Dale Beaumont: So it’s now my pleasure to welcome Jeremy Harbour. Jeremy is a global leader in the field of small business mergers and acquisitions. He’s originally from the UK, but he’s now based here in Singapore. He has investments in 12 different countries, and he has bought and sold now more than 100 businesses, and he has also been an advisor to more than 200 acquisitions over the last 20-plus years. Today he runs a company called The Unity Group of Companies, and also The Harbour Club, and he’s now listed a number of companies on various stock exchanges around the world, including the Nasdaq in New York, also the UK stock exchange, and one of the biggest stock exchanges in Europe, which is based out of Frankfurt.
Dale Beaumont: So he’s going to be talking about how to grow shareholder value in your business, basically how to build a business that one day someone is going to come along and want to buy, and so how do you create a business that is going to be worth a lot of money? So we’re going to be talking about how to build shareholder value, how to build a saleable asset, but we’re also going to talk about another strategy as well, which is how to grow your business through acquisition.
Dale Beaumont: And the reason why this is so exciting is we’re about to go through, over the next 10 to 15 years, the biggest transfer of wealth in the history of the world, and that is because a lot of the wealth is now held by the baby boomers, and many of the baby boomers will be selling off a lot of their assets to fund their retirement, and many of these are actually business owners that will be selling their business in the next 10 to 15 years. So there’s a huge opportunity for you to be able to potentially buy some of these businesses, and maybe even bolt them onto yours to grow a much larger business without having to invest a huge amount of your own money, so that’s some of the strategies that we’re going to be diving into in this presentation.
Dale Beaumont: Now, our speaker has also generously put together a 30-page report that covers a lot of the strategies that he’s going to be talking about today in more detail. If you write down the URL that’s on your screen right now, you’ll be able to go straight to this particular report where you can download it for free. So this is the report, or otherwise later on Jeremy’s going to give you the email address for one of his team members, and you can also email them to get a copy. And there’s also a book that Jeremy has as well, you can find it on Amazon, it’s called Agglomeration, and that book, he’s actually giving everyone a free copy of that book in digital form. All you’ve got to do is just send an email to his office as well and they’ll send that through to you, so already giving huge value.
Dale Beaumont: Another thing about Jeremy as well, coming from the UK, he’s also been invited to Buckingham Palace, and also the British Houses of Parliament to advise on business and enterprise, so it’s great that he is here sharing with us some awesome content about how we can create more shareholder value in our business. Can you please give a huge round of applause to Jeremy Harbour?
Thank you.
Jeremy Harbour: [inaudible 00:03:50], that was great introduction, thank you. Thank you very much, just check the microphone is working. So yeah, my name is Jeremy Harbour, as you’ve just heard, and I am literally the only thing standing between you and your lunch, so I know I have to keep you very entertained for 45 minutes, otherwise you’re going to be throwing stuff at me. So I just really want to get started on this idea of thinking about shareholder value in the first place, because as an entrepreneur you tend to get very stuck in the kind of nitty-gritty of running your business, and most people think about business through the lens of startup, and obviously startup is all about that kind of blood, sweat and years, the stuff you really have to invest to get started.
Jeremy Harbour: And me growing up, I mean, when I was 14 years old… I was the annoying kid at school that was always trying to sell you stuff, by the way, if you had one of those, and I just saw school as a kind of captive marketplace to sell shit to rather than… The education just got in the way. And I started a business at 15 that I actually left school to pursue, and that business ultimately failed, but I then started another company, a telecoms company, and everything I’d kind of read, every book I’d read, every seminar I’d been to, every… Back then it wasn’t videos, but the tapes you’d listen to that you got from Nightingale-Conant and all these kind of guys, these all seemed to reinforce this idea that you start a business, then you work really hard, and if you can work harder than everybody else, you can be more successful, and it was putting in…
Jeremy Harbour: You know, getting up at 6:00, going to bed at 10:00, working on Saturdays,working on Sundays, work harder, harder, harder, harder. Every one of my kind of perceived icons, or the people I looked up to at that time, so when I was growing up as a kid it was kind of Richard Branson and Anita Roddick in the UK were the kind of… The go-to entrepreneurial inspirational leaders of their time, and I looked at them through that paradigm of starting a business and working really hard, and really felt that that was what they did.
Jeremy Harbour: And what was really interesting was the… I kind of later found out that actually all the wealth creation that goes on with those people happens through doing deals, not through running businesses. So Richard Branson, in one of his books, basically admits that he was insolvent until he sold Virgin Music to EMI. Until that deal happened he could’ve gone bust at any minute, and that whole period where I was reading about him and looking up to him, he was basically living as hand-to-mouth as a normal entrepreneur, his just… His problems had a few more zeroes on them at the time, so… And the same with Anita Roddick, it was the deal to sell or list Body Shop that actually was transformational for her wealth as well.
Jeremy Harbour: So, running a telecoms company was my next venture, and I started it in my very early 20s, I was about 20 or 21 when I started it. And the interesting thing, telecoms is… A, it’s a really stupid business to start with no money, and I started it with no money, it’s very capital intensive to grow, but what’s also interesting is when you get to a certain scale, it’s very acquisitive. So as soon as I got to around £1 million of revenue, which was in a couple of years or so, I had lots of other telecoms companies trying to buy me. And the reason they’re all trying you buy you is because two telecoms companies has everything duplicated within them, so if you think about it, one telecoms company could bill all of the clients of two telecoms companies without having two offices, two CEOs, two CFOs, two lots of everything, so the incremental impact of adding another telecoms company’s customer base to your business would be huge.
Jeremy Harbour: And so consequently my weeks were always punctuated with meetings with other telecoms companies that were trying to buy me, and I always preferred having meetings to doing work anyway, so I used to say yes to all of these meetings. And that was actually a great education, because I ended up meeting about 20 of them, and having all these different pitches, and that’s what they were, these weren’t… It wasn’t a procurement process, it was them pitching me on joining their company by effectively selling my business to them. And quite often they would focus on solving problems that I hadn’t even really thought about, or hadn’t thought about this as being a solution for, so they were quite cleverly-structured deals.
Jeremy Harbour: But what I noticed after having a number of these meetings is the one thing they all had in common is that they weren’t going to give me any of their money up front, so all of these transactions were carefully crafted to have the minimum amount of financial exposure for the buyer as possible. And that was really interesting, because I think if I’d just met one or two of them, I probably would’ve been caught in a position where I’m choosing between one of those two deals, but because I kind of overfed on the idea, I started to get the analysis paralysis, and that analysis made me drill down into what they were sort of up to. And that kind of made me think, “Well, hang on a second, I haven’t got any money. Maybe I should be the buyer, not the seller, because I could put one of these kind of deals together.”
Jeremy Harbour: And again, that was kind of maybe naïve bravado, because I was only a… You know, practically still a teenager and still trying to figure out how everything works. Although actually, when you’re a teenager, that’s the one time in life where you think you really do know how everything works, but… And then so basically I decided to… Instead of going out to meetings as a guy that runs a telecoms company who’s looking for clients, I would go to meetings as a telecoms company that’s looking to acquire another telecoms company, and this is just a really interesting shift. You know that whole, “The quality of your questions dictate the quality of your answers,” so what you say really has a massive impact on the information you get back from people?
Jeremy Harbour: A really incredible thing happened when I started saying that I’m a telecoms company looking to buy another telecoms company. I immediately elevated myself in the opinions of anybody that I met. I used to go to a lot of these networking meetings, you know the breakfast meetings where everybody stands up for a minute and says what they do, and then everybody exchanges leads? For me, they were really easy to get business, because everybody uses a telephone and I’m selling telephones, it’s kind of like a really… It was a really straightforward thing to do.
Jeremy Harbour: So I would go along to these networking meetings basically as a hunter. I would be looking for my next client, I would look at everybody and think, “How many phones have they got? How much do they spend on their phone bill? What can I get from this person?” I was literally in there as a fucking glorified salesperson really, I wasn’t… I positioned myself as an entrepreneur, but actually I was just a glorified salesperson going out and winning new business, and if I didn’t win new business, the company didn’t have that much new business without me doing that.
Jeremy Harbour: So what was really interesting is when I went to those same meetings and said, “I’m a telecoms company looking to acquire other telecoms companies,” straight away for a start they’ll talk to you, you’re not mercenary anymore, and they’re not trying to find excuses not to talk to you. But then all sorts of other
opportunities and other things came out of those conversations. I actually ended up going to… It was actually a… This wasn’t one of those business meetings, it was a fundraising thing for a charity, for The Prince’s Trust, which I was a volunteer for, and at this fundraiser happened to be the CEO of Costco. Now, I think you have Costco in Australia now, back then you didn’t, but Costco is a 55… Or it was, it’s probably a lot more now, $55 billion business, they have these stores all over the place, if you’ve… If you’re not familiar with it, if you go
to someone’s house and they have a bottle of ketchup the size of a two-year-old child, they shop at Costco.
Jeremy Harbour: So basically, met the CEO of Costco, and gave the line, “I have a telecoms company, and I’m looking to acquire other telecoms companies,” and his reply was, “We’re having loads of problems with Vodafone and Orange,” being two major networks in the UK, and I said, “Okay, what are the problems with them?” And they said, “Well, we want to open a store within store in Costco selling mobile phones, and we want it to undercut the high street because that’s our commitment to all of our members, and Vodafone and Orange refuse to do that under their own brand.” And I went, “Fuck it, I’ll do it.”
Jeremy Harbour: So a week later, we… Literally a week later, we have a pilot store open in one of these Costcos. Four weeks later, we have five pilot stores open in Costco, and we then go through the procurement process to open up in all 22 stores as they had in the UK at that time, a £6 million contract to open these stores in Costco. And basically he comes back to me and he says, “Okay, our procurement department has drawn up the documents, but we can’t find your company. The only company we can find called Unity is this little £1 million turnover telecoms company in Watford.” [inaudible 00:12:28] “Yeah, that’s us.” So had we gone through the traditional procurement route, we wouldn’t have even got in the front door, but because I met them and was speaking in a way that made me look bigger, in a way that was more strategic, that we’re looking to do
acquisitions, I was automatically looked at through a different lens.
Jeremy Harbour: And that’s really interesting, because effectively that conversation was a shareholder value conversation instead of a customer value conversation, and I think it’s really easy… You know, if you ask any mature entrepreneur, “What’s the worst thing about business?” It’s staff and customers, isn’t it? So basically
the concept of shareholder value is getting away from the staff and customers bit of business, because it’s… Customer value creation is really important, it’s… It needs to be done at the startup phase. Once it’s been done, the entrepreneur needs to move into a role that is more strategic.
Jeremy Harbour: Once you’ve got the sales and the marketing and that stuff working, they are jobs that can be done by people that can continue to evolve and develop and refine those strategies. As an entrepreneur, you shouldn’t be stuck in doing that stuff forever, and most entrepreneurs do get stuck doing that stuff forever, but a few of them manage to transition and go up the ladder the next step and look at creating shareholder value, creating real wealth for them and for their family, and becoming non-executive.
Jeremy Harbour: So you’ve probably heard that expression, “Working on your business instead of in your business,” which is a lovely expression, but very hard to articulate into exactly what that means for a business owner who is caught up in this whirlwind of just doing everything that the business needs to do. And the way I describe
shareholder value, by the way, is that your day should consist of talking to people about mergers, about acquisitions, about exits, or about joint ventures. They should be the only four conversations you’re having on a daily basis. That’smergers, acquisitions, joint ventures and exits. If you’re talking about anything else, you’re probably still stuck in the customer value or the working in the business type of stuff.
Jeremy Harbour:So that was a really interesting experience, the fact that just by changing the conversation you get this elevated stuff. And then more by luck than judgment, but then luck is… You know, luck came about because I was looking for it, I managed to find a little mobile phone business, and it was a company called Mobile Business Solutions, and it was in a small shithole in England called Slough, which anyone who knows England will know. It’s a smell on the motorway just coming out of London, and… But basically, it was near this really big industrial estate, it’s the largest industrial estate in Europe actually, the Slough Trading Estate, and so it captured a lot of the business customers that were on that trading estate just by being the closest mobile phone shop to this estate.
Jeremy Harbour: The business had been going for 13 years. It was a kind of marginal business, he was doing 150 grand a year, probably making 12 grand a year in net profit, but he had a few kind of things conspiring against him. The first one was his lease was expiring on his property, and it was literally about to be bulldozed and turned into apartments, and the cost of moving to another little retail outlet up the road from him, he’d figured out would cost him about 70 grand. So he’d already been running it for 13 years, he was already pissed off with it, he had the seven year itch two times over, he was sitting in a little mobile phone shop all day, didn’t really like that, and he was being faced with a kind of breakeven point of another five or six years of sitting in a little shop, so that wasn’t terribly inspiring for him.
Jeremy Harbour: Coupled with that, he had lots of supplier frustrations, just things that were driving him nuts with the company that he was connecting his phones to, and the other thing was he had shiny new thing syndrome, which is very common with entrepreneurs, which is the other thing that they want to go and do
instead of the thing that they’re doing right now. And the shiny new thing syndrome for him was just doing some property development stuff that he was doing on the side, that if he could apply himself full-time to he could make loads more money.
Jeremy Harbour: And that’s a really interesting one, because in a way he was only still in that business because of the time he’d invested. You know the good money after bad principle? The same thing happens with time, so the only reason he continued with the business is because he’s done it for 13 years, so he was
throwing good time after time, that’s even worse than good money after bad money, isn’t it? Because it’s the one thing they’re not making anymore, you can’t get it back again.
Jeremy Harbour: But it’s a really common human kind of instinct to say, “Well, I’ve done this for so long, I’ve got to get something out of it.” Well, the something out of it would’ve been locking the doors and having the freedom to go and do something else, but in his mind he wanted to… I think he wanted to go downthe pub and tell people he’d sold it. I think that was… You know, regardless of price, that was the story he wanted to attach to that 13 years of his life, and that’s really important, is giving people the story they can tell.
Jeremy Harbour: But anyway, I didn’t know what the fuck I was doing, so I used to corner lawyers in networking meetings and say, “How do you buy a company? What are the documents you fill out? How do you transfer the shares?” Like literally, “What is the process of buying a company?” I couldn’t afford a lawyer, couldn’t afford an accountant. Basically, I managed to come up with a deal structure with him that would be 15 grand for the whole business. So it had about 1,000 active handsets, which was about what we would connect in a year, so it was really… A really important deal to us, but I didn’t have 15 grand. I had literally rinsed every single possible opportunity growing this telecoms business. I was robbing Peter and not paying Paul, and there was no way I was going to…
Jeremy Harbour: In fact, I think that month I had a choice of paying my staff or my credit cards, there wasn’t the option to give 15 grand to this guy. So basically, I put a deal structure to him which was, “How about nothing up front, how about $1 down to complete the contract, and I’ll pay you as I migrate the customers over to my platform, once we’ve got them to re-sign effectively onto our contracts?” And basically, this I think was about five or six weeks out from bulldozer time, and as we got… As the bulldozers got closer, the amount of money up front came down and down and down and down, and it got to two and a half grand up front, and I couldn’t even lay my hands on two and a half grand, and so my deal had to be nothing.
Jeremy Harbour: You know, I sometimes give these kind of speeches and people go, “How do you buy a company without any money up front?” I said, “It’s really easy, just start with no money and go try buy a company.” Necessity is the mother of invention. But this one was just very, very simplistic, that it… It literally came to the last day and we signed a letter between us, I loaded all of the stock into a van and drove back to my office, and I was the proud owner of this business for £1 down basically, and this just…
Jeremy Harbour: I remember, I can feel it now actually, the visceral feeling of driving back from that meeting, and just the hairs on the back of my neck standing up with excitement because I’d found a fucking loophole, I’d found a gap. I’d grown by a year’s worth of sales in an afternoon without any risk, any capital commitment, no sales, no marketing, no learning how to do stuff, no trial and error kind of around marketing campaigns and things like that, and we just added a year’s worth of sales in an afternoon. And it was like an epiphany. It was like somebody showed me you don’t have to run the marathon, you don’t have to do that blood, sweat and years, you can just run the last 10 yards and they still give you a medal. It was kind of like, “Wow. All that shit I’ve been doing, I just don’t need to do it again,” and it was… It really was just an overwhelming epiphany, and it challenged a paradigm that I’d held really dear, which is that you have to start a business and work really, really hard.
Jeremy Harbour: And actually, funnily enough, then when I read the same books, the same tapes, the same seminars, I realized all those people made money doing deals, I’d just been looking at it through a different lens. You know you normally just listen to stuff and make it reinforce your own beliefs? So your brain automatically deletes anything that doesn’t match with what your beliefs are, and then you just, yeah, fill it in. So literally you read all those stories again, you realize every successful person ever has made their money doing deals, whether that’s selling a company, listing a company, buying a competitor, some sort of transaction like that has been the game-changer in their personal wealth in almost every situation that you come across.
Jeremy Harbour: So the really funny thing was, after I’d done that deal, I was just full of the joys of spring. It’s kind of like breaking your virginity, you know? You’re like, suddenly like “Right, how do I do that again?” And so I was just like, tuned in obsessive on this stuff, I wanted to find that next deal, and I went back to my little board of directors at the telecoms company all excited, saying, “Hey, hey, hey, we can just buy companies, we don’t need to start them, we don’t need to grow them, we don’t need to do sales and marketing. We could buy anything, we could buy a pub.” And they go, “Whoa, whoa, Jeremy, now calm down, calm down. Let’s just stick to telecoms… We’re a telecoms company, let’s just stick to telecoms companies.”
Jeremy Harbour: And I go, “Yeah, but what if I found something and it’s opportunistic? We could just do it, couldn’t we?” And they’re like… Anyway, lots of negotiation later, it came down to you could do a telecoms company or maybe an IT business, because IT and telecoms were converging at the time. BlackBerry had just come out, so we were spending a lot on server installations. We did our own billing in-house, so we sent bills to our customers, that’s a very IT-intensive activity, so our outsourced IT costs were going up every month. So we felt, “Okay, a telecoms company or an IT company.”
Jeremy Harbour: Literally two weeks later, we’re doing job… I say “We’re doing job interviews,” I’m doing job interviews, but I’m not allowed to interview people because I just talk at them for two hours and then offer them the job. So the Ops Director’s sitting with me to make sure that some questions get asked during the interview process, and I’ve got this resume in front of me, CV in front of me, and it’s a guy called Gary Harmon, and his current place of work is Harmon IT Solutions, it’s an eponymous company name. And I just say, “What’s Harmon IT Solutions?” And he goes, “It’s a small IT company, there’s me plus two engineers, we do network support and server installations.” I’m like, “Fuck, this is cool. Why are you applying for a job, Gary?”
Jeremy Harbour: And he goes, “Well, so my wife’s pregnant, so the room I call the office, she calls the nursery, and basically she would like me to be home on time every day, because sometimes we do overnight installations because for servers and stuff like that it’s better to do it when there’s nobody in the office. I often pay myself last, because I always pay the engineers on time at the end of the month, and then when we’ve collected some more money and I… I pay myself. And yeah, basically I’m just looking to transition into a normal kind of employment role for when the baby arrives.”
Jeremy Harbour: And I said, “And what are you going to do with the business?” He goes, “I haven’t really decided, I’m either just going to wind it down and close it, or I’m going to give it to the engineers.” And I said, “Okay,” and I said to… Turn round to Ben and say, “Can you believe this?” And I go, “Gary, can you give us a minute?” And so he leaves the room, and I turn round to the Ops Director and go, “Fuck me, can you believe that? It just walked in here.” And Ben, the Ops Director, goes “Yeah, he’d make a great Account Manager.”
Jeremy Harbour: And it was then I realized, I’m the only person listening through these… I’m tuned into Deal FM, like absolutely everything for me now is a deal. No one else is fucking seeing this stuff, and it was really weird, really weird for me. So I guess a lesson for you guys is that there are these kind of deals everywhere, they’re in conversations you’re already having, but you’re not positioning yourself in the right way in the conversation to attract them. So talking about looking for acquisitions, that’s kind of the first step, because that opens doors to, like I say, way more interesting conversations. And yeah, there are deals everywhere. What was interesting was that deal was literally a few weeks after the first one. I did another one, so the first one was in July, the third one I did was just before Christmas, so in seven months I did… I’d gone from my first deal to three deals, and I guess if you’re using that virginity analogy I became quite promiscuous at this point.
Jeremy Harbour: And I ended up doing 12 deals over the next 18 months, so I took my £1 million telecoms company… Obviously we had the Costco contract kicking into this a bit as well, but we had a £1 million telecoms contract at the beginning… Company at the beginning of that 18 months, and at the end we have £13.5 million in revenue, 12 companies, and 135 staff all bought with no money down, and mostly profitable operating businesses. I was in my… What I call my empirebuilding phase, and I literally just bolted stuff on. My goal was I’m going to take a little bit of cash out of every single business every month and build my income up.
Jeremy Harbour: And that’s a wonderful idea in theory, but income is… Well, income normally is about 20% less than you spend, so growing your income has wonderful impact on your lifestyle, but it doesn’t create any wealth. And basically I also learnt a valuable lesson, which is the only thing worse than running one shit business is running 12 shit businesses, because the staff and the customers and everything else is really multiplied up, and you really are… You know, I had a beautiful car, beautiful house, all that kind of stuff, but I was just… Well, I had a 250… Bearing in mind I’d never had 250 grand in my bank account in my life at that point at one time, I now had a 250 grand a month payroll, so every month 250 grand would go missing from my account, and that four weeks would take… It would seem awfully close to have to get it all back in again, so it was just a baptism of fire in terms of understanding everything.
Jeremy Harbour: So I got to that point, and I kind of thought, “Okay, look, the telecoms company… Because I’ve been busy buying all this other stuff, the telecoms company, I’m going to sell it. We’ve done this little bump up in revenue because of the Costco contract, but it’s now pretty stable. Let’s sell the stable one.” But I’ve got this other business, it was a contact center business that I bought, and basically it had a three-year contract with the world’s largest insurance company at the time, and it was just spitting off cash, so it was doing… In the last quarter it had done £200,000, so $350,000 Aussie dollars of net profit, net cash in a quarter, from this one business, so it was my cash cow, it was the one that bought me the Christmas cars and things like that.
Jeremy Harbour: So this was the one that I said, “Okay, I’ll keep the cash cow, because that’s got the big contract and everything else, and I will sell the business that’s kind of plateauing.” The sale of the telecoms company took roughly nine months, I sold it in June of 2006 and immediately bought a 56-foot boat, which everybody told me not to. The call center business went bust. The world’s largest insurance company was AIG. And what was really interesting about that is the reason I didn’t sell the call center is because it had a three-year contract with the world’s largest insurance company. The reason I should’ve sold the call center is because it had a three-year contract with the world’s largest insurance company. The right time to sell a business is now. You create a capital event when you sell a business.
Jeremy Harbour: You’ve probably all read The 4-Hour Workweek with Tim Ferriss, where he talks about these mini-retirements, these sabbaticals. What he’s talking about there is kind of a time management thing, which is instead of waiting until the end of your life and retiring, take these mini-retirements throughout your life where you kind of recharge, re-energize, and then come back to stuff with a fresh pair of eyes. I believe in these mini capital events, so instead of working on a business for 50 years and hoping to sell it for a shit ton of money just before you die, why not sell businesses really often and make mini capital events along the way?
Jeremy Harbour: Because a mini capital event can provide you with a surprising amount of passive income, and I don’t mean passive income that these bollocks internet companies people try and sell you, they’ve bastardized that term. Real passive income follows assets, so deploying capital into assets generates real passive income, and it’s surprising how much you can get from a relatively small amount of actual capital. You know, a half a million in capital can quite comfortably generate you 100 to 150 grand a year of passive income in a relatively safely-deployed way. That frees you up massively to move onto more deals and more acquisitions and more capital events, rather than starving for 20 years hoping you get a sale.
Jeremy Harbour: And here’s the other thing, the first time you sell a company, you will definitely fuck it up. You think how much it took you to learn how to sell a product, you’ve got to do all that learning when it comes to selling companies, so rather than wait for 50 years and then stick the fucking lot on black and spin the wheel, why not try and get some experience of doing that along the way so when you do have a big deal, you’re the smartest guy in the room when it comes to doing that deal? Get experience, just like you would get experience in anything else, so have those multiple capital events along the way.
Jeremy Harbour: So this was my epiphany kind of 2.0, that you don’t make money running businesses, you make money when you sell businesses. You create those capital events that give you the passive income. When you can live off the passive income from your investments, then you can invest everything you earn, and that’s when the kind of game-changer of wealth happens. So you have these wealth gurus that stand up and say you need to save 10% or 15%, or this has to go in a rainy day bucket, and this one has to go in a cloudy day bucket, and this one has to go in a… Whatever.
Jeremy Harbour: Fuck all that. The only way you’re really going to get any real money is to save every dollar that you’re earning, and the only way you can save every dollar that you’re earning is to live off the income from your investments, so you have to get to that tipping point where the income from your investments pays for everything, and I think the only way to do that is to create these capital events through buying and selling businesses, or selling an existing business to give you that capital event. Does that make sense?
Jeremy Harbour: So yeah, entrepreneurs get stuck in this whole idea of customer value, so you really need to move to… Yeah, I mentioned mergers, acquisitions, JVs, exits, the possible other one is financial engineering. Now, I don’t mean financial engineering in the kind of quantitative analysis description of the word, I mean the things that you can do to rejig your balance sheet or change the way your business is presented to make it more attractive to potential buyers and things like that.
Jeremy Harbour: The other really important thing if you’re running a business is you have to succession plan, you have to get out of your business. So it’s very easy for me to stand here and say, “You need to be working on your business, you need to think like a shareholder.” Well, how do you do that? Because succession planning is really, really hard. I tried to do it in the telecoms company employing an MD, and you still end up having to do most of the work because the challenge with most entrepreneurial businesses is that the guy running it is doing… Or the girl running it is doing the jobs of three people for the salary of half a person, and it’s very hard to get someone else to come in and actually do that. Plus, if you get resumes from a bunch of people who want to be MD, I’ve never read a bad one, they all look great. How do you tell who is going to be good? In fact, if they’re available, it’s probably because they’re not very good, so it’s really hard to identify.
Jeremy Harbour: So very simply, my advice in that situation is to look at a merger as a way of succession planning. So what I mean by that is I think the way to find somebody who would be really good at running a business that looks like yours would be to find someone who’s running a business that looks like yours. So find a competitor that’s already in a similar space, or has a similar kind of operational model in their business, and merge with them. Now, the great thing about mergers is they nearly always fall down on ego. Who’s going to run the thing? Everybody thinks being the CEO is winning, so the great thing is you can let them believe that you really want to be the CEO, but at the last minute you capitulate, they’re the CEO, you’re the non-exec director, and they have to get you the KPIs every Friday by 12 o’clock, because you’re pissed by the afternoon, so you want them early.
Jeremy Harbour: So basically, using a merger to succession plan, effectively by bringing the two companies together you get a leadership team that already understand how to build that business, you end up with a bigger business, so you put two $1 million companies together, you’ve got a $2 million company, and you’ve got a team to run it. You can then become non-executive, and you can focus on the mergers, the acquisitions, the joint ventures and the exits, you can go out and sell it. Now, what typically happens… So I had somebody who came through my Harbour Club program and I explained this to them, they found a great merger partner. they found a merger partner over in the US that had a huge database and they were able to launch their business in the US and massively grow it, but they took the CEO role, and the other guy went and sat on the beach and drank mojitos and got his KPIs every Friday.
Jeremy Harbour: What happened was Lloyds Development Capital, which is a big VC over in the UK, came and offered him £18 million for the business. And do you know what the deal structure was? The merger, by the way, was 50-50, and do you know what the deal structure was? The deal structure was £9 million of cash to the guy sitting on the beach, and £9 million in shares vested after five years for the CEO. The entrepreneur always gets fucked, so you want to make sure you’re not in the business at the point when you’re selling to a VC, a private equity company, or anyone like that. They will always get you at the end, so make sure you’re non-executive in the business that you’re trying to sell. And like I say, the easiest way to… I hope I’m not swearing too much, by the way. If anyone’s offended, I apologize. It’s only when I’m very passionate about something.
Jeremy Harbour: So yeah, you need to make sure that you’ve transitioned out of the business and that you really are focused on shareholder value, so that when you do sell to people you can genuinely sell it with them… Sell it to them without you being involved in the longer-term story, or being tied into the kind of earnouts and things like that, so mergers are a great way of getting this quick scale without cash. Also widens you up to much wider audience of buyers, big is beautiful, the bigger the company, the easier it is to sell as a general rule.
Jeremy Harbour: If nobody understands what the concept of a merger is, because people often get bogged down in the complexity of, “Well how do the two…” You know, “Do we all move into the office and do we have the same…” All a merger is is a change in shareholder, so effectively in simplest terms, if you had those two $1 million companies that I’m talking about, and both parties would like to merge on equal terms, you would create an SPV, which is a special purpose vehicle, it’s just a limited company that does nothing, it’s just a shell company, and you would simply swap your shares into the SPV.
Jeremy Harbour: So instead of me owning one company and you owning one company, the SPV would be 50-50 between us and each company would have 100% ownership by the SPV, so it just creates a little group structure, so actually the next day after a merger when you wake up, nothing has changed. Everything is the same, the same bank accounts, the same operations, the same customers, same reporting, everything. The only thing that changes is that the new holding company will report a consolidated financial position, so it will add up the two balance sheets and profit and losses of those two companies, add them together, and that will be the profit and loss and balance sheet of the top company, a consolidated set of accounts, so effectively your two $1 million companies become one $2 million company that has two subsidiaries. That’s it in its simplest form, but then obviously you want to then use the succession planning, which means that you would give them some managerial control over the other company, maybe as a director or maybe just as a relationship that they have to control certain things.
Jeremy Harbour: So that’s all a merger is, to try and just understand it in its simplest terms, so it’s a great way to create succession planning, and it’s a great way to scale a business that you already have very quickly, and then you can use acquisitions to grow quicker. So, there are lots of different ways you can acquire competitors. You can look at distressed opportunities, so distressed companies you can often buy 100% of the share capital for a dollar, so we call that deal the hospital pass, so the… You’re Australian, so you know what rugby is, which is great, so… In America they just look at me blankly, but the hospital pass, as you know, is where you give the ball to someone just as they’re about to be tackled so that they get smashed.
Jeremy Harbour: The hospital pass in business terms is where somebody’s literally about to close the doors and send everybody home. You buy 100% of the share capital for a dollar, you then basically remove all of the good assets from that company into a NewCo. Never put it into your business, by the way, it always goes into one of these SPVs, a separate standalone business. You would put the good assets into there, and you would then have the benefit of using those assets. You also have different roll-up strategies that you can adopt, I’ll come onto one of those in a minute, which is where you can effectively acquire lots of businesses in the same sector to help you grow.
Jeremy Harbour: So, I’ve given you some… That PDF report that was on the link at the beginning, I’ve given you some ideas on how you can position yourself to get deals, a sort of deal structure you can use to give you a no money down transaction, smart ways that you can look at exiting a business, and just a few other bits and pieces in there that hopefully you’ll find useful around that topic. The next thing kind of that leads onto that is really just a massive problem globally for small businesses, and actually it’s exacerbated where you guys are from in New Zealand and Australia, but basically I mean, this is huge in New Zealand, Australia, Singapore, mainland Europe, UK, Canada, USA. Basically the small businesses, and we had the speaker before talking about how many SMEs there were in the world, here’s some really interesting statistics around that as well just to go deeper on that topic.
Jeremy Harbour: Do you know that in Australia, 50% of your GDP comes from small to medium-sized businesses? It’s about the same in New Zealand, and it’s about the same here in Singapore, so half the economy is driven by companies that employ less than 200 people, and in Australia there’s a slight mining weighting, so about 90% of your private sector workers work in small to medium-sized businesses, but here in Singapore it’s 98.5%. 98.5% of private sector employees are working in companies that employ less than 200 people, so they are the absolute engine of the economy in Australia, in New Zealand, in Singapore, in all of those mature economies. Those economies are driven, all the taxes paid, all the people are employed and everything by these small to medium-sized businesses, and yet they get a really raw end of the deal.
Jeremy Harbour: Basically they can’t borrow money from a bank unless they bet their house. They can’t get money from a VC unless their growth curve would give you a nosebleed. They can’t get money from a PE firm unless they have an enterprise value in excess of 100 million, that’s roughly where private equity is kicking in nowadays. They can’t fight on an even playing field with their competitors, because if you open up next to a Starbucks, you can’t license your intellectual property in the Dutch Antilles and buy your cups from the Cook Islands, you just have to pay your taxes and employ people in the normal way, so you don’t really have this level playing field with the larger competitors either, so it’s a really difficult landscape for SMEs to survive in.
Jeremy Harbour: And what I find really frustrating is that there is actually tons and tons of money in the world. I actually live… When I’m in Singapore, I live in the CBD, so I’m right in the central business district, and I’m surrounded by about a… Within a 100 meters radius of my house, you’ve got about $150 billion of cash sitting in bank accounts, waiting to be deployed into deals. They call it the dry powder, the private equity dry powder. Globally, private equity’s sitting on over a trillion dollars in cash to go into businesses, but they have a zero asset allocation to small business, and small business is half the economy, and I just see that as being a massive, massive problem.
Jeremy Harbour: In fact, if you look at where money is being deployed, you’ll find that it’s being deployed in equities, there’s about $30 trillion globally that goes into publicly listed companies. There’s about $180 trillion of debt, so that’s bonds, whether that’s to governments or to businesses. Interestingly, it’s 180 at the moment, I wrote a book which you’ve got the… You’ll get the link to at the end, the PDF copy of it, that was only three years ago and it was 90 then, 90 trillion, it’s gone to 180 now, so it’s doubled since I wrote the book. That might be a problem.
Jeremy Harbour: So basically, that’s a bit of the global economy, the equities and the debt. You then have derivatives, so I’m sure you’re familiar with derivatives, because we had things like the credit default swaps in 2008, kind of made them famous, but derivatives are basically bets on things, they’re synthetic, electronic financial products that are traded between banks, they never touch the general economy, they don’t create jobs, they don’t… Apart from the odd banker. They don’t create any value in society, and yet if you add up the global derivatives trade on an annual basis, it’s about a quadrillion dollars, it’s a one with 16 zeroes. It’s ten times global GDP is in the derivatives space.
Jeremy Harbour: And so I’m looking at this and thinking, why is all the money in the world in bets on stuff, and all the value in the world, creating all these jobs and solving all these problems in all these communities, can’t get a penny? Why is it that value and money has become so disconnected? And actually if you look at it, that’s probably the driver of all this inequality that we see everywhere. You know, when people say that there’s the really rich and the really poor, and it’s really hard to break through, it’s probably because all the money doesn’t get into the general economy, it doesn’t get into people’s hands, it doesn’t touch real people, it swims around between hot sandy countries, so basically we need to get it out of hot sandy places and into small to medium-sized businesses. And actually, I think if you can solve that problem, then you can potentially democratize wealth.
Jeremy Harbour: What’s really interesting is that we’re creating a politics of envy. Every politician that tries to solve this problem tries to solve it by taxing rich people and giving it to poor people, and the problem is that creates a zero-sum game for entrepreneurs, because it’s really fucking hard being an entrepreneur anyway, so 95% chances you’ll lose, and if you have really high tax, if you win, you also lose. It’s not a really great scenario, is it? So the few that actually break through get the shit taxed out of them and have to give all the money back anyway. So it really creates that zero-sum game that doesn’t encourage entrepreneurship, doesn’t create… Doesn’t encourage people to solve the world’s greater… The greater problems, and actually they always point to rich people being the problem, “We just need to tax rich people more, we just need to tax rich people more.”
Jeremy Harbour : I did, just as an exercise, you take the Sunday Times Rich List, it’s the 2,000 richest people in the UK, published every year. You add up the total wealth of the 2,000 richest people, and then you imagine that kind of socialist utopia where you line them all up against a wall and you shoot them all and steal all of their wealth. You would cover the government’s budget for nine months. So literally 100% tax, 100% wealth tax, and you cover the government’s budget for nine months, it’s a piss in the ocean, rich people are not the problem.
Jeremy Harbour: But actually if you look at asset management, so asset managers, you look at the top 200 asset managers in the world, they control $92 trillion of wealth. So the top 200 asset managers hold $92 trillion, and if you look at the pie chart of what they’re investing in, you know, real estate, equities, bonds, derivatives, et cetera, et cetera, zero dollars of that $92 trillion goes into small to medium-sized businesses, and small to medium-sized businesses are half the economy. Why the fuck is $92 trillion not even having an asset allocation to the largest part of our economy? And they claim to be really well-diversified, they’ve got 20 different asset classes they’re investing in, from precious metals, to real estate in China, to all sorts of different things, but nothing into the economy that solves problems and creates jobs. That’s just weird, isn’t it?
Jeremy Harbour: So basically, we looked at this and said, why is that? Why is it that all the money in the world is detached from all the value creation that’s going on in the world? And it basically boiled down to three key reasons. The first one is small businesses are risky. They are risky as investments. Small businesses go bust more often than big businesses, so risk is one factor. The other one is they lack scale. I call it the scale paradox, because you have to be big to get big. You can’t actually pitch for the big contracts that would be transformational in your growth until you already have the scale to do so. Most procurement policies would say that you can’t give a contract to somebody that’s more than 30% of their revenue, unless Costco think you’re bigger, so basically that keeps businesses sort of an artificial glass ceiling, because what tends to happen is the biggest company wins the contract and it gives the scraps from the table to the people that can actually deliver the work, so it keeps them under this artificial glass ceiling.
Jeremy Harbour: And the final one is liquidity. Investing in small to medium-sized businesses is horribly illiquid. In fact, you’re entrepreneurs, you know the best three to five year plans actually take 10 to 15 years, and in 10 to 15 years politicians have changed, tax laws have changed, everything has changed, so why would you take an investment that you can’t get your money back for 15 years? And that’s why they love derivatives, derivatives are very liquid. You can invest in the morning and you can sell in the afternoon, so having that liquidity means that they can… You know, if Trump pushes a button or somebody does something stupid, they can move their investments to a different asset class very quickly, so they get that liquidity to get in and out of things as the global economic winds change.
Jeremy Harbour: So basically, I figured that if we could solve the problems of risk, scale and liquidity, we could unlock global capital, we could create an asset class for small business. And so the way we decided to do this, so the way… By the way, the way private equity traditionally has tried to do this is through something called a roll-up, and a roll-up is very simply where you buy lots of companies and you put them all together, and a bunch of teenaged MBAs… They wouldn’t be teenage, but young MBAs, sit there with their spreadsheets and figure out how they’re going to synergize and save as much money as possible and sack as many people as possible, and get it as lean as possible. The problem with small to medium-sized businesses is you can’t really do that, because most of the value in them is in the culture that they’ve created with their staff and with their customers, and that doesn’t homogenize particularly well.
jeremy Harbour: I remember we had two marketing agencies, and one of them supplied Louis Vuitton, and one of them had… You could claim tattoos and hair dye on expenses. It’s a very different kind of client base, those two cultures wouldn’t necessarily merge together in a traditional roll-up sense. So we decided the way to tackle this was to do the roll-up in reverse, so you get a group of entrepreneurs who are successful, profitable, debt-free, well-run businesses, and you have them collectively buy a fully-reporting public company. So effectively, a group of entrepreneur-led businesses collectively buy a public listed company, and they do that by reverse merger, it’s called, which is swapping their shares, their privately-held shares, for public listed shares in that entity.
So what then happens is you have that holding group structure, the hierarchical traditional structure, but it’s controlled by the subsidiaries, because they’re now the majority of the shareholders, so they have the rights to appoint and dismiss the board, take the strategic direction of the business and collaborate together to take it forwards. They’re also all insulated by being standalone limited companies, so if they get into trouble they can close without affecting the whole group.
Jeremy Harbour: So what then happens is you have that holding group structure, the hierarchical traditional structure, but it’s controlled by the subsidiaries, because they’re now the majority of the shareholders, so they have the rights to appoint and dismiss the board, take the strategic direction of the business and collaborate together to take it forwards. They’re also all insulated by being standalone limited companies, so if they get into trouble they can close without affecting the whole group.
Jeremy Harbour: And basically when you put these companies together, you solve the problem of risk because you’re now a diversified portfolio of companies that’s across countries, and territories, and markets, and currencies, and things like that. You have scale, because you can now point to your big balance sheet and profit and loss. Remember, I talked about consolidated accounting, you would have the consolidated picture for the whole group. And you have the liquidity of being a fully-reporting public company, so investors can invest in the morning and divest in the afternoon if they want to.
Jeremy Harbour: So we called that structure agglomeration, and the book that you can get a copy of is called Agglomerate: From Idea to IPO in 12 Months, and it actually covers a case study that didn’t go terribly well, but you learn the most, I think, from the ones that don’t go terribly well. But we listed a company last year in November called MBH Corporation PLC. It was listed on the German main market, which is the Xetra. So most of you have probably heard of the DAX, it’s always on the TV, the DAX is the top 20 shares on the Xetra, so it’s their main board in Frankfurt.
Jeremy Harbour: So we listed the company, it’s a UK PLC listed on the Xetra. It currently has five subsidiary companies underneath it, and we’re adding 15 to 20 new subsidiary companies this year. So I think the market cap today is probably around 50 million, it’ll probably be around half a billion by the time we get to the end of that particular pipeline, and obviously we will keep adding more companies into it, so every time a new company joins, they effectively just swap their private shares for public shares. Private companies are valued at a much lower valuation than public companies, so there’s an immediate increase in earnings per share every time a new company joins. That’s “Fuck off, Jeremy” alarm. So there’s an immediate increase, and it creates value for everybody.
Jeremy Harbour: So if you would like to understand more about the agglomeration strategy, just drop an email to [email protected], and just put “Agglomerate” in the… You can put “Book” if you like in the… If you don’t want to spell “Agglomerate.” Just put “Agglomerate” in the subject title of the email and he’ll send you an electronic copy of the book. You’ve got the link to download the free report, but if you didn’t have a chance to note that down it’s just that [email protected], and just put “Free report” in the subject and he’ll ping that straight back to you. And if you want to follow me on Twitter, I’m JeremyJHarbour, or you can find me on LinkedIn as well. But as I’m out of time, time for questions? Yeah? If there’s anyone that would like to ask anything?
Speaker 3: Thanks Jeremy, that was really informative, having… Running a telco myself.
Jeremy Harbour: Cool.
Speaker 3: Seeing a lot of insight into this. When you’re looking for businesses to buy and
either doing a roll-up or doing an M&A, what are you looking for on the balance
sheet, and assets, liabilities, and directors’ holdings and things like that?
Jeremy Harbour: Yeah, so I mean we have… So when I’m teaching people this stuff we have 12 different deal structures, so what we tend to do is find the business first and then figure out which deal structure would be the right one for that, so you… What that enables you to do is pretty much look at anything, and then if it’s distressed you have a distressed option, if it’s solvent you have some solvent options, or if it’s really highly-performing we have options for that as well.
Jeremy Harbour: Having said that, this is what I teach, not what I do. What I do is I just look for companies that are profitable, debt-free, well run, have very credible management in place, typically have one to five million of EBIT, and pretty much everything else I ignore. That’s just like a really zoned-in sweet spot, I do deals like that very regularly, and they’re great businesses, and I love working with those kind of business owners as well, they’re a lot more stable than the distressed ones that I used to do quite a lot of, so… Hope that answers the question.
Speaker 3: Yeah, thank you.
Dale Beaumont: All right, thank you, and any other questions? Other questions? Opportunity to ask. Okay.
Jeremy Harbour: Cool, that’s nice and easy.
Dale Beaumont: All right, so just wanted to again say big thank you to Jeremy for giving up his time, so let’s give him a big massive round of applause.
Jeremy Harbour: Thank you.
Dale Beaumont: Thanks again.
Jeremy Harbour: [inaudible 00:51:53].
Dale Beaumont: Thank you.
