million in revenue, 3 million in EBIT DA, but they’re gonna solve a $15 million a year margin problem for one of the buyers. 

00:23:46 Speaker 1 

The other buyer was what we called the. 

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US and Alaska Native corporation. 

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They’ve got certain rights from our government. They can do no bid. Federal government work up to a certain amount and we were able to figure that. 

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Our client business was worth about 100 million a year in revenue to them in probably 30 million a year in margin. So here’s this sleepy little $25 million company. 

00:24:15 Speaker 1 

3 million in EBIT AH, we turned over hundreds of rocks to find buyers, and we get two that say we have to own this business. One is I need to solve my. 

00:24:28 Speaker 1 

Major client problem and the other is we can unlock all this value with no bid federal government work. We got those two buyers into a bidding war and it’s a longer discussion than today and it’s a really cool story. But the the Long story short. 

00:24:46 Speaker 1 

The winning bid was 75 million US on a $25 million company, doing 3 million in ibadah. 

00:24:56 Speaker 1 

That probably should have traded at about 2021 million, 7 * 3 and they ended up trading at 75. 

00:25:06 Speaker 1 

And this wasn’t because they had some crazy technology. They weren’t venture capital back. There was none of that. 

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It was understanding. 

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Buyers, two different buyers and what their value drivers were. 

00:25:23 Speaker 1 

And what value we could unlock for each of those buyers? And I can give you dozens of more stories like that. But what I want to leave you with. 

00:25:35 Speaker 1 

From that perspective, is every business everyone in the room right now has Rembrandts in their attic, and you want to be obsessed about what those Rembrandts are, and more importantly, what value might they unlock for a different? 

00:25:56 Speaker 1 

Group of buyers and again one group of buyers might love your customer list. One group of buyers might love some technology built right now in in kind of the new world order that we have. It’s really hard to hide. 

00:26:11 Speaker 1 

Yeah, so if you have a rock star team and and you’ve Got Talent locked up in your industry, you may get bought just for your talent just for your leadership team. 

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Just for you know, maybe some some like mid level management talent. It could be things like the industries that you. 

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Serve or your. 

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R&D capabilities, or there’s a myriad more we were. We worked with this really cool company. 

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In upstate New York in the USA. 

00:26:42 Speaker 1 

And they had they had a frozen drink machine that they sold to convenience stores. I know super sexy business that was their thing and they didn’t sell the major like national chains. 

00:26:56 Speaker 1 

They sold to the one to 25 unit mom and pop style convenience stores and they sold this frozen drink machine and they were doing great. And then the pandemic came and so we helped them kind of reimagine. 

00:27:09 Speaker 1 

In their business and working through a process of helping them discover their Rembrandts, we have some tools that we can share on how to discover your Rembrandts. 

00:27:22 Speaker 1 

It often one of the clues. One of the things that helps you kind of. 

00:27:28 Speaker 1 

Think through what are the Rembrandts. It’s often the things you totally take for granted. 

00:27:33 Speaker 1 

So it took almost an. 

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Hour for them to say. 

00:27:37 Speaker 1 

Oh yeah, we you. 

00:27:38 Speaker 1 

Know we have this whole merchandising system and. 

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Our clients aren’t very. 

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Sophisticated on point of sale and marketing. 

00:27:44 Speaker 1 

And we’ve built this whole like set of displays and we bring all this collateral in and it drives like frozen drink sales up by like 80% in most of our clients. They were so good at that they so took that. 

00:27:57 Speaker 1 

For granted, it took me an hour of asking questions and drawing them. 

00:28:02 Speaker 1 

Out before they even mentioned that. 

00:28:05 Speaker 1 

Well then they realise that that capability could actually spread across the whole range of convenience store. 

00:28:12 Speaker 1 

Items and that was the Rembrandt in there at their ability to help. Convenience stores. Point of sale, merchandising and they ended up getting bought by a company that did a lot more than frozen drinks that was looking for that merchandising capability so a lot of times it’s things you totally take for granted. Things that you’re so good. 

00:28:34 Speaker 1 

That are so fundamental in your business that you just assume everybody does that well, everybody must have these customers. 

00:28:41 Speaker 1 

Everybody must have these capabilities and and those are the things that can really drive. Kind of that. Rembrandt discussion. 

00:28:49 Speaker 1 

And it’s a fun discussion to have as a as a leadership team you. 

00:28:54 Speaker 1 

Know a lot of times. 

00:28:54 Speaker 1 

Leadership teams don’t really like to talk about the exit event because people get skittish around well. I love it here. I don’t. 

00:29:00 Speaker 1 

Want to leave? 

00:29:01 Speaker 1 

And but we should always be thinking about how to build. 

00:29:05 Speaker 1 

The value of the business, whether you’re. 

00:29:07 Speaker 1 

Going to exit it or not. 

00:29:09 Speaker 1 

But the the Rembrandt discussion is really about how to build that value in the business. So Peter, I’ve said a whole lot. 

00:29:17 Speaker 1 

I’d like to pause here and just see. Are there questions? Do we need any clarification? I rembrandts in the attic is kind of my favourite topic and I tend to ramble on about it a lot so. 

00:29:28 Speaker 1 

So so. So yeah, I I just. 

00:29:31 Speaker 1 

Like to pause and see. 

00:29:32 Speaker 2 

No thanks Sean, we’ve got. 

00:29:33 

A couple of roving microphones in the room and judgement. 

00:29:37 Speaker 3 

Yeah hi, thank you very much. That was my name is Joe. Uh, when you talk about in your business have you worked with companies and said what is the Rembrandt in a product that you have that your customers? 

00:29:51 Speaker 3 

Uhm, cannot avoid or or as so obsessed with actually buying subject. Actually drill it down and and break it down even more into products in your company. 

00:30:01 Speaker 1 

Yeah, so the the product can actually be the Rembrandt. So let’s say you have the killer product that like you said your customers can’t get enough of and you know it’s the one thing that’s really driving your performance in your results. 

00:30:15 Speaker 1 

I would be thinking about. 

00:30:18 Speaker 1 

Who would? Who would absolutely kill? 

00:30:21 Speaker 1 

To own this product to sell to their customer base and if XYZ company bought us and they can take this product to their marketplace it would be game over and they would they would do anything it took to be able to to and it could be a service as well but they they would do. 

00:30:41 Speaker 1 

Anything they could to get this product or this capability or this service? 

00:30:46 Speaker 1 

And what I didn’t say, and it’s it’s actually. 

00:30:48 Speaker 1 

A great segue. 

00:30:50 Speaker 1 

You can reverse engineer the value of the Rembrandt, so for me when I had Bob company the the real estate software implementers I knew because they told me exactly the value to the two buyers. 

00:31:06 Speaker 1 

Of his Rembrandts I knew what the no bid contracts were worth, and I knew what the loss preventing the loss of that of the big customers on the other bank were to the point where interestingly, I had a very nervous client, he he thought his business was worth 20. So when we passed 50. 

00:31:26 Speaker 1 

He was terrified and when we got into the 70s he thought the world was going to come to an end. 

00:31:32 Speaker 1 

And I actually wanted to push for $100 million valuation and he actually put the brakes on and said no, we need to stop at 75 and after he got done and he sold the company and it was about a month later. 

00:31:47 Speaker 1 

He was having. 

00:31:47 Speaker 1 

Lunch with the buyer on on the the the the lead guy on the buyer. 

00:31:53 Speaker 1 

Side and he said, hey. 

00:31:54 Speaker 1 

Mike, what what was your number? How far could we have gone and Mike said? Are you sure you want to know? 

00:32:00 Speaker 1 

And he said, and I bet him a dollar. It was 100 he. 

00:32:03 Speaker 1 

Said yeah, I’ve got. 

00:32:04 Speaker 1 

A bet riding on it and Mike said I had authority to go to 95 and I think I could have pushed to get to 110 and that’s because we knew the value. 

00:32:15 Speaker 1 

Of that, Rembrandt solving that problem for for this company was worth way more than 75 million. 

00:32:22 Speaker 1 

And then and they were, they could have gone further and listen. It was a great outcome of $3 million. You big company for 75. 

00:32:30 Speaker 1 

I’m pretty sure most of us in the room would would raise our hand and say, yeah, sign me up for that, but he did leave money on the table because you know, we we know how to reverse engineer and think. 

00:32:42 Speaker 1 

About all that extra value. So when you think about that killer product as a Rembrandt. 

00:32:48 Speaker 1 

Who you know? Maybe if I bought your company that might be worth 10 million a year to me. But maybe if Peter bought your company it might be worth 30 million a year to him because he’s got a different customer mix and a different. Go to market strategy. So be thoughtful about you, know the the reverse value engineering of the Rembrandt. 

00:33:10 Speaker 1 

Does that answer your question? 

00:33:11 Speaker 3 

Yeah, and some. 

00:33:17 

Any questions John? 

00:33:28 Speaker 4 

Thank you, thanks again. That was really insightful. Those those half 1000 points I wanted to talk and understand a little bit more. 

00:33:35 Speaker 4 

About .4 that you. 

00:33:36 Speaker 4 

Talked about the recurring versus periodic so. 

00:33:41 Speaker 4 

You talked about it 1 Extreme project based. You know everything is a project and you don’t know where you are in 1/4 and then talked about longstanding pairing. So I guess subscriptions at the kind of other end. 

00:33:52 Speaker 4 

But there’s I guess there’s a range of things in between, you know, short term contracts, master service agreements, preferred supplier souls. 

00:34:02 Speaker 4 

Or just customers that you continually get revenue from for a long period of time. So can you kind of tell us a bit more about that and the effect of valuation between one extreme to the other and what we should be thinking about when we’re thinking on this. 

00:34:17 Speaker 1 

Yeah, what a what a fantastically good question and I think a great takeaway for everyone. So the gold standard of recurring revenue are long term contracts. Now I will argue tooth and nail that well run companies that believe in customer experience and. 

00:34:37 Speaker 1 

And word of mouth. And how the marketplace perceives them. 

00:34:42 Speaker 1 

Would never hold customers that are completely disgruntled to long term contracts and I think long term contracts. 

00:34:50 Speaker 1 

In many cases, are completely overvalued. At my call centre company that we sold, we had about 10,000 customers when we sold in 2012. 

00:35:01 Speaker 1 

And I want to say it was under 50. It was between 30 and 50. There were actually on any sort of term contract. Most of the customers were what we called at. 

00:35:13 Speaker 1 

Well or on like a 30 day agreement. With that we wouldn’t even hold him to 30 days if they were upset if they if they were unhappy, we’d let him go that day so they didn’t bad mouth us for the next 30 days. 

00:35:27 Speaker 1 

If you’re in a situation with a buyer. 

00:35:30 Speaker 1 

And this topic comes up. 

00:35:33 Speaker 1 

I suggest you fight tooth and nail about. 

00:35:38 Speaker 1 

Customers that have been with you for a long time that pay on a periodic recurring basis in some sort of like normalised range are recurring revenue. 

00:35:49 Speaker 1 

Customers should be treated that way and should be valued that way. One of the problems with software as a service or SAS companies. 

00:35:59 Speaker 1 

Is a lot of them have kind of entered the? 

00:36:01 Speaker 1 

Marketplace with this. 

00:36:03 Speaker 1 

One year, three-year five year agreement nonsense. None of them hold their customers to it for the reasons I just said, but it’s muddied the waters on recurring revenue, so for me. 

00:36:15 Speaker 1 

And and again, you know, and buyers are sophisticated and sellers get run over sometimes as a I mean sellers sellers are getting run over and buyers are sophisticated as a seller fight like hell to say. 

00:36:32 Speaker 1 

Even though they’re they’re non contractual, their short term, they’re all the things you just. 

00:36:37 Speaker 1 

Said if they’ve been doing business with you for a period of time, they are recurring revenue customers, and that’s one of those areas where there’s certain areas you dig your heels in in negotiation and there’s certain battles you’re willing to lose. 

00:36:53 Speaker 1 

To win a bigger war. 

00:36:55 Speaker 1 

The recurring revenue battle on on short term contract no contract versus long term agreement is an area to absolutely dig your heels in. 

00:37:05 Speaker 1 

Uhm, and yeah, I fully believe customers that do business month over month, over month for a long period of time are absolutely recurring revenue customers. 

00:37:16 Speaker 1 

When I say project, it’s the we’re going to build your website and it’s $50,000 to build a website, and then we’re going to host it for $99. 

00:37:27 Speaker 1 

It’s pretty easy to say the 50,000 is period like in the 99 a month is recurring, but in in the cases where it’s month over month over month, even without agreements, in long term contracts. 

00:37:40 Speaker 1 

Fight like hell, that’s recurring revenue. 

00:37:47 Speaker 5 

Hi hi John, my name Simon. I’ve got a question. I’m going to go with the the art analogy. So do you have any thoughts or advice around situations where the entrepreneur can’t really make the distinction between a a piece of Rembrandt and the artwork of a 6 year old? 

00:38:04 Speaker 5 

Obviously that’s an extreme situation, so probably more realistically, someone who know they’ve got something good but don’t realise how good it is ’cause they just don’t know what they don’t know and what what’s up value to to potential buyers. 

00:38:17 Speaker 1 

Yeah, and and 1st I’ll say beauty is in the eye of the beholder, So what? By array loves buyer be might care less about you know in in the in the no bid federal government versus you know the Manhattan brokerage firm the Manhattan guys could care less. 

00:38:36 Speaker 1 

About the note the. 

00:38:37 Speaker 1 

Federal government work. They didn’t even want. 

00:38:39 Speaker 1 

And vice versa the the no bid. Federal guys didn’t really care about the Big Manhattan clients, so it’s it’s very individual buyer versus buyer. 

00:38:49 Speaker 1 

But it’s really an exercise and and use the you know, use the analogy about. You know, buying a home and just to start to change the mindset. 

00:39:00 Speaker 1 

But a lot of it comes down to thinking about like it’s a thought exercise. 

00:39:05 Speaker 1 

Imagine if and I love it. Strategy should always start with. Imagine if imagine if XYZ owned our company, what could they do with it? And I’m. 

00:39:16 Speaker 1 

I’m assuming you’re working with an entrepreneur that maybe doesn’t see it, or are you? Are you saying that maybe about yourself? 

00:39:25 Speaker 5 

No no. Hi hypothetically yeah. I mean I mean, a lot of entrepreneurs who who who do fall into that. 

00:39:30 Speaker 5 

Category as well. 

00:39:32 Speaker 1 

And and here’s the beauty of it. It’s the stuff we take for granted. So a lot of entrepreneurs don’t see it like they don’t they. They’re so fundamentally good at it. 

00:39:43 Speaker 1 

That they don’t, that they don’t see it. And I really feel like it’s the work of the coach. It’s the work of the strategy group. 

00:39:50 Speaker 1 

It’s the work it should be the. 

00:39:51 Speaker 1 

Work of the. 

00:39:51 Speaker 1 

Entrepreneur to break that mindset and and think about things a different way with the convenience store guys. It took him an hour. 

00:40:01 Speaker 1 

They didn’t see it, they saw a. 

00:40:02 Speaker 1 

6 year old. 

00:40:04 Speaker 1 

Drawing in their attic and then it was me. Kind of saying, well, you know who are some of your competitors and what do they do and what do they sell? 

00:40:12 Speaker 1 

What if and it was this question as well? 

00:40:15 Speaker 1 

What if they were able to merchandise those 23 products like like you’re able to merchandise the frozen drinks like, oh, they can probably 10X their sales? Well, that was the that was the moment, but they didn’t. They didn’t see it. 

00:40:29 Speaker 1 

And they didn’t kind of get it straight. 

00:40:31 Speaker 1 

Away and it’s. 

00:40:32 Speaker 1 

If you’re advising entrepreneurs, it’s and the cool part is it’s a lot of fun like the work. 

00:40:38 Speaker 1 

Doing the Rembrandt work is a blast because it’s, uh, a total blue ocean discussion and you, you’re you watch the light. I’ve seen it just in this room. 

00:40:49 Speaker 1 

Today that every time I’ve ever given this talk and it’s hard on zoom, but. 

00:40:53 Speaker 1 

I watched the light bulbs go off. In fact I was on a panel discussion about 8 months ago. 

00:40:59 Speaker 1 

So, and unfortunately it was a group of people that had just sold their companies and. 

00:41:03 Speaker 1 

Somehow they put me. 

00:41:04 Speaker 1 

On there and I I explained the Rembrandts thing and the guy that was two seats down from he said, you know I sold my company 3 months ago. 

00:41:14 Speaker 1 

And I think I left 50% of the value on the. 

00:41:16 Speaker 1 

Table based on what you. 

00:41:17 Speaker 1 

Just said so it it. 

00:41:19 Speaker 1 

It’s not always obvious to the entrepreneur, but it’s tremendously fun to work through the process and and it’s a creative exercise and and that’s why I love it so much. 

00:41:32 Speaker 2 

John, where does the secret source come out? Is the secret source the the the Rembrandt or is that separate? 

00:41:41 Speaker 1 

In terms of in in terms of driving exit value. 

00:41:47 Speaker 2 

Oh no, it might be knowing the secret source. Is that another name for the Rembrandt, or is it could be insane but could be diff? 

00:41:47 

Yeah, I’m. 

00:41:53 Speaker 1 

It could be in. 

00:41:54 Speaker 1 

It yes, and I I do think if you have a secret sauce, by definition that is, uh, Rembrandt. 

00:42:00 Speaker 1 

But it’s only. 

00:42:01 Speaker 1 

Valuable if it’s valuable to a buyer. 

00:42:05 Speaker 1 

So your secret sauce in the hands of a buyer A might be ultra valuable, but in the hands of buyer, be yeah, it’s great. 

00:42:14 Speaker 1 

You know, we we, we run the business effectively and that’s somehow we drive strategy, but that’s not necessarily the value driver. So it is really a very individualised. 

00:42:25 Speaker 1 

Uhm, kind of process. 

00:42:28 Speaker 2 

John, I know you’ve got some other appointments. Go to learn about another 5 minutes. We have one or two questions. Would that be OK? 

00:42:34 Speaker 1 

Yeah, more than happy to I I I love this topic it’s you know I’ll tell you Peter why I love it because. 

00:42:41 Speaker 1 

We talk about leadership management and and you know all the all the business basic stuffs all all the time. 

00:42:48 Speaker 1 

But we don’t talk about this stuff. We don’t think about this enough. And this. 

00:42:53 Speaker 1 

Is where you create wealth. 

00:42:54 Speaker 1 

As an entrepreneur, this is how. 

00:42:56 Speaker 1 

You change multiple generations of your of your family. 

00:43:00 Speaker 1 

And it’s really, really important. 

00:43:02 Speaker 1 

Stuff to talk about, so I’m happy to spend. 

00:43:04 Speaker 1 

More time thank you. 

00:43:05 Speaker 6 

Thanks my question is I’m the I’m the founder and CEO of a creative digital agency, which means I work with a lot of millennials that will probably jump ship at being sold out. Do you have any advice on when to start telling people? 

00:43:20 Speaker 6 

Within your company that you are thinking about exiting and and how to manage the culture or that transition without it completely destroying the integrity of your team and what buyer is buying into. 

00:43:35 Speaker 1 

For sure and. 

00:43:36 Speaker 1 

Just a couple, I’ll I’ll give you some kind of best practise things to think about here. 

00:43:41 Speaker 1 

Uhm, you want as few people involved in the process as possible. It’s really kind of on a need to know. 

00:43:51 Speaker 1 

Basis and I and I actually. 

00:43:54 Speaker 1 

You know in the right scenario if you if you structure it the right way, you don’t necessarily have to worry about millennials jumping ship as long as they feel like there’s still some part of something bigger than themselves. But the most important piece to this puzzle. 

00:44:10 Speaker 1 

Anyone that’s going to have a role in the process should have a stake in the outcome. 

00:44:17 Speaker 1 

So if if they’re going to know before the close date that something is going to happen, they should have a stake in the outcome out of the proceeds of the sale, and in most good transactions there’s actually even some incentive for them to stay on and and help. 

00:44:37 Speaker 1 

The buyer get the business to the next level and if done well you can really create opportunities for that for that team that maybe didn’t exist under your ownership. 

00:44:52 Speaker 1 

Uhm, you know maybe they’re being bought by a bigger company, or maybe that company knows that you know you’re gonna step away as the entrepreneur and they they really want to make sure your team stays engaged and there’s all sorts of different vehicles, stock options, and phantom stock and stay bonuses. 

00:45:12 Speaker 1 

And I mean there’s a myriad of them. 

00:45:13 Speaker 1 

But anyone that’s got a, it’s got a role in the process. Should have a stake in the outcome, and the fewer the better is our advice. 

00:45:24 Speaker 3 

Thank you. 

00:45:30 Speaker 2 

Yeah, and then. 

00:45:31 Speaker 7 

I just had a quick question. You talked about the divergences between sellers and and buyers and how the the buyers have sort of got the knowledge at the moment and your process for selling is is obviously quite unique, having dealt with lots of bankers before. They’re just looking for the EBIT da multiple. 

00:45:50 Speaker 7 

Even though they’re incentivized to get the highest thing, they don’t really understand your idea of the Rembrandt. If you were a seller, what one question would you ask to make a potential partner who’s going to help you sell to make sure that you’ve got the right partner to help you sell your business? 

00:46:08 Speaker 1 

Yeah, that’s a great. That’s a fantastic question is. 

00:46:11 Speaker 1 

Well and and I don’t know if it’s I would ask one question, but I would want to assess how they feel about maximising value so and and maybe the question is hey, what’s your position on maximising value in a transaction? What what do you? 

00:46:31 Speaker 1 

You know it is the definition of success. 

00:46:34 Speaker 1 

In a maximised value transaction? 

00:46:37 Speaker 1 

And you’re totally right, there’s so many. 

00:46:41 Speaker 1 

Investment bank, you know, kind of success fee plans that really don’t value the last dollar anymore than the first dollar. 

00:46:49 Speaker 1 

One thing you really want with your investment bank and it sounds counter intuitive but you want to see their fee structure aligned with you where the last dollar is the best dollar. 

00:47:00 Speaker 1 

For all of you, not just for not just for you. If if their fee structure is flat. 

00:47:07 Speaker 1 

You know a flat percentage across the board, or even worse, a higher percentage of the first dollars in and the lower percentage of the last dollars in your at your at odds. 

00:47:17 Speaker 1 

In Santa Claus, you want them aligned with you, so whatever it is. 

00:47:21 Speaker 1 

Maybe it’s you. 

00:47:22 Speaker 1 

Know just for argument’s sake on a on a company that should trade at 50 million. 

00:47:27 Speaker 1 

And a stretch goal would be a. 

00:47:29 Speaker 1 

Under it, you know, maybe it’s 3% of the 1st 40 and then it’s you know 4% of of anything between 40 and 60. 

00:47:38 Speaker 1 

And maybe it’s 5 or 6% from 60 to 75, and maybe it’s 8% or 10%. Anything over 75. You’re going in thinking you’re worth 50. 

00:47:50 Speaker 1 

You’d be thrilled to get $100 million transaction and pay a huge fee to the bank if they were really incentivized to find that last dollar, and that’s how the fee structure, the way they structure fees will tell you a whole lot about how your bank thinks about maximising value in a transaction. 

00:48:10 Speaker 1 

You know, if they’re a flat, you know 3% across the board. They’re not going to work really hard to get you much above market, and some banks are willing to do the hard work and sell the strategic buyers for strategic multiples. 

00:48:23 Speaker 1 

And other banks want you for wealth management and all sorts of other things. They give you a commodity price. 

00:48:30 Speaker 1 

And they’re going to sell you for, you know, financial value, industry average multiple. 

00:48:36 Speaker 1 

We’re we’re yeah we’re totally industry agnostic and I don’t even want to know what the industry. 

00:48:41 Speaker 1 

Average multiple is this. 

00:48:43 Speaker 1 

If I leave you with nothing else today, your business is worth what one buyer one buyer. 

00:48:50 Speaker 1 

Is willing to pay at one point in time and that’s it. 

00:48:55 Speaker 1 

It’s, you know. 

00:48:56 Speaker 1 

It forget industry average that’s you know. 

00:48:59 Speaker 1 

We can look at that to to know. 

00:49:01 Speaker 1 

If we won or. 

00:49:01 Speaker 1 

Lost one buyer, one point in time and one more. 

00:49:07 Speaker 1 

One more fun thing on the Rembrandts and and Kristen Cop, who helps run the coaches organisation is on. 

00:49:13 Speaker 1 

And she sent me a very, very important text and I want to share it I want. 

00:49:18 Speaker 1 

To give her. 

00:49:18 Speaker 1 

Full credit we talk about when. 

00:49:20 Speaker 1 

You go to your industry trade. 

00:49:22 Speaker 1 

Association events and conferences. 

00:49:25 Speaker 1 

The Rembrandts in your attic oftentimes are the things that you’re doing that solve all the problems you see in the breakout sessions, so you know if you go to industry events year after year after year, the breakout sessions are always about the the headaches in your industry that the. 

00:49:44 Speaker 1 

Thorns in your. 

00:49:45 Speaker 1 

Side and if you’ve got Rembrandts in your addict that overcomes some of those breakout session headaches, a competitor that can that can buy you and unlock that. 

00:49:57 Speaker 1 

That’s, uh, Rembrandt. That’s one of the one of the Rembrandt cool Rembrandts in the attic. So be looking for those. 

00:50:04 Speaker 1 

What can nobody else in this industry figure out that we’ve got figured out and the breakouts are a great way to see that? Thank you, Kristen. 

00:50:13 Speaker 2 

John, just two last questions. I’ve pretty appreciate your time. That last one with gold will have all these people sort of sorting around lobby areas, finding out where the the workshops are, then taking those down. 

00:50:25 Speaker 2 

Great idea Tristan, and then they’ve got one. One last question here. OK, it’s one where you’ve got the the very last step. 

00:50:32 Speaker 8 

The bookend, thanks for thanks Keith John, great topic. 

00:50:37 Speaker 8 

Thank you really, practical and inspiring stuff. 

00:50:39 Speaker 8 

I want to circle back to the employee share ownership plans and profit share type of side of things. Because Verne spoke about those earlier and I really see the power of those in terms of building culture, building alignment and scaling our business. But then from the seller side, it seems like they may be complicating. 

00:51:00 Speaker 8 

For the buyer on that side of things, so I just wanted to understand your perspective on how they add value both in the scaling up process, but then how they overcome or soul if you will. In the in the sale. 

00:51:10 Speaker 8 

This is. 

00:51:11 Speaker 1 

Yeah, 22. 

00:51:12 Speaker 1 

Things on that, I think, great question as well. Two things that. 

00:51:15 Speaker 1 

Are really important. 

00:51:16 Speaker 1 

One is when you grab an employee and this is universal. 

00:51:20 Speaker 1 

It’s it’s true in the US, but it’s it’s true in Oceana as well when you grant an employee equity. Certain legal rights come with that equity. 

00:51:31 Speaker 1 

So your goal is really to have an employee participate in the upside and. 

00:51:36 Speaker 1 

The growth of the come. 

00:51:37 Speaker 1 

You wanna you want? 

00:51:39 Speaker 1 

To build your incentive plans in a way that don’t diminish your rights legally but still incentivize the employee for the upside. 

00:51:46 Speaker 1 

So we we talk about in the US we called Phantom Stock or stock Appreciation rights, or there’s lots of names for it. But there are there are non legally binding. 

00:51:58 Speaker 1 

Ways to give employees the opportunity to participate in the upside. 

00:52:03 Speaker 1 

But the the other piece of that puzzle is when you go through a process and you exit, oftentimes the buyer will want to put together they’ll. 

00:52:13 Speaker 1 

They’ll want to basically pay out and and you know, cash out your plan, but they’ll want to put together ongoing programmes for employees, so a big part of the negotiation. 

00:52:24 Speaker 1 

Is you know stock options and and you know however, they structure it, but you can actually use those in a transaction to build loyalty as opposed to like we talked about earlier. 

00:52:36 Speaker 1 

I’m worried that all the employees are going to leave so it can be a valuable vehicle on that side of the equation as well and. 

00:52:44 Speaker 1 

When you sell a company, what happens? Anyone that wasn’t anyone that finds out about it when it happens, their first thought is I’m going to lose my job. I’m gonna get caught up. 

00:52:54 Speaker 1 

Going to get made redundant and anything you can do, and this is more advice to a buyer than the seller, but anything you can do for those employees to make them feel like they’ve got a future goes a long, long way and stock incentives and participation rates. Definitely it is, you know, it’s definitely. 

00:53:12 Speaker 1 

Part of it. 

00:53:14 Speaker 2 

Thank you John. 

00:53:15 Speaker 2 

And last question now. 

00:53:18 Speaker 9 

Thanks John J Cole from MP group. My questions around the topic of tyre kickers and potentially giving away your secret source through this process and if there’s any advice or risks or things that we need to look out for when people are actually wanting to inquire on purchasing business. 

00:53:35 Speaker 1 

Yeah, for sure and and you know it’s a great question and it’s one of the thorniest problems that we face when when we run a process will vet the list of. 

00:53:46 Speaker 1 

Uhm, perspective buyers with the client and you know they may say, hey, that’s a competitor. I don’t want them to know like so be really thoughtful about your outreach list. 

00:53:59 Speaker 1 

And if it is a competitor or there are some threats, be really, really coy with your information. So you want to move a buyer a long way down the road and make sure that they’re they’re truly interested and invested. And it takes a lot of conversations and a lot of time. 

00:54:19 Speaker 1 

To kind of ferret that out if you’re running a full blown process with multiple buyers. 

00:54:25 Speaker 1 

Be a little bit harder on the ones that you think might be the tyre kicker so and it’s totally reasonable to ask for, you know, proof of funds and house is going to get funded and you know are you financing it. 

00:54:38 Speaker 1 

Is it coming from equity or the sponsors like you’re in the driver seat when you sell your company, never for that. 

00:54:46 Speaker 1 

This is another really important one. Never, ever. 

00:54:49 Speaker 1 

You are in the driver seat. A couple last Nuggets. 

00:54:54 Speaker 1 

Run your business like you’re never going to sell it until the day the deal closes and the ink is dry and the wires cleared. 

00:55:02 Speaker 1 

Never ever ever let a buyer think you’ve already mentally committed to a sale as soon as they think. 

00:55:09 

You know and. 

00:55:10 Speaker 1 

I watch it all the time with institutional buyers. They ask question. 

00:55:13 Speaker 1 

It’s like, oh, you’re a boater. What kind of? 

00:55:16 Speaker 1 

Boat, do you think you might? 

00:55:17 Speaker 1 

Buy or you know you could get an amazing vacation house and they’re really trying to plant the seeds in the in the sellers mind that deals already done. You gotta fight that urge tooth and nail. The deal is not done until it’s totally done. You run your business like you’re never. 

00:55:32 Speaker 1 

Going to sell it. 

00:55:33 Speaker 1 

You are always a compare. 

00:55:36 Speaker 1 

Editor in the process. So if you have 6 fires, you’re the 7th buyer, because if you choose not to do a deal, you’re essentially buying your business from yourself. And that’s super important. If there’s only one buyer, there’s never one buyer, ever. 

00:55:54 Speaker 1 

Your and we we do not recommend one sole source buyer, but if you get in that situation you have to be the competitor to that buyer. That buyer needs to know. 

00:56:07 Speaker 1 

That you are willing to say you know what? It’s not the right deal for me. I’m moving on so never ever, ever ever is there one buyer. And yeah, you, you really want to be very coy. 

00:56:22 Speaker 1 

With what you share, especially with prospective competitors, and you want them to do a lot of work to get down the road, to know that they’re serious and they’re not just fishing for information, it’s always a. It’s always a dance. It’s always a balancing act. 

00:56:39 Speaker 1 

Really strong NDA’s are. 

00:56:41 Speaker 1 

Worth a little more than the paper they’re printed on, but not much, but certainly have MBA’s in place. 

00:56:47 Speaker 1 

You know you can. 

00:56:48 Speaker 1 

You can kind of hint out that you’ll be very protective and you will enforce this NDA. You know if if anything. 

00:56:58 Speaker 1 

Comes from it, but it’s always. It’s always a challenge. It’s always a balancing act. 

00:57:03 Speaker 2 

Excellent, excellent. 

00:57:06 Speaker 2 

John, absolutely fantastic. All those gold nugget so we can. We can work with. John is very generous and very modest. 

00:57:14 Speaker 2 

He chose to give up US 2 hours in this time. The option against that was actually flying his plane and going down to the Sir Richard Branson, Ireland. Nick are. 

00:57:24 Speaker 2 

Put on there. 

00:57:24 Speaker 2 

Their their charity. So John absolutely fantastic. Really appreciate that. 

00:57:29 Speaker 2 

To stay safe and the risk. 

00:57:32 Speaker 1 

Yeah, and thank you very much. Thank you and Pete, Peter and Keith. You guys are doing amazing work. 

00:57:38 Speaker 1 

Our our our coaches are moved and I’m going to give a shameless plug for you guys. Now our coaches are moving the needle around the world and we went through kovid and our community rallied around through kovid and thousands of entrepreneurs made it through kovid and not only survived but thrived. You guys you guys? 

00:57:58 Speaker 1 

We’re doing some of the most important work in the world. The middle market is what drives the global economy. It’s not. 

00:58:05 Speaker 1 

Not massive businesses and it’s not Main Street mom and pops. The middle market is totally underappreciated, and the most important economic driver we have on the planet. And I admire you guys for what you do every day. So thank. 

 

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