Shane Cheek is the CEO of Continua Software, a private company that focuses on acquiring and growing B2B software companies. Prior to this Shane built and sold his own businesses, and this episode shares his advice on how other business owners can better prepare for a sale of their business.
@ShaneCheek is the CEO of @ContinuaSoftware which is a private company that specialises in acquiring, operating and growing B2B software companies.
Shane is an experienced founder, builder, business seller and investor. His expertise and practical insights make this episode a must-listen for #businessowners who are potential sellers looking to understand the best strategies to sell their business, especially when they are selling to an industry buyer. In this episode we cover;
"People are messy, businesses are messy, people are imperfect, and businesses are imperfect as well. Acknowledging that and then approaching any potential transaction or sale with that as a realization makes things smoother and hopefully more enjoyable and fun along the way as well" - Shane Cheek
Visit @continuasoftware.com to learn more about Continua Software and their focus on acquiring businesses in the software and technology space.
Contact Shane at Shane@continuasoftware.com to connect with him regarding business opportunities or discussions related to small businesses in the software and technology sector.
Timestamped summary of this episode:
00:00:06 - Introduction to Small Business Banter podcast
Michael Kerr introduces the Small Business Banter podcast, highlighting its focus on business owners and their advisors at various stages of business ownership.
00:02:34 - Continua Software and Outreach Model
Shane Cheek discusses Continua Software's focus on acquiring B2B software companies and their outreach model to directly connect with business owners. He emphasizes the importance of building relationships and understanding the people behind the businesses.
00:10:14 - Reasons for Considering an Exit
Shane highlights the reasons why business owners consider selling their businesses, including reaching a plateau, feeling tired, and personal factors such as upcoming travel or personal fulfillment.
00:14:30 - Importance of People in Acquisition
Shane emphasizes the significance of prioritizing people in business acquisitions, focusing on aligning values and building rapport with business owners. He discusses the importance of understanding owner's goals beyond financial aspects.
00:17:22 - Flexible Operating Model and Partnership
Shane explains Continua Software's flexible approach to business acquisition, accommodating varying levels of owner involvement post-acquisition. He emphasizes the importance of aligning owner's strengths with the business's needs for mutual success.
00:20:46 - Challenges in Business Transition
Shane discusses the tensions and challenges in making new business decisions, especially for sellers who have built successful businesses.
00:23:39 - Key Elements of a Good Business Opportunity
Shane highlights the importance of consistency, predictability, and clarity of roles and responsibilities in evaluating a business opportunity.
00:27:28 - Importance of Building Relationships
Shane emphasizes the importance of building a relationship with the owner of the business, comparing it to dating and marriage, and the role of a good advisor in the process.
00:31:48 - The Role of an Advisor in Selling a Business
Shane discusses the significance of having an advisor to guide the seller in the sale process, and the impact of having an advisor on the certainty of closing the deal.
00:39:32 - Managing Inquiries and Interest
Shane addresses the increasing inquiries to owners from various sources, emphasizing the need for credibility and genuine interest in potential buyers, and the importance of managing the pipeline effectively.
00:41:47 - Qualifying Inbound Inquiries
The owner needs to quickly validate the quality and intentions of inbound inquiries. Key questions to ask: Why do you want to buy my business? What is your capital source? What are your values and alignment?
00:44:28 - Evaluating Potential Buyers
It's important to assess the track record and intentions of potential buyers. Owners should approach incoming inquiries as they would a long-term sales prospect or a potential business partner.
00:47:48 - Initial Steps in the Sale Process
After an initial conversation, gathering historical financials, customer lists, and staff lists is crucial. Advisors can help prepare the business for sale by cleaning up and organizing key information.
00:55:53 - Reflecting on Business Performance
Owners should reflect annually on their business performance, similar to the process of preparing for an exit. Making 1% improvements in the business can have a significant impact over time.
01:01:34 - Understanding the Buyer
Understanding the motivations and playbook of potential buyers, such as private equity firms, is crucial in the sale process. Each buyer may have a different approach and set of expectations.
01:02:14 - Private Equity Playbook
Shane explains the private equity playbook, including initial approach, attractive evaluation, period of exclusivity, and strict due diligence process.
01:03:24 - Understanding the Buyer
Shane emphasizes the importance of understanding the type of buyer and being prepared for potential retrading, annoyance, and invasive due diligence process.
01:04:50 - Post-Sale Considerations
The discussion focuses on the emotional impact of selling a business, filling the void after the sale, and the importance of planning for life after the sale.
01:07:18 - Setting a Walk-Away Number
Shane advises on setting a walk-away number and emphasizes the significance of understanding the cash flow implications of the headline offer.
01:13:03 - Embracing Imperfections
Shane discusses the importance of acknowledging the imperfections in businesses and how being upfront about them can lead to smoother transactions and problem-solving approaches.
00:00:06
Welcome to the Small Business Banter podcast. I'm Michael Kerr. I'm 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 for business owners and their trusted advisors at what I see is three different key stages of ownership ship in a business. Could be when you're looking to sell, it could be when you've been approached by a potential buyer unexpectedly, or it could be when you're an aspiring owner about to buy a new business.
00:00:39
There's a lot on the line, personally and financially at each of these three stages. 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 experienced small business advisor, and they will have personally been through a business sale. What you'll get is practical advice, new ideas and motivation to help you when making a really important decision about what to do with your business.
00:01:13
You welcome in to edition number 134 of Small Business banter. The podcast Shane cheek joins me today. Welcome in. Firstly, Shane. Thanks Matt.
00:01:27
It's really great to have you in. Shane is the CEO of Continua Software based out of Adelaide, and continua software is a holding company that acquires software companies b. Two B software companies. Shane will tell you a little bit about that. The reason for the discussion and thanks again for making time Shane is really want to talk about the activity search funds buyers making their own approaches direct to owners of particular kinds of businesses is not a new thing, but it seems to be very alive at the moment.
00:02:07
And I'm particularly interested from the point of view of the owner of a business that gets an approach or thinks they might get approached. How might you prepare better when someone like Shane gives you a call? But we'll get into that a little bit more. Shane, what's continue software all about and what's your background? Thanks for having me on today.
00:02:34
My background most of my career has been spent in venture capital private equity for about 15 years. Prior to that I was a software founder, built a b two B business that I actually took into the US and exited that, but then spent the next decade and a bit in the VC sector. But I grew tired of a business model that required me to run around networking events and travel. Yeah, chasing the elusive but ever hopeful unicorn that would pop up and drive investment returns. And during that kind of journey as a fund manager, I'd also been investing personally into software companies.
00:03:28
Obviously it was a space that I knew and felt comfortable with. And I found myself being approached more and more by business owners of software companies that they weren't startups, they didn't even really know what a startup was. They had simply built a business, built a company over multiple years, and had reached a point where they had been operating for decades in some cases, and had grown to 510 $15 million in revenue and then plateaued. And they were really unsure about what to do next. They would often come to me talking about wanting to raise capital or growth capital, but often when I would sit down with them, the conversation often became more of a conversation around exit or succession transition for the ownership of their business.
00:04:30
So that really planted the idea in my mind that I thought there was opportunity to acquire more of those sorts of companies. And so I decided to pursue that in earnest in 2019, 2020, just as Covid decides to hit. And I partnered with one other family office based here in Adelaide to do that. And so that's what continua software has become. We invest off of our own balance sheet, so we don't have any external investors, we don't run it as a fund.
00:05:16
So that that gives us more of a medium to long term perspective on owning and operating companies.
00:05:28
That's really the background, I guess. Yeah. And you're very much focused on software in b to b? Yeah, absolutely. We've got privately some other investments in some companies outside of that sector, but software, particularly business to business based software companies, are the bread and butter of what I know and what I've done in the last 20 years of my career.
00:05:57
So that's where we've decided to focus. Yeah, stick to the knitting. So we're going to get into your advice for an owner across the board on getting ready, because I feel like there's more and more of these incoming calls going to be received by more and more owners across not just software, but across a lot of different sectors. We're going to get to how you talk about how you might handle the call, how you might start to think about an exit, how you get ready for what kind of information shouldn't share. We'll get into the woods on that.
00:06:42
But can I just start with, for you and continua software, why outreach, that is, making contact directly with business owners is your model. Are there not marketplaces where you can go and find businesses that are suitable for investment or acquisition? Yes. Can you talk about that? Yeah, sure.
00:07:09
I guess one of the first things we did was sit down and try and understand what was the size of the market that we were wanting to focus on here in Australia and New Zealand is our target market. And so we went away and did some research, started to build out a bit of a database of companies, and we came to the conclusion that there were about 10,000 software companies in Australia and New Zealand that were privately owned, had not raised external capital, and had less than 50 employees. So that that was sort of the addressable market, I guess, for us, of potential acquisition opportunities, and we're speaking to several hundred of those each year. And then, of course, we build relationships with investment bankers, business brokers, corporate advisors, accountants and lawyers who might already have relationships with the owners who can introduce opportunities to us. But overwhelmingly what we do find is that most owners don't have a plan for the exit or for selling their business.
00:08:36
They'll have a loose idea that they might want to sell at some point in the future, but more often than not have not really put thought into it, and so therefore haven't prepared, I guess, the ground to enable a sale or a transaction to occur. So that's really encouraged us to do more and more outreach directly to owners, introducing ourselves and telling them our story. And more often than not, the owners aren't ready at that point to sell, but it's simply about beginning to build that relationship and connection to them so that when they are putting more effort thought into selling, then you're there. Continua software is there and is a name that they know. Yeah.
00:09:31
Interesting. Again, across the board, a lot of owners haven't prepared formally, and that's why I think there's so much you've gone to the point of researching and you've got your addressable market, which is a real statement in itself, that they know you're after and probably reflects back in the conversations you have with those owners. We're only interested in these kinds of businesses, so it gives you some credibility. But why do you think a lot of those owners don't get to the point of having a formal exit plan? Is it expensive?
00:10:14
Do they not know who to talk to? Are they just too busy in running the business? Yeah, I think it's a combination of things, Michael. I think that a lot of owners are busy with the day to day, and I'm sure we'll get to this later in the conversation just around how the owners have structured their business and how easy is it going to be for that business to be transferred, separated from the owner? Often they're so integral to the operations that it can be hard to separate them.
00:10:53
But yeah, I think they're busy. I also think it's something that they often don't want to put a lot of food into, because whether they want to admit it or not, and I can speak from personal experience here as well, you attach so much of your own self identity to your business, the idea of what you do next is a scary thought. Yeah. And it makes a whole lot of sense because when you put so much of yourself into a business to get it to wherever it is, it's pretty hard to step away to contemplate something other, because it does, as you say, define identity and purpose for many.
00:11:42
That's why I think in the material on your website, it's something about people first. When you're looking at the investments, I mean, you got to back people anyway, right? That's when you. Yeah, absolutely. But, yeah, that.
00:11:57
So that's, you know, I think, you know, it's. It's got to be a centerpiece of this kind of role of finding and acquiring and harvesting leads over many, many years, building that confidence and trust in a business owner who might eventually come back and say, look, yeah, let's do it. Yeah. Overwhelmingly, it is about the people. And I think it's even more important for small businesses that might not have put as much process and systems into their business.
00:12:36
You fall back on the line on the quality of the people to operate the business. And so that's where we spend most of our time, is understanding who the people are in the business, and also from our own values are about wanting to enjoy what we do, making sure that we have fun, which seems like we're not allowed to actually say that these days, but we definitely want to enjoy working with people and working with the companies that we acquire. That's why we say people first, and we need to be willing then to have the conversations with the owners, with the shareholders, and often understanding what they really want to achieve out of starting their business or helping them start to understand what that could look like. Yeah, I'm sure you've ruled a few out purely on that first pass.
00:13:40
You get to a point where you got to feel for someone to go, I'm not sure I want to be in business or do business. Yeah. Surprisingly, it actually happens more than I would have thought that we will look at the business fundamentals and it will tick most of the boxes, but we'll say no. We just don't feel like there's alignment of values between us and the seller or the team. Yeah, you talked about owners often coming via accountants or whoever, and the story is they're looking for capital.
00:14:20
And you said really that what they're contemplating is an exit at some time.
00:14:30
What else do you hear as reasons for an owner thinking about doing something?
00:14:41
So I think what we hear from owners is that they often reach a point with their business where, as I said before, they've plateaued. They don't feel like they can necessarily the next level to the next stage. And of course, there are ways that they could choose to address that by bringing in talent, by building an advisory board, or bringing assistance in to help with the growth of the business. But sometimes they just feel like, look, I've put 40 years into this business, feel tired. My significant other is telling me that around the world holiday that I promised them needs to happen very soon, or I could be getting divorced.
00:15:39
Yeah. And sort of a confluence of factors that all come to a head that lead them to want to sell. Interestingly, money is often not the biggest factor, and particularly because we want to buy good businesses. We want to buy good operating businesses with good, solid cash flows. And so what I'll often say to the owner is, you will never make more money than when you've actually been owning, operating the business.
00:16:18
Yes, you'll get a very nice check all at once from selling the company. But of course, it then means that that value generation is finite. It stops when you sell. Yeah.
00:16:33
So we were chatting about, if that's a conscious choice by an owner to run the business hard and make as much as they can while they're there and in it, that's okay. But I think you and I both would probably agree, once you get past, if you can build a bit of rapport and some relationship where you can show a pathway to the business being bigger, better, more, whatever you might be able to do together, just fulfilling the vision that the owner had originally. As you say, it's not always about money.
00:17:22
Is that a part of your operating model where you go in to the business? Do you buy tomorrow and start operating? Or do you typically have a period where you're working with the owner to transition the business, but also potentially position it for more growth or for greater output? However measured. A really key part of our model is that we look for businesses that have good fundamentals.
00:18:02
To begin with. We, and we underwrite our acquisition of those businesses based on their current operating model, not on some potential, not a forecast about what the business could look like in two or three or five years time. So the first thing we try and do with the businesses is first, is do no harm, not stuff them up and we can be quite flexible with, again, understanding what the owner wants to do. Do they want to sell 100% of the company today and essentially sort of throw the keys at us and run?
00:18:50
If they want to do that, then we can accommodate that, so long as either we can put one of our people into the business to run it, or there is someone at the second level within management that can step up into the general manager CEO role. So we can be flexible that way. Or the owner might want to step away from doing all the things that a CEO needs to do and just get back to doing what they love and what they're passionate about, which maybe that's focusing on product, maybe that's sales or business development. We can accommodate that. Or perhaps they want to just take a consulting role with the business and still work for a day or two a week.
00:19:39
Yeah. In that it's a partnership of sorts. And so you're also bringing objectivity about what you think the owner might actually be good at versus what they think they might be good at. Yeah. It very much then needs to be a conversation about, okay, that's fine if they want to still maintain some type of involvement, but the conversation needs to be about what does the business need going forward?
00:20:09
Rather than how would a business satisfy their needs or their sense of fulfillment or self identity. Flexibility. Yeah. And that's where, again, it comes down to, again, being people first and having very honest conversations with the owners around what they want and where we then think that they would best be suited for the business. It's important that everyone understands that if we are acquiring the business, that we are the owners of the business from that point on.
00:20:46
And so that can create some tensions or some challenges around new decisions being made, taking business in new directions. For some sellers that can be threatening or hard to accept. They often won't think that we know what we're doing or know that we will make the best decisions.
00:21:12
It's a challenge, particularly when someone has built a business to 2510, $15 million, and in a lot of ways, they're already key milestones to have gotten there. There's something that they've done incredibly well with their team or whoever's part of it. But to then doubly think about getting out of the business and also letting go, if it is an interim period where you come in and you're owning and running the business while they're still there, they're big challenges at a personal level. To let go or to trust. Yeah.
00:21:56
So absolutely, trust is key. So there is a large kind of degree of emotional intelligence required here between both parties, but buyer and seller to be able to work well together post acquisition. Yeah. So when you're people, very important in your evaluation, and I guess you get to work with some of your successful acquisitions over many years, because typically they're not going to drop, everything's not going to line up tomorrow. So you can take the keys.
00:22:35
What are you looking for in the business? I think you hinted at that earlier. I mean, obviously separation of owner and business, but what are some of the hallmarks of a good opportunity for you as a business?
00:22:59
I can get into some specifics in just a minute, but I think broadly, it's about consistency and predictability in the business. So when we're first looking at an opportunity, it's about looking into the history of the business and understanding, well, has there been consistency in how it has been operated? Can you join the dots in a company's journey over time and understand how decisions have been made in the past and what has led from those decisions?
00:23:39
Because if you have confidence in what's been done in the past, then you should be able to project into the future and say, well, so long as we keep doing roughly the same things, this good business should continue to be good in the future as well. So that's kind of the overarching thing. Then you come down to more specifics around. Okay, what can create that consistency and predictability. And I think there are some key things having real clarity around roles and responsibilities in the business.
00:24:20
For the team and the owner themselves. Yeah.
00:24:28
For that team being very clear around who is doing what and when and who has accountability for decisions in the business. And then that can often be captured or managed through a quality assurance type process. And of course, there are a range of ISO or quality standards that the company or the business might have implemented to really professionalize and systematize those types of parts of operations. That gives us some confidence around consistency.
00:25:12
Yeah. I mean, that goes across all businesses. If you can aspire to have standard operating procedures and well defined.org charts. Yeah. And understanding whether the business is, how much key person risk is there in the business.
00:25:34
So if the owner does suddenly leave, or unfortunately, if the proverbial bus did happen to catch them as they were about to cross the street, how easy is it for another team member to step into that role or someone completely new come into the business and be able to get up to speed quite quickly? How do you go about evaluating that when you're putting your own money into a business? There can be a sense of, I deal with a lot of owners and what they view as their key attributes or influences on the business. Sometimes it's some things that are really understated that are so important. How do you go about going?
00:26:29
We can back this business because we understand the role of the owner. That's where it does come down to spending some time with the owner. And that can be a challenge as well. In a sale process, often if there is an advisor or a broker or an intermediary standing between us and the owner, and we often want to spend as much time as possible with the owner and for sometimes some very good reasons, the advisor might want to strictly control. Yeah.
00:27:05
The level of interaction.
00:27:10
We are building a relationship and it is like a marriage. We are going to be attached to this business and to the team in that business for a long time. So we want to be able to go on a few dates first. Yeah, for sure. It's such a great analogy.
00:27:28
I'd use it all the time. The dating marriage thing.
00:27:33
This is where having a really good advisor is so important for an owner. And that means you've got to understand the business and understand what the owner wants. And it's not always about maxing out the dollars, it's a big part of it, but also to step away and say it's time for the buyer and the seller to get together and have their own discussion. And I do that regularly.
00:28:15
It's like you have a bit of a script for it. You say, look, I understand why you want to get together, but you're not going to talk about the deal price or the key technical or legal thing. It's a place for a discussion to get to know each other. And I think it's vitally important and in the end can be quite pivotal in getting the deal done or not. If you keep them apart and try to orchestrate, it's counterproductive.
00:28:49
Or can be. It can be. Absolutely. I think you can move very quickly to understand whether or not the party is going to be close in terms of pricing and value, and then the price is the pricing that can be put aside for a while, and then you want to focus actually on having conversations more about what their values actually are as a team, what they find important. And I can appreciate that from the seller's perspective.
00:29:28
And again, having been in that position myself several times before, it's all well and good to have that conversation with one potential buyer. But if you're entertaining three or four potential buyers, then that can be a huge drain. On time and resources. That's again where a good advisor can really play a very important part in focusing those conversations and helping the seller to understand where they should be putting time in and where they should perhaps be pushing back and not letting the potential acquirer waste too much of their time. Yeah.
00:30:03
Look, if you're in the fortunate position to have a few potential buyers, you got to closely manage that. It's an opportunity to explore the whole deal, all of the parameters of the deal and what it means for you personally before and after as well. But as you hinted at, it can also be incredibly disruptive for the owner in terms of trying to keep their foot on the accelerator and it feeds down to staff. If staff haven't been communicated to at the right time, in the right way about seeing the owner distracted or seeing people turn up to the office and close the door, you got to handle that properly. Yeah, we, we do tell most owners that we would be speaking to, if they don't already have an advisor, that they should certainly bring one around.
00:31:12
We would find that there's a higher certainty of closing the deal if there is an advisor on the seller's side. That's interesting. Yeah. Probably the biggest risk to us is we invest a huge amount of time and effort into a potential seller and if we get down to conducting due diligence on them, then there'll be a real investment of capital at that point as well.
00:31:48
And we'd hate to see it if the deal falls over just because the seller is uncertain, unsure whether to proceed. Having an advisor to help guide them along the way is a real help. Yeah. At the right time for the advisor to be able to say this is not perfect, but it's pretty good, it's pretty close, you should do this. I mean, the advisor has mostly got an incentive at that point to get something done if it's the right kind of deal.
00:32:21
And they've invested in understanding what a good deal is for the owner. But yeah. Otherwise you can feel besieged. You've been through it. As a seller.
00:32:35
I've seen sellers feel under siege and they might react and say, look, it's not enough money or I've got a really great project in the winds and give me twelve months. But that's an interesting take that to have not any advisor, but an advisor who can help the owner kind of pursue something that it's very rare to get perfect. It's almost impossible to get perfect, but if you get pretty good and you can move and you've got something, again, we opened up, talking about identity and purpose. And it's so vital to have the next phase post business mapped out, because then there's something to latch onto, whether it's travel or whether it's another bit, whatever it is, it's important that it's clear in your mind that there is something else to take over. The way we think about it is that when that business has been such a large part of the owner's life and identity for decades and decades, just because they sell it doesn't mean that they're going to suddenly lose that connection to the business.
00:33:59
So that when they're at a dinner party or at a barbecue or playing around a golf with their mates, they're often going to talk about, I was an owner of Company X, y or Z and we want them to be able to say, and since I've sold it, the company has achieved this and this and this and it's gone on to bigger and better things and to be proud of that journey and proud of that evolution for the business. That's a very important part from our perspective. Yeah. I refer to it often as being an ambassador for the business, where both sides want to see that the owner, whenever they have the ex owner, past owner, talks about that, sold to a good home and they're doing great things and whatever the deal was based on, it's much better that everyone's largely on the same page about, this is a good thing, this is the right time for me and it's good for the staff and good for the buyers.
00:35:14
And of course, the best marketing we can have is owners who have sold to us who are then willing to speak to other potential sellers about their experience with us. Yeah, you start to get a reputation as a good buyer. You do, absolutely. It is a surprisingly small world and your reputation is credibility. Is everything market?
00:35:43
Well, yeah, you're operating in such a 10,000 is a pretty big, arguably a big niche, but you know who you're after. Everybody can kind of find out about a good or a bad experience.
00:36:03
So we talked about, you mentioned you'd had a couple of, you know, exits yourself.
00:36:13
I don't want to forget at the end to come back to, you know, what, what you might have done differently. I'm kind of putting this in. So I remember when you make these approaches, how do you make these approaches? And is it phone calls, emails? Is it through a third party?
00:36:38
What can an owner expect? And what are some of the things that you would get immediate feedback on? That could be quite important in the way that the future conversation unfolds. So firstly, we are looking to build out our own list or database of potential pipeline opportunities.
00:37:11
We are quickly trying to get to a point where we can understand how large is the company in terms of revenue. Is it growing, shrinking? And we can usually estimate that, obviously through jumping onto LinkedIn, for example, and simply looking at the number of employees and applying some rough rule of thumbs around revenue per employee to estimate size. So that 10,000 companies number that I've spoken about, that soon narrows down only a couple of thousand. That might actually fit all of our, our fundamentals criteria.
00:37:58
And then when we are reaching out to the owners, if we can get a soft referral or introduction from another professional or a business colleague, we'll go down that path. But often it is simply a cold phone call or email introduction.
00:38:24
We want to do that on a very confidential basis, though. So making sure that we are reaching out to the right person in the business. We don't want to be reaching out to an employee who might not be a shareholder. Yeah.
00:38:43
And more often than not, it's just about posing the question to the owner around, have they contemplated a sale, telling them who we are and what we look for, and then inviting a conversation to begin. And very often the owners will say not interested, or close down that conversation quite quickly, which I understand because they're busy. I don't think that necessarily serves them or their interests in the best way, because we'll talk about that a bit, if you like, as well. Please do. Because timing as an owner is hard to control.
00:39:32
And there's more of this inbound. The prospects for an inbound call are increasing all the time. So the old sort of nah, mate, or she'll be right, or I got a plan, or I don't need anybody. That's not the way you've got to establish that. There's some credibility on the other side of the email or the phone call.
00:39:58
But I think a lot of this activity is going to be let's have a conversation, let's understand each other, and we're not rushing to do anything either side, but it's very much worth harvesting genuine interest. If you establish that it is somebody from the sector, somebody with a track record, and you don't have to give away the farm, and you don't just sign an NDA and give them all this information, but the pipeline is there for you as well too, because things can change rapidly in a business and you might need, but also you can phase it over a few years or even more I get excited about that because I see that it's managed badly. Yeah. I think to your point about the increase in inquiries to owners is definitely going up. If we look at our space for these privately held software businesses you're getting obviously private equity firms reaching out to companies.
00:41:11
You've got software consolidators or aggregators like us that are reaching out. You've got strategics coming from their industry that might be looking to bolt on other capabilities and then you've got independent searches as well. And that's entire movement in its own right that's beginning to pick up pace. So you've got three or four different inquiry sources coming into the owner.
00:41:47
So the owner does need to be able to validate the quality and capability, I guess, of those inquiries quite quickly. And their intentions, what are they doing this for? The good ones aren't wasting their own time. Yeah.
00:42:13
So I think there's probably three things that the owner should be asking quite quickly if they want to try and qualify these inbound inquiries. The first is simply why do you want to buy my business?
00:42:34
You don't want to just feel like you're part of an outbound email campaign where the buyer has just bought a list of 500 businesses that are sending out engineering email. So has the buyer actually put some thought, done some work to understand your business, your market at your industry? What's their thesis around wanting to buy you?
00:43:03
What is their capital source? So actually do they have the balance sheet or the funds available to be able to purchase you or are they trying to lock you into some level of exclusivity around a transaction and then having to go out and find the capital to do the deal. And then the third is back to my point around values and alignment. Again, just having a conversation with them around what's important to them from a values perspective. Those three things I think capital source values and why me?
00:43:46
Yeah, and I think vital those three. And I'd probably add what's your track record? Have you done this before? There's plenty of explorers and tie kickers, but if you got those three or four things, know, I imagine in some of your approaches you catch people off guard or it's a really nuanced conversation to say hey, this is Shane, I'm from continua software, please tell me your. Business and can I sell you a vacuum cleaner or a used car on the way as so.
00:44:28
But the strong message is there's a way for owners to take those calls but quickly establish whether or not this idea that you time your exit. I'm ready now to go in three years. It just doesn't happen. So if it's a legit incoming inquiry, harvest it like you would a long term sales prospect. If you've got or a relationship you're going to kind of fundamentally change your business with.
00:45:06
It's also really, and I found this, as a seller, it's really confronting to have somebody come in and analyse and question everything that you've done and everything that you've built and ask you, why have you built this product? Why have you gone after these types of customers in that market? Why have you built your team this way? And often you actually don't have very good answers to that. Because sometimes I've reacted and I've made the best judgment call I could on this one the day, and to then go back and have to reflect and explain why you've made the decisions can be very confronting.
00:45:55
So that's, again why I think it can be challenging for the owner, the seller, to start to entertain these inquiries from buyers. Yeah. And I'm sure you'd be saying or thinking it's not a negative, that it was a reaction to an opportunity or a proactive search for a particular opportunity or a particular problem to solve, but it's probably for you very key to get an insight to the way that owner thinks and whether you would want to then partner with them over a few years to exit them out of the business. Yeah, 100%. And also the way they think and the way they operate is usually reflected very highly then, in the types of people that they've built around them and the team they've built and the way that team operates.
00:46:50
So the team is usually a reflection of the quality of the founder or reflects the qualities of the founder. So again, it's where the values become so important.
00:47:10
Hey 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, the worst thing you can do is jump into a sale process, advertise, and hope for the best. If you want to get a sense of what your business is worth today, what your options are to make it more sellable, then head on over to Kerr Capital website and check out the value and sellability diagnostic. Now let's head back to the podcast.
00:47:48
So just on a mechanical level, in the end, you might get to a contract after you do due diligence. But what are the first few steps? Is it adaptive? Because some owners are really reluctant to share too much or do you have a fairly standardized way of like, we want to know turnover, then we're going to have an interview. What's your kind of key steps after.
00:48:18
An initial conversation, whether that be in person or on the phone? Of course, we would like to be able to then say, send us three years of historical PNL, your customer list, deidentified, broken down by segments and staff list. But of course, those things are usually very rarely immediately available.
00:48:50
And again, this is a good point around having advisors helping the seller kind of prepare the information for the business and clean up. I don't want to say clean up, but make sure that the business has access to the data that it's going to need to be able to present to a seller is important. If the advisor, or if there's not an advisor involved, then it means that we are going to probably have to roll our sleeves up and almost help the seller put that information together, which again, is a big investment of time on our part, particularly if a deal isn't going to get done.
00:49:31
But of course, we are trying to assess as quickly as possible whether or not we actually think the business is going to be worth putting that amount of time to help them. Yeah, but as the analogy of the dating game, you do have to get to know each other in stages, perhaps. I mean, I'm sure there's plenty to do it differently, but I'm working more and more with owners. That's why I said the search, the inbound thing is happening at a much greater pace. And I'm, I'm working with owners and it's been a really key part of my advisory work for the last 1218 months where someone gets an approach and what do I do and what information do I give and when I'm not a fan at any stage before a formal due diligence of giving someone a tax return because it's personal, it's confidential, but it also can be quite misleading as to what really goes on in the business.
00:50:47
So you got to go back a few steps and summarize that and de identify key information, but show a potential buy at the right stage. We've got seven clients that we've got a good spread. We're not going to tell you who they are, but at least then the interested party gets a feel that it's not all one client company, because that could very well be a big cross. Yeah, 100%. And that's why one of our fundamental kind of criteria is that it will be hard for us to get excited about a business if the top five customers represent more than 25% of their revenue.
00:51:37
So we want businesses that don't have any customer concentration risk. So that's something we want to look at. Quite quickly and we're not encouraging people to waste anybody's time. But if you're sitting there in a business and you haven't given thought to exit plan or you don't know what's involved, some of these discussions, without giving away too much, can be quite formative in gelling you to do something, because someone's feedback is you've got great profitability, you're so central to the business that is too risky, or you've got one company, you've got some market feedback and some motivation to think about what you might do, at least if not fundamentally change the business. But you're sitting there in isolation wondering about what might happen.
00:52:38
And I have no doubt that it causes internal stress with an owner and it's pretty hard to. You can tell yourself you can have a mask on that everything's great and I'll go and get some capital and grow the business. But deep down I suspect it's troubling for a lot more. But I'm very sympathetic that a lot of owners don't know where to turn to, don't have that trusted relationship with a good accountant, a good business coach, whoever, a good m a advisor or business broker. And that's a lot of the reason why I like to get owners and advisors in the small business space to talk about the stuff we're talking about, to encourage owners to do something to alleviate the big questions, the stresses that come from not answering those fundamental questions.
00:53:45
Yeah, I think a lot of the questions that you'd ask yourself and ask of your own business in preparing for an exit are good questions to ask annually if you were going to continue to operate the business. So I think whether you actually then choose to sell or not, I think a lot of the work that you put into preparing and reflecting on the business will help your decision making and give you clarity going forward. Yeah, I think that's why coaches, there's some excellent business coaches, but I think there's been a big void for owners about they go to their excellent accountants and excellent lawyers, but it can be compliance driven. Got to get this done this quarter. The last interview on small business banter I had representative from Judo bank talking about, and they're really doing an excellent job of funding small businesses.
00:54:53
And we were chatting about, to your point, the annual review. So you do see your accountant annually. But other than getting your tax return done, what else could you get done by way of reflecting on what you did for the last year or three years and what you might do to change that? In the same way as an annual banking review can be a trigger to. We have done some forecasting or some business planning, and we're going to get busy and we need some funding.
00:55:35
There's got to be. Exit planning is a big ticket item, but you break it down. And as you say, that reflection on some of those questions you might get asked is one of the ways you could start to break that big.
00:55:53
Hair. What do they call it? Big, hairy, audacious? I don't know. Yeah, the bhag.
00:55:59
Bhag? Yeah. This thing looks like a monster, but you break it down into some doable bits and you're making progress. Yeah. And I'm very much a believer in the 1% improvements in the business are important, and they add up very quickly to making a substantial difference over time.
00:56:21
And to be able to make those kind of 1% improvements in the business, you need to have a granular view on how it's performing and how it's operating. And that comes from having good, clean financials, having data, having KPIs. Yeah. A bit of a dashboard of what really drives your business. Quite often I was just thinking about.
00:56:44
So we asked for the PNL, the financials for the business, and of course, for a closely held, privately held business, it's often the financials are prepared in a way that are focused more on tax planning for the owner, rather than necessarily showing the true operating performance or potential of the business. So again, whether you go to your accountants or to an advisor to help you think about that, and then perhaps reforecast or pair a pro forma that actually shows the real potential, I think is going to be very helpful.
00:57:29
It's the start of any work I do on any engagement, and it kind of can create a few concerns and questions when an owner's been going, and I'm not being critical, just they go from year to year and there's all these. They're watching some certain parameters, or KPIs, in their business. But tax returns mostly don't tell the story. So it's not about not even giving you access as a potential buyer. It's just saying, let's be honest, most businesses have add backs because they're not business expenses, or maybe they have revenue that's not even business revenue.
00:58:11
So the first piece of the puzzle for me is getting four or five years worth of financial returns. It's not rocket science. On one excel, reorder the expenses from high to low, and then what's not a true ongoing business expense. And obviously, if you've got pure and clean financials, it's a lot easier. But that's not how it works.
00:58:39
You see some fundamental trends over a few years and you know that that summary at the right time is what I will ship off to an interested party. And it's enough for them to say, well, top line, it's of the size that we're interested in. Bottom line adjusted. Yeah, maybe we talk about some of those add backs and adjustments, but they start to get a sense of it's stable or it's growing or it's all over the shop in terms of bottom line, and then from there with the owner can. Then the first probe on all those things is from me, why that doesn't, you know, that that looks inconsistent or high or whatever.
00:59:30
So that's when they start to really kind of appreciate that there's another perspective on their numbers. And the numbers do tell a story. A good one or a bad one, depending. Yeah. And particularly for a smaller business that, let's say, if it's turning over, say, 3 million in revenue and it's operating on a 2020 5% margin, a couple of decisions around headcount or investing in the product can very quickly evaporate the earnings business.
01:00:25
Chunking expenses. Yeah. So again, just getting understanding why decisions have been made, again, it comes back to that consistency and predictability. Yeah.
01:00:42
I do now want to go to your own experience as an Exeter, from the perspective of what are some of the things. I don't want to talk out of school, and I'm aware that you're in the business of acquiring businesses. You bring capital, but you also bring some rich experience. I'm guessing from having done it yourself, what were the things that you would advise based on your own experience at an owner? What are the top things you would do?
01:01:19
The top things you wouldn't do again. And if it was ten out of ten, that's fine. Just say no, we got it all right. It was all perfect. Yeah, I wish.
01:01:34
I think it does come down to understanding exactly who is buying the business and how do they operate and what are their motivations. For example, I've sold quite a few businesses to private equity firms, and they have a very particular playbook and approach to how they would usually do a transaction, particularly if they are out of the US.
01:02:14
So the private equity playbook is they'll make an approach they will ask some initial questions. If you kind of fit their criteria, they'll come back with what's probably a very attractive evaluation for your business.
01:02:37
The owner selling I'm very excited about a nice big number.
01:02:43
They'll then lock you into a period of exclusivity to deal with them. It could be 90 days or longer and they'll almost always try and retrade with you. Meaning that they'll come back and say, well, yes, we said that you were worth 30 million, but we've now learned X, Y and Z about your business and we have to sort of reevaluate the basis upon which we set the price.
01:03:24
That can feel like you're being hoodwinked. That can obviously annoy the seller. I think you just need to be prepared for that to occur if you're going to go down that path and sell to that type of buyer.
01:03:44
The they're also going to have a very strict due diligence process that is going to always take more time and require more effort than you ever thought. Even when you try and overestimate how much time you think it's going to take and how much effort that should be, you're going to be surprised. Yeah. It's an invasive, wearing down, watering down kind of process. Yeah, absolutely.
01:04:20
So I think that's important about just understanding what type of buyer is talking to you and how they operate.
01:04:31
Going back to what we've said earlier as well. Just around for us, you as a seller, very clear, but having a reasonable idea in your mind about what you're going to do next. Yeah.
01:04:50
You go through this washing machine type experience for several months and then you look at your bank account and there are some nice numbers in there after the sale has, has gone through and you've had the farewell dinner with your team and maybe shed some tears and shared some stories, but then you wake up next day and you're not doing what you've done for the past 20 years, 30 years. Yeah, it's a gaping hole. It is absolutely a gaping hole. And you can fill that with good things or bad things. I think if you don't put effort into thinking about that up front, you'll often fill up that gap of hole with bad things.
01:05:46
Yeah, it is on the money, we're saying have a good sense of what's after.
01:06:00
It might be you got to fill your time. I think entrepreneurs and business owners, I actually don't like the term entrepreneur too much, but these business owners that have built, they just go about it their own way. But they are wired to work hard to take on the impossible when there's nothing to go to. And playing comes up all the time on this podcast. But playing golf all of a sudden, five days a week or famously walking the dog is not as much as I love my dog or playing golf, it doesn't fulfill.
01:06:41
So that is vitally important. And I think the other thing I just wanted to pick up on before these offers that do come calls come in offers sometimes come in. Beware the high offer, because there's usually a lot of ground to cover and a downward pressure through due diligence and through all sorts of other processes. But I think it's also vital that you have in your own mind what a walk away number is. You don't have to necessarily share that.
01:07:18
It doesn't necessarily have to be based on maybe fundamental, the more traditional fundamentals. But it is important for you to be able to say, and you mostly need good advisors who can help you understand that. But you do need to be able to say, that is a ridiculous thing. I'm going to treat that with a degree of scepticism.
01:07:46
But also, if it's close and you start to see it unwind and you walk away because you know where it's headed and it's not within your range. I think if you've gone out and you've solicited two or three offers and they've come in at a number that's so far removed from that magic number you've got in your head, then it is worth reflecting on. Why is that? If those offers had come in from what you would consider to be reasonably experienced buyers, if the market is saying that you're priced at this point, then okay, how do I bridge that gap? What do I need to do to be able to actually achieve the magic number that I've got in mind?
01:08:39
And just back on that comment about the highest offer or high price up front, I think it's also really important to understand what portion of that is going to actually be cash that hits my bank account on closing of the sale of my business versus how much am I going to have to roll in equity or how much is going to be a seller note or be a delayed payment. There are all sorts of ways to structure those deals so that the big number that gets thrown out front doesn't necessarily represent how much cash lands in your bank account on day of closing. Yeah, do all your calcs and look at that. I think we've both seen where the thing that gets everyone excited is the headline number. But until you see an overview of like a non binding, indicative offer, and this is later in the process, but that talks about the whole the picture, what's in, what's out, what is the owner expected to do?
01:09:44
There's been deals I've seen where there's a really attractive headline number, but the owner's got to stay in and work for five years and that might suit it might not, as you say, earn outs and all sorts of other ways. So get clear on that. I think we're at a point where we can expect more owners to get more approaches and therefore I think it's going to bring on the need to do something bit more proactive. If you are an owner, you've given plenty of great advice today on how to deal with that call, but also to have the reflective conversations with whoever your trusted advisor is about what do I really want to do with the business? And most importantly, what do I want to do after that, if I can strike a deal?
01:10:44
And also I think doing that you can think through. Do I actually need to sell to a third party or can I sell to my employees or are there other ways that I can create a succession or transition plan? Yeah, that management buyout. Employee buyout is another significant area of opportunity for owners. It's a very delicate conversation, but it's also true that the staff are often have a lot more power than they might understand and the owner has a lot less options in dealing with a buyer that doesn't appeal to the staff necessarily.
01:11:32
So yeah, it can be a natural pathway, but got to be handled well, like everything. Yes, Shane, it's been an excellent discussion. It's so valuable that you're out there acquiring, but you've sold, you've exited, and you've shared some really highly valuable information and advice. So I really do appreciate that. I wish you well with continua software and is there a couple of things.
01:12:11
Any closing comments before I ask you to kind of shout out where people can get a hold of you? Thanks, Michael. I've really enjoyed the conversation as well. I think just my closing comments are that people are messy, businesses are messy, people are imperfect, and businesses are imperfect as well. And I think acknowledging that and then approaching any potential transaction or sale with that as a realization I think makes things smoother and hopefully actually more enjoyable and fun along the way as well.
01:13:03
We are buying businesses that we know are imperfect and we are going to be imperfect owners of those businesses as well in the future rather than trying to hide from that, actually knowing where the imperfections are where the skeletons in the closet lie. They aren't reasons to kill a deal. They're just issues that we need to be able to understand and then we can do our best to manage them. And so I think that's really important. Again, coming back to that point around consistency and predictability for owners, if they can be honest and upfront with us and share those goggles in the closet, then they won't be deal killers.
01:13:54
We like to solve problems, so we actually want to understand where those problems might lay in the business. Yeah. It's not the first line on the check sheet to say they've made one mistake in past deals. Off, start off with some good news. Absolutely.
01:14:10
Start off telling us all the positive. Yeah. But not one thing is going to make or break. Not one good, exceptional lucky result is also going to be something that you would filter out and say, well, maybe you're not going to get lucky again, but yeah.
01:14:27
All right, so you're happy for people to reach out to you to continue or do you want to? Absolutely. So people can go to our website, which is continuaoftware.com, and I'm happy to share out my email address as well, which is simply Shane@continuaoftware.com always happy to connect to owners, operators or to advisors who want to talk business. Obviously in the software and technology space, we are focused on businesses that have revenues of between 2 million and 15 million operated in Australia and New Zealand. If there are operators in that segment, then we'd love to speak to them.
01:15:14
I'll put those details in the show notes as well. So yeah, we can have a pathway for someone to reach out again. Shane, really appreciate your time. Thanks so much for being so open and generous. It's great.
01:15:32
Enjoyed it.
01:15:38
Well, I hope you enjoyed that episode of Small Business Banter and I hope it was helpful in helping you make the most of your small business ownership. To subscribe, to listen back, or to check out any of the resources or information we talked about on the show today, head over to the website smallbusinessbanter.com au, or you can search up small business banter on your favourite podcast player. Don't forget to subscribe and if it was helpful, tell another business owner about the podcast. If you think I can help you personally, please reach out to Michael Kerr via the website. There's a new episode out every couple of weeks.
01:16:16
I'll see you then.
01:16:29
Close.