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Key Factors: Why Business Owners Expect More Than A Business’ Exact Value



In this episode of The Deal Room Podcast, Jon Hemming of Unity Management shares helpful insights that may be particularly relevant to businesses that are looking to sell, brokers who deal with business owners who have high sale value expectations, and accountants who deal with businesses that might be gearing up for sale in the future.  

 We talk about key factors on why business owners have high expectations on the value of their business, and practical tips on getting a business ready for sale. https://itunes.apple.com/us/podcast/the-deal-room/id1267098895

Episode Highlights:

00:02:41 Key factors for why business owners expect more than a business’ exact value

00:04:36 Limitations on business growth

00:07:38 Reasons why businesses find it difficult to sell

00:14:08 Steps to get a business in a sale-ready state

00:20:50 Quick recap


Joanna: Hi, it’s Joanna Oakey here, and welcome back to The Deal Room podcast. Today, we are talking with John Hemming from Unity Management – a company which focuses on advising companies on business growth strategies and improving exit value. John comes from the perspective of having worked with fast growth, high-tech, online, medical, manufacturing, engineering, and service enterprises. 

And in today’s episode, we look at the many angles that may be particularly interesting to businesses that are looking to sell, brokers who have dealt with business owners that might have unrealistic sale expectations, and accountants who deal with businesses that might be gearing up for a sale in the future or who are looking at ways to be more proactive with their clients.

Joanna: Hi John. Welcome along to The Deal Room. We’re really excited to have you along today.

Jon: Thanks Joanna, thanks for having me.

Joanna: Great. Well I wanted to talk to you today because I know you’re a business growth specialist who’s also a broker. I thought it would be really interesting to get your insight from a bit of a different perspective on this area of business sale, and the disappointment that you often see for business owners when they come to this point of sale.

Jon: Yeah well look, business owners often come to us when they have either not got the valuation of the business that they wanted, or they’ve tried to grow and unsuccessfully to build the business they want basically. And yeah it’s often a situation where they spent many years trying to do it and then they’re very upset that it’s not really going to be able to give them the retirement funding that they want.

Joanna: Right. Ok. And why is that? And I think you’re probably talking here about an issue that many brokers probably have to deal with as well – this issue of business owners coming in and thinking that their business has a value that’s much greater than is a realistically achievable value, .you know once you’re out there looking for a buyer. But what’s your feeling for why it is that business owners expect that they’ll receive so much more than they are likely to actually receive?

Key factors why business owners expect more than a business’ exact value

Jon: It really comes down to three or four key things and that is that they haven’t been able to run the business with sustainability of historical earnings and profits, often, they haven’t got the depth of management and the transferability of the management systems and know how within a business’ end. And then also it’s very very hard to predict the future earnings and scalability of the business. So they’re the key things.

Joanna: And just so that we know the sorts of businesses that you’re talking about, what sort of businesses do you mostly deal with and what sort of size do you see that have the greatest risk or issues in terms of clients that come across your books.

John: Look the type of businesses that we deal with, they’re in the two to 20 million revenue turnover space. And they’re from all different industries. But we’ve been lucky to work with a lot of high growth technology in engineering and advanced manufacturing type businesses but a bit invariably they all have different challenges or different life cycles and therefore to work with somebody that has got proven methods for dealing with these issues is a real benefit to them.

Joanna: Okay. Alright so you get these businesses at the point essentially where they’ve decided that they wanted to sell and they’ve been trying to sell for a while through brokers or other people. Is that right? And for whatever reason it’s not happening. Is that sort of an example of the type of business that comes to you?

Jon: Yes that’s right. They’ve either tried to sell and they haven’t got the valuation that they want or they’ve had it on the market and it’s just really falling short or they’ve tried to grow and knowing this is a sort of performance characteristic that they need in the business and just haven’t been able to do it.

Joanna: Yeah, ok. And what’s an example there of someone that’s been trying to grow and then can’t do it in terms of what they are doing wrong.

What characterizes a business that’s trying to grow and can’t grow?

Limitations on business growth

Jon: So there’s a lot of businesses at the moment where globally we’re seeing a lot of limits to growth around finding the right people, internally try capability and capturing IP within the business. So there’s a lot of businesses out there that they really do reach their potential and then without actually putting the right people in business systems in there it’s very difficult for them to to scale up and transfer that knowledge and also capture that knowledge from a succession. You know, even employee share scheme where the directors connect with the business, but it could be just sort of technical or operational level. Or they just haven’t got that knowledge transfer within the businesses. Yeah, not only a limit to growth but quite an operational risk as well.

Joanna: Yeah absolutely. Because obviously a buyer that’s coming into a business wants effectively at some stage generally to be able to take over the business entirely themselves even if they don’t – you know – usually owners are selling because they want out, if they want to leave. But none of this is possible if there’s not an easy transfer of the whole business to someone else. I guess that’s sort of one of the underlying issues isn’t it, for these business owners.

Jon: Yes, that’s right. Yes. So transferability of some of the business and the repeatability of future earnings and then good documentation of databases and business systems, it all goes into capturing business value and increasing that valuation,when they do want to exit.
Joanna: Great. And so what are the recommendations that you give to these businesses. Are there usual recommendations at the point when businesses come to you that you give to them or is it something that’s tailored.

Jon: Yes. All the programs are tailored. We have a process,an approval process obviously that we take the business owners on, but in the first instance we will look at the business model, we validate the business model for today and in the future so that they’re really wrapping their business around a model that is going to deliver the customer service and the revenue and the profit and therefore the valuation of the business at the same time. That’s a really important part of the first step because then they can see that path around – okay, well we’re at five million dollars but we want to turn it into a seven million dollar business. This is the model we need to take. These are the projects and activities that we need to do and then this is how we’re going to really be able to reverse engineer the business at the end of the day.

Joanna: Is that the first step for most businesses that come to you whether or not they’re closer to that two or that 20 million because I guess two to 20 million is a big difference in number. And presumably you see and certainly I see from my perspective the way a two million dollar business and a 20 million dollar business is run are often quite different, right? So I guess when you have these businesses coming to you at the 2 million mark versus the 20 million mark ,what’s the biggest difference in the reasons why they’re finding it difficult to sell, or is it the same reason?

Reasons why businesses find it difficult to sell
Jon: That’s a really good question. I mean often they’re very similar reasons but often I think if I had to say two things it really comes down to – often business culture and the performance culture that’s actually embedded in the business with the people but also the systems and processes that they have today run the business with the people. And I think that’s really key because that then enables the business to scale. But it also is key to capturing the asset. And as we all know, income follows assets and that is very easy for somebody to just do due diligence on the business to say – okay everything’s here that I need to move forward and I can see that I can scale. I can see that the future earnings are going to be sustainable. And they’re very comfortable with it.

Joanna: And so you talk about performance culture. So what’s the example or the type of thing that characterizes an optimum performance culture in an organization? Let’s say an organization that is towards that smaller range in that 2 to 10 million, what’s an ideal performance culture there?
Jon: The key performance culture is really, to simplify, it’s really having people within the business that have a can-do attitude of the business aside from being completely stunned at businesses that are working very hard to do the right thing by the customers. But it’s just constantly falling down that ability to get things done and to remain customer focused. So it is about having the “can do” attitude but remain customer focused as well. But also having great communication. So those three things are really hallmarks of a great performance culture and overarching that obviously is the leadership around that – okay well, where are we going and how are we going to get there and having everyone come together under that.
Joanna: Interesting. So have you got some examples for us? I’m interested to hear about some of these examples of businesses that have come to you with some more stories about trying to sell and having issues. And then perhaps how you’re working with them has put them into the position that then they’ve got a new view on how it is that they’ll eventually be able to exit on their own terms.

Jon: A really great example is an advanced manufacturing robotics company that had a lot of its business I suppose in the old-world economy, and they’re running things really without too much automation but they had a very startling culture. And I think they were really able to connect with their customers. And one of the first things we did was really understand what the customer wanted and then we built the service delivery and the capability of the business around that. And they had a very senior level of staff as well, they had about 30 percent of the staff over the age of 60. And also they had a prior business owner who was still in it and it was really when those older staff members moved through the the business and were able to embrace technology, rebrand the business, reposition it, had this dialogue around being customer focused and really wrapping the business around what the customers want today, it really took off.

Joanna: So it sounds like it’s not necessarily a fast process though – it’s sort of something that obviously takes time.
Jon: That’s right. Look, and with that example, that’s a two year project really. That’s the transformation from an older style business into a business set for the 21st century. And that was for robotics and automation and that sort of thing. But within 12 months you can have a very different business. If the business is change-ready. And it’s a very exciting process.

Joanna: Absolutely. And look, I guess this issue, the whole issue that we’re talking about of business owners spending years and years growing this business finally deciding that they want to sell and then at the end of the day finding that maybe the business isn’t worth what they’d expected it was, is going to become more of an issue as time goes on. Because we’re, I believe, in the next sort of decade going to see a flood of baby boomer businesses being sold. So this will cast business owners at that point into a pot of a larger pool of businesses on the market and potentially less buyers, right? So the time is right now if it’s going to take a while to shape your business properly for the right exit, now’s the right time to start isn’t it?

Jon: That’s exactly right. And look I think if we had to say one thing about this whole process is that businesses have come to us with their father and maybe a father and son team where the father maybe 65, and the time it takes to turn the business around and have it ready for succession and have it future proofed- it’s really too long and often health issues are involved. And given everything that’s happening on the global stage as well, business environments are changing so fast. So part of this process too is around future proofing the business and really getting the opportunity to clear the slate and go okay this is what the business needs to move towards. And obviously with succession in mind but capturing business value, working out what the people coming through the business want and making it happen.

Joanna: Ok, fabulous. And so, do you have any alternative approaches to selling a business that you sometimes recommend?

Jon: Oh look I think the employee share schemes can be very good, as you would know Joanna, setting this up where people coming through, I mean they are the best way to ensure that the culture of the business is maintained often and somebody takes the business over internally. And it can be done in a very fair way over a period of time in a very low risk way for both parties. And everyone knows what’s involved. That’s probably one of the easier approaches.

Joanna: And so do you have any tips for businesses if they’re looking to sell in the next one to five years? What are the top few tips you would give them in terms of the action steps they should be taking now to get their business into a sale ready state.

Steps to get a business on a sale-ready state

Jon: The first step is to get a valuation or an appraisal of the business today around its existing condition and they need to work out the gap – okay well this is actually what we need out of all of this, what we think it’s worth or what we want to build towards. And then once you’ve done that, the really key thing is to validate the business model today and future proof for operating the business today and then to the next three to five years, you can’t really look much further out than that. And then make sure it’s a really customer centric business with the competitive pressures from global markets – the internet, technology, that these are considered. There’s a lot of businesses that are going to kind of come under pressure from technology that we’ve never ever seen the next few years.

Joanna: Yeah absolutely.

Jon: And this is really one of the key things that we do in the strategic planning phase. We look at that, and it can save you an enormous amount of time but also make you an enormous amount of profits as well. Being ahead of the curve, not waiting to then having to react to something. For example, that comes out of left field that you know you haven’t really thought about. 
 
Joanna: And what about for brokers, because we have many brokers who listen into this podcast. Do you have any tips for them in how to deal with businesses that come to them when they can see from the outset, there they’re dealing with a potential seller who has a real gap between their belief of the value of the business and what the broker really knows is the likely value out in the marketplace?

Jon: Yeah. Look I think it’s probably a situation of managing everyone’s expectation and very strong rules of thumb around selling businesses at fair value and I think it’s really around educating the seller around the different ways to value a business. And I suppose that whole rule of thumb at the end of the day,it’s only worth what somebody is willing to pay for it in a certain timeframe right?
Joanna: Absolutely.

Jon: And really just. And that’s where the valuation process around including price sales is so important. And above all the other methods everyone uses price earnings multiples and all sorts of stuff.

Joanna: Yes.

Jon: But the price sales, valuation, and looking at price sales is so important. Yeah that’s probably a really good process for everyone to get a bit of a reality check on that.

Joanna: A reality check. I like that. And look it might be an opportunity as well. We also have a lot of accountants that are listening in to this podcast and I see this as an opportunity for accountants to also add a bit of value in terms of their dealing with their clients as well, right? If they can identify clients that they know are looking to sell in the future and recommend to their clients early enough to go and get the right advice to help with the correct strategies to grow the business in shaping them up for a sale. Then they’re providing the ultimate service for their clients really, aren’t they?

Jon: That’s exactly right. And look, I think it’s important to say, I mean I work with a lot of terrific accountants but there’s a big difference between accountants and the approach that they take in the work that we do. Yeah accountants are very retrospective. They’re often looking backwards on the business, around financial performance and that sort of thing and I’m not saying that’s not important, it is. But we’re very forward looking. And it’s a much different approach.

Joanna: Yeah. It’s about a team approach. I think one of the things in being a trusted adviser for a business whether that’s from an accounting or a consulting perspective or a legal perspective is thinking about your client, and your services to your clients more holistically. And there’s so many things that we can do from a legal perspective to really help build the foundations for businesses well before the time for a sale. You’ve talked about loads of areas that you can work on building the business well before a sale and accountants have their own area that they can work on. And I guess what we need more of ,I believe, is this connection of these different types of professions working on businesses to all help them together in each of our different areas to really build them from each of these different perspectives in time enough before they get to that sale point. That’s my perspective anyway.

Jon: No, absolutely. I couldn’t agree with you more. And because they really all do go hand in glove. That’s exactly right. And when you do find a team of accountants and legal l team and consultants and development and they can all work together, that’s just absolutely fantastic. Yeah, absolutely. 

Jon: No, absolutely. I couldn’t agree with you more. And because they really all do go hand in glove. That’s exactly right. And when you do find a team of accountants and legal l team and consultants and development and they can all work together, that’s just absolutely fantastic. Yeah, absolutely.

Joanna: Yeah. And I mean no one’s more upset than all of us as these professional advisers who work with our businesses as our clients when they come to the point that they’re disappointed about the sale value. And at that point when they’re at the point of sale there’s not a lot that each of us individually or even together can do to push that price. It’s really the skill of the broker and the potential pool of buyers that are out there at that point. But it’s just if we’re able to come in a little bit earlier then I think together we can all really achieve great outcomes for our clients.

Jon: Yeah, no, that’s exactly right. And just avoid the disappointment where they don’t have to make a decision that is less than perfect or it’s a forced sale or.. Yeah that’s exactly right.

Joanna: Exactly. And obviously businesses don’t know what’s going to come at them at any point sometimes, for sales happen don’t they? And they come out of the blue. So I guess even for businesses that aren’t really lining themselves up for the sale in the near future, it’s always a good idea to have a business that is well honed and able to be sold just in case you’re into that environment where a forced sale situation occurs.
Joanna: And some of these perspectives that I talk about with businesses, it sounds like you talk about with businesses as well, are really about growing and getting the business in the right shape that makes it a better business to run, in any event, right? Whether or not businesses are looking at sale in the future or not.

Jon: That’s exactly right. So well said. I mean, I’ve done strategic plans to very good businesses that have implemented everything we talked about and then we ring them three years later and go “are you thinking of selling?” and they go “well we’d love to but it’s profitable, we’re just going to hold on for now”.

Joanna: Love it.

Jon: Another four or five years, you know?

Joanna: That’s great.

Jon: Give us a ring then.

Joanna: Yeah.

Jon: So yeah. No, it’s unbelievable. So that’s the name of the game. And then, you’ve got the options right.

Joanna: Absolutely. It’s all about options.

Jon: Yeah.

Joanna: Great. OK. Wonderful well look. Thank you so much for your time today, Jon. I thought it was really interesting. Hope our listeners found it interesting as well.

Quick Recap

Joanna: Just as a bit of a recap. We were talking today about dealing with the disappointment of businesses at business exit who suddenly find out that their business isn’t worth what they had thought. And we talked about some action points as well as about getting a valuation and understanding the gap about validating the business model, about making sure a business is customer-centric, and making sure it’s ahead of the technology curve. So thanks a lot for coming along. And we look forward to hearing from you later. 
 
Joanna: Well thanks a lot for listening in to The Deal Room podcast today. If you’d like more information about this topic, head over to our website at the dealroompodcast.comwhere you’ll be able to download a transcript of this podcast episode if you’d like to read it in more detail. You’ll also there find details of how to contact Jon at Unity Management, unitymanagement.com.au. There you’ll also find details of how to contact our lawyers at Aspect Legal if you or your clients would like to discuss any legal aspects of a sale or acquisition. We have a number of great services that help businesses both prepare for a sale or acquisition to help them prepare in advance and to get transaction ready and also to help guide them through the sale and acquisitions process once it’s started. We work with clients both big and small and have different types of services depending on the size and complexity. 

So don’t hesitate to book an appointment if you want to find out how we might be able to assist. And finally if you enjoyed what you heard today please pop over to iTunes and leave us a review. And don’t hesitate to also send questions in to us. We love receiving questions from our listeners and love to talk about them on our podcast in the near future. 

Thanks again for listening in. You’ve been listening to The Deal Room Podcast with Joanna Oakey. See you next time.



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