Speaker 1
… the telecoms business I’d founded. Now, telecoms is quite an acquisitive industry. Basically, all of the back office and the business function in the telecoms company is pretty much duplicated in two telcos. So, when you put two of them together, you can effectively get rid of the entire cost phase from one of them. That adds a huge uplift to the profit of the company. So, acquisition is always one of the engines that a telco will use for growth, as well as its organic strategy.
Speaker 1
So, what that meant was that every week I had these people coming in who were pitching me on selling them my business. The pitches were all different and all interesting. Mostly interesting. But the one thing that was really apparent was that none of them really involved giving me any cash up front. So, that kind of got me thinking. At the time, I was running a bootstrap business. I didn’t really have that much cash either. Maybe I should be the buyer instead of the seller. Maybe I should try and put one of these deals together that doesn’t have much cash up front in it. So, I went running around looking for a potential deal. I stumbled across a 13-year-old, small mobile phone business. It had 1,000 active handsets across 600 customers. One of the customers was Nintendo, so it had some nice customers in there, good business clients.
Speaker 1
Basically, he was suffering with some motivations. He had some issues. I put a deal on the table, which involved no money up front, and he said, “No. How about a bit of money up front?” Over time, basically he just got worn down. There came an inflection point where he just couldn’t wait anymore, and he ended up just accepting my offer of no money down. Now, what was really interesting is if I’d had a little bit of money, I would have given it to him, but my choices at that time were pay my credit card bill or pay my staff. I didn’t have this third option of giving this guy a bunch of money for some customers. So, really, necessity was the mother of invention. Necessity was the reason why that deal happened.
Speaker 1
But what it taught me was amazing, because basically it taught me that those deals were possible. We grew by a year’s worth of sales in an afternoon. So, I did no sales and marketing. I took no commercial risk to do it. It completely shattered a paradigm that I had created in my mind about what you had to do in order to be successful. This idea of you have to start a business and work really hard that had just been so ingrained in me like a religion, suddenly I realized that it just wasn’t true.
Speaker 1
In fact, it was kind of like I realized you don’t have to run the marathon; you can just run the last 10 yards and you still get the medal. It was just a complete breakthrough for me. In fact, I bought that business in June and by Christmas we’d done two more deals. In fact, very quickly over a very short space of time, I got up to 12 companies, 135 staff. So, within 18 months, we were at 12 companies, 135 staff, £13.5 million of revenue, a little shy of 20 million U.S. dollars of revenue. It was completely transformative to my career.
Speaker 1
Now, what was really interesting, the lessons after that, was I… it all got a bit overwhelming. 135 staff is 135 problems. I mean, everybody knows that business would be really fun if it wasn’t for staff and customers. I guess my next epiphany was the only thing worse than running one crappy business is running 12 crappy businesses. So, I decided that I might try and sell my telecoms company, the core business. Now, it had grown quite a bit over that period of time, because it had benefited from some of the synergies with the other companies, but it had kind of plateaued and it wasn’t really growing at that point.
Speaker 1
But one of the other companies that I had picked up was a little call center business that, when I bought it, it was doing a million pounds of revenue. It had just won a contract. It was a three-year contract with the world’s largest insurance company, and that contract was spitting off. In its first quarter, it spat off 200,000 of net profit in three months. Like most entrepreneurs do, I figured, “I’ll keep this, because it’s a cash cow. This one is just spitting off money. I’ll keep this one. I’ll sell the one that’s kind of stagnating.”
Speaker 1
The sale process took about nine months, and at the end of that nine months, I got an exit, which was the telecoms business. This was about 2006. I got an exit, which was the telecoms business, and I got an insolvency, which was the call center business. The largest insurance company in the world was AIG Insurance, who famously went bankrupt in 2008, but they got themselves in a whole world of trouble in 2006. In fact, they were almost banned from the UK by the Financial Conduct Authority, or it was the Financial Services Authority it was called back then. But, yeah, they got themselves in a terrible pickle in the UK and that meant that our contract was pretty much worthless.
Speaker 1
So, what was really interesting there… there’s a couple of great lessons that come from that. The first thing it taught me, I guess, was that you make money when you sell. Having that capital event was just another major breakthrough for me, because what I’d done prior to that was acquire these businesses and take an income from each one. So, I was building income and I felt that income was what I needed to create. Actually, what I realized is income is kind of just what you spend. In fact, if you’re like me, income’s like 20% less that you spend. I think it was Oscar Wilde that said, “A man who lives within his means lacks imagination.” So, basically, income is one area.
Speaker 1
When you sell a business, you get this capital. Now, capital can provide true passive income. Look, passive income is a dirty word. It’s really overused. It’s often used by online scammy pitches to get your money off you. Real income follows assets and real assets come from capital events. I guess the big lesson I learned there was I’d always thought I was going to build this telecoms to 50 million or 100 million and then sell it. I guess I’d looked at exits and looked at business in the same way as most people look at a working career. So, most people want to work until they’re 60. Then they retire, and then their life starts and they start to go and try and do all the things they always wanted to do when they were young. I guess in business, people have the same idea, which is they run this business for a really long time, and then they’re going to sell it for some huge amount of money, and then that huge amount, they’re going to use for something.
Speaker 1
That’s an incredibly risky strategy, because, as you know, the economy goes in cycles, you can have a global financial crisis, some big macroeconomic thing. Google could start to do whatever it is that you do for free. There are so many things that can interrupt that plan. Plus, you’ve never sold a business before. You’re probably going to get screwed. You need to learn how to sell businesses. It’s a skill. It’s an art. It’s something you need to get good at. The first time you do it you’ll make a bunch of mistakes, so why would you want to make a bunch of mistakes on your life’s work on this thing that you’ve created? What tends to happen is people panic so much that they surround themselves with these really expensive advisors who just leach off them and charge them a fortune to get their dream deal done.
Speaker 1
So, I guess my epiphanies or my lessons from that would be, when is the right time to sell a business, and the right time to sell a business is now. That call center business, basically, I didn’t sell it, because it had a three-year contract with the world’s largest insurance company. I should have sold it, because it had a three-year contract with the world’s largest insurance company. That would have been something the buyer would love to hear.
Speaker 1
The next thing I learned was that you shouldn’t focus your career or your wealth on a big future win. You should have a series of capital events. These small capital events basically give you enormous financial security. The way I describe it is, before you have a capital event, you’re trying to reverse park your car on a really busy street with cars roaring past, people beeping their horns, buggies and stuff crossing, and distractions everywhere. After your capital event, it’s like reverse parking your car on a totally empty street. There’s no distractions. Everything’s a lot calmer. You can make decisions from a much calmer place. So, it’s kind of like little and often. Have these mini capital events throughout your career. They build your wealth. That builds you a real passive income. That means that your income is now not under any kind of pressure and you can invest stuff a lot more and in a lot smarter ways.
Speaker 1
So, basically, over the years, I started buying and selling lots and lots of companies. In the last 20 years, I’ve probably done 100 deals. Plus now with my own cash, I’ve probably advised on another couple 100 through my network. Back in 2009, I was getting a bit of a reputation for doing these deals without using any cash. People were quite intrigued as to how I did it, particularly competitors of businesses that I’d picked up for effectively no cash. Those competitors were very keen to understand how I had achieved that, particularly as they knew these companies and quite often these companies had tried to sell to them for much, much bigger amounts of money.
Speaker 1
All of these people were offering me consulting deals or non-executive directorships or ways for me to come and work for them, basically, and do what I would do. I just couldn’t understand why on earth I would want to go and work for someone. In 2008, I bought a seminar company. It was about a three-and-a-half million, so five millions U.S., revenue seminar business in the UK. They did these multi-speaker business events a few times a year. After going to one of those events, I thought, “Okay, here’s maybe a solution to this consulting issue. Instead of going to work for someone, how about I just charge a ticket price, teach them everything, and then it’s up to them if they go off and implement it? If they want a joint venture me with me, they can. There’s no compulsion. I can be proud of them if they then go and execute on the information instead of jealous that they’ve stolen my ideas and gone on and done stuff with it.”
Speaker 1
Basically, the next bit was setting up the Harbour Club. In 2009, I did the first-ever Harbour Club. I did four of them in 2009. In fact, we still do about four a year at the moment. The thing that I noticed was that, in 2009, nearly all of my deals came from joint ventures with Harbour Clubbers. So, whilst I’d done it as a little bit of a hobby to deal with these people that wanted me to do consulting, what I realized was how powerful a deal flow generator it can be.
Speaker 1
Now it’s completely transformed. The events are amazing events. We’ve obviously got tons more information that go into them now, because we’ve got so much more deal experience than we had in 2009. The tactics have really been honed down, and the strategies have really been honed down. The 12 no money down strategies that we use for acquiring companies enable you to do everything from distress deals right the way through to the deal that I’m negotiating right now is $7.8 million a year of EBIT. We’ll hopefully have that done in time for the event in Miami so I can use it as a case study. But that’s a no money down acquisition of a company with $7.8 million of profit, and we’re selling it back-to-back. So, the legals for the sale and the purchase are being done at exactly the same time. It’s a seven-figure exit fee.
Speaker 1
So, it’s possible to do very large deals or very small deals and loads of different structures and ways that you can buy and sell companies. It’s really turned into a unique beast. The great thing as well is that it’s just a community. It’s a global community of entrepreneurs who are actively buying and selling businesses, they’re sharing ideas, they’re posting videos on the forum. They’re collaborating together, joint venturing in different geographies and helping people. So, it’s really taken on a fantastic life of its own. We public listed a company back in December called MBH Corporation PLC. We did an IPO of three companies, and then immediately used that as a vehicle to acquire another one. We’re acquiring many more at the moment through that vehicle, using one of the strategies that we teach on the Harbour Club.
Speaker 1
We were able just to reach out to the Harbour Club network to talk about the types of deals that we’re looking for. Literally, you get overwhelmed. I mean, my team here in Singapore is 12 people. We’re now completely jammed up for the next few months doing due diligence and evaluations and dealer analysis on those deals. So, the network is hugely powerful. It’s something you get access to as well, obviously. If you’re looking for a particular vertical or to grow in a particular way, you can just reach out on the forum and you will get tons of stuff coming to you. So, it’s really evolved into something I never imagined it would, but the timing has been impeccable.
Speaker 1
So, that’s basically the thing in a nutshell. There’s a free PDF report, a whitepaper kind of thing that I wrote, which gives you some ideas on structuring deals for no money down and finding opportunities for no money down deals. If you haven’t already read that… I think most of the people on this call probably would have seen that, but if you haven’t seen that already, you can just go to www.HarbourClubUSA.com. Now, I’m a Brit, so I spell Harbour H-A-R-B-O-U-R. So, I have a U in there. I don’t think you normally put that U in there. So, yeah, HarbourClubUSA.com.
Speaker 1
So, let’s tuck straight into some Q&A here, because people have started to put some questions. Let’s have a look. “How do you structure your deals, holdbacks, seller financing, et cetera?” There’s 12 different ways that we structure deals, basically, or 12 different structures that we teach on the Harbour Club. So, within the PDF report, I give one example, which is kind of in the area that you’re talking about, Mark, which is we use something called a deal pie. The deal pie is really just a way of presenting the full value to the business owner but breaking it down into different components. So, that might be a little bit of cash from their own bank. It might be some earnout.
Speaker 1
The difference between earnout and deferral is that deferral is a fixed amount of money over a fixed period of time, sometimes referred to as spend to finance or seller finance or a note. But basically a fixed amount over a fixed period of time. Earnout is linked specifically to a performance. So, the business has to achieve something in order for them to get the money. You might link that to something that you feel is less likely to happen. You can transfer the key suppliers from the business over in order to get commissions back that you can then use as part of the cash component. There’s a whole smorgasbord of things that you can include to do it. That’s one concept. But like I say, we go through 12 different strategies. There’s lots of different ways to structure a deal and get out the other side.
Speaker 1
So, “How does one go from the BIBO strategy to an agglomeration? Is the strategy to go public as the exit plan?” Actually, BIBO and agglomeration are two completely different strategies that we teach on the Harbour Club. They’re both actually unique to the Harbour Club as well. We developed these ourselves. So, the BIBO is what we call a buy-in, buy-out. Buy-in, buy-out basically means that we effectively solve a problem for the entrepreneur and we take a stake in the business. We then add value to the business, and then we sell the whole company together. What tends to happen is we actually tend to sell that stake back to the original owner. So, once we’ve fixed the problem for them, they’re the best buyer, because they probably see more value in their own company than anybody else does. Then basically we structure a loan agreement that enables them to buy us back out using debt.
Speaker 1
So, the advantage of using a loan agreement versus vendor finance is a loan agreement is much easier to enforce. With vendor finance, it’s very easy for the other party to stop paying you and then to kind of argue that the thing wasn’t what you said it was or that there’s something different about it or, “You told me that it was black, and it’s a really dark blue,” kind of argument. With a loan agreement, it’s really simple. You lend them the money; they have to pay you back. So, using a loan agreement instead of a traditional seller finance is a great way to sell them the business back. They can pay for the shares with their own profits, and you’ve created value. That’s BIBO in a nutshell.
Speaker 1
There’s a little bit of nuance to that, and also we cover a lot of stuff as to how you get that stake in the first place. So, how do you take that 20, 30, 40% in the company. By the way, we also have some really cool contract terms, which will enable you to get control of the business for that 20 to 30% stake. So, importantly, you don’t have to get the 51% to control the business. You can get control with a much smaller stake and then, like I say, sell it back to them.
Speaker 1
Agglomeration is effectively… again, it’s a no money down structure, but it’s a way of buying profitable, debt-free, well-run companies and instead of using cash to buy them, you use shares in a public listed entity. We can give you that public listed entity to issue the shares from, or you can do it through an RTO, a reverse takeover. So, finding a listed shell or a small public company that you can use as the vehicle for doing the acquisition. Or you can do your own public offering, but obviously doing your own public offering is not a great no money down strategy. In fact, it’s quite a bit of money down to get a company listed, but we have some strategies for you to do that without having to put the money down up front.
Speaker 1
Interesting you mentioned going public as an exit plan. Going public is not a great exit plan. It’s quite a painful, long, extensive process. Basically, investors won’t come anywhere near it if they think it is an exit plan. So, what going public is is a great platform for growth. It’s a great platform to do M&A from, because you now have a new currency, which is your public listed shares, you have credibility, you have transparency. People can see the strength and the value of your business. So, actually I think using public markets or using capital markets is a platform for growth. It’s far smarter than using it as an exit plan. Of course, you have liquidity, so you can sell. You can sell a chunk of shares and buy a Porsche, which is something you can’t do when you have a small private company. So, that can be handy.
Speaker 1
Next question. “I know of a business that does 1.2 million a year and it’s in distress, because the two business partners are misaligned. Would a partnership breakdown fall within a deal that you don’t want to do, or is there still an opportunity there?” No, that’s a great opportunity. You’ll quite often find where you’ll have a shareholder dispute and they’re refusing to talk to each other that you can effectively be the referee, the guy that stands in the middle, and you can talk to both of them sensibly and try and find a deal somewhere down the middle that works for everybody. So, yeah, acting as referee and doing some deal in the middle there is a great way to do a business.
Speaker 1
“Have you had a chance to do a deal in Eastern Europe, former Soviet Bloc. If yes, what were the challenges?” Yeah. I’ve spent quite a bit of time in the former Soviet counties. In fact, I had some real estate in Ukraine and we have a business partner in Slovenia who is putting together a group of telecoms and cable TV companies across that region. So, I’ve actually met with probably about 80 telco owners from Serbia, Croatia, Slovenia, Slovakia, Hungary. Where else have we been there? A whole bunch of countries around that area. Actually, I mean, in terms of the appetite to transact is great.
Speaker 1
I would say to begin with there’s definite trust issues. You have to spend a lot of time on the building the rapport, and it’s kind of important who introduced you to people, but I think that’s just more of a cultural thing. But in terms of getting the deals done, the only issue that we found is the… I mean, the great thing is now in most of those countries, legal title is really straightforward, so owning stuff is simple. That’s a really important part with any emerging market is, can you own stuff? Because you have places like China and Vietnam, which are fantastic but it’s really hard to own anything. So, most of those former Soviet countries have at least got public titles sorted out.
Speaker 1
It’s really translation of legal documents and stuff that’s been the thing that’s slowed us down. For example, I mean, we’ve got heads of terms signed with more than a dozen of these telcos, but they’re still going through a legal process that involves getting translations. For example, the first one in the pipeline, we’ve probably spent 70,000 Euros on translation and legals. For anybody that’s done the Harbour Club, you’ll know that the way we normally approach legals is that we almost pay nothing for legals. So, that’s been quite a shock. But I think it’s kind of cool. If we acquire all of the companies that we have signed heads of terms with in Europe, we’ll be the 20th largest cable operator in Europe, which will be quite a cool trick.
Speaker 1
Next question. “What great deals are you seeing in the market these days? Any trends?” Yeah. I would say one of the mega trends globally at the moment is the demographic wave. So, obviously you have these Baby Boomers, the people that were born after the Second World War. They’ve had a massive impact on so many industries through their life, because it is the biggest demographic wave in history. So, they created the music industry in the ’60s, the travel industry in the ’70s, the car industry in the ’70s, the real estate boom of the ’80s. All of this stuff came from this Baby Boomer generation rippling through from a demographic perspective.
Speaker 1
What’s interesting is, in the U.S., in fact in most mature economies, about 70% of small to medium-sized businesses are owned by this Baby Boomer generation. For the first time in history, the next generation is smaller. So, there is not a natural succession for these business owners. Also, the next generation wants to do something in the technology space or the blockchain or marijuana or an app or something like this. They’re not particularly interested in running their parents’ air conditioning company or heating engineering business. So, you’ve got these fantastic companies that are run by people in their 60s and 70s that are generating profits, have good turnover, and have a great, loyal customer base but no natural succession plan.
Speaker 1
Quite a few of these, they will sometimes try advertising them for sale or they’ll try and privately sell them through their accountant or someone else. After a few years when they realize that they can’t get a buyer, what they’re tending to do is to wind these companies down. So, they’ll actually just take as much cash out as possible., as people retire, they don’t replace them, until it gets down to a really small hub, and then they literally just close the doors and walk away. So, these people are motivated by a very different set of values than a traditional seller, because they care more about their legacy, they care more about continuation of their brand and what they’ve spent their life building, and they’re looking for a safe pair of hands. They want somebody that’s going to take over the business and be everything for it.
Speaker 1
So, you can negotiate with them in a very, very different way. There’s many industries with lots of small, fragmented players that can be rolled up, using that information effectively. Yeah, I think that’s a really big trend. It’s a big trend in the U.S. It’s a big trend in Europe. It’s a big trend in Australia, New Zealand, Canada, Singapore. Of course, not so much in the emerging economies where they don’t have this mature economy [inaudible 00:27:31], but I think the demographic wave is a massive opportunity. If you think about it, about half of GDP in the U.S. comes from small to medium-sized companies, and 70% of small to medium-sized companies are owned by that generation. So, it’s trillions of dollars, basically, are coming from these guys. I think a huge opportunity.
Speaker 1
“Do you find dealing in the U.S.A. much different from the rest of the world?” So, a lot of the Harbour Club strategies are built around, I would say, human behavior rather than legal frameworks or things like that. A couple of them are built around legal frameworks, but basically, I mean, contract law is also the same in most countries. So, from that perspective, no, it’s not too different. Interestingly, I mean, one of the catalysts to us doing the Harbour Club in the U.S.A. was one of our delegates from the UK who’d done about eight or nine deals in the UK married an American lady and moved to Florida and did a deal within two months of landing in Florida.
Speaker 1
His viewpoint on it was that A) there’s way more opportunity. There are literally millions of companies that are either trying to sell and can’t or haven’t thought that they could sell and are great opportunities to deal with. There are loads of those kind of take a stake options, businesses that are not optimizing themselves where you can effectively take a stake, help them optimize themselves, and then help them sell or sell back to the original owner. So, those kind of BIBO transactions.
Speaker 1
He also felt that, in the UK, the average business owner was a lot more resistant to reaching out for help. So, a lot more resistant to having those kind of conversations. He just felt that American entrepreneurs seem to be a lot more open when it came to discussing solutions or discussing ways that you can create and add value to their business. So, he just found it easier to have the conversations. The close rate isn’t necessarily higher. It’s about the same but much easier to have the conversations with people, to actually get to the point where you’re proposing some kind of solution. He’s now got a reasonable pipeline of opportunities there.
Speaker 1
I’ve done four deals in the U.S. in my career, but more because they were just introduced to me and then I’ve closed them. They were all profitable, long-established businesses that we put into public companies. I also have a stake in a bank, which was a slightly different deal, but we’ll discuss that on the Harbour Club as well. So, we really see the U.S. as being a huge opportunity, because it has this demographic wave issue. It has lots and lots of these potentially retiring owners. It has the English language and the legal system that allows you to do the deals that we do, and we’ve proved the concept there. So, we think there’s a huge opportunity.
Speaker 1
So, “We focus on helping the exit, and I’m hoping to use these tools to acquire them.” Cool. Yeah, I think there’s a lot of poacher-turned-gamekeeper or gamekeeper-turned-poacher. I don’t know which way around it is, but there’s quite a few people that come on the Harbour Club that are normally either in the broker space or in some kind of advisory capacity. They see these deals happening, and it would be quite nice if they were equity holders in those deals when they happen.
Speaker 1
“Thoughts on raising money/a fund to acquire these small businesses with cash?” So, listen. My view on acquiring businesses with cash, there’s two issues. The first one is you massively increase risk. So, as soon as you commit cash to a transaction, you’ve got risk. When you have risk, you then have to take all the mitigating strategies around risk. So, doing lots of due diligence, getting warranties, having lengthy legal agreements to protect you and to protect what you’re doing. If you can structure a deal that doesn’t require you to put cash in up front, you can be pretty bullish about the due diligence and you can be pretty bullish about the legal work that you do on that transaction, because your downside is protected. You imagine business as a tightrope; if you can set that tightrope so it’s only six inches off the ground, you can have a really good run at it. So, effectively, you get a much lower-risk environment.
Speaker 1
Now, if that sounds scary to you, you need to understand that, effectively, you’re buying a limited liability company with a limited liability company. So, you always use an SPB, a special purpose vehicle, which is limited in liability. It’s a C Corp, as you would call it, an LLC with its own tax identifier. Basically, you use that company to buy this other company. So, you’ve got two levels of limited liability protection in place. You’re not entering into any agreements personally; it’s your SPB that enters into the agreement. So effectively, you can just liquidate the thing and walk away in a worst case scenario situation.
Speaker 1
Effectively, if you can structure the deal without the cash up front and you’re using this limited liability protection, then you’re basically de-risking to a huge extent. There are tons of these deals out there that can be completed without using any of your own cash and without borrowing money from banks with personal guarantees. So, that’s kind of the structure that we really focus on.
Speaker 1
When you get into the profitable, debt-free, well-run businesses, again, the reason I don’t like to give the owners cash is it’s a massive distraction. You give someone a few million dollars and try and get them to turn up to work on Monday. It’s really hard. So, again, what we tend to do is build a deal model or a structure that doesn’t give them all the cash on day one, so you keep them motivated and you keep them engaged in the business for some time but also gives them a better chance of realizing the full value of their business.
Speaker 1
In an agglomeration, for example, we have two instruments that we can buy companies with. One of them is publicly listed stock. So, that gives them access to the upside in the growth of their business, but of course opens them up to potential downside. So, the other currency that we use are publicly listed bonds. We issue a debt instrument to do the acquisition. That effectively doesn’t then have the volatility, because it has its senior debt in the company that’s acquiring them but also doesn’t give them the upside potential. So, depending on their risk appetite, they might choose a proportion of equity and a proportion of debt.
Speaker 1
Now, using that debt instrument in that way is quite unique, because the way people normally use a debt instrument is that they will, a bit like… I don’t know if anybody ready Barbarians at the Gate, which is the largest leverage buyout in history, the purchase of Nabisco. But in that, what they would do is they would go out and sell the bonds to raise cash, and then use the cash to go and buy the businesses. What we’re doing is we’re issuing the bonds directly to the business owner. So, they can receive it into their bank account, into their broking account. They receive a coupon, so they’re receiving interest on that, and it has a maturity date in the future where they receive the full value of the capital.
Speaker 1
We use a very low level of leverage, so we will typically only lever a couple of times the EBIT of the group. So, a couple of times the net profit. It’s a really cool instrument. I’m probably going into a bit too much detail, but we can go into more of that structure when we’re at the event in Miami, because instead of going out and raising money and then giving money to entrepreneurs, it’s a really cool way of doing deals without using cash and getting them over the line in that way.
Speaker 1
“Why would I buy a business when I can just start one?” Why would you run the marathon when you can run the last 10 yards and you still get the medal? Acquiring a company really is a hack. I think if you really want to start a business and you really want to start doing something specific, why not buy something that does something similar or has similar clients and then pivot that business into whatever it is you want to do? Because you’ll have revenue, you’ll have staff, you’ll have an office, you’ll have a brand, you’ll have a website, you’ll have all those things. You basically take away the blood, sweat, and the years that typically have to be invested in a startup. It’s really hard to push that rock up the hill for that first two to three years of starting a business, and when you acquire a company, you take all of that away.
Speaker 1
So, starting a business, I think, is a sort of right of passage. I think you have to do it. I think it teaches you amazing things. I think it teaches you how to bootstrap. It teaches you how to manage staff. It teaches you how to do sales, marketing, finance, all of those things, but unless you’re a masochist, I wouldn’t do it again. It’s something that I think is a right of passage, but once you’ve done it, I think it’s time to move up that entrepreneurial ladder.
Speaker 1
Look, here’s a really interesting thing. Look, entrepreneurs are great problem solvers. We spot opportunities and things and problems that need to be solved, and we come up with creative solutions to solve those problems, which is awesome when you’re doing a startup. It’s really great for that early momentum period. It’s a massive pain in the ass when you’re actually a fully-fledged operational business, because entrepreneurs just want to fiddle with stuff all the time and interfere in the operations of the business. So, quite often what you’ll find is, just when the business is getting to a point where it’s about to start to work reasonably well, the entrepreneur goes in and changes everything again or does stuff. So, entrepreneurs love change; your staff and your customers, not so much. You need something to distract you from wanting to upset everything all the time.
Speaker 1
So, basically, the key thing to understand is that, in that startup phase, you’re focused on customer value. You’re focused on the product and the sales offering and everything like that. Once you’ve kind of nailed customer value, it’s time to move to shareholder value. It’s the next wrung on the entrepreneurial ladder. It’s the moving from working in the business to working on the business, which you’ve probably heard a few times before.
Speaker 1
So, my question to entrepreneurs is, what do you do everyday? When you rock up at the office, what’s your job? Are you a glorified salesperson? Are you running around just selling your product to other people, or are you focused on strategic stuff for the business? Are you focused on shareholder value? If you’re focused on shareholder value, you should be looking at mergers, acquisitions, joint ventures, and exits.
Speaker 1
That should be the thing that you do all day, every day, and you let the people in the business deal with the staff and the customers and all of that kind of stuff. That makes the business much more scalable. It makes it much easier to sell. It makes your life much more interesting. Doing deals is really fun. It’s kind of like, you know the buzz you get when you get a sale in your business? Imagine that tenfold. It’s a really great feeling. People always say to me, “Of all the deals that you’ve done, what’s your favorite?” I always go, “The next one!” I’m a deal junky when it comes to that.
Speaker 1
Next question. “I’m registered for your Miami event. Very excited. Can you talk a little bit about what I should expect?” Yeah, it’s three really intensive days. So, as I said right at the beginning of this, I make my money doing deals, not from doing seminars. I am a traditional dealmaker. So, I don’t deliver this in a traditional seminar format. You know the traditional seminar format where the first day is telling you how amazing the second day is going to be and potentially a little bit light on information? We have three days which are really overwhelming with information. In fact, if there is sometimes a complaint from delegates it’s that there is a bit too much stuff in the course, but I guess I would prefer to have too much than too little.
Speaker 1
Yeah, really be ready for an onslaught of information, because we go through all of the lifecycle of a transaction, from all the different sourcing techniques… so, how you can actually go out and get deals to come to you. We focus primarily on businesses that aren’t for sale. So, how do you find the off-market deals? But we do also have strategies for businesses that are for sale and how you can deal with those as well. We then go through how you hold that meeting with them. So, how you position yourself in that meeting to drag this towards a no cash offer. We then focus on the deal strategies themselves, the structures. So, there’s 12 of those structures.
Speaker 1
That overlaps us into the second day, and then on the second day, we start to go through the legals, the financials, what you do when you’ve got the deal, how you close the deal, how you get into the business. Then the last day, we go through all of the financial engineering, how you add loads of value very quickly to a business that you’ve just acquired, how you exit that business and how you get the best value for the company, and then what you should do with that value. So, I talked at the beginning of this call about these capital events creating passive income. We also have some really interesting insights into offshore private wealth banking, which can give you incredible income from your cash.
Speaker 1
Actually, we’ve got some really unique stuff just for the U.S. market on that as well, because you have this most incredible tax system. I live in Singapore where tax is pretty much a four-letter word. But you have this incredible tax system. I mean, for the largest economy in the world, even with the tax cuts recently, you still have one of the highest tax rates in the world. So, there’s just a really cool system that you can use for rolling up your investments without any tax burden and completely legally. That’s quite a cool structure for you guys that we don’t have to teach here in Singapore, because we have no capital gains tax and no tax on investments here. So, that’s kind of broadly what you can expect. We all have lunch together. We all have dinner together. There’s tons of networking. There will be people on the course who’ve done the course before, and there will be people on the course who’ve not done it before. The content is tailored for the U.S. market as well. It’s going to be really exciting. I’m very much looking forward to it.
Speaker 1
“Are most of the deals you’ve seen within the purchase of specific trade background and experience? How easy is it to enter a new sector?” Great question, Alex. I recommend people to stick to their sector for their first deal, to what I describe as staying in your comfort zone. That’s nothing to do with learning about a new sector and everything to do with your confidence in approaching that deal. You’re just going to be able to build empathy and build rapport more easily in an industry where you can talk the language and you understand the common problems and challenges. It’s that rapport that helps you get the deal done.
Speaker 1
I think once you have that confidence, you can then move into other industries. The size of business that we’re looking at, they should have the depth of management and experience within that business already that, even if you don’t understand the industry, it’s not a handicap. Basically, I mean, yes, there’s a quick learning curve that you have to go on to understand the basics of any new sector that you enter into, but sometimes being an outsider asking the dumb questions can be the thing that unlocks a lot of the value in the company, because people are so stuck in their way of doing it their way that they haven’t thought of it in a potentially different way.
Speaker 1
So, I describe myself as sector agnostic. I do deals in all sectors, but I tend to have most success in business services. So, they can be the soft or hard, they can be the blue collar or white collar, but business services is a broad area I tend to find I’m more successful in. I can add more value, create more value in that sector. But, yes, we recommend doing deals in your area of expertise to begin with.
Speaker 1
“Are there any challenges with exiting? Is there a risk of being stuck with a company?” Yeah. So, definitely selling businesses is as hard as buying them. I mean, basically, the two things that slow a sale down are due diligence and finance. They can be kind of linked as well, because if the buyer is using external finance, then obviously that finance company or bank or whatever it is tends to also then interfere with the due diligence process. So, those two things can be a little bit painful. One of the keys to selling, I guess, anything, whether you’re selling something on Amazon or you’re selling a house, is if you can create a path of least resistance for the buyer, then you can make the sale process much easier.
Speaker 1
So, one of the things we focus on on the Harbour Club is, what is that path of least resistance in an exit? How do you solve the due diligence and the finance issue for the buyer so that the sale can happen quickly? That’s, I guess, one of the keys to exiting. But you didn’t put any cash in up front and you are a motivated seller. You want to sell your business. Now interestingly, quite a few companies for sale are almost reluctantly for sale. So, because these people are so emotionally connected to their business, on some level they don’t want to sell it. They put these psychological obstacles in the way for the purchaser. They’re the hoops that you have to jump through before you can get the deal.
Speaker 1
So, “How do you find companies, and what criteria do you look for? High debt levels, certain industries, partnership, views, et cetera?” There’s a whole bunch of motivations that we look for. The criteria basically comes down to size. So, we’re looking for businesses that, in the distressed area, are more than half a million in revenue and probably less than five million in revenue. That’s a bit of a sweet spot for a no money down, motivated transaction. You need to have that more than half a million at the bottom end, because otherwise it’s not a real business. It’ll be one customer-centric or one employee-centric, and you need that little bit of depth of management, somebody else at the business that can actually do what it is that the business does.
Speaker 1
So, having that minimum scale is important, and the five million really tops out. I mean, we’ve done deals much, much bigger than that, but it tends to be at five million of revenue that they’re on the radar of their competitors already and you can find yourself in a slightly more competitive scenario. Below five million, it’s pretty much virgin turf. You’re the only game in town. You can put your offer on the table and you can just wait. Sooner or later, they don’t really have other options, so it can quite easily come back. It’s very important that you don’t get sucked into what I call deal heat, which is where you’re so excited that you found one that you’ll do anything to get it closed. You kind of just have to be patient, have a few offers out there, build a good pipeline, and then they get deal fatigue and they kind of drop in. So, it’s very important to stick to your guns and stick to your specific offer.
Speaker 1
No, we don’t particularly look for high debt levels. I mean, in a distressed area, cash flow problems can be an advantage, because that keeps them awake at night and so they want to take action. It’s one of the motivating factors that people feel they have to do something about. So, that can help. Industry-wise, no. Geography’s probably more important. So, having something that’s either nearby, because if you have to turn up, it’s nice if you’re not spending nine hours in a car each time. Geographical location is kind of important or partnering with somebody that’s in a geographical location. Of course, through the Harbour Club you’ll find people all over the place that you can potentially partner with. So, size and geography are probably more important than pretty much any other factor. Within the profitable end, we tend to look at more than half a million of profit. It’s a much bigger scale of business. So, half a million upwards.
Speaker 1
Next question. “Why does issuing bonds directly to a prior owner sound like a hope certificate that hopes for future growth to bridge the leverage gap? Three days in Miami, I hope there are detailed materials.” So, the bonds that we issue are listed bonds. This isn’t a piece of paper that says, “We owe you some money.” This is a public listed tradable security. So, it’s delivered to their custodian account with their bank or their broker. They can sell them over the market. Also, it doesn’t rely on the future growth of the company to pay. Typically, the bond is issued at, like I say, a two-times leverage. So, two times the annual profits in leverage. It typically has a five-year term. So, the company has five years effectively to repay or refinance that full amount.
Speaker 1
So, it’s up to the person who receives the bond whether they sit on the bond and just receive the coupon, because typically the coupon from a bond is higher than they would get on a certificate to deposit with their bank, but obviously potentially riskier. So, they can decide whether they want to receive the coupon or whether they just want to dispose of the bond and have the cash. There are distributors who sell these bonds all day long for a couple of points off the issue value, traditionally, for this kind of thing.
Speaker 1
Then, “Three days in Miami, I hope there are detailed materials. I’m a poor note-taker.” So, when you come on the Harbour Club, you get somebody else’s notes, effectively, somebody else that’s done the course and made a load of notes. You get a USB key with lots of the documents and things that we refer to in the course, and also some video trainings around specific topics. You get access to a forum. So, on the forum you can chat to lots of other members, members who’ve done deals, members who haven’t done deals. You can ask questions.
Speaker 1
There’s bonus content on there as well. So, videos of case studies of deals and extra trainings that I’ve done where people have asked me, “Can you go through X, Y, and Z again?” We’ve done a video and put that into the bonus material area. We also give you a copy of all of the slides that are used throughout the entire course. There’s lots of topics where we don’t go into a lot of depth, like, for example, contract law. We could speak to you for two hours about contract law and the differences in different jurisdictions. It’d be a good cure for insomnia, but probably not very entertaining. So, things like that and things like how to analyze a balance sheet and all of those kind of things.
Speaker 1
We’ve turned it into mini guides, so there’s about eight, I think it is now, mini guides that you’ll get, little books that you get on the course. You also get my book, Go Do Deals. Now, Go Do Deals is a book that is available to pre-order on Amazon, but delivery is December 2020. So, it details quite a few of the things that we talk about on the course. Probably 20% of the course is in the book. You get a copy of that book signed by me as well. I think if you can find an unsigned one, they’re worth a fortune. And a bunch of other stuff. There’s a quick start guide, a whole bunch of bits and pieces.
Speaker 1
So, there are lots of materials, but I would also take notes if I were you. Like I said, there’s a lot of information, and it is three days of relentless information. So, take notes, but there’s plenty of follow-up afterwords. Everybody on the course actually gets my WhatsApp and my Skype details for pinging me one sentence questions whenever you want. Because I do deals, most of my time is feast or famine, so I have lots of time off. My time off, I’m more than happy just to reply to questions from delegates about deals and things. I’m quite generous with my time in that respect.
Speaker 1
“How do you deal with business brokers?” Business brokers are not terribly useful in a transaction. I guess just like a real estate mogul doesn’t spend his time peering through the windows of a real estate agent’s, good dealmakers probably don’t do deals with business brokers. The key is to find the businesses that aren’t for sale. Brokers have typically manipulated the numbers. They don’t particularly add much value. They try and keep you away from dealing directly with the principal, whereas the whole deal is predicated on you dealing with the principal. So, best to avoid them. There’s lots of deals out there that aren’t with brokers. So, quicker and easier to spend time with them. Funny enough, I just did a call yesterday with one of the Harbour Clubbers who just bought a business that was for sale through a broker, but it’s the exception rather than the rule.
Speaker 1
“How do you recommend dealing with a company that has a poison pill clause?” Interesting. I mean, poison pill clauses tend to be more prolific in larger companies or in public companies. For those that don’t know, a poison pill clause is something that happens if somebody tries to buy the company. So, normally it’s some dilutive share issue or something that kicks in, huge redundancy costs or something like that. I guess it’s kind of understanding what the purpose of putting that poison pull clause in there in the first place was and whether there’s any ways to have it rescinded as part of the deal. That’s quite an unusual one. I’d be happy to have a one-to-one conversation with you about that to understand what the purpose and what the angle was.
Speaker 1
Oh, baby bond. Yeah, okay. Cool. Interestingly, you say a baby bond. We have a thing called a mini bond here in Europe, and this is not a mini bond. So, a mini bond is a retail bond. They’re actually quite complex to issue because of the retail nature, so we still have a normal corporate bond. They’re minimum denominations of 100,000 U.S. dollars. Just as long as there’s not confusion around the linguistics there. Somebody’s put here, “I’m a broker. No offense taken.” Yeah, apologies if… brokers that do come on the course, they do get a bit of a panic through the process, I’m afraid. Hopefully, you have a thick skin. So, thank you.
Speaker 1
Right. Well, I think our hour is up. Thank you all so much for spending your Valentine’s evening with me. It was no problem for me, because it’s 9:00 in the morning here, the next day. This is the day after the Valentine’s. So, somebody’s done a hand raise on here. I don’t think I can deal with that. I think you can just type questions in this group chat area. So, if you’d like to type questions, you can. Otherwise, hey, look, have a wonderful evening. Enjoy your Friday. Friday’s looking great, by the way. If anyone’s looking forward to Friday, it’s looking like it’s going to be a great Friday. So, have fun. Speak to you all soon.
