Ep 311: Setting Up For A Profitable And Peaceful Business Exit Setting with Michael Kerr

Do not sell your business until you know these three questions. Hi, I'm Jaryd Krause. I'm the host of the Buying Online Business podcast and today I'm speaking with Michael Kerr, who is a small business advisor, business broker and registered valuer.

His core service is helping owners pre-sell to increase the value and sellability of their businesses. He also provides specialty advice for owners who get unexpected offers to sell at the drop of a hat.

He's also studied at Melbourne Business School, his MBA. He has been the founder of Kerr Capital for over 20 years. He's been a senior executive with experience in banking, accounting, and fund management, and he was in a tech startup for three years in the dot-com era.

And he is also the producer and host of the small business banter podcast, which I am on. Go away and check it out. It's a great podcast on not just making money. I'm great at helping people make money. And we talk about that and he is as well.

but we talk about why, why the money and how we use that as a tool for a better lifestyle for ourselves, our friends and our family. Now in this podcast specifically, Michael and I talk about how long it takes to sell a business? How long should people give themselves lead time to get ready to prepare for sale?

What are some certain things that happen through an approach? Say somebody comes and approaches you to buy your business and why you shouldn't just sign an NDA right away and start giving information away. What are some of the three questions you need to ask before that to that possible purchaser? We just talk about some of the things that you can do to de-risk your business to get a higher multiple and also how to increase revenue in the business to be able to get a better valuation for your business.

We also talk about acquiring and how long it can take to acquire a business if you're a company or an investor that is looking for something that's quite specific, why you need to be patient and why timing is very, very critical when you're looking to acquire a business as well. Now, there's so much value in this podcast episode on how to get set up for exit.

Also talking about acquiring businesses. If you haven't got my due diligence framework, make sure you go away and get it from the site, buyingonlinembusiness.com; that's free resources. There'll be a link in the description. It essentially helps you take the guesswork out of buying a business. I've used it; thousands of people have used it.

Go away and get it. Now let's dive into the point.

Michael, thank you for your time and welcome to the Buying Online Businesses podcast.

Nice to be invited, Jaryd, and happy to spend some time.

Absolutely. Kerr Capital, it's been a couple of decades now. Congratulations.

Thank you.

Yeah, it's still going strong, but yeah, 22 years in, it was an antidote to corporate life.

I just had to do something on my own.

Yeah. You're in banking and you're senior executive bank as well, right?

Yeah, I had some time in lending money to small businesses, working in accounting, and a bit of time in fund management.

Yeah. And then I had three years in a tech startup, from 99 to 2001, tech boom or whatever it was—one, the first time it blew up at the end of 2001. But that was a hell of a transformational experience in contrast to corporate life.

Yeah.

Tell me why and how was that a transformational experience for you compared to corporate? Like, is it more fast-paced, more going on in a shorter period of time?

Yeah, it was literally every day you could make a difference to the business that we were trying to build. There were two founders, maybe four or five, three or four software engineers writing. It was internet marketing technology. So was pretty innovative, but I didn't know anything about tech. was good at business development.

And so we sat in this office, the seven of us, a couple of offices and every day made a difference. And I have never ever experienced anything like it. I'm not sure I want to again, quite honestly, because it completely consumed me for three years, but we went through some. I had a minority share in this business and it was like a rocket ship, but you see what difference motivated individuals can make.

Yeah, absolutely.

Like when you're very hungry, I mean, in younger years as well, when you're very hungry and you've got this goal and nothing else matters, you're just going for that. Like you can make some pretty bold moves, right? You can't.

Yeah. And look, if you believe, and I did, we all believed that we're going to create this business and we're going to make a mark and it was the two founders, incredibly bright, motivated, driven individuals out of McKinsey. And so I was working in this environment where it was all consuming, but it was; it's just remarkable what you can achieve if you want.

Yeah. And if there's no other choice, it's survival by the day, more or less when you got some funding; that's, you know, it's you're burning cash.

Yeah. So you guys raised funds to grow the business. did you happen? see three years. Did you just sell your shares or did you guys all exit? Well, it was the end of .com one and there was a really large international telco joint venture that had, in, it's coming in as shareholders and we're going to underpin. We already had, at that point I was in Australia, we had think 30 people in the U.S.

And everything imploded. was this, call it an orderly exit? The Talco joint venture paid out some of its forward commitments. there was everybody who kind of got rewarded to different degrees, but I was a small shareholder. But after that, I took 12 months to think about what next. And 12 months of recovery, huh? Yeah, it was a bit like that. Yeah. Yeah. I don't blame you. I don't blame you at all.

I think it's so important to recharge. The more we energize and recovered and rested, the better decisions we make and the better decisions we make in our life and our business, the better our life and businesses are, right? Yeah. And I think we opened up talking about the treadmill of corporate, which is fine. And there's some wonderful companies, excellent opportunities, but there's also this idea that you can, if you've got your own business, your own side hustle, whatever, kind of time it.

Ideally, build it so you can have a bit of time out from time to time and it's on your terms. But yeah, the idea of refreshing and revitalizing is kind of scary, but it can also be incredibly good for whatever the venture is. as you said, personally, I think it depends on how hard and fast you go. There's a lot of burnout that can happen for a lot of entrepreneurs and it can be forced. For me, it was forced for that very reason.

Right. to go from like 80 hour work weeks down to like 10 to 15 hour work weeks was a massive identity change for myself and was hard for my ego to pretty much handle. And then it took me multiple years to get there, but. Did you feel guilty because you weren't putting in 80? that? Yeah. It was times where I would like; I was working 70 hours as a plumber and then I was working 10 to 20 hours a week on my own businesses, online businesses starting it out.

And then I was also commuting. And sometimes if I did something with friends on the weekend, I'd feel guilty. It was like, I'm not working hard enough, but this is a younger version of me trapped in the hardcore hustle culture. But it worked for a period. It worked and it got me results that you can only see with the foresight. Can you sort of see or have hindsight? You can see, okay, you might do it a little bit differently, right?

Yeah.

And also, like you said, is like that's corporate and being able to be in business and have a bit more control of your own time in terms of when you work. That's why people are listening to this podcast: to buy something to replace their income so they can spend more time doing what they love with the people they love.

So have you exited that one? Got out of that. Congratulations. You also, before we get into it, do your primary service of helping people sell businesses or get ready for a good exit. Sell.

Have you acquired a business before or have you helped people do acquisitions at all? You've done a significant amount of acquisition work as a proportion of all the work I've done. Mostly rather than just kind of ad hoc stuff, it's mostly been with organizations that have expressed a desire to grow through acquisition but don't really have the time or skills, and sometimes it's about just holding back on their identity.

So those projects have typically been me getting in, understanding the business that is their business, why they do want to grow, and why acquisition might be the best way to do it. And so then typically it's okay, so we come up with some criteria. This is what a good acquisition could look like. And for these reasons, and that's important because when you're chatting with a target, call them a target.

You're not just coming across as some uninformed, happy to buy your business. You build credibility because you understand why they're interested in acquiring you and why they might be interested in buying you. then it's like, It's a sales pipeline. You kind of build out this list of businesses that might meet the criteria and you go through a process of qualifying them and that's the kind of more strategic acquisition work and a lot of companies and businesses talk about growth or acquisition, but the reality of it is it's quite simple.

You've got to meet some criteria and you just have to be patient to build and manage the sales pipeline. That's how I see it anyway. Yeah, I agree. It really depends on somebody. If you've got something that is very, very specific, that's going to be an acquisition that you can merge into your company or to a company to find that the more specific you are, typically the longer it can take, right?

That's a very general rule, but is that what you found as well? Yeah, yeah. There's so many; even if you identified seven or eight really good opportunities, if they're good businesses, the owners on the other side are less inclined to sell anyway because the businesses are going okay. Timing might not be right, so you can have, right? you just have to be patient because if you're in for the long term, those opportunities might come back around in one, two, three, or four years.

So it's all purposeful acquisitions. Yeah, you're right that you need to be patient and very dedicated. Yeah. Patient is a great word because you might have money burning a hole in your pocket as an account company and you're wanting, or you're wanting to just, if the business has a lot of finance, you want to acquire something to pay that finance or faster.

Yeah, being patient is pretty critical, right? Yeah, yeah. You don't want to overpay. You want to be; if it's a really excellent opportunity, you will pay more than the market, whatever that might be, because it might, you can extract some energies or some real, you can get, you go faster or get quicker to where you want to go. So you shouldn't rule out that. But yeah, it's absolutely.

So when you've done these, have you helped people acquire finance from their primary business or SPV and then acquire? Is it just that they're just using a bit of cash or investors? Look, most of the time if you go through the levels, it's for an individual to buy a business; it's kind of tricky. The banks here, maybe—in Australia, it's just ridiculous. Yeah. To fund essentially some goodwill.

If you haven't had any experience running a business, in those cases, you've really got to bring your own capital. The businesses that are, and there's a lot of acquisition off-market, go on in lots of sectors or lots of industries. And it's bigger groups who have a really established business, their own funds, or have credit with any of the banks they want, and their pros at this is one of the things about the business broking market.

There's a lot of stuff going on that never hits the market because if you're in a vertical or a sector and you're an aspirant growth company, you know who you want to buy. Not in hospitality necessarily, but in a lot of sectors, industrial professional services where there's no need for the owners to, if they're any good, they'll get approached and those businesses approaching are usually bigger and better funded.

And so those smaller businesses that are looking to get acquired know exactly how to build that business to be so attractive for that person that's dominating that sector to acquire it. In fact, so attractive that they kind of have to because of the risk of them not owning it.

Right. Yeah. That's the playbook.

If you're good at, mean, you hear, I've heard stories of businesses that have been built from scratch with the eventual owner in mind. And I don't know how many very clever people it happens, but I think for a lot of the work I do with owners, what's your business worth now and who should buy it?

So then you can start going to keep running the business successfully and keep your eye on the prize, which is making the business successful today. But if you've got an eye to who might buy your business,. It's a hell of a start as compared to where a lot of owners get to, which is I'm ready to sell.

I think I'll advertise and see who's out there. it's, really is; you really do have to be patient then because who knows who's going to come in through some of the business-for-sale websites and the like? absolutely. So you help people get their businesses more sellable and get a better valuation. What type of businesses do you typically work with, Mike?

Look, in terms of size, guess it could be businesses worth, if I think about the last 12, 18 months, businesses that have been worth between a million dollars and maybe $30 million. It spans; it's a pretty big range. It spans quite a lot of sectors. Industrial services is probably where I do more of my work. Kind of familiar with the way those businesses work, but you've looked at health.

Allied health is a really vibrant sector. So I've done a fair bit of work there and, but it's kind of, I think one of the common factors is that even a $30 million business might have one or two owners that are really still very dominant. And so I get to work closely with the owner because the exit or the decision to stay has a direct impact; it's directly affected by them and their aspirations in a wide range of industries.

Yeah. And somebody looking to acquire a business where the owner is heavily involved—that's just like, could be like them buying a job or key person dependency. If they're a larger company buying this service to merge into their own, they're going to have to find another key person to do that sort of role because the owner is not going to want to stay in as an employee.

Right. So is that what you mean by that?

Sometimes, look, sometimes the deal could be attractive enough. So it really depends. I think a lot of owners would ideally like to sell and go do whatever they want to do, travel or take whatever. Yeah. But this is the thing about if you come back, you recognize it's going to take years rather than months to properly get your business away.

You should start to factor in working inside of, know, particularly insert, there are some businesses, not just services, where it's pretty hard to replace the owner. So the way you mitigate the risk, if you're the buyer, is to say, we'll keep you engaged for a year or two. And so the owner's got to decide that and excuse my French, but you don't want to work with dickheads.

So yeah, that's who you sell to aside from the deal, the dollars you want to be working. Some and possibly even where you feel like you can ping on your age and stage, you might, might actually feel like there's a bit more in you and in the business that you want to deliver inside of a bigger, more well-financed organization with national offices or whatever. it's true, think, yeah, it kind of horses for courses, but you can mitigate all those things—the risk factors of keep-person dependency with some planning on the sell side and just creating a good environment on the buy side to say, well, and there are good acquirers and bad acquirers.

There are good acquirers in industries that get reputations that you wouldn't want to do an earn-out deal with them or you wouldn't want to stay with them. Yeah, for sure. What's the typical lead time? mean, like, I'm sure it's going to change from business to business, but what's the typical lead time that you like somebody says?

I want to get this ready for exit; can you help me make it more sellable? What's a typical lead time that you would work with somebody and then what are some of the usual things outside of de-risking the business from key person dependency? I guess the reality is a lot of owners keep putting off or don't invest early enough in getting their business ready for sale. that's just an issue.

Or you just get suddenly approached and out of the blue and you're not quite sure what to do, but I can't think we talk about that later. But so if you're, and it's pretty hard to control the eventual exit timeline, but if you were thinking three to five years ahead of when you want to be out, like totally out, because you're going to allow for a period of time working in the business transition, not just a month.

Like you said, it could be a couple of months, six months to two years, depending on. Yeah, it could be. And it could be really bad. could be actually a positive thing. I have seen both.

Yeah. But that's probably, I think, more than five years. It's like, it's just so far into the future that you get why you're not going to kind of take it seriously and generally. So if your age determines that if you're in your 60s or whatever it is, five years is probably too; if you're 65 and you want to be out in a couple of years, just limit your options.

But anyway, five to three years would be ideal because there's a couple of stages. You can get in; you can evaluate the business. What's it worth today? What are your options? And it's a bit, oh, well, maybe not attractive, but at least you've got time to sort out issues. And you've also got time to implement some changes and see the fruits of your labor. that's it; there's things that will help you if you have to sell tomorrow.

These are things that you just have to fix. You got to get that agreement signed or you got to get the lease updated or whatever it happens to be. And because it's not going to sell without it. But the real value upside is saying, Well, we've got some years to restructure, refocus, and redesign the business. that's, you're probably then investing money now, which comes out of P&L. It's a one-off cost, but if you can start to see the curve go up, exactly.

Then you can say to the buyer, We remodeled, we changed things. And not only is it increasing, but there's every reason why it's going to be sustainable because here's what we change. And you can't do that stuff in a month or two; you can fix an unsigned agreement, but you can't fundamentally; you make major strategic decisions about where the business is going.

Yeah. For example, say you've got a three-year time horizon and you have some things that you want to do. Make some heavier moves to reinvest in the business to make it more attractive for a seller in three years. Doing that in the first year. And then you can see in the second two years prior to sale, like you don't have those expenses, but the business has been set up to be far more attractive for a buyer. It's more profitable and more attractive and they're not valuing the business based on three years. They might be valuing the business based on the last two years.

So they don't see the investment that you've made. They just think, they just believe that it's always been like that and you can get a higher valuation for that or a better exit for really doing some strategic work in the first year and then slowing down reinvestment into the business in years two and three, right? Yeah, that's right, Joe. Like you can arguably some of that cost, might, if you're really cheeky, you might say, it's one off, you know, that, you know, so we'll add it back.

Without add-backs, a lot of businesses aren't really making that much money. But then you go, mean, yes, value, you. I think there's a couple of things if you're thinking and changing things in the business; it should put the business's financials on a better footing and you might see some growth coming out of that after that investment. so it goes to your bottom line is better.

It goes to the value, the multiple. mean, when you boil it all down, most deals are done on the basis of an earnings and a multiple. Earnings time multiple equals whatever the purchase or the sale price is. And so you can actually shift value two ways. You can grow profits. 25 is, or 24 was up 10 % on 23. But you can also say it's a better structured business, less key man. So instead of three and a half, we want four.

And so you've got two levers and we've been chatting before about just growth and growth and growth. But if you're selling your business and you can demonstrate to a buyer that it's on a good trajectory, that's going to continue after I get out of the business; it just goes to a more successful sale result.

But you're also shifting the focus to the future legitimately. If your business is flatlining or buyers want to go back three, four, or five years and fair enough, but it doesn't, and it only takes a negative, the sale process can go on for months, years. And if you have a quarter where things drop off a bit, then the whole psychology changes.

It's like this thing is not; it's got no growth. might still have value, but it's got; you want to be shifting thinking from where you can to where it's, because every valuation is a proxy for what you think you're going to get out of it in the future.

Yeah, it's a massive shame to see that so many people have bought, not bought. So many people have built these businesses over many years. It's been their career and they're getting to an age where, like, I don't really want, I want to retire. They might have taken money out of the business and bought assets so they can retire, but they also want a bit of a paycheck at the end of the day by selling the business.

But because they're getting older and they just don't have as much care for their career and their business anymore, it might be like declining slightly because they're just not; they've just put all of this work into this thing. And a lot of those businesses are not selling for a great price or don't sell at all because of that. Yeah, that's the worst. Yeah. It stinks to see. Look, the thing for a lot of, if it's a conscious decision to wind out the business and just take it easy.

Great. But often will be, they'll be taking the foot off the accelerator. Yeah. Unsure what to do, but still concerned about maybe leaving some kind of legacy, keeping the staff in the business or keeping on serving customers and clients in that local area. So yeah, it can be a real kind of sad decline.

There's always something you can do about that if you, as the owner, take the initiative to get some helpful advice. Yeah, absolutely. just by, even if it's just like one year of some work, towards getting it to a decent P and L and a level where you've de-risked the business a little bit more, which helped. The way I see it, the more that you de-risk the business, the higher the multiple typically.

And then you can work on that growth, like a little bit, like more than just a flat line in the business in terms of like earnings, which can be so helpful. It depends on what sort of business it is that can allow you to do that in that sort of time period. Now you mentioned that you have sometimes people come to you with, We've got this offer or this person that's interested in our business and they're not ready for sale.

What are some of the things that you do to help them sort of get ready for sale in a short period of time? Yeah. So you're referring here to where I'm in my factory office and get a call out of the blue. This might be interesting. Yeah. Yeah. Yeah. As I said, it happens a lot. So I mean, some of the golden rules for that scenario are don't just sign an NDA and start sharing information.

Fully, yeah.

Don't sign an LOI. No, really, don't feel like you've got some of these acquirers in some of these industries. That's their professional acquirer. and you can feel like you're really... Because they're a bit of a cash check at you and you're like, okay, maybe.

They often do. it's like, it can be quite alluring and can come at the right time of having a crappy week or two and this could be my out; I don't have to worry about exit planning or getting, but so they're really good at lining you in and sometimes, and it's not all like, it doesn't necessarily mean they're not genuinely interested. I'd say the other golden rule is just to figure out before you go too far down the line, it's okay to say, I'll come back to you, I'll talk to an advisor, because it's got to be a two-way conversation, but you just got to establish.

If you get a call out of the blue from someone about buying your business, who the hell are they and why are they interested? It's perfectly fine to say, Who are you? Why are you interested? And what else have you done in the sector? Just to put it back on a bit of an even keel because it can feel and you can get squeezed and feel like having a one-way conversation.

So it's really just going to the balcony and saying, All right, I've established who they are, haven't signed anything, haven't given any information. They'll actually probably be quite respectful if you kind of treat it a bit more like a two-way conversation. So you don't have to give away anything.

What you got to do is come back and, whoever it is, get some advice, but also really reflect on personally what you want to do. It's nice to get a call. If the timing's perfect, don't tell them that. Just don't, you know, really don't do too much other than try and discover who they are and why they're interested in buying. You can then engage in a dialogue that looks less like you're desperate, that you're really keen or that you're happy to do a deal tomorrow.

So it's hard when you get caught on the hop, but it does happen a lot in a lot of industries. So there are a couple of things that you've just got to try and avoid. And then it's like the dating analogy. That's the first call; just treat it like you're building; you're going to sell your business and somebody's turns out they're genuinely interested in the industry. It should take time.

They'll ultimately, if they're screaming to do a deal tomorrow, probably just walk away because the good acquirers building bigger, more sustainable businesses will work with you for the time it takes.

And also it really buys you, like there's some great questions in psychology I understand when you're getting approached by somebody to buy a business is that by you setting it up in not just giving them everything that they want, but you sort of having the questions like, hang on, who are you? Why buy this business? What have you done?

It doesn't just buy your respect in the deal; it can all, but when the second and third-order consequences of buying your respect in a possible exit mean you could because you bought respect, they've got more trust in the owner, which gives more trust in a higher valuation as well. Just by those questions, they can make you so much money.

Yeah, you're right, Jaryd.

If you're easy with your information, just even if you sign an NDA, right? It doesn't matter. You got to understand who they are and why they're interested in buying. then an NDA is worth the paper that it's written on.

Yep. Hold off, play hard to get, and be a bit obstreperous if you need it because ultimately they'll go. Well, this is someone who values their business, values their commercial and confidence information isn't just going to roll over. So yeah, it does. It lays the groundwork for a better deal, which has to be two-way.

Absolutely. Even if you say like you get caught on the hop, which I have to bring up because that's so Australian of you to say.

And I just want to decipher what that means for the American audience, because I love it, by the way, but being caught on the hop means not being ready, like hopping around with one leg because you're in a bad position, getting caught in a time where it's not the most ideal to be loving what's happening in business.

Yeah, well, you're working your 10 or 12 hours a day and somebody calls out the blue because they've done their research and you're not expecting you to call from a venture capital firm or a large competitor. With some money going, Hey, this is we got money we want to buy. Pretty attractive, pretty attractive, which comes back to the dating scene as well.

Like what you said with dating is, treat it like dating because if somebody like comes along, that seems very, very attractive and you've been having a tough time in dating, you're just going to do whatever, right? Which is not great.

Yeah. Yeah, that's right. Yeah.

You're looking to understand them a bit better before you make any commitments or any bold statements here. Yeah. It's the analogy I use it all the time because we are talking about, even though we're talking about business, we're talking about the people within those businesses and particularly owner-centric businesses. They care about a lot of things.

Yes, they care about money, but I've had plenty of business sales that have gone awry because there's a non-financial factor at play. They're going to get rid of staff. They're not going to treat clients and customers well. Exactly. They're not going to change the name of the business. So these things are important to owners. For the better acquirers, mean, if you're dealing with a public company, the teams can change inevitably or usually every cycle three, two, three, four years.

So, but there are other families; there are global family business empires that are built on, I think, and I understand it's all very commercial and rightly so, but they also value relationships and they value how the business has been built over many, many years. And I want to kind of preserve some of those things. And so they should; I think that's very fair.

Absolutely. Yeah. Michael, thank you so much for your time. Thank you for coming on and sharing.

Where can we send people to find out more about what you're up to?

The easiest is kercapital.com.au or reach out to me on LinkedIn, Michael Kerr, K-E-double-R. I look forward to chatting with anyone that's listening in. So appreciate the opportunity.

Yeah, absolutely, Michael. I really appreciated the conversation. So thank you.

Everybody that's listening, thank you as well. And I'll see you on the next one. Take care.