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Are you and your business Game Ready?

| | TEC

 

In this episode of TEC Live, Stephanie chats with Graham Morgan explaining what ‘Game Ready’ really means. A must listen for every small and midsize business leader, if the ultimate outcome of your business is a sale or you are a founder planning to transition your business further down the track you need to start now. Make sure you have a 360˚ view of your business with the ability to pivot for an opportunity or misfortune as you never know what’s around the corner…

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Podcast Transcript

Stephanie:  Our guest today is Graham Morgan, Founder and Managing Director of Morgan Shaw Advisory, which is a business that offers a wide range of services, primarily focusing on helping small to medium size businesses significantly increase their value, realize that value in an exit event, while still keeping the owners safe and sane.

I love that. That makes a lot of sense, I think. We talk about a lot of things here, but what I like, Graham, is the idea of you’re going to help people make money in the process while staying safe and sane. Graham Morgan, welcome to TEC Live.

Graham: Thanks, Stephanie.

Stephanie:  So how hard is it to sell your business?

Graham: Oh, it’s very difficult. If you look at the statistics, less than a thousand businesses in Australia get sold every year.

Stephanie: Of any size?

Graham: Yes, of any size. It is difficult, and it’s difficult for a variety of reasons, not least in the fact that I think it’s around half of all businesses fail to sell just because they’re not properly prepared.

Stephanie: And so when you say less than a thousand sell, how many do you think are trying to sell or sort of put themselves up for sale?

Graham: I don’t know that number, but I do know that there’s around over 2 million businesses in Australia, 2.3, 2.4 million.

Stephanie: Because a thousand doesn’t sound like many, does it?

Graham: No, no. It’s a very small number. We read about every day in the Fin Review that another business has been sold, merged or whatever, but the reality is, is not that many are sold.

Stephanie: Right. You said half of them don’t sell because of a failure to prepare. What kinds of things are people getting wrong?

Graham: They’re not getting their documents lined up. That’s certainly one issue. They haven’t actually thought about their businesses through the eye of a buyer. It’s a bit like when people are trying to sell a house. You’ve got to think about what will a buyer look for and what are the things that would put them off? And it’s the same with a business. People, normally when they set up to run a business, they might’ve done it 20 or 30 years ago, they didn’t actually think about what the day would come when they wanted to sell it.

And so what’s quite difficult for them, then, is thinking it through from the eyes of a buyer, what will they be looking for? And of course a buyer is looking at all of the negative things in a business and what could go wrong. And a seller’s trying to think of all the positive things and what goes right.

Stephanie: Yeah, here’s the opportunity and look-

Graham: Correct. And so sometimes there can be that dis correlation as to how they’re both looking at the same set of accounts or numbers.

Stephanie: And I’d love to get back to that, but that assumes that someone’s even interested in the first place, because if you’ve got that disconnect between what a buyer is looking for and what you think you’ve got to sell, that’s assuming there’s a buyer looking. So how do you attract a buyer?

Graham: The first thing that’s important, and I think this is where this phrase that we use called ‘game ready’ is so important, is that before you should even start to speak to somebody else or trying to find somebody who would be interested, you’ve actually got to make sure you’ve got everything lined up and ready to go. Because if you do find a buyer, and I’ll come back to answer your question as to how do you find them, once you find them, you then have to move quickly, because once you have somebody who shows an interest, they may well be looking at other opportunities.

Or even as simple as if there’s a big time delay in terms of you providing them what they need in order to evaluate the business, they start to get suspicious and nervous and wonder why you haven’t got to hand what they want. So the first thing I would say to people is if you’re thinking of selling your business, even before you have the initial conversation, you need to get yourself completely ready.

Stephanie: So maybe even, and I know we’ve spoken about it before, that even if you’re not thinking of selling in the short term, if the ultimate outcome of your business will be an exit and a sale and something might happen to you, like you get sick, if that’s an option, then you need to be game ready, don’t you?

Graham: That’s completely right. I mean, there’s the negative side of what you were talking about, which is life. And you know, sadly, by the time we get to the age of 75, one in four females, one in three males are going to get cancer, which is a horrible statistic. And then when you add on top of that what happens to people with strokes and heart disease, the chances are, something horrible is going to happen to us or one of our loved ones at some point. So for no other reason, you should have your business ready to go, because what you don’t want if anything bad happens to you is that your beloved or somebody else within the business has to then try and sell a business that’s not ready. That’s the first point.

The second thing is, opportunities happen in life as well. The positive happens, so your major competitor could suddenly go into administration or knock on your door and say, ‘Would you like to buy me?’ And the same importance of getting your documents and your business ready is just as critical, because if you need to go to the bank to borrow some money to fund the acquisition, then you need to make sure that you’re ready again.

Stephanie: So game ready generally?

Graham: Correct.

Stephanie: I’m imagining that this is more of a challenge for small midsize businesses, because they’re living day to day, either the highs or the lows. They might think exit and retirement are kind of the same thing and that sort of, ‘Well, that’s in my seventies. I’m going to keep working, and this is my baby,’ and what have you. So am I right that that’s a particularly challenged group for being game ready?

Graham: Exactly right. First of all, on a practical level, especially with smaller businesses, they may just not have the staff and the support. They won’t probably have a professional CFO, as a large organisation would. They may well have an accountant who could be an external accountant who doesn’t know the business too well, and they may rely on a bookkeeper, who could just be one of their staff who has just learned how to do it throughout the years. So even something as important as their financials may not be in a good shape to actually pull together. And the second thing is, you’re right, they are normally time short, because they’re working on the business. And one of the things that we do is to help people to actually to work on their business instead of in their business, because that’s important.

Stephanie: That’s the first important step to be ready. I’ve been through this, but in bigger businesses, as a participant, I think five times, and it’s really stressful. Just even being a line manager, further down the line with something happening overseas, and due diligence and requests for this and I need this information by this afternoon, fill in this spreadsheet, it’s actually stressful, isn’t it, being part of a sale?

Graham: Absolutely. And that’s part of the other reason why we want people to get game ready, because it is hard enough anyway. There’s a lot of emotions. People, as you say before, you refer to it as their baby. And business owners, especially small business owners, actually probably spend more time thinking about their business than they do about anything else, including their family. It seems to be all-encompassing for people who have a small business. And so this importance of getting ready so that when you get into the eye of the storm, you actually are in control of the process rather than the process controlling you, if that makes sense.

Stephanie: Well, then you’re dealing with some of the other things, the unfamiliar and ultimately negotiation, because you’re not worrying about I have to get my books together for the last financial year or whatever.

Graham: Yeah, that’s correct.

Stephanie: Okay, so back a little bit, then, to where you would attract someone. So you’ve talked about the opportunistic attraction, someone knocking on your door, ‘Hello, I’d like to buy your business for a lot of money.’ If you’re starting, you’re game ready, how do you find a buyer?

Graham: Part of what we would do with a client and what we would advise is getting game ready is much more than just getting your documents lined up, and that is very important. And structuring those documents so that they would be ready to go straight into a data room is very critical. But part of it as well is, two other parts. First of all is maximising the value of the business. When we do that initial review, we quite often will see things that if they fixed, they could get more money for them. And that’s what we talk about, about increasing the value of a business.

Stephanie: What kind of things?

Graham: It could be something like if you look at a client’s revenue, there could have been opportunities where they haven’t maximised their revenue. They may have a client base where there could be too much reliance on one major customer, et cetera, et cetera. And then there could be operational things, where their costs have just drifted over the years and they’re bigger than what they need to be. So there’s a variety of areas that we would look at the whole 360 of a business and say, ‘Well, if over the next six months whilst we’re building all of the documents and getting you ready, you can fix these four or five things, then you can increase that value.’ And that’s an important thing, because if a prospective buyer is coming in and can see the business is actually improving its sales and its profitability, that just helps to lift the price.

But to answer your question, the other aspect is, sure, you could just go and list your business on one of the sale websites or whatever, and that works for certain businesses. If you’re trying to sell a simple business and it’s not worth that much money, then that’s okay. But if you really want to get value, then what you should be doing is thinking strategically and saying, ‘Who in our industry and market would pay top dollar for this business?’ And that could be somebody up or down the supply chain, it could be a competitor, it could be an overseas buyer who wants to get into the country. And that gets a bit more complicated. And that takes research and a bit of effort to actually say, ‘These are the people that we should go and speak to.’

And so our approach would be, is we would much rather be targeting six businesses that we believe that there would be value for them, so at least when you knock on their door, you can say, ‘Not only have we got this great business, but we’ve got this great business, and if we’ve, if we’ve understood your position correctly, we think this would add a lot of value to your business.’

Stephanie: And so that’s the idea, then, of using a third party to be involved, and that makes sense. So that then brings us back again to the idea of matching what a buyer is looking for with the story you’re telling about your business.

Graham: That’s very true. And some of that research that we would do is, let’s just say for example, it’s a manufacturing business. Knowing that somebody is looking to grow in a certain area because we’ve been tracking what may have been happening in news feeds and various other things, and that they’ve got spare capacity in their current business, and knowing that we’ve got somebody who wants to sell their business that they may own the property or they can get out of the lease, means that the buyer could take over that business, move them into their premises and immediately save the cost of a rent or another property.

And that’s immediately when you can go to a prospective buyer and say, ‘We know that you’ll make more money out of this than the current owners.’ Therefore, there should be some interest.

Stephanie: Some clever matchmaking, isn’t it?

Graham: Yes, it’s exactly right. It’s matchmaking.

Stephanie: In getting game ready or preparing, financials, that’s the obvious place to start, is it?

Graham: Yes, it’s financials, but it’ll be going back over at least three years, if not five, ideally, to show a story. And financials isn’t just about the P&L, but it’s the balance sheets, because as we all know-

Stephanie: We’ve spoken about the balance sheet here, and cash. It’s all about cash.

Graham: Yes, absolutely, and balance sheets always tell you the story of what’s been going on in the business. And it doesn’t matter so much that people might’ve been running private finances or whatever through the business. That can all get tidied up and sorted out on the way through. But what’s important is that those financials need to be accurate. They need to be very easily understood. And so one of the first things we would do is, we will in effect be doing a reverse due diligence on our clients. We will be asking all those awkward pointed difficult questions, because we have to know what the truth is so that we can actually present that properly to a buyer.

You know, you should never go into these things trying to think that you can put lipstick on a pig. You can’t convince somebody to buy something that’s not real, and so we have to do our homework and due diligence first to make sure that’s prepared. But to answer your question, any details about the property, employees, key customers, key suppliers. If you’re selling a business where you might own the land, you need to make sure, have we done anything to the land underneath? Have you done soil testing? There’s a whole variety of things to make sure that that business is truly ready.

Stephanie: Imagine a business that isn’t that far down the track, you know, a solid family-owned medium size business that they know at some point that’s going to be the exit, but they’re probably five, 10 years away from that. What would be the disciplines that you would suggest a business puts in place now so that when it’s time, it’s not hard, they’re not scrambling?

Graham: The first thing I would do is to make sure you get some regularity of your own internal processes and routines. So making sure you’re reviewing your financials every month, even if there’s plenty of cash in the bank and you’re happy with how things are going, but making sure you’re reviewing that every month. And there’s a big difference, as we all know, between getting financials that are just spit out of a system and proper management accounts that actually inform you as to what’s going on in a business. So whether it’s your financials, whether it’s what’s happened with sales, your pipeline, where your new prospects are coming from, all of those aspects of what we would call good business management you should have, and ideally have an agenda with the relevant senior management there and actions taken and improvement plans done.

You should be setting an annual budget. You should be reviewing that every quarter. You should be doing a strategic review once a year and actually have a proper strategic plan with, again, name actions and deliverables. And if you can, we would suggest that you have an advisory board, which can be as simple as one external advisor or belonging to a group that actually can give you that support, so that the owner can get some external influence and actually somebody looking at it with a different pair of eyes, just going, ‘Yeah, I know you’re quite happy, but have you thought about this?’

Stephanie: But you’re missing something.

Graham: Yes, or whatever. So good business management, I guess, is the main thing. And start to think like a buyer. If you were buying this business, what would you think about that monthly report? Would you think that was a good monthly report? And it’s not just about the numbers or what it says, it’s but what actions did you take off the information that you were provided?

Stephanie: So having that lens on your business of, if someone was looking to buy my business and this is what they saw, how would they feel, is actually a really interesting approach to take, isn’t it, as a leader? Because it puts you outside your own head as to how the business is tracking.

Graham: That’s a very good perspective to put on it. If we always try and look at it through the eyes of somebody else, and in this case, yes, I’m suggesting that you do it with a buyer, but it’s also not a bad way, if you think about it, that well, how would an employee look at the business as well? And how would a customer look at it, or a supplier? And that might be something useful for any business owner, just to say, ‘I know how I look at this as an owner, but how would all those other stakeholders look at the same piece of information as well?’

Stephanie: Well, it brings some objectivity, doesn’t it, Graham? Because if you’re an owner, if it’s your business and you’re kind of running a little bit month to month, you’re always filling in the gaps. Well, here’s a problem, but that’s all right. I’ll be able to get this one in soon and that job will finish or whatever. But if you really are thinking of it from someone outside looking in, then you need to be more structured and disciplined.

Graham: I think that’s correct. And the other lens I would suggest that you put across it, particularly on the quarterly reviews and definitely the annual reviews, is the problem with financials or any of those other reports, is that apart from sales pipelines, the rest are all looking back in history, and so what you must be doing is saying, “Where do I want this business to be in two years’ time, five years’ time, 10 years’ time?

As you say, even if you’ve got no intention of selling, there’s a whole variety of stakeholders. Whether you employ one person or a thousand people, those people will depend on you making the right decision for their future at some point in time. And so even if you’re never going to sell and you’re going to hand it on to your children and they’re going to hand it on to their children, there still will need to be a transition, and for the business to survive, there’ll be a growth. So I think a lot of what we’ve been talking about today, whilst I will always put across the lens of it, how would you sell your business and maximise the value, are just good governance and good business management techniques anyway.

Stephanie: So there’s something for people to learn in this as well. What about a common example in a midsize business, when the founder is still the owner and is a really key person in that business? How much of a challenge is that, then, if they’re trying to sell the business?

Graham: Oh, it can be very significant. On my own personal journey, the reason I ended up helping small and medium size businesses sell is because I spent a lot of time for corporates buying businesses and seeing those people across the table from me. And one of my favorite questions that people quite often misunderstood why I was asking, is I would say to them, ‘How much holiday do you get?’ Or, ‘Do you play golf?’ And what I was looking for, actually the response I wanted, is that they’re not in the business, and they take a lot of time off.

Stephanie: Yeah, right. ‘Actually, I only work three days a week,’ that kind of thing.

Graham: Yes. But they would delight in telling me that they work 70 hours a week, they haven’t had a holiday in 10 years, and I’d be sitting there thinking, ‘Well, I don’t know how we would integrate that business.’ This is one of those areas where an owner has to start extracting themselves. And what I say to them is, is that first of all, we would look at the management team and see if anybody can step up, because that’s important. And if there isn’t, then we need to do something about that. If there is people who can step up, then what I suggest is you say, ‘Well let’s take it one step at a time. Why not never work a Friday again? If you want to work on the business on a Friday in a library somewhere, then by all means do so, but just don’t come in.’ Or take one-

Stephanie: Is that what you’re suggesting I do? Because it sounds terrific.

Graham: I think you should, and maybe Mondays as well.

Stephanie: Yeah, beautiful. Going to do that, yeah.

Graham: Or just say, ‘In three weeks’ time, I’m not going to be available for a week.’ And then perhaps in that week, sit down with your accountant or an advisor or somebody else and just start to work through and say, ‘If I do want to transition this business, what do I need to be doing?’ And think about those big rocks for a business as to what they should be working on.

Stephanie: I’m hearing a message in this. Well of course, it’s game ready, but it’s looking at pushing out your time horizon too, isn’t it? That you can’t be a founder-owner and say, ‘It’s time to sell. I’m selling now.’

Graham: Correct, because you don’t determine that. You can get everything under control, you can get all of your documents ready, you can have the best strategic plan, you can have got your succession planning, your client profiles perfect. All of those things can be done, and that’s all important if you can give yourself the best chance, but ultimately you still can’t determine the timing of these things sometimes. All you can do is to make sure you’re in the best possible position for when those opportunities come.

Stephanie: And what are some good news stories where you’ve seen a midsize business do really well by having everything lined up?

Graham: A number of examples, and one of my favorites, I think, is that a medium size business, two guys had been running it for a number of years. There was a number of things that kind of needed to be fixed up, but it was a good business. Through the case of a nine-to-12-month program, we built a strategic plan. We engaged with the management to be part of that process. Out of that process, there was two people who stood up and were obvious leaders. Through some mentoring and guidance, we brought them up and gave them more experience. We started to get the owners to spend less time in the business.

And we were doing everything to get game ready, and we were almost there when the knock on the door did come, and it was a huge big multinational business. So we had to do a little bit of kind of fast tracking at the end, but we were 90% there before they knocked. And the fact that when they then actually did put the offer in, which we negotiated up twice, partially because we had a good forward story and we could keep showing that it was going to be growth coming through, when we actually had a nonbinding offer that was acceptable and could open up the data room, because everything was so organised and structured, they literally just said straight away, ‘We’ve never seen a business look this good.’

The due diligence, even though it’s always intense, was a lot more manageable. And the fact that the owners ended up then selling it for more than what they wanted, being less stressed than they thought was possible, for me is just the perfect scenario. And the fact that all the employees keep their job and they transition to a new owner. And two of the people in the team actually ended up being the general managers. All of those things make me feel really warm and fuzzy.

Stephanie: That’s a really good story. The big thing I’m taking away from this is being game ready at any time is actually really good business practice.

Graham: Correct.

Stephanie: Anyway.

Graham: Even if you never sell your business, and let’s hope that none of those horrible things ever happen to people, but you know, even if they don’t, and even if their children want to take over the business, the worst thing that’s going to happen is that you’re going to be very organised, very structured. The business will be more profitable, and actually you’ll be able to take proper holidays with your family. That’s the worst scenario of being game ready.

Stephanie: Yeah, yeah, which I love. That all counts. And then the best scenario is that you’re in a position to go into something that will probably be new for you, which is inherently stressful, but that you’re ready to go and to really maximise the opportunity then that comes from it.

Graham: That’s exactly right. The other reason why most deals fall over, I mentioned one which is about being game ready, the other one is time, because people get fed up, worried, concerned if time takes too long in between processes. So the other advantage of being game ready is that once then you have engaged with a buyer, you can push through quickly to execution. Time will kill a deal as much as anything else.

Stephanie: Yeah. Fantastic insights, great insights on business, and thank you for sharing your experience. I love it how it’s from both sides of the desk that you talked about, that you’ve been buying and selling at the same time. Graham, thank you so much for generously sharing those insights, and wonderful to talk to you. Thanks very much.

Graham: Thanks very much, Stephanie.

Stephanie: So that’s TEC Live for today. CEOs are in the business of making decisions, and leadership is the art of execution. I’m Stephanie Christopher, and look forward to talking to you next time.

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