Pete Seligman is leading from the front in championing the next generation of business ownership. Peter explains what EtA and Business Search are, how it works and it's growing impact on the exit planning aspirations for small business owners.
@Pete Seligman talks about and #eta (Entrepreneur through Acquisition) and #searchfunds and their impact on small business owners. He's an investor and co-owner of multiple businesses.
Pete explains the concept of search funds and how they provide a vehicle for investors to back #acquisitionentrepreneurs.
We talk about;
Takeaways
Michael (00:00.498)
I welcome into edition 137 of Small Business Banter. Pete Seligman joins me today. Very big thanks for coming on just before Christmas. Pete, it's great to have you in chatting about what we're gonna chat about.
Pete Seligman (00:14.707)
Not a problem, it's great to be here and there's always time for these great conversations. So, no, it is a busy run into Christmas, but yeah, I'm happy to be here.
Michael (00:24.434)
Excellent. So what we're going to chat about, Pete, is search funds. And both from the perspective of yourself as a searcher, you know, as an investor, co-investor in businesses, but also how business owners that are on the end of a call from a search fund, how they might...
manage that call better if it aligns with their own personal plans and if the timing's not great or how they might harvest that lead because I feel like there's a lot more off-market, it's not the right expression but more of these sales happening behind the scenes. So, Pete, I just had a quick look again on, I think you've got the most experiences on LinkedIn.
of a guest I've had on, I think it was 37. So you've, you're a co-invest, you're a co-own, you've worked as a senior exec, private equity. So tell us about Pete.
Pete Seligman (01:27.711)
Yeah, I'll try and distill 37 into like five maybe. So yeah, I mean, I grew up in Sydney. I studied engineering, civil engineering, and then I also did a business degree. And that was back in the late 90s. And I started my career, actually, as a design engineer, and then moved into project management, but mainly on construction sites and large infrastructure projects. And so over time, that kind of morphed into an opportunity to move into investment banking.
Macquarie Bank was investing heavily in infrastructure at the time and that was my opportunity to jump out and leverage the business degree that I had and get on the other side of the equation there. And so I spent another period of time with Macquarie both here and in London with kind of roles globally. And that was initially focusing in on due diligence for infrastructure projects.
Michael (02:22.742)
It's a very big ticket we're talking about. Yeah.
Pete Seligman (02:24.435)
Yeah, yes, multi billion dollar projects. So, you know, when Macquarie was sniffing around at buying Qantas, I was part of that time when we bought container terminals in Canada, I did that we bought the whole national grid, meaning all of the mobile telephone towers across the United Kingdom. So I was part of that project. So so yeah, really, really big stuff.
But I mean, this will come back later in the story, but that also means that you end up being a very, very small part, right? So, so, so yeah, but it was really interesting to get that lens and with that lens, I learned a lot about risk and reward and due diligence and risk management and all that kind of stuff. So, so that was.
Michael (03:08.278)
And I'm guessing about yourself in terms of your own aspirations to be a bigger player as an owner.
Pete Seligman (03:16.243)
Yeah, well, I think at that time, I didn't realize that I had that entrepreneurial
aspiration. I think I was moving through a career that I thought was the career that I should have followed. So like, I did an engineering degree because my family has a big history in engineering. I then went on to practice as an engineer because it was something that came naturally to me. I'm generally good with numbers and concepts and problem solving and physics and that kind of stuff. But it never really clicked. And so that's why I moved on to the next thing and tried investment banking. But again, that didn't really click. So I think I was constantly trying to find what was
think then I came home, I joined Stockland Property Group for a period of time in general management, but still didn't quite click. I mean, in each situation, I think I managed to work out how to be successful, but it didn't fulfill me in the same way that I was looking for. And I think that's why come forward to 2012, I kind of realized that what I was actually looking for was something where I had
bit more autonomy and also accountability. And I use those two words a lot when describing that transition because I was looking for the autonomy to be able to be a bit more master of my own destiny about, okay, let's head in this direction and then we actually do. But also the strange thing that I was looking for in terms of accountability was actually if things went wrong, I wanted it to actually hurt a bit more. Like I felt like when things went wrong in those big ships, in those big companies,
Michael (04:45.158)
Yeah.
Pete Seligman (04:49.639)
life would just go on and that wasn't kind of wasn't exciting enough because it wasn't scary enough strangely whereas as anyone that's been involved in a small business will know definitely if you decide to change tack you can be very agile but equally if you tack in the wrong direction it can hurt pretty quickly so the feedback loop is quite good and so that's why I enjoyed it so 2013 bought my first business
invested in a handful more over the next five to eight years. In most situations, I would drop in as the CEO for a period of time, make myself redundant, and then move into a non-exec director role. And then the story kind of gets to its current chapter in 2020 when I didn't wanna drop into the CEO role again, was looking for what I would do next and came across the concept of a search fund, which was my...
ability to find that gap between investing and operating and get a good balance of the two.
Michael (05:55.294)
Yeah, the search fund ETA, Entrepreneurialism Through Acquisition, has gathered a lot of steam in the last, it seems like relatively recent past, six months or so, but in the US, probably well ahead, but catching on like wildfire here. So firstly, you already had a track record of buying businesses.
Pete Seligman (06:12.852)
Mm.
Michael (06:23.33)
the wider wire search funds so uh... increasingly popular nasa wetwood if you're going to find a business other not the businesses you see for sale on the business for sale website so therefore you gotta go often and can't hunt them down is that
Pete Seligman (06:37.451)
and
Pete Seligman (06:42.055)
Yeah, I think there's a couple of factors there. So like distilling it right back to the basics. If you want to be a business owner, you can either start a business or you can buy one, right?
And there's a lot of people out there who have great ideas that they want to bring to market and they're excellent startup founders and then there are other people of which I'm one that don't have any great new ideas, but are Pretty comfortable running businesses and growing them and so buying an existing business is a great pathway Um, it's something that I think Effectively for as long as businesses have existed people have bought them
Right? So that whole idea of buying a business instead of starting one has been happening, but I just don't think particularly in the Australian market, it's been acknowledged as a thing such that a community can grow around it. Right? And so even when I bought my first business in 2013, it effectively was entrepreneurship through acquisition or ETA. But I wouldn't have called it that. I wouldn't have known that's what it is. And I wouldn't have known that there potentially could be a community of people doing the same thing.
In the US, it's been around since the 80s as a community. And in Europe, probably for about the last 10 to 15 years, it's been pretty strong. And in Australia, really only in the last three or four years, frankly, has it been something that we've been able to build a community around. In relation to search funds specifically. So ETA as a concept is imagine that being the big bubble and then a subset of that bubble is a search fund.
which is really a vehicle that allows investors to back an acquisition entrepreneur. So if I wanna buy a business instead of starting one, I could come up with my own funds and I could go looking for a business to buy whether via brokerage site or direct outreach, and I could go and buy one and continue on my way as I did.
Pete Seligman (08:40.875)
But if I either didn't have sufficient funds or wanted to buy a slightly bigger business, then I might wanna get some capital to invest behind me. And that's what the Search Fund Vehicle provides.
Michael (08:50.93)
Right, and that's the community piece that you talk about.
Pete Seligman (08:55.716)
Yeah, it's the ability to get an investor group or syndicate behind you that provides you with a little bit more capital so that then not only do you have some runway to stop doing your day job so you can focus 100% on the searching part of the process, but also then when you get to the acquisition, you've got a little bit more capital behind you to get something slightly bigger.
Michael (09:21.482)
Yeah, yeah, which is, yeah. And traditional funding, bank funding of those acquisitions, particularly for perhaps a first time owner or entrepreneur is pretty challenging.
Pete Seligman (09:35.143)
It can be really difficult at the small end if you haven't done it before. There are avenues if you've got a few runs on the board that you can use, which I have done. But yes, if you've got a group of investors behind you, you're buying something slightly bigger than it also makes the debt piece slightly easier. Not easy, but slightly easier as well.
Michael (09:55.682)
Hmm. You want, yeah, to, to deform. Now you wouldn't want to be too easy, Pete. Right. You want to make sure that everyone's got, you know, some incentives to.
Pete Seligman (10:01.771)
Yeah. Oh, I always say if it was easier than everyone, I'd be doing it right. So it's not none of this is none of this is easy. But I think that's also I mean, back to the point that I made before, I think the reason why I went down this path 10 years ago was because I didn't want it to be too easy. Like, you know, we all live for the challenge, right? A comment that I make often is that if you want to head down this path,
Michael (10:08.237)
Yeah.
Pete Seligman (10:28.959)
you want to enjoy the climb, not just the view from the top. And so I think it's really important that people understand that, yeah, it is challenging and there are some really difficult times that you need to make your way through, but that's what makes it more fulfilling.
Michael (10:41.378)
Yeah, I think startups have had such focus the last, and that's a great thing, but the boring established business owned by, there's a lot of them owned by owners that are needing to think about, perhaps not doing terribly much about getting out, so it seems like the environment's right, and it's a great, you know, the opportunity to buy.
an established business that you can innovate from within or scale, do all the things you might do in a startup. You know, there you've, you buy a business and the fax is faxing on a Monday morning or the phone's ringing or the internet is pinging with. So yeah, I'm a huge fan of it. And there's a lot of them out there. It's probably, with your search activity, what are some of the, do you go after?
Pete Seligman (11:22.583)
Mm. Yeah.
Michael (11:38.454)
particular industries or business types.
Pete Seligman (11:42.355)
Yeah, it's a good question. So for me, so in the role that I play in this system, I'm an investor in search funds and also an investor in acquisition entrepreneurs. And the reason why I distinguish between the two is that some of those entrepreneurs will actually establish a search fund that then is a vehicle into which we can invest. Others will go through their search phase.
by themselves effectively. So they'll fund their own search phase and then they'll bring a deal to the investor community into which we'll invest, right? And so it's just a slightly different process but imagine it's the same. So when it comes to actually searching for the business, I'm one step removed because what I'm there to do is support each of those entrepreneurs in their own search journey. And so...
when there's questions like other particular industries that we focus on or particular business size or type or model or whatever, the first answer I give to that is it really depends on the entrepreneur because it's, a lot of people use the analogy of the horse and jockey. So effectively this model of investment is about picking the jockey first and then helping them find a horse to ride rather than the other way around.
And so it's really important that in thinking about the targets for that search process, it's got to be something that ticks both boxes of being yes, like a good business to invest in, but actually a good business that has a fit with the entrepreneur.
Michael (13:11.346)
So that's your way of saying that not sticking to your knitting, but you're an engineer, you bring particular skills to what you do and so you don't want someone stepping across seven different sectors to get to something that's high growth, high potential, but no, not the right experience. You're not going to back them.
Pete Seligman (13:33.031)
Yeah, yeah, I absolutely and it doesn't mean they need direct experience in specifically the target that they're looking at. But they need to have some affinity with it, something in relation to the way in which they operate the kind of skill set or experience they bring that's transferable into that business or that sector. It there needs to be some affinity. I was joking with someone the other day about this. It's like, you know how people say that
if you see someone walking along the street with their dog, for some reason, like people typically pick a dog that for some reason like looks or behaves like them. Do you know what I mean? There's always this alignment between, where you really, yeah, right? Okay, so strangely, even without defining it, if I look at, I now sit on seven boards across a range of different sectors for entrepreneurs who are in operating these businesses.
Michael (14:11.998)
Yeah. There's a lot of names on that.
Pete Seligman (14:29.723)
And I'm not sure that I necessarily would have picked it up front. But now on reflection, when I look at the businesses that these guys have selected, there is that relationship between, Oh, now I can see why there's that fit there because that person has that style or that character or that experience or whatever. And that's exactly what that business needed at this point in its journey. Um, so yeah, I think.
the fit between the entrepreneur and the business is really, really important. And everything other than that is all of the normal stuff that you'd wanna make sure of in a due diligence. You don't need massive macro tailwinds, but you wanna make sure you don't have huge headwinds. You wanna make sure that you've got good diversity of revenue, good quality of earnings. There's all that kind of normal stuff that you do. But in terms of sector and business model and type and all that sort of stuff.
Michael (15:21.282)
Yeah, we have.
Pete Seligman (15:26.12)
where I start is like, is this something that I actually think this entrepreneur's gonna really get their teeth stuck into?
Michael (15:32.53)
Yeah, because you know, you know, the pathway is, it is going to have a lot of ups and downs. And so beyond making a bucket of money out of whatever the venture is, you got to stay the, stay the journey. And so you need to feel, you know, in some way connect, you want, you would want to see them connected beyond just that one singular objective, which is, which is probably top of the tree, but there's other things needed to make it successful.
Pete Seligman (15:52.46)
Yeah.
Pete Seligman (16:01.361)
Yep.
Michael (16:02.326)
Pete, where are the searches and the entrepreneurs coming from, broadly speaking?
Pete Seligman (16:08.803)
Yeah, it's a good question because in other markets, it's much more obvious, I'd say. So for example, in the US, it's the most obvious. So in North America, in all of the major universities and colleges, Harvard and Stanford and Chicago Booth and Wharton and all of these big name schools, the MBA programs have targeted streams around entrepreneurship through acquisition and search funds. And so those schools on an annual basis are spitting out.
tens if not hundreds of entrepreneurs that are jumping straight into search funds and ETA. And so in those markets and in Europe as well, most of the entrepreneurs are coming straight out of business school. Now they may have had some work experience in a large, you know, like a McKinsey or something, or they may have come from some other operating background, but they're generally a little bit younger and are coming straight out of business school. In Australia,
we're seeing a little bit more diversity in terms of background and age range. I think firstly, because none of our universities here have caught on yet, and I'm doing as much work as I can to try and solve that problem, because it's a huge opportunity for universities. So we don't have that flow of people coming out of the post-grads straight into this pathway.
We do have people that have returned from offshore universities, like have come from universities in Europe or North America, having done exactly that program, but they're returning home to search rather than do it in those markets. And we also have older people. And when I say older, I mean like mid to late thirties instead of mid to late twenties, who have maybe had a longer pre MBA career. And then they
did an MBA and then in the MBA, learned about the pathway and then came out and, and progressed it. But for my personal view is I think that the pathway is open to almost anyone really with the right support network around them. I do think that there's more opportunity for more experienced people than what you see in other markets. So I think people...
Michael (18:06.395)
Yeah.
Pete Seligman (18:30.411)
you know, in their 40s and 50s, you know, are just as eligible to go down this path as people in their late 20s and through their mid 30s. And I actually think in a lot of ways that extra kind of life experience and you know, those battle scars can be super useful in dropping into these smaller businesses.
Michael (18:40.203)
Yeah.
Michael (18:51.498)
Yeah, they definitely are. And you said yourself, it took a while for it to come to you that you wanted to be your own. But also, I think it's the same for a lot of people that it could be 30s, could be 40s, could be 50s. But when it's right and you bring that experience, I do like that. I hadn't really.
Pete Seligman (19:00.643)
Hmm.
Michael (19:21.346)
been tracking reading about search funds and ETA for a period now, but the community part of it has become a bit more apparent to me today that you can bring financial backing but also support. So the pathway to becoming a business owner, it's not age-bound. And I think there's a lot of really experienced people, probably more so in corporate, that
or past business owners who have sold, you know, who can really take advantage of this. And it's never too late. And the environment is, there's a lot, and I do want to get to talk about, you know, from the business owners perspective out there, but there's a lot of businesses at any one time on the main business for sale, you know, Seek and...
Pete Seligman (19:54.083)
Mm.
Pete Seligman (20:03.299)
No.
Pete Seligman (20:20.643)
Mm.
Michael (20:22.03)
There might be 150, 200,000, 70, 80% of them are personal retail. They're not, they're buyer. And I actually love this, but you can buy yourself a job and control and scale if you want to. But I suspect that for finding businesses that searchers want, you're going to have to be identifying your prospects.
by industry and reaching out and having calls with business owners.
Pete Seligman (20:52.703)
Yeah, there's a bit of both. So the data in Australia isn't fantastic. It's not as bad this part of the market. It's not as good in some other markets, the data you can get on businesses of this size is really deep and really easy to analyze. But the best estimates that we've come up with over the last few years triangulating data from various sources is that, you know, normally for a search fund, and usually for anyone that's wanting to go down this path.
you're looking at businesses with earnings of between kind of one and four or one and five million. You can definitely go down to half a million of earnings or even smaller than that if you're doing it on a self-funded basis and you're deploying less capital and you're going to drop in and run it yourself. But usually say between one and four or one and five. That's usually employees between say 20 and 100 ish. That kind of size of business. And we reckon that there's probably
And when I say we, I mean a range of us in the market that are trying to work out what this number is. But it's somewhere between 80 and 130,000 of those businesses in Australia at the moment. And the total number of registered ABNs in Australia is like 2.9 million or something, right? But most of those are, you know, sole traders and one to four. Yeah, yeah, exactly. So, but we reckon that there's, just call it 100,000, right? It's gotta be something like that.
Michael (22:09.297)
Yep.
80% of them are zero employees or something like that.
Pete Seligman (22:22.019)
And, and those are right in the, in the target range. And I would say that based on as many servers as I could find, a majority of those these days are probably owned by people of retirement age, like there, there really is that wave coming through. Um, that's a real thing. Um, I saw a survey a few years ago, I think it was PWC that did it where they said, you know, what percentage of businesses of that size are at any point in time listed for sale and it was some tiny percentage or less, less
Michael (22:49.494)
Yeah, that makes sense to me.
Pete Seligman (22:51.619)
right? But then it had this other statistician said, what percentage of business owners if asked would sell, and the percentage was like 86 or something, right? So, so there's this huge kind of dormant, like if you knock on the door, you will probably get a good response. And so searches who are looking definitely will trawl as many business broker sites as they can, and will have many business broker relationships they can because obviously that's, you know,
Michael (23:01.751)
Yeah.
Pete Seligman (23:19.707)
something that's warm is gonna be better than going from scratch in terms of getting someone up the curve for a sale. But yeah, the outreach is definitely a large part of the process, but the hit rates that we're seeing across multiple searches is that for every 100 cold emails that go out to a business owner, they're getting somewhere around between 25 and 35 responses which is huge.
I would say. That's a massive number.
Michael (23:50.006)
That, that my, yeah, my experience, I did a lot of, I've done a lot of acquisition work over the years on brief and I, I kind of had a rule of thumb, which is for 10 calls, one owner would say, not interested, have a plan. Um, one would say, uh, I don't want to talk to you. One that say, you know, come see me tomorrow. Um, and, and the other right.
were a bit like you said, you know, open to the idea, but therein lies the challenge and the opportunity to how do you filter eight down to, and if they're getting quality, you know, 35% quality interest from their inquiries, that's excellent. And I, because that there's a fluky, you know, change your mind today, it's kind of marketplace.
Pete Seligman (24:35.243)
Yes.
Pete Seligman (24:39.595)
Totally. And yeah, and like of the next step that I was gonna share is I think of the 35 out of 100 that respond, that probably converts into maybe 10 meetings, right? So then you have 25 that drop off after like a phone call that actually validates that they're probably not ready or there's something else or they want some massive valuation that's unachievable.
And then so you probably end up with somewhere around about 10% of any outreach calls from the top of the funnel end up in a meeting Which is which is a really good hit rate frankly like that's
Michael (25:16.643)
It is a... we've created 10 conversations and they're not all going to happen tomorrow, but they might happen in 2, 3, 5 years.
Pete Seligman (25:19.039)
Yeah.
Pete Seligman (25:23.531)
Well, and in the context of, particularly in the context of an acquisition entrepreneur that actually is buying a business so they can drop in and become the CEO, they're only looking for one. Like they only need to buy one. They're not like a private equity firm that's out there trying to look to see if they can buy five or 10 over a period of time. Like, so you only need your hit rate to be so good. You're just trying to find one to buy. And then after you've bought it, that's the horse that you're on for the next five to 10 years, right? So.
So yeah, I think that the hit rate's relatively good. The number of businesses out there is large, but as you say, I would say that there's a large proportion of those business owners that either haven't thought about an exit or if they have thought about it a little bit have maybe put it in the too hard basket. And if someone did knock on their door, that would...
Michael (25:53.015)
Yeah.
Pete Seligman (26:18.063)
a lot of them wouldn't necessarily know what to do. And it's a really good question that I know you're gonna lead into maybe in the next. But the one kind of framing comment that I might make is that when thinking about this ecosystem, there are various parts at play. And obviously we need entrepreneurs to run these businesses. We need investors to back them. We need banks to provide debt or non-banks to provide debt.
We need advisors in the network that understand this part of the market so they can be helpful in that. And then we need businesses to buy. And under that heading of businesses to buy, we need business owners that understand not only the process of selling their business, but they also need to understand what a search fund or an acquisition entrepreneur looks like because at first look, they might look very unreliable.
32 year old, you know, woman with five years of operating experience in an MBA rocks up to, you know, your front door and says, Hey, I want to buy your business, you'd be reasonable to expect to turn around and say, well, how are you going to afford that? But if they understand, okay, I know what a search fund is, I understand that means that she's probably got investors, and that she's got a whole ecosystem sitting behind that. It's worth me investing some time in that conversation. So
So yeah, that education process is super useful.
Michael (27:44.767)
Yeah. And look, a lot of the advisory work I've done in the last 12, 18 months has been, and the more of this search activity, the better. Because I work with the owners when they get that call. What do I do next? And the reality is many of the businesses won't have a formal exit plan or won't have given it enough thought as to what's a good plan.
Pete Seligman (27:59.252)
Mm. Yeah.
Michael (28:12.374)
got a good time frame to get out. So from their point of view, the reality might well be that this could be the call that does get them out or triggers them to do some proper formal exit planning. How do you advise owners to deal with those inbound inquiries?
Pete Seligman (28:36.095)
Yeah, it's interesting that, so the first thing that I'll probably say, and I'll say this as a business owner myself, right? So I've bought businesses over the last kind of 10 years. The last kind of handful that I've been involved with, I've been part of a much bigger syndicate, but the first businesses I bought were really just in partnership with a mate of mine, right? So I am a business owner that occasionally gets approached, right? And so I can speak from that perspective too.
It's hard because as a business owner, you spend a lot of your time, rightly so, focused on running your business and focused on what you're going to do next and how you're going to make sure that you're taking advantage of all the opportunities in front of you and frankly, dealing with all of the problems that hit you from day to day running a small business. So adding another layer of thinking about what an exit might look like is hard. I think working out at any point in time, how to quote unquote,
don't look, but be ready is really important. And some of that comes down to just fundamental, good business practice, like making sure that you do have your accounts in order. If you only produce annual accounts, then starting to produce some monthly accounts can be useful. Investing some time and energy and making sure that you do have the numbers right and you've got a team of people either internally or externally that can do that for you is really important.
Um, I think the other thing that's really important is starting to understand and properly and kind of honestly reflecting on what your role in the business actually is, because I think that it's easy to assume that you've stepped away and the business doesn't actually need you, but then when push comes to shove, there might be certain bits that you're propping up without even noticing it. So taking a good heart.
Michael (30:33.47)
Yeah, 30 years of embedded understanding about how things work isn't, it just seems, it's a backdrop for you, but it's completely new for another owner.
Pete Seligman (30:44.447)
Yeah. So having a think about that, I think is really useful. So all that kind of prep work before you even get the knock on the door, there's a lot of people probably yourself included who rightly so are trying to encourage every business owner to at least spend some time thinking about that, which is, which is really useful. But I think when you get the knock on the door, I think as much as possible,
Pete Seligman (31:15.123)
you wanna try and assume best intent on behalf of the person that's knocking on the door. I think maybe understandably, but I think probably more often than not, there's a level of skepticism that business owners treat potential buyers with. And I think you need healthy skepticism.
But I think if you apply too much skepticism, you might miss something. There's no way that anyone can force you to sell your business. So there's no harm in having an open conversation around what a sale might look like. If you don't like it, you don't have to do it, right? And I think that working out how to invest your time appropriately in investigating anyone that's thinking about
Michael (31:47.522)
Yeah, the...
Pete Seligman (32:11.679)
making an offer for your business, I think is really useful. And having the right advice is number one.
Michael (32:15.038)
Yeah, I think it, yeah, getting the right advice, but that first call can catch you on the hop. But in broadcasting something like this discussion, the probability of, if you've got a business making one to $4 million of EBIT, you're probably already on the radar of a bigger competitor in the supply chain. So they haven't already approached...
Pete Seligman (32:22.53)
Yeah.
Pete Seligman (32:36.535)
Yeah.
Michael (32:42.754)
the likelihood of an approach from a search fund or investors increases all the time. And so be ready because as opposed to a blanket approach from a business broken firm wanting to sell the business and more or less saying, we'll help you sell your business for whatever you want.
Pete Seligman (33:10.902)
Hmm.
Michael (33:11.222)
the skepticism you need there is much higher because they're basically looking to add another listing to their 500 or 1000 or 2000, which is fine. So healthy skepticism, but also recognition now that the probability of a call from a search fund is higher and higher. So take it one step at least. And with all that...
Pete Seligman (33:14.285)
Yes.
Michael (33:39.678)
experience of running a business, I often talk about, use your instinctive experience to assess whether someone's got any credibility. Like, would you go into a project with this other business owner? Would you extend credit to a customer? That's commercial instinct you're using right there and there. So, no different with a potential buyer for your business.
Pete Seligman (34:05.279)
Yeah, and I think the other thing is, which I'm hoping we can do, the more that we kind of build out the knowledge base in this, in the Australian market for this kind of activity, is that we can get to a point where, you know, a business owner is approached by an entrepreneur that's part of a search fund, and they say, hey, you know, would you be interested in selling your business?
I've got a search fund that's backing me like I'm here to try and see if we can come to a deal That after that initial call that as you say might rightly, you know, catch you on the hop They can do a little bit of research identify the fact that there are a few of these people around and Maybe even reach out to I mean even people like me or other Advisors like they might find out that these three accountants have I was currently supporting
a whole range of other searches, I'm going to call them and just say, Hey, look, I'll approach. Can you tell me a bit more about how this works? Like there should be more touch points that they can reach out to rather than just a data point of one. That's really helpful. If you're active about how can I learn more about what this actually means?
Michael (35:09.866)
Well, yeah, like a view.
Michael (35:15.574)
I mean, if you've done any cold calling for anything, you've kind of got 30 seconds, right, to establish a little bit of credibility and not trying to force anything within the first couple of minutes. So yeah, that wouldn't be sales 101, but it's relationship management 101. I was keen to find
to get your take on, I've forgotten completely where I was going with that question, but with that unexpected approach. What I was going to ask is the likelihood also of a co-investor coming in, so not necessarily a total purchase of a business. This idea that you
If you, if you hit up on an owner at a particular time in their ownership cycle, they might well say, I'm not, I'm not ready just yet to get out. I enjoy what I do. I can see, you know, one of the things that owners say to me about not getting on with exit planning or, or some structured thinking about where they go is because I've got this new project. I've got this new collaboration. I've got this, you know, new, you know, um,
new opportunities to really significantly grow the business, probably double it in two, three years. I'll come back and talk to you then. So you've co-invested in businesses. Is that like a pathway for an owner to venture, joint venture partner with an investor to actually grow the business, use their experience, their energy, their skills, and
Pete Seligman (36:50.391)
Hmm.
Michael (37:09.29)
with a view to getting them out maybe in five years, ten years, but at a much higher value because you've brought in some of the capital and expertise you need.
Pete Seligman (37:20.383)
I think it's an option. It can be challenging. So I think it's an option if the existing owner has a plan that they need growth capital funding to achieve, then they should definitely seek that growth capital funding. There are a lot more sources for that, both.
equity and debt sources for growth capital than what they were even five or 10 years ago. So that marketplace is a lot more liquid than it used to be. So if you're sitting on a business that has, I know earnings of one and a half, and you reckon you can see how you can get it to earnings of four, but you're short on capital because working capital is going to grow and various other things, or you need to invest in your equipment or whatever it happens to be. I think taking that plan to capital partners, whether that be debt or equity is
definitely a valid pathway. I think partnering with an investor or group of investors that's also going to bring some form of executive capability, like a co CEO or something else in that, I think is really challenging. Because I think if the challenge for the owner is again, it's that kind of self awareness, honesty pace is to determine
whether or not it's actually them that might be holding the business back at its current level, right? And that's a really hard conversation to have even with yourself, frankly, to be able to say, I know this business could be, you know, 4 million of earnings, but it's currently sitting at 1 million of earnings and has been there for the last four years straight. And I know that all I need to do is recruit these two extra people into my management team, but I wouldn't.
trust anyone else to do those jobs except for me. And often what we find is that the thing that you need to unlock has something to do with the risk appetite of the owner operator or something to do with the ability to structure their team around that next level of growth. And so I think
Michael (39:30.878)
Yeah, there's a lot of owners. There are a lot of owner centric businesses and there's this, if that, if you've got a business that's got a ton of potential and you're not interested or it doesn't suit you and you're happy where you are, I can, that's a, you're in a good place if you're conscious about it. And from your point of view as an investor, then maybe that's why getting
Pete Seligman (39:51.441)
Yeah.
Michael (40:00.038)
at the stage they're ready to exit entirely, you might be more interested than actually venturing or becoming co-shareholders when they're just using their business to support their personal and financial aspirations.
Pete Seligman (40:05.804)
Yeah.
Pete Seligman (40:14.911)
Yeah, I think the challenge with that partnership approach is that sometimes what the business needs to change gears is actually a change of ownership. And as I said, it can be a really hard conversation to have because I think, so the analogy that I use often when I'm talking about this dynamic is I use the analogy of sailing, not least to which, because I love sailing, but there's a lot of people that own boats on Sydney Harbor, right? And there's a lot of people that own
Michael (40:26.999)
Yeah.
Pete Seligman (40:44.139)
very good yachts on Sydney Harbour. And there are plenty of yachts on Sydney Harbour that inherently have the capability to sail the Sydney to Hobart race. And there's a lot of owners of those boats that sail around Sydney Harbour, talking about how they'd love to sail the Hobart one day. And then what happens sometimes is they might even say to someone that has sailed to Hobart, hey, you know what, you've sailed to Hobart, why don't you jump on my boat?
and we'll sail to Hobart together, right? And then the first time they head out of the heads to head into open water to just go for a quick test sail. And suddenly the swell jumps from one meter swell to four meter swell and the wind climbs from 15 to 20 knots to 50 to 60 knots. And the owner of the boat saying, whoa, wait a second. Like this isn't what I signed up for. And yet the guy that just jumped on that's done sitting in Hobart.
10 times is like, well, this is Sydney, this is what it looks like. Like this is normal. Like you do have a boat that can do this. This isn't abnormal, but the conditions are completely different. And I think that it's sometimes too easy for business owners to look at what their business might look and feel like twice or three times the size, but...
something's holding them back and quite often it is their appetite for that next level of intensity. And so they need to be comfortable. It's a self-realization thing of you know what like that's just not me so this is where I need to let the next person take the reins.
Michael (42:24.55)
Yeah, and this is why small business is deeply personal and individual. And I'd speak to hundreds of owners a year. And to have those privileged trusted conversations is, you know, it can take a while, but most owners I've met would like to have it. But it just hasn't been the right time. They get all sorts of reasons getting away. They're busy.
Pete Seligman (42:54.138)
Mm.
Michael (42:54.242)
There's something going to happen next week, so I'm going to put it off. But the more we can get those open conversations started with their trusted advisor, of preferred trusted advisor, which could be someone often outside of the business. It's very hard in the business to talk to people about what you're going to do with it. So it might be a...
Pete Seligman (43:13.441)
Yeah.
Michael (43:21.486)
could be an accountant, could be a coach, could be a banker, could be whatever. As long as they're having those conversations, that's the most important thing. And I think just being prepared to let go a little bit. And the older you get, the more you need to be open. Or be just very clear that I'm going to stay here until I'm done.
Pete Seligman (43:43.319)
Well, I remember one of the businesses that I bought back in 2015, the first conversation was in 2013. And the price that we offered at that point, the owners said, no, we want more for this business than that. And so we just said to them, well, okay, well, if you want more, here's the levers that you can pull. If you pull those levers effectively,
we'll buy it, we'll pay more for it. You know, like if you do the work to take it from here to here, we'll buy it here for the higher value. Like, so that's great. And so they went away and said, excellent. Now we know which levers to pull. We'll pull those levers and have that impact. And they called us every six months to talk to us about whether or not they're pulling this lever or that lever or whatever. Anyway, two years down the track, they realized that they just didn't, for whatever reason, couldn't.
Michael (44:12.566)
Yeah.
Michael (44:20.77)
That's some good advice there.
Pete Seligman (44:36.151)
pull the right levers at the right time in the right way to make that change. And so the business is still in the same position it was two years later than as Howard had been operating for the last five to 10 years prior. And so clearly there was this glass ceiling that they were just hitting as owners of the business. And so they agreed that we could buy half of the business with an option over the remaining half that in aggregate would give them the number they were after. And so we went in and did that.
And just with that change of ownership and that fresh set of eyes and that willingness and appetite to pull some of those levers a bit more purposefully, we got the business to react and change and grow. And then 18 months later after that, we bought them out in full for the price that they're after. So I think sometimes you can get some real clarity around
what needs to happen in order to take your business to the next level. But then if you're finding that for whatever reason you just can't do it, then that might be an indicator that actually, you know, you've taken that, you know, you've taken it as far as you can go. And now maybe the time might be to pass on the baton.
Michael (45:53.078)
Yeah, so you're getting involved in deep discussion there. And I think the lesson for owners is healthy skepticism, but open up. And it can be the trigger to reassess. You don't wanna burn your time. But as you said, somewhere through this interview, to start with this idea that they've got good intentions and you can work that out pretty quickly. But that's a classic case
Pete Seligman (46:17.707)
Yeah.
Michael (46:26.471)
We want you to feel fulfilled and happy and rewarded for the work you've put in. But we're being very clear this is where we are for these reasons.
Pete Seligman (46:38.683)
And, you know, I think, no, no. And one thing that always seems to come up is definitely on the sell side. And I mean, as I said, I'm a business owner myself. And so I'm often thinking about what an exit might look like. Earn out for a business owner is a dirty word, right? It's like, no, when I sell, I want one number and I want on completion and I want no risk and I want it all on day one.
Michael (46:41.739)
It's not horse-triding.
Pete Seligman (47:06.495)
And that's fine. Like you can structure a deal with a single number. But where I think earn outs have their place is in that gray area between where the buyer is sitting in terms of what they can see as value in the business and where the seller is sitting in terms of what they think the opportunity is and how to bridge that gap is through your comment there around the creative deal making around structuring something.
that provides the opportunity for that sharing of that risk profile. And I think you've done well, and I've done a handful of these, and I think most of them have worked pretty well. If done well, you end up managing to tread that line quite nicely. And you can get into a position where, you know, the owner doesn't need to sell themselves short, but the buyer doesn't need to take on excessive risk. And it's a great risk sharing.
kind of parameter if both parties can get their head around it in a way that makes sense. But I definitely, I think there's a lot of owners who just flat out reject any concept of any deferred payment. But I think that does potentially risk cutting off your nose to spite your face because there could be an opportunity there to actually design something that works for both and in effect gets you more capital released for your business than you otherwise might achieve.
Michael (48:25.481)
Yeah.
Michael (48:30.642)
Yeah, yeah, that keeps coming up. You've got to, you've got to be, be skeptical, but be realistic and elegant and deal with the right kind of potential buyer and earnouts are misunderstood. You know, vendor finances underused misunderstood, but it, if you, you know, if you understand how the, how things are going to be calculated and you're dealing with the other side, who's
Pete Seligman (48:40.454)
Mm.
Michael (48:58.478)
you're starting to establish a level of trust. You've got entertainment and it often is your best chance to exit so don't get too cute.
Pete Seligman (49:08.395)
Yeah, and the thing is that the other thing that I think and I honestly think that all advisors, particularly those close trusted advisors, long term advisors of business owners like across the country are amazingly valuable and have been so for decades for all of these business owners. However, I would also say that it's highly likely that
the same advisor that you've lent on as a business owner for the last two decades might not be the person that has all of the tools in their toolkit to take you through a sale process. It doesn't mean that they're off the team, but it might mean that you need to augment that person with a bit of that capability that might be missing for this, what could be the biggest transaction of your life.
Michael (50:01.416)
It often is not just for financial reasons, but for purpose, legacy, or to be in or out of a business at the wrong time. It really impacts people heavily when they've been doing it for such a long time and it's defined who they are.
Pete Seligman (50:08.791)
Mm.
Pete Seligman (50:16.055)
So I think if you're a business owner and you've been approached by a potential buyer and you're thinking about embarking on a sales process, I would encourage you obviously to have really good conversations with your existing trusted group of advisors. I would also encourage you to have very direct conversations with them about their comfort level and experience level in dealing with a transaction of this nature and get them to feel comfortable.
to admit to you where their gaps might be, so that you as a team can fill those gaps. And it means that if you've got your accountant who has been your stalwart for the last two decades with your business, but they're not completely up to speed with transactions and M&A in this space in the last five years, then it's a matter of saying to them, well, how can we augment our team with someone that can?
And I still need you here, because you're the person I trust, right? So you're the person that's gonna be helping me navigate this, but we're missing a piece of the puzzle. So how do we make sure we get that in? Because too often I see owners leaning too heavily on super capable and trusted advisors who just happen to miss the piece that we need in order to have a successful transaction.
Michael (51:31.798)
Yeah, and they've been there for them for a long time, but that doesn't segue to being what you might need right now. So that's excellent advice, Pete. Pete, in terms of any closing comments, I know we've both got to get to other commitments shortly. It's been incredibly valuable.
really like the approach that you're communicating to us, that embrace with a healthy level of skepticism, these approaches are gonna come for, and if you're a business in that, making in that sort of profit range, as each year goes by, more and more and more probability you're gonna get a call. So what you're saying is deal with them.
learned, you know, bring into your trusted advisors, but have that conversation and reflect on this. It's a healthy way to kickstart the process of you establishing what you want to do with your business. So anything else you wanted to add before we check out?
Pete Seligman (52:38.204)
Mm.
Pete Seligman (52:42.507)
Yeah, I think the thing that I always refer back to, and I refer back to it, a concept I refer back to in lots of different forums. So it might be when we're talking about business planning for a business that we already own or strategic direction and vision setting for businesses that we're about to acquire. I always come back to this concept of owner's mission.
And for that, I mean, you know, a lot of people talk about the business mission and vision and all that kind of stuff. And, and that's all really useful things to get clarity on. But for me, the owner's mission is that, and I often use the word selfish, it's that selfish intent. And I mean, in a good way, that selfish intent of the owner. So why is it that you own this business? And it could be I own this business, because I'm passionate about this market sector, or I own this business because
you know, my dad ran it and now I'm taking it on to run it for him or I own this business because I feel like I can make a bunch of money in this area and then redeploy that capital into something like who knows, like there's lots of different reasons why people get into business. I own this business because I'm super competitive and I love the opportunity to get out there and be competitive and win, right? Like it could be all sorts of reasons why you do it. Yeah, exactly. Right. But.
Michael (53:57.806)
And they're all valid for you.
Pete Seligman (54:01.111)
I think that it's really important to reflect on that owner's mission. Um, definitely if you're a single owner, it's always important to know why, because that, that mission will change over time. Like the mission that you had when you first started 30 years ago will definitely be different to the mission that you had five years ago when you thought you might have five to 10 years to run, let alone the mission you've got today, which is why the hell am I in this business? So, so really having clarity around that mission is important. Um,
Because what that'll do is it'll help you understand what it is you wanna get out of it and it is an exit. Like your mission for it while you own it is important. Equally your mission in exit is as important. Like what do I wanna achieve in an exit? Am I just looking for a financial outcome that's then gonna buy the retirement property that I've always wanted to buy on the hill above the lake and whatever? Or is it, I always wanted to...
get a certain amount of money that's going to be able to fund my kids and their kids through whatever or like, it could be a dollar figure related to it. There could be something where I built this big business on up so that it could continue on. Right? And so they're legacy piece, right? So there could be all sorts of reasons. So I think that mission is really important. So that's the first point of my second point related to mission is, then you get this extra layer of complexity as soon as you got more than one owner, right? So if
Michael (55:10.078)
Yeah, legacy. Yeah.
Pete Seligman (55:25.491)
If you're sitting there as the owner of a business and you're 35% and there are two other owners, and you're starting to feel as though maybe you're heading into a period where there might be an exit, I'd get on the front foot with your co-owners and say, right, what's the mission here, guys? Why are we here? How long are we here for? And let's be really, really honest. How much do we want out of this? Do we wanna continue on?
And that conversation is easier if you're all about the same age, right? It's easier. Yeah, it's easier if you've all got about the same kind of family dynamic. Um, it's, it gets really hard if you're different generations, um, you're different personal situations, some have family, some don't, you know, all that sort of stuff, like.
Michael (56:01.62)
It's very challenging when not, right?
Michael (56:06.914)
pathway, runway.
Pete Seligman (56:21.172)
You even have situations where one of the owners no longer works in the business, another owner is a non-exec director and the third owner is the CEO, right? Because the one that's not involved anymore wants the CEO to stay on because that will maximize the price. And then like,
Michael (56:37.357)
Yeah, it is that kind of exit to your fellow shareholders is nowhere is that easy.
Pete Seligman (56:42.871)
Yeah, super, super. Yeah. And so, so I think I guess my to your question around what's the parting message, I think it would be like really step back and say there's this vehicle that happens to be this business that I've owned for however long, like, what if I really look internally at my heart of hearts, and if there are multiple owners, our hearts of hearts? Like, what do we really want from this? Like, and let's just be
like super honest and even if that's selfish or even if that's what it, let's just be super honest and let's get that down in writing. So then we can all agree, here are the, here's the baseline parameters for how we're gonna engage in any conversation about exit. It won't be right the first time you do it because you'll sleep on it and iterate it and all that sort of stuff. But at least if you start that process, you're so much better prepared when you do get that approach because you start to, you've at least got a starting point to frame those conversations.
Michael (57:41.886)
Yeah, yeah, yeah. One voice in terms of if there are three shareholders, you know, we've got a pathway that we're pretty much agreed on. Pete, that has been sensational. I really thoroughly enjoyed what you talked about, you know, your deep experience. So I'm grateful you came on and shared it with us.
Pete Seligman (57:48.467)
Yeah.
Pete Seligman (58:02.111)
Yeah, thanks for having me. I mean, I always love these conversations. Always good to chat. I really appreciate it.
Michael (58:08.13)
If anybody wanted to touch base with you Pete, what's the easiest way?
Pete Seligman (58:13.267)
I'm pretty noisy on LinkedIn. So I'd probably say that's the easiest way. You can just send me a DM on LinkedIn is probably quickest and then we can, you know, switch to mobile phones and email addresses after that.
Michael (58:18.348)
Alright.
Michael (58:25.97)
Yeah, okay. Well, look at it'll go in show notes. And I look forward to staying in touch, Pete. All the best for the season. And again, a big thank you on behalf of the listeners. There's a lot in there.
Pete Seligman (58:39.763)
Yeah, not a problem. Loved it. And you too have a great, have a great holiday season. Cheers.
Michael (58:45.262)
Thanks, Pete. Take care.