Earl Eddings is an entrepreneur who has had deep experience starting, selling, and buying businesses. He's as busy as ever in ongoing roles as owner, chair, mentor and adviser and in this episode shares what's learned when it comes to selling a business.
@Earl Eddings has started, sold and acquired multiple businesses. Along the way he's had high profile roles including as Chair of Cricket Australia, and served as Non Executive Director, Advisory Board member, Adviser and Mentor to other business owners and businesses. He's had wins. He's also learned a lot from experiences where things didn't go to plan. These experiences were however formative and continue to shape how he continues to approach his work, the support he provides to other business leaders and business owners.
In our discussion we cover;
Some of the key takeaways;
@kerrcapital @michaelkerr
Michael Kerr (00:01.262)
Hi, it's Michael Kerr here presenting Small Business Banter.
Michael Kerr (00:12.558)
Welcome to the Small Business Banter podcast. I'm Michael Kerr, your host, and I'm also the founder of Kerr Capital, where I work day to day with business owners. The Small Business Banter podcast is built just for business owners and will be especially relevant if you're an owner looking to sell, if you've been unexpectedly approached by a potential buyer, or if you're an aspiring owner about to buy a new business. There's a lot on the line personally and financially. It's stressful.
It's emotional and it's usually new territory. So to help, each episode of Small Business Banter is a discussion between me and another business owner or an experienced small business advisor. We talk about their experiences. So what you'll get is practical real life advice, different takes on everyday problems, and a renewed confidence to tackle your own business challenges.
Michael Kerr (01:23.598)
Welcome into edition number 138 of the Small Business Banner podcast. Earl Eddings joins me today on the podcast. Big welcome, Earl. Good morning, Michael. Good to catch up again. That's great. I wanted to, continuing with the theme of Small Business Banner, talk about your extensive personal experience with exits of businesses of varying sizes. And as you just said, you've been on both sides.
of the equation. So could you just start with a little bit about the portfolio of Earl Eddings businesses and professional interests, including what you're doing right now? Okay, thank you for being here, mate. It's always a good opportunity to talk to other small business owners. I've been there and done that, so I know some of the pitfalls and the joys it brings. My first business I set up from the third bedroom at home while my wife was six months pregnant with our first child, so that was interesting times in our life.
I just saw an opportunity in the market to, in a consulting capacity around health and safety and risk management. I saw a lot of big corporates weren't doing it that well. Lucky enough, we had a great client in Telstra and we built off the back of that. Did that for four or five years. And then we made the BRW top 25 startups and top 100 companies in 2005, which put us on the radar a little bit. That was called? Our consulting group, built up to about 10, 15 people.
And the interesting thing when you, particularly in professional services, is a bit of a ratio. Most people don't get past the one person, that's fine. Or then you've got to jump to four people and then you sort of get to four to 15. And then you've got to jump from 15 to 40 and 40 to 100. So it's a bit of a scary jump. We're not necessarily getting any more out of it, but taking a lot more risk. So I was around that 10, 12 mark, which was really good. Loved it. We had a great team, great culture.
But then I saw to grow the business, I'm going to have to take a lot more personal risk, which I wasn't really prepared to do. And then an offer come through, we had a number of offers to buy us. Some genuine, some not so genuine. These were, just came to you, these offers. You were doing such a good job in your marketplace that they came, which often happens. Yeah, we had a couple of competitors wanted to take us out and our client, we had a great client list. And as that staked, it must mean I was getting a little bit bored. I wanted something a different.
Michael Kerr (03:40.788)
So we had a great offer from a company called WSP or a global company that are listed on the London Stock Exchange. They were buying up a number of companies in Australia. They made me a great offer, in fact, an offer too good to refuse. Eight times earnings, cash upfront with no earn out or very little earn out. So I thought that's a great opportunity. I had a young family, I wanted to build a house. So it was a really good opportunity to set ourselves up for life and then have a great job.
put me into a role where I was running five countries, setting a global board out of London. So a great learning experience, you know, in my mid -30s to be able to do that. Was that your first owned business? Yeah, yeah, a small minority partner with me. We got a great deal, as I said, for a professional services firm to get that type of valuation. It made sense to do it. And I think in any time you got a business, you've got to be a little bit not emotive about the deal. And I found one of the biggest challenges is,
it often becomes a person's purpose in life, which is fine. Yeah. I want to talk a lot of. Yeah. But when you go to sell, you're going to be very unemotive and that can be very challenging for a lot of people. I can't let go. So I had made the conscious decision. If it was going to sell, I was going to go full throttle on the other side of the deal because I want to do other things. So a lot of people can't let go. Yeah. And anyway, so it was a great learning experience. Got to run 10 other companies and bring them all together. Um,
And after three and a half years, I had three kids under three and a half, gonna be spending eight months a year overseas. And I got approached to do another role with a listed company called GreenCap. And they did a roll up pre -GFC of 10 companies did no due diligence and GFC hit no - Paper money. Yeah, paper money and a lot of debt. So I got brought in to sort of fix that up and sell off assets, buy new assets and then change the whole dynamic. So.
did that for five years and you know that was a really hard running a listed company 38 you know in a turnaround situation. We got there, I was keen to capitalize the business and take it global but the board said you've done a great job fixing it now we sell it. So we got bought out by Wesfarmers the division of what was called Wesfarmers Industrial Safety Products, doubled the share price. I thought we had another year or so we could have done a lot better but that was the board's decision.
Michael Kerr (05:57.766)
And yes, I went into West Farmers. So how many years on from the first one was that? That was probably about 10 years. Oh, okay. But it's still two significant exits. And from there, what was the... Well, that's the time I was heavily involved in cricket administration, so I was taking up a lot more of my time. So I was travelling around with cricket and fortunately I've become chairman of Cricket Australia, which was another great experience, meeting people around the world and being...
you know, something you're deeply passionate about to have an influence, especially post Sandpaper Gate when I was brought in to help fix that up. Very challenging, but very rewarding as well. And I had 13 years on the board of Cricket Australia, which was some of the best times of my life. But in the media, which was a But also, you know, it coincided with probably the last moment in Australian cricket. Yeah, so it was working through that and the challenges that, you know, it made you realise how much.
cricket is in the tapestry Australian society. And when you let the Australian public down, it was really challenging. But you know, to the credit of always the boys bounce back and change their behaviour. And I think they've got a great team now. I think they're great ambassadors for the sport. The women's team is fantastic. So very, very lucky. At the same time, then I was on a board of another ISEC listed company, it's not executive director, another fixed rubber. I don't know how it got involved in fixed rubber, but there was a company called MSL.
They did sports technology. So the golf link, they do all the tap and go, pole systems for stadiums around the world and, and the like. Um, must've been, I was on my due diligence again. I may not have gone on that board. Once it got in there, it, uh, it wasn't doing very well, you know, settled with a lot of debt, losing money, share price, I think got down to about two cents a share. Um, and the institutional investors weren't happy and they wanted blood. So I got bought in, I was there when that happened. They bought a new board. Um,
And as a turnaround, we did fantastic. Well, even through COVID, we did really well. We did some really, really smart acquisitions, which turned the fortunes around for us. And we sold that 12 months ago today, actually, to private equity and sold for 30 cents a share. So it was a great turnaround for the shareholders, a great story, you know, 1500 % return on investment turnaround. So 15 banger, love them. And I'm still involved in the background with private equity firm as an advisor for them. Right. You know, there's some meaty
Michael Kerr (08:19.054)
roles you've had, but it does go on. So you're still involved. Well, your key role at the minute is as syndicate chair for one of the CEO institutes. Yeah, one of my side jobs. So I've still got my own consulting company just recently sold by Renly to a big insurance broker called Steadfast. So I'm still there and a capacitive CEO of the consulting arm.
But on the side, I'm a Seneca chair of the CEO Institute, or a coach of mentor, CEO's of sort of 30 to $300 million turnover businesses, which I love. It's a passion of mine. It's very lonely being a CEO, and only a CEO would know that. So it's a great opportunity to give back, but also help other aspiring CEOs. And you've got some interest in racing thoroughbreds. That's a...
personal passion. Yeah, you still sort of got out of that now. My wife and I bred horse race horses for about 15 years, loved it. But things sort of, you when you got three kids at private school and bills to pay, that was that got put on the back burner, but we had some great fun and some reasonable success with it. Yeah. Well, there's, there's a lot, there's a lot in that, but you know, being on both sides of the transaction, which you, you, you were is a really interesting good place to start. So can I go, go back to that your first,
exit, was it always a plan? Did you have, did you start the business with an exit in mind? I mean, there's a lot of chat, a lot of promotion of the idea that you should, you know, you should be building to exit from day one. But was that, was that the case with you or was it a bit more? Partially, I just saw an opportunity in the marketplace. I was working for a firm. I didn't really, my values didn't align with theirs. I don't do my own thing. I've always been an entrepreneur, always wanted my own business.
but always in the back of your mind, you're there to sell your business at some stage. You can do it as a job, so you're buying yourself a job, nothing wrong with that at all, and I'm sure a lot of people do very, very well out of that, but at some stage, I wanted to grow it and have an event, a life -changing event. So I think it's very important when you start a business, your business is always for sale, whether you know it or not. And if someone can offer you enough money, it's very hard to knock back. So I think when people...
Michael Kerr (10:37.358)
are running their own business. When they get through what I call the honeymoon phase, the excitement, the fear of running your business, when you get into what I call the growth phase of your business, you should always have the back of your mind that some stages could be the life changing event. I need to be ready for it and make sure I do it properly. I see a lot of small businesses don't, they don't plan for that. So when someone comes and offer them, they're very flattered, but what they don't realise they could be doing a lot better if they had planned properly for it. Yeah, yeah. And look, it's...
Yeah, between running your business and choosing consciously to cap it almost, I only want to be small, however you measure that, which you said is fine. I agree totally, there's a lot of very successful people out there that kind of know their boundaries, I know their limits and that's a good thing. And then there are others who are headstrong about getting an event, an exit event, but in the middle there's a lot of businesses that...
and owners, and all these businesses are driven by owners, they're in between. And that's where you've got roles as non -executive director and chair and guiding those people along. Because you can get really busy running the business and you can feel like you're having fun or you can feel super stressed, but you need a plan of some sort, whether it's to hold it and just be happy with what you've got or exit it.
And both are fine strategies. And I've seen a lot of great people do really, really well, having a small little business, four or five people stick to their knitting. They're very passionate, very technically, probably a subject matter expert in something. And they can build a really good lifestyle for themselves. And you go for any pain in any business. And we've seen that through COVID. Things come out, you don't really know what to do. But when you get, when you're comfortable what you're doing, you know, a good underlying business, you don't have to sell. You can have that lifestyle and you can do some really good things with that.
But if you do want to grow, you've got to be under, when you do sell, you only want crack at it. And I see a lot of organisations fail or not maximise the value because one, they haven't got either the right mindset or the right structures in place to maximise the value. So what are some of the things you think are really important there if you're giving advice to one of your clients, your syndicate members, the CEO, what are the really important things to make it easier to sell?
Michael Kerr (13:03.918)
Yeah, I think you've got to give yourself a good, good runway of at least a couple of years, because you think of someone's going to buy the, I look at your last two years figures. So if you got business, got what I call a lot of toys, where you got cars and properties and you're taking a lot of cash out and a lot of fun, that's fine. But you've got to understand that's going to be diminutive to your value. So you've to be able to clean up your balance sheet, get a good, so show you're growing and you're growing strongly and you've got a good client base. So sometimes that takes a good two years to work out through the system.
to clean up your balance sheet. Cause remember if you're buying or selling a business and say eight times earnings or every dollar you save, that's you're going to get an eight time investment. And I don't think a lot of people realise that. So they're taking all cash out of the business, but you've got to times that by eight or five or 10 or whatever it might be. That's the impact it's having on your business. Yeah. Pay a little bit of tax before then. But then you get eight. Yeah. That's why I think the appetite, particularly when the bigger companies are buying smaller companies, the appetite.
to go through and say, oh, look, I've got to add back this. It just makes, it just smells a little bit more, doesn't it? Yeah, it makes for a messy transaction and always leaves a bit of a bad taste in everyone's mouth. So I think the cleaner your balance sheet and your business can be for two years prior to your sale process is really, really important. And that you've got to be disciplined to do that. And have a very clear plan about how you're going to do that. Because when they open up the book, so I want to see, you know, everything's clean and you don't have to sell assets and get rid of leases and things.
And when you're on the buy side, anything that goes to value, you're gonna try and use. So you wanna make sure that you don't give them an opportunity to claw back the value of your business. And that's in D &D, that's what they'll do. Oh yeah, claw back the headline number. Yeah. Which is a big trap, isn't it? Someone gets an approach and there's a number floated and it looks pretty exciting. And that the next six, nine, 12 months,
are about validating that we should pay that, but really in a lot of cases about just chipping away at the price. And it's where if you have management accounts or financial reporting that's not up to scratch and you've taken your foot off the accelerator a bit, because you think it's all going to get done, it's when you get in trouble. I think it's a lot of big traps there. Firstly, one, it's a big distraction and people do take their eye off the ball because it's so focused on the deal.
Michael Kerr (15:30.062)
And generally you've got limited resources where the buyer has got a lot of resources and they're to ask you a heap of questions that it takes you away from running the business. And then the deal may not get done. So that's a big trap for people. I think the other one is if you haven't got your systems up to place, pick up your small business, mind you. And that's a big risk for a bigger company. So the more you can show you got systems in place, long -term contracts, long -term supply agreements, et cetera, is going to go to your value. But if you've got no systems in place or little.
the business is totally relying on you, you're a key person risk, then the value decreases both in terms of the quantum they'll pay, but also the number times earnings they'll pay. So having those systems in place, showing you're a proper business, not a one -man band or heavy reliant on the owner is really critical. Yeah, that's why this two or three year runway is so important, isn't it? Because if you draw a line in the sand today and you make a decision that you would like,
to set sail for an exit, then you do have time to look at those things. If you've got three months, there's only so much you can do. What I see a lot of in the last 12, 18, 20 months, and it goes back to your first business, you got approached out of the blue, but I think that's happening more and more. And this idea that you,
have a planned exit is a good thing. If that's what you wanna do, you have a plan and you work towards that plan, but also factor in that if you've got a growing successful business, the probability of a call from someone saying, we like what you're doing or we're a bit concerned that you're going so well, we're better to, that happens all the time. We had in the last episode, I had a Pete Seligman from Sydney who's a professional search investor. He's invested in.
tens and tens of businesses. And that is something that if you wanted to exit plan, you've got to factor in that unknown because successful businesses will be on the radar of bigger businesses in your industry. Yeah. And I myself, when we're looking at doing roll -ups, you scan the market and you'll know who's out there and you might have 20, 30 on your list and you work through your list. And then, you know, so you may not know if you're on a list somewhere generally, you're doing your job.
Michael Kerr (17:55.47)
Yeah. And you've got to be ready for that. It's a sales pipeline of merger and acquisition opportunities. How did you handle that first call you got the first time for one of your own businesses? And would you have approached it differently now? The WSP deal wasn't our first offer. We had three or four and that taught me a lot. One was about how much distraction it could be.
and how disappointing it could be when people caught you and then they come back with a number and go, you're just wasting my time. So that gave me a lesson, well, if I'm going to do it, we'll do it properly, but do it on our terms. So we're not back a lot. No, I'm not talking, we want to focus on doing this. But when these people introduced me by a third party who I knew really well and their value or their strategy really excited me. And I thought I can go work there. And I was only young. So when you're young, you say, well, okay, what's the next five years look like after I sell it?
And like any of pay rise or when you get a big check, the value of that in the last six weeks, the excitement of that last six weeks, then you're back into the reality of, of life. So it can't be more, it can't be more about just the money. It's got to be about purpose. Now it's fine if you're older and you're retiring and it's your exit event and you're super, and you're always in great, you'd ride off into the sunset. But when you're young and you've got a lot more to do, you've got to be okay. It's very, you've got to be able to go somewhere. It's going to keep you interested where you can grow as a person and have opportunities. Otherwise, why would you do it?
So I think where you go is just as important as why you wanna go there. Yeah, so that probably means that in those discussions with that acquirer, it's gotta be a two -way thing, doesn't it? So you've really, aside from the number, particularly the earlier you are in your career or ownership, the more important it is for you to kind of treat it like if it doesn't happen, it's not the end of the world. There'll be somebody, you can keep growing your business, but you said get excited, and I think that's...
really, they've got to open up the kimono on their side as well, right? So you can say, well, yeah, I could see myself in this organisation or it is too hierarchical or too whatever and it's just not going to suit. So even if the number was attractive, you may decide to pass. Yeah, exactly right. I think most people jumping in too early without actually thinking of the strategic rationale. I know when we sold Green Cap to Wes farmers.
Michael Kerr (20:16.91)
I just didn't agree with the strategic rationale why the buying was, it didn't make sense to me. And when we So you were suspicious almost. Yeah, very suspicious. It made sense. It was good for the shareholders. They wanted an event, but as a CEO or MD running a business, I saw the value we could still keep creating. And while I was, obviously the board said we're selling it. Well, went into it, you know, a hundred percent committed to doing that. I can never understand the strategic intent from effectively a retail wholesaler of products, buying professional services for never made sense to me.
And it played out on the other side of the deal. It was just a total disconnect about what we did and what value we could offer them. And so, and then I said, well, you know, I left after a few months because it just wasn't what I wanted. And I could see the business was being eroded by just a disconnect between value proposition, between strategic intent and risk appetite. So I made a real decision to go do something else. I left on good terms and still, but it just wasn't for me. I could see the business was going to change for the not, I didn't think for the better. Yeah. I mean, that, that's, um,
there are owners that have that legacy element, the top of the tree. And I encourage those two -way conversations if there is some interest from a buyer as to what will they do with the business. Because some people really do deeply care about it. And it could be reflected in caring about the staff or the suppliers or whatever, but they care about it deeply. So you've just got to, you can't be afraid to ask.
searching questions of the other side. Yeah, you're doing your DD on them as much as they're doing it on you. And the numbers are the easy side of any deal. The numbers will work out one way or the other. They'll work it or won't work out and you get a value. But it's about the people. And I remember speaking to somebody at all a lot of acquisitions for Amazon. He goes, the first 10 meetings we have is about the people. The numbers are the last thing we look at. So one, if I'm on the buy side, can those people deliver? Are they fit for our culture? Are they fit for what we want to do? Have they got the capability?
So that's where you should spend most of your time in any deal, right? The numbers are the easiest part of any deal. Yeah, you've been in a lot of people consulting businesses or tech, but if you're gonna stay with the organisation, you do probably have to fundamentally agree with what the general direction is, but also you don't wanna go to work and hate it.
Michael Kerr (22:42.478)
Yeah. And I say that a lot and I always challenge people when they're buying their business. It's great to get a big check and that's fun. It's great. It's validation all your hard work, but you've also got to give up something. You've got to be prepared to give up some freedom, give out and be, you know, be part of a bigger machine where you're not in control. And if you can't do that, don't sell cause you're going to be miserable. Yes, you might have a lot of money, but you're going to be miserable. Conversely on the buy side, they're the first questions I ask if I'm buying a people related business about why do you want to sell? Why do you want to come to us? What would you want to do?
Because when you run your own business, you put so much discretionary effort into it. And I find if you buy the wrong people business, then you lose that discretionary effort. They become what I call nine to fivers. And you've lost all the value that they've created for you. And then people leave and they get disenchanted and it falls apart. That's why 80 % of most deals fail because of they don't consider, I don't think the cultural aspects and on the other side of the deal, what do we do? Well, yeah, there's this, I think the...
the bigger up the value scale you go, the more there is this financial, and it's like the financials are how it's measured, and particularly in the listed company environment, but it can almost be that first and then, oh then, can we marry these two organisations together? And you're so far down the track that sometimes it's too late to do anything about it, but it really, you think starting with, can we marry these two organisations and the people?
A great example when a few years ago now when Combank put Colonial First State, Colonial First State was a ripping business and make a lot of money. The first thing Combank did when they bought it was, well, you've got to be like us. It's all the value that Colonial had built because they're great culture and great process that was just eroded straight away. Cause they made them fit into their model, which the reason they bought them, cause they were more entrepreneurial, doing great things and destroyed their culture overnight. So that's why you need to be careful when you're selling to bigger companies. You don't get caught up in their speak -a -morphous mass and destroy the...
The doll you've created? Yeah.
Michael Kerr (24:42.446)
Hi there, it's just a quick interruption to the podcast and it's a message from Kerr Capital, a supporter of the podcast. If you're a business owner thinking about selling and you're unsure about what you should do, well the worst thing you can do is jump straight into an unprepared business sale, cross your fingers and hope for the best. If you wanna take control, get a sense of what your business is really worth and a plan to make it more sellable, then head over onto the Kerr Capital website,
check out the Value and Sellability Diagnostic. If it piques your interest, contact me, Michael Kerr, or book one of the free 45 -minute diagnostic calls. Now let's head back to the podcast.
Michael Kerr (25:26.542)
I just want to go back to that question when you're on the buy side of, you why are you selling your business? It's such a vital question. And the answer back is, is pretty formative in the way you go about assessing something. Yeah. So my, my experience is either I want an event to happen because I'm want to retire, but I want to look after my people or I see that we can't go the next level. We need help because
we're capital constrained. And I'll, you know, I think between us working with you, we can create something we all can do by myself, which is very legitimate. Cause you get to a state where I can't fund this. So I need a bigger brother or a bigger sister to come and help me do that, which is the legitimate form. Or you get excited because someone's off me a lot of money, which to me is probably the wrong answer because they haven't thought through all the other things that, you know, what do I do post deal and how do I, you know, how's my life going to change? And so will dramatically. Yeah.
Um, and if, if the buyer is saying, you know, the classic one, if on the sell side, if nothing changes, that's bullshit. Sorry. And he said it's a bigger slide. I tell cause it does change and it needs to change. So you can't expect people to give you money, a lot of money, and then not to have things change on your lot in your life. So you've got to be prepared for that. And before you both mentally and physically be prepared, you are going to lose control. And so a lot of getting your mindset right as an owner that yes,
I've got a responsibility to people gonna give me money. I've got a responsibility to make sure this thing works. I see a lot of owners as soon as I catch the check, they're out the door already, which is to me not very ethical. Yeah. Well, and it's also it on their behalf possibly, but also on the buyer's half haven't pressed hard enough about what they really want to do. And they haven't, maybe there's been some misunderstandings, but in the end, if you're going to marry those two organisations, you, um,
you've got to have those conversations early about how we're going to work together. Exactly. Which takes a lot of this, this where a lot of these discussions go haywire because a lot of trust is needed to open up about, I do want to sell because, or I do want to grow, but I don't have the resources. You don't have that conversation every day with anybody that knocks on the door, do you? No. You've got it. So that the coming together and having a
Michael Kerr (27:49.102)
an open conversation about where this business could go and why it could benefit both sides, needs a lot of trust and maybe some relationship building prior to that. Very much so, particularly if they're a competitor. You don't want to give them away too much. And secondly, it does, it takes, it's, and when you do it in the discussion, it's like any relationship, you've got to feel comfortable and trustworthy enough to open up. You might have some fears and challenges, I don't know what to do anymore. It's very hard to tell someone who's about to give you a big check. So.
They having that trust relationship and also making sure who's doing the deal is who actually going to be working with on the other side. And from a buy side, I've always been very clear that people doing the D D aren't the ones they're going to be working with on the other side of the deal for a couple of reasons. One is in any D D can get quite heated and quite challenging. And you would have been through a lot of that Michael and he can get, why am I doing this? And so you want, you want to circuit breaker because you got to work for these people on the other side.
So I always separate the deal team from the management team. Yes, you need to have a relationship with those people, but they don't do the DD. And also then solves the issue of people getting what I call deal hungry, where they get put so much emotional time and effort and money into it, they've to get the deal done, even though it may not be the right thing to do. So having on a buyer side, having a DD team very separate to the people are going to be working with us on the side of the deal, they build the relationship, but the people doing the DD are very separate team and they're very focused on that. And yeah, but you've also got to,
You've got to educate the other side. That's it. They asked the hard questions. That's their job to do that. And equally, you should have your own people doing that of us. Um, the other thing too, I think it's a lot of small business, try and skimp on the money when they're doing DD, um, pay the money. If you get no disrespect to your local accountant or whatever, but if they haven't had proper M and a experience dealing with big, bigger firms, their legal teams, you are going to get screwed over on your value. So you need.
spend the money, remember if you're getting eight, nine times every dollar you save is gonna go increase. So you need to make sure you spend the money, invest right as you get the best possible advice you can afford. Yeah, yeah. And the expert advice who do that stuff all the time. And as you said, Derek, really good advisors around across law and, and accounting and all sorts of fields. But, you know, the, in the pinch of doing a deal, you need someone who's
Michael Kerr (30:13.294)
Yeah, custom. Yeah, he's on your side. And you know, most people aren't having the experience to negotiate hardcore sale agreements. No. So you want someone on your side who you can go in there and be your bulldog, protect your interest, but also know the bigger picture is yes, we want to get a deal done. Yeah. And we want to get the best possible deal. But we also got to work with these people on the other side. Yeah. But you're there representing why I don't have to be in the room. That's where you get emotion. Yeah. And when you get emotion, you don't necessarily get a better, better. Yeah, that's right. And those, you know, those.
the challenge with those long standing advisors can be that you've got a personal friendship with them and they only want the best. So, but you need someone as you say, to ask the hard questions and then to be able to also relate that to what you need to be clear with them what a good outcome looks like. Yeah, and they need to be able to manage your expectations too. Sometimes you go in there and you got your expectations up here, but realities are here.
I see a lot of owners when they're selling got this unrealistic expectation of their value. It's hard to talk them down from that because very much it's their baby, their life, their family. So you've got to have a good advisor who will do the best for you, but also manage your own expectations as well. Well, I think that's, you early it's if you plant is I would like to talked about if an owner sitting there wondering, let's say they're.
at a stage where they're thinking, I'm probably three to five years where I'd like to be out. I mean, to do it properly can take three or five years. I think that's number one point to make. What do you advise those, how do you kickstart? Like you can say, I know I'd like to be out in three to five years. I'd like to get X million dollars, whatever it is, because I think it's worth that. But where does that start today? What are the first,
important things. I go back, we're going to be in 10 years. So if your plan is in 10 years, you're totally retired, you're playing golf and fishing, great, let's work backwards. You're going to play golf and fish so many times. Yes. So what other things are you going to do in your life that's going to be purposeful? And if you feel that, you you might be doing other not for profit work or volunteer work or be on boards or on boards. That's great. But work backwards from that. Yeah. I see a lot of people, take it out. We've got the baby boomers coming through so many businesses.
Michael Kerr (32:30.318)
haven't got an exit plan yet they need to sell or want to sell but haven't thought out what's the future look like. So you've got to start where you want to be in 10 years and work backwards from that. That's personally, mainly right? But also then where the business fits into that. Yeah and then you work backwards from that, okay I want to get to here's what I've got to do and planning that who do you want to sell to? So having a list of what would a perfect deal look like in terms of I love that business over there because they bring the you know one plus one could equal three.
And I know they'll look after my people and me. That's really critical. So having a hit list of people you'd like to sell to, um, scanning the market, understanding when else is out there. Well, you might even do something. Okay. Well, my business, I'm only going to get three times multiple for it. We're not that, but in five, if I added one, a smaller one I could buy in the meantime, I could get five times in three years. So you can be strategic and do your own little acquisition first to give you scale and size is going to give you much bigger multiplier in five years time. So if you look at where you're doing a.
review of your business. So we're a bit too small. I want five times earnings, but we're only going to get through because the size we are. But if I buy another one and bring them together, I could get seven. So you do the things you need that five year runway to plan where you want to be in that team. Yeah, because you're actually looking ahead at potentially firstly, you're making a list of potential buyers. That's for a lot of businesses. The only genuine buyer is going to come from within your supply chain or industry. So.
It shouldn't be that hard. There are mainstream businesses and buyers could come from anywhere, but let's just, so talk about the businesses. If you can sit down and whiteboard, I do this all the time, who should buy even why? And the why's equally as important because you start to think about how your business could, you know, bolt onto theirs or, you know, fold in. So.
And then you go to, you don't have to go and ring them tomorrow, but you need to start thinking about who and why. And then you need to track, as you said, what goes on in industry. So are there transactions or deals going on at three times earnings or 10 times earnings? So you can start, but I think you need to bring that down a little bit even more granular to get your business assessed by someone who knows what, and say, if you had to sell,
Michael Kerr (34:54.989)
tomorrow, this is what you get. And it's often a real wake up call, but if it's three months before your hope for exit timeline, it's a disaster. If it's five years, then it really sets, if you want to go after it, you then have a platform from which to do different things, like focus on one area of the business, not another, but to grow the multiple and grow the earnings.
You need to plan for that. And it's going to take at least two budget cycles to show you got the numbers that's going to look at. Cause you can't point to all going to change next quarter. Yeah. I want to see the results and that's part of the, you know, but you also got to show the future growth opportunities. Another one is getting your contracting in place. So make sure your clients are long -term contracts, making sure you're not, um, you know, not, you're not concentrated too much on one client. That's another big.
red flag for a buyer. The value of some of your earnings is coming from one client. That's a, you know, that's a big risk that client walks. So making sure you've got diversity of client base, your key staff are all lined up. They've got their contracts or not going to walk. So there might be some, you might need to do some sort of deal or get some upside as part of any transaction if they hang around. Cause last thing you want to be selling your business and only keep people leaving and become competitors, which happens a lot. And that's going to be, they're the key risks that buyers going to look at.
So sustainability revenue streams, cost base and your key people. And they're the, you know, you've to lock them all in place and it might take you that three or five year, right? And, you know, the, the obvious assistance you can get there is as the owner, if you, if you are a key person in that business, you can stay and run it yourself or you can, if you're planning longer term, you can, you can factor in time under their ownership.
but it goes to what we were talking about earlier. You've got to make sure you actually wouldn't mind working. It's not going to be perfect, but if you can get to a point where you think, I've then got my exit sorted, I'm going to be involved for a couple of years, I'm excited, or I can deal with that, that's vitally important. And some of those risks of having concentration with a few key customers, or even the fact that you, as the founder, are really important in the business, you can...
Michael Kerr (37:14.87)
mitigate and offset that by being ready to work with the buyer for a period of time. Yeah. And it might be some steps in there too. You might develop a strategic partnership where you help each other out, particularly if you've got complimentary services or products. So let's develop a strategic relationship where we'll work together on projects to get a bit of a feel for each other as well, a bit of a try before you buy. And I found that's a great way too. I've got to know their culture a more. It's not really right for me and my people.
But now we see, I see a lot more opportunity, let me in there. So I think it is some little steps along the way you can do. It could even be a partial sell down. It could be, okay, I'll sell you 30 % now. I've still got control, but with a view that in two or three years time, certain hurdles are met, I'll sell outright to you, which is another good opportunity to keep control, work through a process and become comfortable with each other. Yeah, it's the, you're right in agitating by more proactively going to,
competitors or suppliers or customers and saying, how about we, you with the overarching logic is maybe they're going to be a buyer of our business, but let's get to know them a bit more and see how they react. I've got a couple I'm helping at the moment. They're going through that process at the moment. Cause they see together, they can be far more powerful, but it's just doing the dance at the moment, whether how much we want to be together. Is it a bit of a de facto relationship or we're going to, before we get married? Yeah. Um, what,
What's your thoughts on, and we've done a few of these, non -binding indicative offers where I'm a huge fan of, it's a dating analogy. You don't know each other, you're getting to know each other a bit, you go on a first date and maybe you get married, but using something like a non -binding indicative offer, which if you haven't heard the term, it's...
It's a summary of the top line deal terms and it puts a bit of an onus on both parties to do certain things to continue to explore the deal. That may not be the perfect legal definition, but to working, what it's so powerful at doing is getting both sides to commit to documenting some things without it being binding, but it indicates that.
Michael Kerr (39:38.03)
we're getting closer or we're moving further away because it's written down that we're going to, we're looking at doing this deal, it's confidential. Here's some high level commercial terms, key deal terms. We need you to stay on for three years. You're the founder, we need, and you get to the point, no, I can't do that. Or they highlight, there's highlighted problems that you've got some time to fix and if you don't, but that sort of.
governing documents are really important one, isn't it, to guide discussions from a phone call through all the way to a deal? Good and bad. So the good is it shows some intent and that's great. Where I can, but going back to my previous point, if you're going and thinking that's the deal, it's not the deal. No, it's definitely not the deal. And I think people got to educate themselves that NBIO is not a deal. So the number's not going to be the number. It might go up, more likely going to come down. So be prepared for that.
Secondly, I see a lot of big companies. Lock yourself in for too long a period of exclusivity. Remember, they've got another heap of other deals. So that's not the most important thing. It's the most important thing in your life, but it's not the most important thing in their lives. So keep a really sharp, not exclusive period. So you're not gonna waste your time. You wanna get to know quick. It's not gonna happen, get to know quick, so you're not wasting your time, your resources, and you'll be focused on other things. Because I see these draw out.
and all of a sudden you looked up at six months, you haven't hit your numbers because you've been so focused on this, you haven't been driving the business. So maximum I would give anyone is six weeks. If you can't get a deal done in six weeks to that position, well, you know, it's not worth it. So, but I've seen them drag out for 12 months sometimes and it's just a total distraction. Yeah. And yeah, I think that goes to like poor creation of one of those documents, you know, and you've got to, it's like, you've got to be deal sharp, right? This is, um,
you can't have open -ended due diligence, you can't have exclusivity. There's things you just, and early days is the time to say, and to also stand your ground. We're not, if you receive one of these from a larger company and they're external advisors, you say, we're not even close, we're having an early discussion. We're not gonna, and that's good to.
Michael Kerr (42:00.782)
pushback hard on things that just don't make sense. I've had discussion on both sides where people really negotiate hard. And I said, well, guess what? When you buy me, I'm going to be negotiating just as hard for you. So it's a good thing. I feel like someone with respect and dignity, of course, but there's your one shot at it. They're not going to go easy on you. They're going to give the best deal for their shoulders. And you've got your shareholder, you've got to do the best deal for you. That's why I think having independent advice in the middle, doing the day -to -day crunching is really important. So you...
take you out of the equation much as you can. You've also got control when you want to sell, if you don't want to sell, but have those people have those hard conversations, because you're not experienced enough to do it. You might be the best dealmaker in your industry, but you're not going to do that with a lawyer on the other side of the table and whatever it might be or accounts. Yeah, and when you talk about deal making there, it's in respect of that core service offering or that the core business, but it's a whole different thing negotiating a business sale agreement. Yeah, very much so. And leave it to the experts.
try and I know it's probably the most important thing you're doing in life business wise. So you've got to try and make it as unemotive as possible. Sometimes it's impossible to do, but in a day it's about a transaction. Yeah. And getting the best deal you can. Yeah. Which it goes to also your nearest and dearest, right? It's a founder has been in the business for 20, 30, 40 years and they've got a personally.
as you said earlier, look 10 years ahead and go, what am I going to do? Cause they're wired in a particular way that it's often pretty hard just to play golf a lot or go. Especially play golf like me, it's frustrating. Haven't done that yet, but I'll take your word on it. But it is, you know, there's a, there is a big void and, and, and it, and then that flows onto the nearest and dearest, your family. And so it does.
require some introspection and about, assume you get a deal that's worthwhile, what actually am I going to do and how is that gonna be disruptive when you're not in an office or in a factory or whatever you're doing 40, 50, 60 hours a week and all Your partner might not want to be having you around for lunch every day. They're not used to it. You've been driving this business for 20, 30 years. It's been...
Michael Kerr (44:25.71)
And they've been up on the ups and downs and highs with you. It's part of their life too, but you got to, it's got to be a family thing because you got no idea what's going to happen on the other side unless you plan. Your wife might not want to see you home every day. Yeah. Yeah. And still some dearly, but you know, that's your lifestyle. So you've got to have that broader chat with your family and yeah, your partner, like it, you know, it could be, um, there's, you know, yeah, there's two, you know, whatever there's a, there's a family structure often and um,
It can be quite disruptive for one or other or both. Yeah, so I'm thinking about kind of bringing this back to what your role is currently. You're a non -executive director, you're a mentor, you're a chair. And it's a lot of the thinking of those businesses and those owners about,
an exit event or are you working with some who see that they're a long -term holder of a business? A combination of both. I've got some, well I'm like an independent chair advisor to them, which is more growing the business at the moment. So accessing capital, helping them grow it to get to a stage where they can have an exit. So this is going out for some private equity or some food? Yeah. And that's a tough market at the moment. So once again, managing expectations.
So getting the position so they can go ask for caps. So the same thing, wanting access to capital or debt to grow the business affects the same process of selling your business. So getting them, okay, here's what you need to have in place to go ask for a capital. Cause I want to grow internationally or open up new offices. Or it could be, yes, I want to retire in a few years. What do we do? So I'm involved in both sides of that. And what I call the growth phase and the exit phase.
So I do a lot of that work and do board roles and do a lot of coaching and mentoring, which I love, and learn from all the mistakes I've made and do a lot around governance of boards, which is something I'm passionate about too, how they manage the business, how they manage governance and risk and to allow our business to grow. So. Does a lot of those conversations, I can imagine them being getting down nitty gritty on the personal aspirations, legacy or? Oh, very much so. Cause then.
Michael Kerr (46:45.87)
We get caught up in our business, right? It's a passion and it's hard work. Not many people can work nine to five in their own business. It doesn't work like that. It's a 24 -7 thing. And it takes a certain type of people who are entrepreneurs, which I've got a lot of respect for people who own their business because they know how hard it is. They haven't got the cushy middleman event job where you take a paycheck and you can turn off at five o 'clock. So, and it becomes entwined in your personality. So really understanding what, where you want to go, what's driving, what's your purpose.
I always come back, what is your purpose in the business? It was just to make money, great, we can do that. Is that creating an environment of culture for people to grow and you'll get in at some stage you'll get an exit, all so great. So really understand what makes them tick, what's their motivation and where they wanna be. What's your long -term plan? I think it's pretty hard in, we're talking small businesses here, which can be hundreds of millions of turnover, certainly tens of, but.
many of them are owner -centric and that's, well I think we've said this a few times, we both love and respect that and what we're trying to encourage is to be just really clear with what you wanna do with your business and your team. And that's, I think we're getting some good advice early, think 10 years ahead and just be conscious. Because going into, I think it's phasing out but,
This idea that you can just put your business on the market and sell it when you're ready is... It's a bit naive. It's naive. Yeah. And once again, if that's why, even if you're not planning to sell your business, an offer could come tomorrow. So always have your business ready for sale. Yeah. I don't mean the instant agree, but have your balance sheet up to date, making sure you're managing your debt, all those various things that the first line they're going to look at. So even if they may not have a plan, if someone's going to cut off you enough money, you'll eventually sell your business. Yeah.
So you've got to be ready for that. So a deal could come tomorrow. But you'll have to have, it's good business practice anyway. You should be doing those things, running a business. Yeah, look, I think it's really, it is easy to get caught and be incredibly good at what you're doing and make, you know, and have a successful business. But what we're saying here is there's, even if you're not considering selling,
Michael Kerr (49:10.382)
but especially if you are, you've gotta have, it's almost like you gotta have another hat on, which is I've got a sense of what my business might be worth. I've got a sense of who's gonna buy it. I've got some advisors at the ready to help me if I need to start proactively planning. But it is, and it's really hard when you're out there working all those hours to say then, now I gotta think about,
Because I don't think you can just completely outsource the sale of your business. It starts with you. And so tracking who's who in the industry, but tracking it from the point of view, who's buying? And why are they buying? Why are they buying? And so it's another hat you've got to wear. Or you, which is, I think, increasingly popular and important and makes a lot of sense is have.
an advisory board or have some council, someone you trust, a couple of people you trust, you get and talk, particularly someone that brings experience of taking businesses through a sale process. It could be a bigger coffee meeting once every six months, but as the owner, it's on you to have a, you know, wear that other hat and be active in thinking about who's going to buy and why. Yeah. So I'm just, I'm establishing an advisory board at the moment for a,
a startup in the biotech industry. And that's the thing is that getting an advisory board, you don't, you don't, you don't appoint them directors yet. Get an advisory board. Cause as you grow through your growth stage, you're going to need different skills, but yeah, you reward them whatever way you want to reward them, but have good people around you. You can balance ideas off and bounce and get challenged is more importantly, you don't want to guess people and people to challenge your thinking and why are you doing that? So an advisory board is great. It doesn't cost you much. You don't lose control cause you're still the director and owner, but um,
I find the advisory board is really good. Now, if you get to a stage where you want to formalize that, you can move that to a more formal governance structure and appoint them as directors. The advisory board is great and people love to help you. And there's people like you who have seen what you've gone through, they've done themselves, they want to help. And I think there's a lot of great people out there who can advise you and be that sounding board. Yeah, well, everyone needs it.
Michael Kerr (51:30.286)
Yeah. And it's more accessible than ever. Pop -up advisory boards, coffee meetings, mentoring, networking groups with all those Chatham House rules. I imagine that's with the CEO Institute. It's non -competitive individuals talking about the challenges that they find it really hard to talk about. Exactly. It's group therapy for CEOs, I call it. And they've all got the same challenges. It doesn't matter if you're running a 30 million business or a 300 million dollar business.
Many of the problems are still the same. Yeah. And, and, um, and it's either that loneliness of being a business owner, it gets talked about a lot, but it doesn't have to be that way. Yeah. I know even from a CEO perspective, you're running a bigger business that you might have a great relationship with the chair and your board, but certain things you don't want to share with them. It's going be times where you're vulnerable. I don't know what to do or I'm stuck. So you want to have that trusted advisor who is not going to impact on your career, but you can open up, be vulnerable to and change the same with being a business owner.
You need to have someone you trust implicitly who's got your best interests at heart, but aren't a cheerleader. Yeah. They're gonna tell you, he's wonderful. They're gonna say, why would you do that? But knowing that they, and I've got a couple in my life too. If I want to pitch an idea, I'll go straight to them because they'll tell me straight away if it's not gonna work or, you know, it's bullshit. So having those people you trust implicitly, because they know they got your interests at heart, but also be honest with you. Yeah. Yeah. And that's, you know, you gotta let go a little bit, right? And try and, and, and,
You don't do it, you get hardwired when you're running your business, that it's all on you to do this stuff. But somewhere you gotta kind of challenge yourself to bring in a bit of outside counsel at a personal business level. Yeah, it makes a lot of sense. Well, been a ripping chat, thank you. It's nitty gritty of deals. And,
I always like to kind of find out who you look up to and you've got a pretty active career, mentoring, directing and owning and raising funds. But who do you look up to and take motivation from as you go about doing what you do? I have a lot of different mentors or people I trust.
Michael Kerr (53:59.31)
who I can talk to where I've been there and done that from, I built a great relationship with Sir Peter Cosgrove when he was governor general, cause he loved his cricket. That's a great chat. So we can like an MBA in an hour, we're talking about leadership issues and challenges of cricket at the time. But I've got my mates who I know are older than me and being there and done that in certain aspects of their life. So I can bounce ideas. My wife, been a fantastic supporter all the way through. And she's very different to me, personality wise. She's very considered and not.
you know, very straight down the line. So if I can get it through the head of the opposition, normally it's a good idea. But having those support people around you and having a great family and great friends who you can tap into is probably the best. And there's a lot of good business advisors out there who've been there and done it and always up for a coffee. So don't be frightened. The worst thing they say is no. So if any aspiring or any business owner out there want to chat to people, reach out to me. It's so easy to have LinkedIn and other way.
and very hard, most people say yes. Yeah. On a slightly different theme, but my kids and kids of friends are coming along and sometimes I sit with them just about their next steps in their career and talk about LinkedIn as it seems foreign, but to some of them. But mainly it's saying to them, reach out to people with a bit of, do a bit of.
research, there are many people who would like to help you. And they can be friends of the family or they can be in an industry that you're contemplating. There are a lot of people if you ask nicely in the right way will give you a bit of, and not everyone will give you the right advice and not everyone will respond, but inbuilt idea that you should be getting out and meeting new people and getting some influence and some.
guidance from them is a good thing. Totally agree. And most people, when they get to our age, they want to give back. They love seeing new people come through having a crack. And I love it. And I love when people reach out, come over coffee. Love to. And I really respect it that they've done that. And I want to give back. You want to help. You want to. So yeah, don't be shy asking. He's not trying to do it the right way. But I think now, particularly as we're coming out of COVID, we have come out of COVID and people not going back to the office. I think any, for any business, that's a
Michael Kerr (56:23.224)
bad thing because you're a young person, entrepreneurial, you're missing out on so many opportunities to network and learn and I know it's slightly off topic, but getting out and talking to people, meeting people is the best way and listening. Yeah, it's almost like it's been challenging for the last four or five years to actually do that. It's been constrained. And so now more than ever embrace that. And whether you're our age in business or whoever, younger adults looking...
to progress their career. They've got shut out of the unis for years, they're all online now, their first years of career, largely at home. So anyway, slightly off topic, but it's all relevant because we want people, owners and other to build good networks around them. Small business makes up 95 % of the Australian workforce.
if you're everywhere from the local coffee shop to the plumber or whatever it might be, it's the backbone of the Australian economy. So the more that they can do it right, the better it is for everybody. So anything we do to help small business is really important. At some stage you're going to sell it, or you need to sell it because you're retiring. Do it properly because it could be the only, it's probably, apart from your house you own, it's going to be the biggest financial event in your life. So you get it done right. And way more complex than selling a home. And that's what I think gets misunderstood. Sometimes a lot more emotional too.
Sometimes, mostly. Yeah, the smaller you get, the more, well, not even the smaller, yeah. All right, Earl, if anybody wanted to have a coffee or reach out to you, where do they, what's the easiest way? Probably either on LinkedIn or my email, earl .eddings .gmail .com. Okay. Earl, much appreciate your time. It's been really insightful. Thank you. Thanks, Mike. I've really enjoyed it.
Michael Kerr (58:18.702)
Well, I hope you enjoyed that episode of Small Business Banter and I hope it was helpful in you getting the most out of your small business ownership. To subscribe or listen back or to check out any of the resources or information we talked about today, head over to the website, smallbusinessbanter .com .au or if you want, search up Small Business Banter on your favorite podcast player. Don't forget to subscribe and if it was really helpful, I'd love it if you told another business owner about the podcast.
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and how about you leave me a five star rating? If you think I can help personally, please reach out to me, Michael Curvi, the website. There's a new episode out every couple of weeks. We'll catch up then.