00:00:12:04 - 00:00:12:32 Welcome to our

00:00:12:32 - 00:00:16:32 weekly livestream recording of the Amazing Podcast series devoted to acquisition

00:00:16:32 - 00:00:20:31 entrepreneurs, search funds and whole capabilities in the UK and EU.

00:00:21:00 - 00:00:24:00 Discussing the topics and challenges that impacts SMB succession,

00:00:24:00 - 00:00:27:07 M&A and exploring the highs and lows of searching, acquiring,

00:00:27:07 - 00:00:30:17 owning and operating small and medium sized businesses.

00:00:30:20 - 00:00:34:29 I'm joined, as ever by my illustrious co-host, Gareth Wilkins, serial acquirer,

00:00:34:32 - 00:00:39:08 CEO, Biz Crunch, and all around fonts of acquisition knowledge.

00:00:39:11 - 00:00:45:05 You know, I think if I was a font, I'd be a sensory.

00:00:45:08 - 00:00:47:01 Yes. What a letdown.

00:00:47:01 - 00:00:50:01 You've got me with a ghost.

00:00:50:01 - 00:00:50:17 A ghost?

00:00:50:17 - 00:00:56:12 Our guest is profound Ghost of a Freudian.

00:00:56:14 - 00:00:57:24 But yes, yes.

00:00:57:24 - 00:00:59:28 Tune in next week for a thrilling adventure there.

00:00:59:28 - 00:01:02:15 But we are.

00:01:02:15 - 00:01:02:27 Yeah.

00:01:02:27 - 00:01:06:26 We're here to talk about due diligence, do's and don'ts.

00:01:06:28 - 00:01:07:16 Key topic.

00:01:07:16 - 00:01:11:03 For most of us doing acquisitions, what do we need to look at?

00:01:11:04 - 00:01:13:10 Where do we need to spend our time, etc.?

00:01:13:10 - 00:01:14:21 Well, I guess before we dive into that,

00:01:14:21 - 00:01:17:21 we should talk about stuff that's happened this week. Yes.

00:01:17:26 - 00:01:21:24 Well, if you hit it off, Gareth maybe got some interesting news from Italy.

00:01:21:26 - 00:01:22:11 Yeah.

00:01:22:11 - 00:01:27:02 Yeah, I like it when we can bring news from the wider European ecosystem.

00:01:27:02 - 00:01:31:10 And Italy seems to be spawning new traditional search funds

00:01:31:15 - 00:01:33:18 rate of knots at the moment.

00:01:33:21 - 00:01:36:31 The fifth to emerge in recent weeks

00:01:36:33 - 00:01:42:06 is lost of capital, which has just closed its race.

00:01:42:09 - 00:01:44:22 Surrounded by Francesca Vardy

00:01:44:22 - 00:01:48:30 and counts illustrious search fund investors

00:01:48:32 - 00:01:54:06 on its cap table among which is Conti capital and search capital partners.

00:01:54:06 - 00:01:58:26 Both of Italy Search Capital Partners is in Milan,

00:01:58:29 - 00:02:03:07 founded by Giacomo Andreoli and Luciano Lanzini.

00:02:03:10 - 00:02:06:15 Those guys are very well experienced and are becoming

00:02:06:15 - 00:02:08:04 quite prolific on the scene over Italy.

00:02:08:04 - 00:02:13:15 But we're wishing Francesco very well now that he is beginning his process

00:02:13:15 - 00:02:15:12 of finding the acquisition targets

00:02:15:12 - 00:02:17:06 he wants to bring over the line to build his platform.

00:02:17:06 - 00:02:19:05 So well done for the close.

00:02:19:05 - 00:02:21:12 Francesca Exciting stuff. Yeah.

00:02:21:12 - 00:02:23:33 Like I said, it seems to be quite a lot coming out of Italy at the moment.

00:02:23:33 - 00:02:26:24 It's really a hotbed for search funds at the minute.

00:02:26:24 - 00:02:30:11 Yes, I think it's

00:02:30:14 - 00:02:32:26 a symptom of the emergent

00:02:32:26 - 00:02:38:05 kind of latent scene of search around that Mediterranean area.

00:02:38:07 - 00:02:41:25 As we know, Spain has been a big progenitor

00:02:41:28 - 00:02:44:28 of the search fund movement,

00:02:44:31 - 00:02:48:08 probably second most only to the US.

00:02:48:11 - 00:02:51:23 So it's unsurprising that it's spreading through those Latin countries.

00:02:51:23 - 00:02:55:16 At the same time as it's gaining momentum here in the UK.

00:02:55:16 - 00:02:58:16 So watch this space for more, I think.

00:02:58:23 - 00:02:59:16 Interesting stuff.

00:02:59:16 - 00:03:01:25 What news is from the other side of the pond.

00:03:01:25 - 00:03:06:27 So Calgary based Rumi Cafe, it's all led by pastel samovar tea and sort of

00:03:06:28 - 00:03:10:00 launched a cohort of the graduate program, which is super interesting.

00:03:10:00 - 00:03:13:31 So they're taking on ten ambitious acquisition entrepreneurs

00:03:14:00 - 00:03:17:06 to help them sort of find an upright and acquire businesses in Canada.

00:03:17:06 - 00:03:20:29 I'm really it's an incubator for search funds,

00:03:20:32 - 00:03:22:18 which I think is really cool.

00:03:22:18 - 00:03:25:24 We've spoken about this a few times about how, you know, search funds

00:03:25:24 - 00:03:30:22 are so important to this movement because search funds for more acquirers,

00:03:30:24 - 00:03:33:07 but there's only more search funds.

00:03:33:07 - 00:03:34:13 Each is absolutely brilliant.

00:03:34:13 - 00:03:39:09 Yeah, but they're getting these interns, these graduates who have come out of sort

00:03:39:09 - 00:03:43:26 of, I guess, an MBA program and now hungry to get stuck in to acquiring companies.

00:03:43:33 - 00:03:47:32 But Rumi, a sort of, I guess what, preparing them,

00:03:47:32 - 00:03:52:10 arming them, capitalizing them, possibly even to go and do these deals.

00:03:52:13 - 00:03:54:08 It seems so. Yeah.

00:03:54:08 - 00:03:55:24 That's really interesting.

00:03:55:24 - 00:03:57:24 Super interesting. Led by a great team.

00:03:57:24 - 00:03:58:24 I know that you've been following them

00:03:58:24 - 00:04:02:24 for a while, Gareth, so I'm really excited to see what comes out of that.

00:04:02:27 - 00:04:06:12 Yeah. Yeah, me too.

00:04:06:15 - 00:04:09:06 Are you familiar with Coniston?

00:04:09:06 - 00:04:11:05 You know, I think I've done a similar thing.

00:04:11:05 - 00:04:13:11 Maybe we'll talk about those in a different

00:04:13:11 - 00:04:16:11 in a different episode, but yeah, really interesting.

00:04:16:15 - 00:04:16:33 Yeah.

00:04:16:33 - 00:04:19:08 That those guys have been busy doing that.

00:04:19:08 - 00:04:20:24 Cool.

00:04:20:24 - 00:04:23:06 Okay, well, yeah, Well, back to Europe

00:04:23:06 - 00:04:27:01 then for the final of the three news items for this week.

00:04:27:04 - 00:04:28:22 Let's talk exits.

00:04:28:22 - 00:04:32:22 It's always nice to hear of a searcher getting the,

00:04:32:25 - 00:04:36:07 you know, the culmination of their journey in this case is an eight year journey

00:04:36:07 - 00:04:40:06 for working Pardoe of senior capital

00:04:40:09 - 00:04:45:19 he acquired was retail back in 2017, 2018.

00:04:45:19 - 00:04:47:24 I think

00:04:47:24 - 00:04:51:27 it's a call center solutions company that he's just managed to exit and sell

00:04:51:27 - 00:04:57:08 to ever airfield who are a buy and build vehicle to basically got a platform

00:04:57:11 - 00:05:01:05 they've talking because it's Alinta but yeah

00:05:01:08 - 00:05:04:22 who says a fun cycle is five years I know and effort

00:05:04:25 - 00:05:09:01 no doubt on behalf of you keen but he's he's got there he's done it

00:05:09:04 - 00:05:11:23 and hopefully as we often see is the case

00:05:11:23 - 00:05:16:03 with excited entrepreneurs that capital that wealth event nobody gets

00:05:16:03 - 00:05:21:32 put to good use in capitalizing the next era, the next vintage of investors.

00:05:21:32 - 00:05:24:21 So it's not like trying to obligate working,

00:05:24:21 - 00:05:27:10 but I'm sure he'll be paying forward his experience in one way or another.

00:05:27:10 - 00:05:31:14 So congrats again for your exit and hope that maybe

00:05:31:14 - 00:05:33:26 we can even get him on to talk about it at some point.

00:05:33:26 - 00:05:34:27 That would be fantastic.

00:05:34:27 - 00:05:37:27 We'll have to reach out to him and get once again, you know,

00:05:37:32 - 00:05:41:05 Spain's leading the charge in Europe again is amazing.

00:05:41:05 - 00:05:43:14 I love to see these sort of success stories and exits.

00:05:43:14 - 00:05:44:31 You touched on something really interesting there,

00:05:44:31 - 00:05:47:10 actually, that they often do get rolled into new ventures.

00:05:47:10 - 00:05:52:01 It's something that I really love to see in an ECI.

00:05:52:04 - 00:05:53:26 Do you think it's a sort of

00:05:53:26 - 00:05:56:32 we don't often see people taking that cash and running sort of thing.

00:05:57:01 - 00:05:58:25 Do you think there's something sort of addictive about it?

00:05:58:25 - 00:06:02:14 I think once you're in it, probably be hard to extricate yourself from it.

00:06:02:16 - 00:06:06:27 I mean, the parallel there is, you know, excited tech entrepreneurs in the venture,

00:06:06:27 - 00:06:12:23 seeing that name becoming LPs into VC funds or are prolific angels.

00:06:12:25 - 00:06:16:05 Yeah, I think, you know, you once you understand the space

00:06:16:13 - 00:06:19:31 and you've had direct experience in it, you feel you can

00:06:20:00 - 00:06:21:19 navigate it well to make some good

00:06:21:19 - 00:06:25:11 investment decisions, but also allocate capital and advice

00:06:25:19 - 00:06:28:15 where you think you can make the most impact.

00:06:28:15 - 00:06:31:23 So I mean, Criss Angel SPACs, a great example of that in the UK.

00:06:31:23 - 00:06:36:30 Angel scene, he had a great exit from his tech startup,

00:06:36:30 - 00:06:41:24 which then he has, I think he's been prolific, is like 200 times

00:06:41:27 - 00:06:46:22 investor, 200 portfolio companies in his in his stable and he's so well

00:06:46:25 - 00:06:49:33 regarded, well-liked, well respected because he gives his time

00:06:50:06 - 00:06:54:05 and his knowledge and his experience and his guidance as well as making his,

00:06:54:05 - 00:06:55:13 his investments with capital.

00:06:55:13 - 00:06:58:32 So yeah, I do think there's some parallels.

00:06:59:01 - 00:07:03:05 Simon Webster here in the UK obviously was the big of

00:07:03:08 - 00:07:06:33 such funds outside of the States or, you know, back in the day

00:07:07:02 - 00:07:12:11 he having gone full circle with an exit, has become a prolific

00:07:12:14 - 00:07:16:17 search fund investor and backed, you know, new vintage of of entrepreneurs.

00:07:16:17 - 00:07:18:30 So yeah we do see it there are opportunities there

00:07:18:30 - 00:07:22:17 there are examples and long may it continue you know we need that

00:07:22:20 - 00:07:27:16 perpetuation of capital in order for these bases to continue to flourish.

00:07:27:19 - 00:07:30:13 Absolutely. Well said.

00:07:30:16 - 00:07:30:27 Okay.

00:07:30:27 - 00:07:31:29 With the news wraps up,

00:07:31:29 - 00:07:35:04 it's time to get into this week's topic, which is a bit of a tongue twister.

00:07:35:04 - 00:07:38:18 Due diligence, do's and don'ts.

00:07:38:21 - 00:07:40:19 This is something that

00:07:40:19 - 00:07:43:19 I think a lot of first time acquirers can be a bit nervous about.

00:07:43:22 - 00:07:47:08 I think if you haven't been through the process before,

00:07:47:10 - 00:07:50:07 the idea of kind of knowing what to look for, you know,

00:07:50:07 - 00:07:54:05 what's the red flag, what should scare you off, there is just quite so much

00:07:54:05 - 00:07:57:06 to dig into and it's something that I know very little about.

00:07:57:06 - 00:08:00:02 So this week I'm going to be interviewing you, Gareth,

00:08:00:02 - 00:08:01:12 and I'm going to ask you lots of questions.

00:08:01:12 - 00:08:03:08 I'm going to pick your brains because you've been through this process.

00:08:03:08 - 00:08:06:23 I mean, how many due diligence processes of you have you been through?

00:08:06:25 - 00:08:11:05 I've been through eight on the buy side,

00:08:11:07 - 00:08:18:06 plus a slightly accelerated one when buying a company out of liquidation

00:08:18:09 - 00:08:20:22 and then one on the on the sell side.

00:08:20:22 - 00:08:26:07 So on the buy side, one liquidation pre-pack and then a sell side process.

00:08:26:07 - 00:08:29:33 So, you know, seeing both sides of the table can hopefully attest to

00:08:29:33 - 00:08:33:26 what can be a deal killer or what will where to focus your time and effort.

00:08:33:26 - 00:08:38:14 Because I think fundamentally the clock starts ticking and the meter starts

00:08:38:14 - 00:08:44:22 running from you know, from a legal cost and advisory cost perspective,

00:08:44:25 - 00:08:47:32 the moment that they are kind of get shared and you're in

00:08:48:00 - 00:08:53:17 having two against the clock, if you like, work out whether this is a

00:08:53:20 - 00:08:58:25 a good as idea as you thought it was going to be or not

00:08:58:28 - 00:09:00:11 as the case sometimes is. Okay.

00:09:00:11 - 00:09:03:06 Well, let's start with the very basics

00:09:03:09 - 00:09:06:08 for any first timers out there, what exactly is due diligence?

00:09:06:08 - 00:09:10:31 You know, in the context of SMB M&A, what is it and why is it quite so crucial?

00:09:11:00 - 00:09:13:28 Yeah, really good. Really good point.

00:09:13:28 - 00:09:16:06 I mean, I think there's three moments

00:09:16:06 - 00:09:19:14 of big boy pants times when in a deal, right?

00:09:19:14 - 00:09:24:13 Well, in your M&A journey, we go out there with the

00:09:24:16 - 00:09:28:13 the lofty idea and the dream of getting a deal done

00:09:28:16 - 00:09:34:21 and then it gets real when you are agreeing the terms,

00:09:34:21 - 00:09:37:10 the head to terms, that handshake, that moment where you've got

00:09:37:10 - 00:09:40:22 the countersigned date back and it's like, right, game on.

00:09:40:25 - 00:09:43:22 That's big boy pants moment one.

00:09:43:22 - 00:09:48:15 I would say moment two is when the VTR opens

00:09:48:15 - 00:09:52:14 and you know, you've got your you're managing the share purchase agreement

00:09:52:14 - 00:09:55:14 coming at you in red line terms back and forth from the lawyers

00:09:55:21 - 00:09:57:16 at the same time as you are trying to make sense

00:09:57:16 - 00:10:01:19 of this sea of documentation that you've requested

00:10:01:22 - 00:10:03:14 and really get digging

00:10:03:14 - 00:10:07:02 into, looking for the sort of hidden liabilities in amongst all that.

00:10:07:02 - 00:10:11:28 So due diligence is is duly being diligent about

00:10:11:31 - 00:10:16:02 checking through all of the necessary documentation

00:10:16:05 - 00:10:21:05 and records and financial results and ledgers

00:10:21:08 - 00:10:27:07 and all of the things you need in order to have a very cogent understanding,

00:10:27:10 - 00:10:31:25 in order to have comfort that you can then sign the SBA and execute the deal.

00:10:31:28 - 00:10:33:14 This is your moment to determine

00:10:33:14 - 00:10:37:28 the reality behind the CIM because you're going to read all the path.

00:10:37:31 - 00:10:41:13 You're going to hear about all the possibilities and all the potentials, but

00:10:41:13 - 00:10:45:13 only when you really get into the weeds with this and start, you know,

00:10:45:16 - 00:10:49:03 lifting the rocks and looking underneath and opening the cupboard to looking for

00:10:49:03 - 00:10:53:05 the skeletons, are you really going to get to know the real business?

00:10:53:05 - 00:10:53:22 I mean,

00:10:53:22 - 00:10:57:27 look, flippantly, I say the real due diligence begins the moment the ink is dry

00:10:57:27 - 00:11:00:03 and you own the company because that's when you really know what you've got.

00:11:00:03 - 00:11:01:23 But you want to try and avoid that.

00:11:01:23 - 00:11:05:03 You want to you want to do as thorough a process as time and money will allow

00:11:05:11 - 00:11:08:19 before you're committed and there's no going back.

00:11:08:22 - 00:11:09:05 Absolutely.

00:11:09:05 - 00:11:13:27 And I think that is what scares people about this process, is, you know,

00:11:13:30 - 00:11:15:19 what am I going to find out afterwards

00:11:15:19 - 00:11:18:32 if I do not do a good enough job in the prep and the due diligence stage

00:11:18:32 - 00:11:23:10 before the SBA is signed, you know, what am I going to leave myself with?

00:11:23:12 - 00:11:25:31 So hopefully that leads you to the third

00:11:25:31 - 00:11:28:32 big boy pants moment of I own this company.

00:11:28:32 - 00:11:30:17 Now the SBA ink is dry.

00:11:30:17 - 00:11:34:03 I've got to go and stand in front of a roomful of people

00:11:34:03 - 00:11:37:03 and say, here's what's happened

00:11:37:07 - 00:11:40:24 and hello, I'm here for your future.

00:11:40:27 - 00:11:43:27 And, you know, we're wedded together now.

00:11:43:29 - 00:11:46:17 It's often much easier to do that

00:11:46:17 - 00:11:50:33 if you are doing it from a position of confidence and knowledge than it is.

00:11:51:07 - 00:11:52:16 Well, at the same time, you're filled

00:11:52:16 - 00:11:55:03 with trepidation about taking a leap into the unknown.

00:11:55:03 - 00:11:56:18 You know,

00:11:56:21 - 00:11:57:26 I'm not going to quote Rumsfeld,

00:11:57:26 - 00:12:01:30 but it's it's better to have some, you know, control of the situation.

00:12:01:30 - 00:12:05:27 So due diligence is good preparation, really, for that moment.

00:12:05:30 - 00:12:06:22 Okay.

00:12:06:22 - 00:12:08:02 Well, that leads me on to my next question.

00:12:08:02 - 00:12:11:23 So anyone who's kind of looked at this subject before

00:12:11:23 - 00:12:14:30 and had a cursory look will see that there's different types of diligence.

00:12:14:30 - 00:12:15:19 So, you know,

00:12:15:19 - 00:12:19:26 we hear about financial, commercial, legal due diligence, sometimes even H.R.

00:12:19:26 - 00:12:22:21 or tech is becoming increasingly important in the process.

00:12:22:21 - 00:12:27:02 Which categories do you think matter most for the smaller deals and why?

00:12:27:05 - 00:12:28:14 Really good question.

00:12:28:14 - 00:12:30:25 Obviously, I'm going to capture it with it's very dependent

00:12:30:25 - 00:12:34:19 on the business, both its size and its type and sector.

00:12:34:19 - 00:12:36:18 So if you're buying a software company,

00:12:36:18 - 00:12:39:16 of course that tech due diligence is paramount.

00:12:39:16 - 00:12:43:04 You know, what are you buying beyond hopefully recurring revenue?

00:12:43:04 - 00:12:46:04 What actual innovation have you if you bought,

00:12:46:11 - 00:12:49:17 is there proprietary IP

00:12:49:20 - 00:12:54:16 or is it just a nice looking UI built over a lot of other people stuff?

00:12:54:19 - 00:12:56:31 You know, hopefully you would know that before you offering.

00:12:56:31 - 00:12:58:17 But this is a tech audit.

00:12:58:17 - 00:13:01:07 Tech due diligence is a way of finding that out.

00:13:01:07 - 00:13:03:32 Also, that would tell you how scalable etc. that is.

00:13:03:32 - 00:13:07:21 So I'm going to I'm going to not say a lot more on tech, but

00:13:07:24 - 00:13:10:16 there are some great specialist companies

00:13:10:16 - 00:13:14:30 who typically they're adjunctive to developer agencies who will do that

00:13:14:30 - 00:13:21:13 tech audit for you will get into the each of the code repositories and

00:13:21:16 - 00:13:24:16 tell you if the product looks to have been

00:13:24:23 - 00:13:29:02 put together, engineered properly, or is held together with duct tape.

00:13:29:04 - 00:13:31:29 Yeah, you have to tread a little bit carefully there.

00:13:31:29 - 00:13:34:18 Obviously, you're under NDA at this point.

00:13:34:18 - 00:13:38:20 Software companies are loathe to share the crown jewels

00:13:38:20 - 00:13:41:27 during a due diligence phase, so don't be surprised

00:13:41:27 - 00:13:46:11 if if a number of them are sort of restricting access to really

00:13:46:14 - 00:13:47:27 delicate stuff

00:13:47:27 - 00:13:51:07 do press and push as much as you can to get sides of it.

00:13:51:15 - 00:13:56:06 But remember, you are duty bound to respect it.

00:13:56:08 - 00:14:00:20 And if the deal falls apart, delete any reference to it.

00:14:00:22 - 00:14:04:14 But yeah, that is is one of those trust moments

00:14:04:17 - 00:14:09:25 where you're letting people spider across your code as the seller and hoping

00:14:09:27 - 00:14:13:12 to you know, the saints that this actually completes a deal.

00:14:13:15 - 00:14:13:24 Yeah.

00:14:13:24 - 00:14:15:11 You're really putting a lot of faith in the NDA

00:14:15:11 - 00:14:19:03 there aren't you, because you don't have any other solid commitment on paper.

00:14:19:06 - 00:14:19:28 Yeah, I've heard.

00:14:19:28 - 00:14:24:13 I heard some pretty bad stories about I mean, imagine malpractice there.

00:14:24:13 - 00:14:28:05 So let's hope that you, you know, you've found a level of trust

00:14:28:05 - 00:14:30:32 and you're working with somebody that is is decent when doing that.

00:14:30:32 - 00:14:32:20 So that's what, say, sound tech.

00:14:32:20 - 00:14:35:15 Tech can be fundamentally a software business.

00:14:35:18 - 00:14:37:02 It's secondary in a lot of

00:14:37:02 - 00:14:40:28 the more traditional SMB that perhaps is about in this context.

00:14:40:29 - 00:14:44:00 So if it's a small business, which a lot of these will be,

00:14:44:04 - 00:14:49:09 you know, we're talking potentially maybe a couple of million EBITDA at most,

00:14:49:12 - 00:14:51:11 it's going to start with a few,

00:14:51:11 - 00:14:55:11 you know, universal truths, universal fundamentals here, people.

00:14:55:11 - 00:14:57:04 So what does the org structure look like?

00:14:57:04 - 00:15:00:30 What's the length of service, the tenure of these people?

00:15:00:32 - 00:15:04:05 Also, whilst you're looking at length of service, you're going to be

00:15:04:05 - 00:15:08:14 calculating what your liability is in the event of a redundancy process.

00:15:08:16 - 00:15:13:17 So you really want to be able to see anonymized and GDPR compliant

00:15:13:17 - 00:15:19:09 lists of roles and salaries in that roles and tenure in those roles

00:15:19:12 - 00:15:22:25 so that you can calculate your potential liability there.

00:15:22:28 - 00:15:24:13 But also an org chart.

00:15:24:13 - 00:15:28:08 The spreadsheet of roles and costs means nothing without an org chart

00:15:28:08 - 00:15:31:33 showing the fixed lines and dotted lines of communication.

00:15:32:02 - 00:15:34:22 So you can actually assure yourself that it isn't

00:15:34:22 - 00:15:38:12 just a whole bunch of headless chickens running around duplicating effort, it's

00:15:38:14 - 00:15:42:00 people who are, you know, structured in the way they go about their day.

00:15:42:00 - 00:15:46:16 And there's so clear responsibility and lines of communication.

00:15:46:19 - 00:15:49:33 So I probably spend a disproportionate amount of time looking at people.

00:15:49:33 - 00:15:53:28 But, you know, that is a fundamental thing to try to get to know early.

00:15:53:31 - 00:15:55:04 Yeah.

00:15:55:04 - 00:15:58:04 Second to that, obviously, what's the the supply chain

00:15:58:04 - 00:15:59:32 and value chain concentration risk.

00:15:59:32 - 00:16:04:12 So you want to be seeing potentially again, an anonymous list of customers

00:16:04:12 - 00:16:07:12 and suppliers, vendors.

00:16:07:13 - 00:16:11:06 So like how exposed to

00:16:11:07 - 00:16:14:10 a small number of customers, for example, is this company.

00:16:14:17 - 00:16:19:27 So I like to see a table which shows me like their top

00:16:19:30 - 00:16:22:30 X potentially top 50

00:16:23:04 - 00:16:25:28 because that's a nicely diversified risk.

00:16:25:28 - 00:16:31:14 But at the very least, what does your top ten account for of your total revenue?

00:16:31:22 - 00:16:36:05 If if one customer is accounting for 25% of your business, there's a risk that

00:16:36:08 - 00:16:40:29 you know, particularly with like change of ownership clauses in contracts,

00:16:40:32 - 00:16:45:07 you know is there big exposure that that company, that customer could say,

00:16:45:13 - 00:16:49:20 well, we've got this, we're going to exercise our rights at this window

00:16:49:23 - 00:16:53:14 to explore our options and bang goes a quarter of your business, right?

00:16:53:14 - 00:16:58:25 So I think key risk mitigation around customer concentration

00:16:58:25 - 00:17:02:07 and again, on vendor concentration, if someone's holding you by the short

00:17:02:07 - 00:17:07:02 curlies on the supply chain side and can choke you off, that,

00:17:07:05 - 00:17:10:11 you know that that could be a real risk that you can't continue to trade.

00:17:10:14 - 00:17:13:28 So again, have the have

00:17:13:28 - 00:17:17:08 the seller already got like a panel of suppliers

00:17:17:08 - 00:17:20:32 that they can switch you to in the event that one becomes a bit sticky.

00:17:21:01 - 00:17:25:04 And so customers and vendors really worth exploring.

00:17:25:07 - 00:17:26:09 Okay. On that.

00:17:26:09 - 00:17:29:12 Just before you go on again, someone has been through this process before.

00:17:29:12 - 00:17:31:18 Is this something that you know you're quite comfortable

00:17:31:18 - 00:17:33:29 and acquirers should be quite comfortable saying to the seller, Look,

00:17:33:29 - 00:17:36:01 this is what I want, I want it in this format.

00:17:36:01 - 00:17:38:15 You know, I'd like them anonymous, I'd like the top 50.

00:17:38:15 - 00:17:39:22 Is that something you advise?

00:17:39:22 - 00:17:41:26 You know, just going out there to change the seller I want this is

00:17:41:26 - 00:17:43:17 my due diligence.

00:17:43:20 - 00:17:44:25 Yeah, absolutely.

00:17:44:25 - 00:17:45:16 It should be on your list.

00:17:45:16 - 00:17:50:32 I mean, I always kept a sort of spreadsheet checklist, if you like, and

00:17:51:01 - 00:17:55:11 I think it's probably about 200 rows long of the sort of things

00:17:55:11 - 00:17:59:25 I'd like to see and the sort of things I expect to be in a

00:17:59:28 - 00:18:03:17 in a data room, often a buyer will share that list.

00:18:03:17 - 00:18:05:21 You know, these are the things I want.

00:18:05:21 - 00:18:08:11 And yes, definitely be asking for that.

00:18:08:11 - 00:18:11:08 And is it going to be forthcoming without asking?

00:18:11:08 - 00:18:12:24 Probably not.

00:18:12:24 - 00:18:15:11 Not unless this seller has been through the process before and has been

00:18:15:11 - 00:18:18:27 asked these questions already and already prepared.

00:18:18:29 - 00:18:21:00 But yeah, it's definitely worth asking for.

00:18:21:00 - 00:18:23:10 I assume everything that I'm going to touch on is stuff

00:18:23:10 - 00:18:25:17 you should ask for if it's not forthcoming.

00:18:25:17 - 00:18:25:30 Okay.

00:18:25:30 - 00:18:26:08 Sure.

00:18:26:08 - 00:18:30:27 And also, again, you know, customers and vendors, two super important things.

00:18:30:29 - 00:18:32:19 It is something you would expect to have a dialog

00:18:32:19 - 00:18:34:17 with the seller about, you know, maybe for some more context,

00:18:34:17 - 00:18:37:29 how many of those relationships are dependent on the business owner,

00:18:37:30 - 00:18:38:24 you know,

00:18:38:24 - 00:18:42:08 and that increases the risk of perhaps losing that vendor or losing that customer

00:18:42:08 - 00:18:45:14 is another sort of part of the data that you would go through.

00:18:45:17 - 00:18:46:25 Yeah.

00:18:46:28 - 00:18:49:03 What's the relationship like here?

00:18:49:03 - 00:18:52:08 You know, these are this is more of a verbal conversation with the seller.

00:18:52:08 - 00:18:54:19 Sure. How long have you known these people?

00:18:54:19 - 00:18:56:02 Are they the sort of supplier that you know,

00:18:56:02 - 00:18:58:22 when you go over to see them, they invite you into their house and now,

00:18:58:22 - 00:18:59:27 you know, known to the family,

00:18:59:27 - 00:19:03:10 you know, that sort of stuff, because you want there to be

00:19:03:13 - 00:19:06:03 a tie between the businesses.

00:19:06:03 - 00:19:07:10 But you also don't want to be that

00:19:07:10 - 00:19:10:10 the only tie between the business is to be the individuals.

00:19:10:18 - 00:19:14:05 And when that individual is removed from the equation because they felt

00:19:14:07 - 00:19:16:06 that that relationship might break down.

00:19:16:06 - 00:19:18:21 So if it's a strong commercial relationship

00:19:18:21 - 00:19:21:16 between the stakeholders, that's that's always better, you know?

00:19:21:16 - 00:19:22:31 yeah, my people deal with their people

00:19:22:31 - 00:19:26:20 and we go way back and that that's enough for me to be a contract.

00:19:26:26 - 00:19:27:27 Make sure that, you know,

00:19:27:27 - 00:19:30:27 they're not going to pull the rug out from under me and I'm happy.

00:19:30:29 - 00:19:33:04 Okay, excellent.

00:19:33:07 - 00:19:35:18 Then we should get into IP.

00:19:35:18 - 00:19:39:02 So we want to know what kind of patents or trademarks

00:19:39:02 - 00:19:42:02 or design rights they have,

00:19:42:07 - 00:19:45:06 you know, written or unwritten.

00:19:45:06 - 00:19:48:20 What is what are the barriers to entry to competitors

00:19:48:20 - 00:19:52:31 that might want to spin up and or colleagues that might want to go away?

00:19:52:31 - 00:19:56:15 In Phenix, a company is your competitor, which is often is the case.

00:19:56:18 - 00:19:59:13 What's going to stop them from an IP perspective?

00:19:59:13 - 00:20:01:04 So that's useful

00:20:01:04 - 00:20:05:18 and also make sure that the business owns the IP, that all the trademarks etc.

00:20:05:18 - 00:20:09:17 are owned by the seller individually and walking out the door with the seller,

00:20:09:17 - 00:20:11:19 you know, you really want to do a bit of an IP audit

00:20:11:19 - 00:20:15:08 and make sure that domain names are registered against the seller's

00:20:15:08 - 00:20:16:15 personal credit cards.

00:20:16:15 - 00:20:20:05 And, you know, yeah, I've seen that stuff happen before.

00:20:20:07 - 00:20:24:09 It's a lot to unbundle post deal when the seller is in the wind or in Barbados.

00:20:24:12 - 00:20:28:29 So you're like, could you just get into a GoDaddy account for me?

00:20:28:32 - 00:20:29:29 You know, it's dirty.

00:20:29:29 - 00:20:31:08 You want to get that stuff all done.

00:20:31:08 - 00:20:34:09 Pre deal really goes with the company right

00:20:34:12 - 00:20:37:12 Don't want to be held to ransom at a later date.

00:20:37:14 - 00:20:42:28 So all those aspects of IP brand and brand assets,

00:20:42:30 - 00:20:44:25 products and services,

00:20:44:25 - 00:20:46:33 you'd like to know a bit more about them obviously.

00:20:46:33 - 00:20:50:12 So if there's certification around a product or there's accreditation

00:20:50:12 - 00:20:53:12 around the the engineers or the staff in a service company,

00:20:53:13 - 00:20:54:13 you want to make sure that

00:20:54:13 - 00:20:59:05 that all of that stuff is compliant is all that is done by the seller.

00:20:59:05 - 00:21:03:13 But you know, they're not they're not just lapsed on a particular approval

00:21:03:16 - 00:21:05:06 and you're going to have to pay ten grand to go

00:21:05:06 - 00:21:08:29 and get this re-approved on day one because they swung the lead.

00:21:08:32 - 00:21:10:09 You know, those things attract a risk.

00:21:10:09 - 00:21:14:08 So you want to make sure that from a compliance and

00:21:14:10 - 00:21:15:14 certification perspective

00:21:15:14 - 00:21:20:00 that what you're buying is safe

00:21:20:03 - 00:21:23:30 can't go on without having mentioning financial stability.

00:21:23:30 - 00:21:25:25 Obviously, financial due

00:21:25:25 - 00:21:29:21 diligence takes up a lot of time alongside legal due diligence.

00:21:29:24 - 00:21:32:00 We'll get into those, too, I think, specifically in a moment,

00:21:32:00 - 00:21:34:26 because that's where you want to have some some support.

00:21:34:26 - 00:21:39:18 But yeah, that quality of earnings, financial stability study is key,

00:21:39:20 - 00:21:42:26 as is the legal due diligence of going through all of the documentation

00:21:42:26 - 00:21:44:00 that you're going to get populated.

00:21:44:00 - 00:21:47:09 So employee contracts, customer contracts, supplier

00:21:47:09 - 00:21:50:09 contracts, leases,

00:21:50:09 - 00:21:52:12 hire, purchase, you know, all this stuff.

00:21:52:12 - 00:21:56:17 We're looking for the gremlins to see if there's a liability there.

00:21:56:20 - 00:21:58:16 So I think

00:21:58:16 - 00:22:03:18 probably the final two are on my checklist normally are governance.

00:22:03:20 - 00:22:07:27 So can I see some previous board minutes, for example,

00:22:07:30 - 00:22:08:09 you know

00:22:08:09 - 00:22:11:32 who's responsible for compliance in a regulated industry?

00:22:12:01 - 00:22:14:27 You know, can I see as regards their track record

00:22:14:27 - 00:22:17:27 and, you know, there

00:22:17:30 - 00:22:20:07 certification, etc., their education,

00:22:20:07 - 00:22:23:07 their background, who am I putting my faith in there?

00:22:23:09 - 00:22:26:28 So, yes, if there's records that show good governance, governance,

00:22:26:31 - 00:22:29:16 then then that should be in the data as well.

00:22:29:16 - 00:22:32:16 And slightly less easy for the

00:22:32:23 - 00:22:35:21 seller to come up with, but something that you should try and commission

00:22:35:21 - 00:22:37:00 if you can,

00:22:37:00 - 00:22:38:19 or that potentially if you working for a broker

00:22:38:19 - 00:22:41:18 they might have already done for you is a market study.

00:22:41:18 - 00:22:45:03 So what kind of information if you got about competitors

00:22:45:03 - 00:22:50:21 like in context with the seller and what, what how can you verify market share?

00:22:50:24 - 00:22:51:23 For example,

00:22:51:23 - 00:22:55:24 can you see data that tells you whether the market is growing or shrinking?

00:22:55:27 - 00:22:58:22 Sometimes that is a pipette that as part of that process.

00:22:58:22 - 00:23:01:22 Other times it's probably incumbent on you to just reassure yourself

00:23:01:25 - 00:23:05:12 for probably even before you've actually made an offer on the company that this is

00:23:05:12 - 00:23:09:03 a market that you want to pursue, that you want to be in,

00:23:09:11 - 00:23:14:11 and that it's a market that this particular company has upside in.

00:23:14:13 - 00:23:17:20 Yeah, some of that work should have been done, you know, in advance.

00:23:17:20 - 00:23:18:14 I mean, potentially

00:23:18:14 - 00:23:21:21 even when you're choosing what type of companies to go looking for,

00:23:21:24 - 00:23:22:06 you know,

00:23:22:06 - 00:23:24:21 it's one thing that we've advised users to do is, you know,

00:23:24:21 - 00:23:27:06 look at markets where they can see opportunities for growth, etc..

00:23:27:06 - 00:23:28:25 But yeah, obviously when it comes down

00:23:28:25 - 00:23:31:31 to the actual company themselves and the data that they would have, I mean,

00:23:31:31 - 00:23:35:19 is that something that you would bring someone in from the outside to do?

00:23:35:22 - 00:23:38:11 Yeah, there are companies that specialize in doing specifically that.

00:23:38:11 - 00:23:40:20 I mean, you know, be cautious.

00:23:40:20 - 00:23:42:21 A market research company is going to want to charge you

00:23:42:21 - 00:23:45:13 a lot of money to do a very thorough exercise.

00:23:45:13 - 00:23:48:03 There are probably some low hanging fruit things you could do,

00:23:48:03 - 00:23:50:05 which maybe we can get onto in a little while.

00:23:50:05 - 00:23:51:31 Well, yes, that does lead me to my next question.

00:23:51:31 - 00:23:56:03 So the next point is assembling your due diligence team.

00:23:56:03 - 00:23:57:00 So, you know,

00:23:57:00 - 00:24:01:02 from accountants to legal counsel, who do you need on your diligence squad

00:24:01:02 - 00:24:05:08 and how do you decide what you can DIY and where you need that professional help?

00:24:05:08 - 00:24:07:25 Yeah, definitely. Both of those.

00:24:07:28 - 00:24:10:00 I would say ideal team

00:24:10:00 - 00:24:13:00 minimum squad should involve

00:24:13:00 - 00:24:16:00 a financial competence

00:24:16:01 - 00:24:18:25 experience, qualified strategic accountant, right?

00:24:18:25 - 00:24:22:10 You need somebody that can dive into the Zero or the QuickBooks

00:24:22:10 - 00:24:27:05 or whatever and until you where things have been awry

00:24:27:08 - 00:24:30:30 or where things be done really well for that matter, it's always good to hit.

00:24:30:33 - 00:24:35:19 So definitely a strategic accountant or someone that knows how to navigate

00:24:35:19 - 00:24:39:26 Ledge as well and piece together the true story

00:24:39:28 - 00:24:42:14 and you're going to have a lawyer on your team.

00:24:42:14 - 00:24:45:14 Lawyers aren't just there to produce the documents for you.

00:24:45:14 - 00:24:48:09 Yes, they're going to be going back and forth doing the terms of the share

00:24:48:09 - 00:24:49:11 purchase agreement.

00:24:49:11 - 00:24:52:16 But you depending on the size of the transaction, you may have

00:24:52:16 - 00:24:56:18 a sort of junior associate or something there that is going through the data room

00:24:56:18 - 00:25:00:25 and actually reading these documents for you with

00:25:00:27 - 00:25:05:32 with a critical eye for detail that is looking for liabilities like, hang

00:25:05:32 - 00:25:07:06 on, this contract will cease

00:25:07:06 - 00:25:12:13 to be relevant when the incumbent no longer owns the company.

00:25:12:16 - 00:25:14:02 For example,

00:25:14:02 - 00:25:18:31 or hey, look, there's a huge bullet here on this lease that

00:25:19:00 - 00:25:21:20 you know, or this

00:25:21:20 - 00:25:24:13 building leases is actually overdue on its break

00:25:24:13 - 00:25:27:13 clause and the landlord could kick you out at any moment.

00:25:27:18 - 00:25:30:18 You know, these are things that you want to turn up

00:25:30:19 - 00:25:33:09 in due diligence because they all have a bearing on.

00:25:33:09 - 00:25:35:03 I mean, I acquired a business

00:25:35:03 - 00:25:38:12 some years ago which we could never see coming,

00:25:38:15 - 00:25:40:16 but pretty much as soon as the ink was dry on the spa,

00:25:40:16 - 00:25:43:19 they got a compulsory purchase order from the local authority.

00:25:43:19 - 00:25:45:21 No, the amount of their building.

00:25:45:21 - 00:25:47:29 And it was only because they wanted to build a retail park

00:25:47:29 - 00:25:51:05 on the building that they had occupied for almost 100 years.

00:25:51:08 - 00:25:54:08 You know, my luck that they won, that we acquire them.

00:25:54:08 - 00:25:57:20 They get this notice through the post from the council.

00:25:57:21 - 00:25:59:11 Yeah, we're developing the site.

00:25:59:11 - 00:26:02:10 Your own home. No,

00:26:02:12 - 00:26:05:12 I mean, they all end well with that.

00:26:05:18 - 00:26:07:01 Yeah, fine.

00:26:07:01 - 00:26:10:06 It expedited the relocation, let's put it that way.

00:26:10:14 - 00:26:12:24 I can imagine. Yeah, Yeah.

00:26:12:24 - 00:26:15:06 So yeah, you'd love to see that coming. Right.

00:26:15:06 - 00:26:19:24 So you could even have some folks poring over like local plans

00:26:19:27 - 00:26:23:11 like that on the, on the local authority's website to say look at all

00:26:23:11 - 00:26:28:21 the earmarked sites in and around where your business is operating from.

00:26:28:24 - 00:26:31:04 Is there a risk of that?

00:26:31:04 - 00:26:35:06 Yeah, it's not insurmountable, but, you know, if you're buying a shop

00:26:35:11 - 00:26:36:29 with a high street location

00:26:36:29 - 00:26:40:07 and it's entirely about that, like the people go there for,

00:26:40:15 - 00:26:44:08 are they going to follow the shop when it moves to a out of town location,

00:26:44:08 - 00:26:44:30 for example?

00:26:44:30 - 00:26:47:07 Yeah, I think that there can be a temptation there.

00:26:47:07 - 00:26:50:00 A lot of sort of scrappy acquirers want to do it themselves

00:26:50:00 - 00:26:51:32 and they want to DIY stuff to keep costs down.

00:26:51:32 - 00:26:53:16 But the cost of a lawyer to go through

00:26:53:16 - 00:26:57:05 that for you is a lot less than the cost when to relocate in your first week.

00:26:57:08 - 00:27:02:28 Yeah, So yeah, that's a balance like and a lawyer will obviously tell you

00:27:02:31 - 00:27:04:32 that you should do the most thorough process you possibly

00:27:04:32 - 00:27:08:05 could that, you know, it takes months and months and months and goes

00:27:08:05 - 00:27:12:29 into every conceivable preemptive all permutation.

00:27:12:32 - 00:27:13:16 Yeah.

00:27:13:16 - 00:27:18:25 You got to temper that, mitigate that with cost and reality and make your own.

00:27:18:28 - 00:27:19:20 I mean, we'll get into it

00:27:19:20 - 00:27:22:23 in a little while but you should have your own rules, rules

00:27:22:23 - 00:27:25:08 for how you want to run this and how far you want to let it grow.

00:27:25:08 - 00:27:26:13 Arms and legs.

00:27:26:13 - 00:27:26:22 Yeah.

00:27:26:22 - 00:27:29:13 We don't want to get into the of deal fatigue, which we will talk about

00:27:29:13 - 00:27:30:19 in a little while.

00:27:30:19 - 00:27:30:25 Okay.

00:27:30:25 - 00:27:33:01 So would say go ahead.

00:27:33:01 - 00:27:35:01 No, no, please finish up.

00:27:35:01 - 00:27:38:01 I have finished It's just I would say your deal team is you

00:27:38:04 - 00:27:39:16 and the people that are in your close

00:27:39:16 - 00:27:42:16 knit community that you are that are part of this process,

00:27:42:18 - 00:27:44:33 you'll need some additional pairs of eyes to go through it,

00:27:44:33 - 00:27:46:32 Check things that you've got to come from, lawyers

00:27:46:32 - 00:27:50:27 you pay for, or people that are in your camp and you know,

00:27:50:28 - 00:27:56:00 good numbers people and possibly a market study and you could have an h.r.

00:27:56:00 - 00:27:59:13 Person look over the org chart and, you know,

00:27:59:18 - 00:28:03:02 cultural indicators about the company if you are particularly concerned.

00:28:03:08 - 00:28:07:01 But i can't name more than about two acquirers

00:28:07:01 - 00:28:08:03 i know that have gone to that.

00:28:08:03 - 00:28:11:13 That's quite interesting.

00:28:11:16 - 00:28:13:12 Okay, so something i wanted to ask about,

00:28:13:12 - 00:28:15:06 which i've kind of heard about a few times,

00:28:15:06 - 00:28:16:22 and we kind of touched on this a little bit earlier

00:28:16:22 - 00:28:20:04 when we're talking about having a good strategic accountant.

00:28:20:06 - 00:28:22:07 But what's the quality of earnings reports?

00:28:22:07 - 00:28:26:02 How does it differ from, you know, the basic financial review

00:28:26:04 - 00:28:27:06 and why?

00:28:27:06 - 00:28:29:19 I mean, I can understand how they could be a deal breaker.

00:28:29:19 - 00:28:32:19 But yeah, what is the kind of the difference there?

00:28:32:20 - 00:28:34:33 Where do they go with that extra debt?

00:28:34:33 - 00:28:35:20 Great question.

00:28:35:20 - 00:28:41:16 The Q of A is all about sustainability and durability of revenues.

00:28:41:16 - 00:28:41:27 Right.

00:28:41:27 - 00:28:46:00 And ultimately, and

00:28:46:03 - 00:28:47:24 are the costs

00:28:47:24 - 00:28:50:24 in servicing those revenues realistic?

00:28:50:31 - 00:28:52:14 Have they been massaged?

00:28:52:14 - 00:28:52:23 You know,

00:28:52:23 - 00:28:54:30 someone might be citing a huge gross profit,

00:28:54:30 - 00:28:57:13 but actually they're mis accounting for where the overheads

00:28:57:13 - 00:29:00:13 go, for example, and stuff should be put in as a cost of sale

00:29:00:18 - 00:29:05:21 that if they if they did it properly, actually the gross profit is far less than

00:29:05:24 - 00:29:09:11 it's being advertised, but it's really the sustainability and durability

00:29:09:11 - 00:29:13:11 of of the earnings of the company driven by the revenue and the costs.

00:29:13:14 - 00:29:17:06 Am I going to continue to get this revenue or has it been cooked up

00:29:17:08 - 00:29:20:26 in anticipation of selling like somebody really expedited

00:29:20:26 - 00:29:24:17 a pulled forward lots of stuff into a year

00:29:24:19 - 00:29:27:07 and then it's going to be fallow for the next few years when it's

00:29:27:07 - 00:29:29:06 when I'm cash flowing, it.

00:29:29:08 - 00:29:30:11 So, you know,

00:29:30:11 - 00:29:33:27 you want to make sure that this is a sustainable, ongoing business.

00:29:33:27 - 00:29:37:23 And it's not just, you know, getting out of the top of the curve

00:29:37:31 - 00:29:40:00 before the ass falls out of it.

00:29:40:00 - 00:29:43:00 So there's that.

00:29:43:01 - 00:29:48:02 But there's also looking at other calls on cash flow as well.

00:29:48:02 - 00:29:53:25 So, you know, getting into a proper exercise within the Zero

00:29:53:25 - 00:29:57:29 or QuickBooks or Sage will tell you what goes on beyond the PNL.

00:29:57:32 - 00:30:01:04 Like, are there some serious sort of ongoing

00:30:01:04 - 00:30:03:03 calls for cash that are happening at the balance sheet

00:30:03:03 - 00:30:06:28 level that can undermine your ability to serve the working capital?

00:30:06:28 - 00:30:10:00 You need to get your PNL going or keep your PNL going.

00:30:10:00 - 00:30:14:16 So yeah, that is fundamental to equality.

00:30:14:16 - 00:30:17:05 Quality of earnings. Is it sustainable?

00:30:17:07 - 00:30:18:32 You're looking at

00:30:18:32 - 00:30:21:32 customers, you're looking at repeatability, you're looking at

00:30:22:05 - 00:30:22:29 recurrence.

00:30:22:29 - 00:30:26:04 If you're a software firm, like if we break these down,

00:30:26:06 - 00:30:29:03 are these coming from a small number of customers

00:30:29:03 - 00:30:30:31 and we don't have a great deal of recurrence

00:30:30:31 - 00:30:34:32 from the majority of our customers because that creates a vulnerability.

00:30:34:32 - 00:30:37:32 If you do so, you're really trying to get an understanding

00:30:38:02 - 00:30:42:16 of of the beating heart of what is driving the earnings in the business.

00:30:42:18 - 00:30:46:23 And that's forensic, really, because you could be taking it as read

00:30:46:23 - 00:30:51:02 just by looking at the sort of high level retrospective ledgers.

00:30:51:05 - 00:30:55:02 Or you could be looking at how the company plans

00:30:55:02 - 00:30:59:10 and how they and the contracts they've got and, you know,

00:30:59:12 - 00:31:03:23 the sort of heuristic indicators, if you will, in the PNL that tell you

00:31:03:31 - 00:31:09:08 how it really played out, because you can spot like a massaged,

00:31:09:11 - 00:31:10:07 you know,

00:31:10:07 - 00:31:15:01 you can spot like an artificial surge in demand if you unpick it and go back

00:31:15:01 - 00:31:19:04 and look at customer behaviors and start asking questions about that customer.

00:31:19:04 - 00:31:24:00 In the four years prior spent 20% of what

00:31:24:03 - 00:31:27:19 they spent in that year before you advertised it for sale. Why?

00:31:27:21 - 00:31:30:08 turns out they sold them

00:31:30:08 - 00:31:34:04 for the next four years worth of service upfront.

00:31:34:07 - 00:31:35:20 But rather than put that for the balance

00:31:35:20 - 00:31:39:16 sheet, is unrealized revenue as a liability.

00:31:39:19 - 00:31:42:14 They've just put it through the PNL as revenue

00:31:42:14 - 00:31:43:33 but haven't yet delivered the service.

00:31:43:33 - 00:31:48:04 So, you know, you know, that's a that's a common trick of let's pre-sell

00:31:48:04 - 00:31:52:26 a whole bunch of future years worth of revenue, get it in this year,

00:31:52:29 - 00:31:55:02 but then you should have an equal and opposite liability

00:31:55:02 - 00:31:56:25 on the basis that you might have to give it back.

00:31:56:25 - 00:32:00:13 But you know, some folks selectively forget to do that so

00:32:00:16 - 00:32:00:26 they can

00:32:00:26 - 00:32:03:26 help you dodge those kind of bullets.

00:32:03:32 - 00:32:04:17 So interesting.

00:32:04:17 - 00:32:06:05 I didn't know that was such a such a common issue.

00:32:06:05 - 00:32:08:08 I can totally imagine that happening.

00:32:08:08 - 00:32:09:25 Okay. So that leads me to our next point.

00:32:09:25 - 00:32:14:23 We're talking about dodging bullets, red flags and deal killers.

00:32:14:26 - 00:32:16:25 So you know, you said that that that can be quite

00:32:16:25 - 00:32:19:01 common issue, you know, bringing those those orders forward.

00:32:19:01 - 00:32:21:33 But what are some other common warning signs that emerge in due diligence?

00:32:21:33 - 00:32:26:11 You know, how do you distinguish fixable issues from dealbreakers?

00:32:26:14 - 00:32:27:25 Yeah.

00:32:27:25 - 00:32:31:07 You would hope that by the time you've got this far,

00:32:31:10 - 00:32:33:24 you have a reasonable

00:32:33:24 - 00:32:37:17 appetite for risk and a reasonable understanding of what

00:32:37:17 - 00:32:41:20 the fires are likely to be burning under the business.

00:32:41:23 - 00:32:45:04 And most of those fires

00:32:45:07 - 00:32:47:31 could be easily extinguished.

00:32:47:31 - 00:32:51:22 There's you know, it takes takes quite a lot to bring a business down.

00:32:51:24 - 00:32:54:12 But, you know, incompetence is a key.

00:32:54:12 - 00:32:57:10 The key key reason often.

00:32:57:13 - 00:33:01:07 But so you really looking for the hospital policies, Right.

00:33:01:08 - 00:33:05:22 I'm a rugby player so you're looking for that Someone's passing you

00:33:05:22 - 00:33:10:23 the ball just about to the point you're about to be pummeled.

00:33:10:26 - 00:33:12:29 So I don't know that I like that.

00:33:12:29 - 00:33:13:27 Yeah, yeah, yeah, yeah.

00:33:13:27 - 00:33:14:19 So that one,

00:33:14:19 - 00:33:16:06 there's the past that you don't want to receive

00:33:16:06 - 00:33:19:01 because you're about to get, you know, your head knocked off.

00:33:19:01 - 00:33:20:31 But, but ultimately yeah.

00:33:20:31 - 00:33:23:33 This, this is the what you're looking for

00:33:23:33 - 00:33:28:06 is does the seller know something I don't about

00:33:28:09 - 00:33:31:01 why this is a good time to step out

00:33:31:01 - 00:33:34:22 or are its best days behind the business?

00:33:34:25 - 00:33:36:10 Is there a looming cliff?

00:33:36:10 - 00:33:39:09 It's about a fall off of.

00:33:39:09 - 00:33:41:13 That's what you're trying to work out is

00:33:41:13 - 00:33:45:10 am I going to hold the back here and find that the bank's got a gaping hole in it?

00:33:45:10 - 00:33:47:24 And by the time I've taken two or three steps,

00:33:47:24 - 00:33:51:06 it spilled out on the floor and it's bugger all left

00:33:51:09 - 00:33:52:09 because I suppose, you know,

00:33:52:09 - 00:33:53:04 we talked

00:33:53:04 - 00:33:56:19 on one of the previous episodes about, you know, looking for motivated sellers,

00:33:56:19 - 00:33:59:30 but sometimes there's a, there's a shadow over that motivation.

00:33:59:32 - 00:34:03:03 Yeah. Right, yeah, yeah, yeah.

00:34:03:03 - 00:34:06:16 So I mean most things you solvable but those

00:34:06:18 - 00:34:10:13 irrecoverable things that irrecoverable decline

00:34:10:16 - 00:34:15:08 being masked by a moment of like we've we've created this veil of success

00:34:15:08 - 00:34:18:26 but actually underneath is a house of cards That's what you're

00:34:18:28 - 00:34:19:27 okay.

00:34:19:27 - 00:34:23:01 And in this process how co-operative

00:34:23:03 - 00:34:25:19 should you expect to sell it to be during this due diligence?

00:34:25:19 - 00:34:26:06 I mean, look,

00:34:26:06 - 00:34:27:13 as an outsider, looking in,

00:34:27:13 - 00:34:29:32 you would imagine that they would be as upfront as possible.

00:34:29:32 - 00:34:31:21 But, you know, the more that we talk about this, more

00:34:31:21 - 00:34:35:18 that there are a few sort of dark eyes patches to slip up on.

00:34:35:18 - 00:34:38:23 So yeah, how much could you expect them to share with you?

00:34:38:26 - 00:34:40:12 I mean, you could

00:34:40:12 - 00:34:43:28 distill all of this down to a test

00:34:43:28 - 00:34:47:01 of the seller's integrity.

00:34:47:03 - 00:34:47:25 Right. Yeah.

00:34:47:25 - 00:34:51:21 That's ultimately what this is all trying to determine, is

00:34:51:24 - 00:34:55:20 can I trust these folks?

00:34:55:23 - 00:34:58:13 You would hope that it hasn't

00:34:58:13 - 00:35:03:23 just been a big artificial kind of con.

00:35:03:25 - 00:35:05:09 You would hope

00:35:05:09 - 00:35:08:09 that they've been truthful throughout and candid throughout.

00:35:08:09 - 00:35:10:28 And, you know, you can get a good feeling, you know,

00:35:10:28 - 00:35:14:20 if you're into neuro linguistic programing and, you know, you're looking at the

00:35:14:20 - 00:35:18:17 where the eyes go, the furtive glances and the and the pauses,

00:35:18:19 - 00:35:21:00 then, you know, you get a good feeling for

00:35:21:00 - 00:35:24:27 whether this person is being honest in the moment.

00:35:24:30 - 00:35:29:07 But it's when you start asking for things and asking

00:35:29:07 - 00:35:33:02 for things that haven't been provided that transparency, as you rightly,

00:35:33:05 - 00:35:35:33 it is probably the thing you're really looking for.

00:35:35:33 - 00:35:37:22 For me, that's the biggest red flag.

00:35:37:22 - 00:35:42:00 Like if there is a reluctance or an unwillingness

00:35:42:03 - 00:35:45:33 or a, you know, or the bullshit machine kicks in and there's, you know,

00:35:45:33 - 00:35:51:16 lots of verbiage coming to try and cover up what you've just discovered.

00:35:51:24 - 00:35:55:11 And they don't really want to confess to what you've just discovered.

00:35:55:14 - 00:35:58:24 Then actually, you might be dealing with a liar or a hoodwink

00:35:58:27 - 00:36:01:20 and it might well be that hospital pass that you don't want.

00:36:01:20 - 00:36:03:22 And that's probably the time to walk away.

00:36:03:22 - 00:36:03:32 Yeah.

00:36:03:32 - 00:36:05:13 So I'm guessing that's quite a big red flag

00:36:05:13 - 00:36:06:33 if you're asking for some, you know,

00:36:06:33 - 00:36:10:24 crucial documents, you're asking for some information and they are,

00:36:10:27 - 00:36:14:20 you know, avoidant and giving you a, you know, a whole heap of excuses

00:36:14:20 - 00:36:16:10 as to why they don't want to pass that over to you.

00:36:16:10 - 00:36:20:13 That's going to be a big, glaring red siren, more than a flag.

00:36:20:16 - 00:36:22:04 And it signs walk away.

00:36:22:04 - 00:36:25:03 That's the moment when or at least it's time for the adults in the room

00:36:25:03 - 00:36:25:24 discussion.

00:36:25:24 - 00:36:29:13 It's the time when you sort of, you know, sit down level with me.

00:36:29:14 - 00:36:30:01 Come on.

00:36:30:01 - 00:36:33:28 You know, our due diligence is discovered this.

00:36:33:31 - 00:36:36:10 Could you tell me a bit more about why that might be?

00:36:36:10 - 00:36:37:23 What's been your experience here?

00:36:37:23 - 00:36:40:05 Have you seen this before? Did you know it was coming?

00:36:40:05 - 00:36:45:27 Like have that, you know, mature peer conversation?

00:36:45:30 - 00:36:48:28 I don't think it's a moment to castigate anybody

00:36:48:28 - 00:36:53:14 unless you you hold the ultimate cards here, because if you don't have comfort,

00:36:53:14 - 00:36:56:33 you are not contractually obliged to go through that with this deal.

00:36:56:33 - 00:36:58:25 Right. Hence the terms of non-binding.

00:36:58:25 - 00:37:01:10 So the due diligence is really at the seller's risk.

00:37:01:10 - 00:37:06:26 And if they're not forthcoming, you know, you can just pick up your stuff and go,

00:37:06:28 - 00:37:07:16 Yeah.

00:37:07:16 - 00:37:11:08 So I think you have that adult conversation.

00:37:11:08 - 00:37:15:02 If you're not satisfied with the response, dig deeper.

00:37:15:05 - 00:37:18:00 It will even lead to that relationship breaking down

00:37:18:00 - 00:37:19:31 or it will lead to transparency.

00:37:19:31 - 00:37:21:04 It may lead through drive

00:37:21:04 - 00:37:24:33 through that transparency and that sort of moment of resignation,

00:37:24:33 - 00:37:28:06 if you like, on the okay, look, the gig is up, so there's got to come

00:37:28:10 - 00:37:31:32 clean and here's here's the real deal.

00:37:32:00 - 00:37:36:06 There actually is a moment potentially to renegotiate.

00:37:36:09 - 00:37:37:22 So yes, fell onto that.

00:37:37:22 - 00:37:43:03 But like that could be it could be an opportunity if it's not a deal breaker.

00:37:43:06 - 00:37:44:09 Yeah. Yeah, absolutely.

00:37:44:09 - 00:37:46:08 If it's not something that absolutely has to kill the deal,

00:37:46:08 - 00:37:49:32 then maybe it's just time for for renegotiation.

00:37:50:00 - 00:37:51:15 Okay, so this does kind of

00:37:51:15 - 00:37:56:06 neatly lead us onto my next point throughout this process,

00:37:56:08 - 00:37:57:28 time management and deal fatigue.

00:37:57:28 - 00:38:00:06 So due diligence can obviously drag on.

00:38:00:06 - 00:38:02:21 And as we're talking about here, you know, if there are so downs from the seller

00:38:02:21 - 00:38:05:02 and any kind of reluctance, even if there isn't this

00:38:05:02 - 00:38:07:17 a ton of paperwork to go through, there's a lot of back and forth

00:38:07:17 - 00:38:10:11 maybe we want to talk about renegotiating prices.

00:38:10:11 - 00:38:12:06 And as we talked about in a previous episode,

00:38:12:06 - 00:38:15:07 you know, the kind of build up of all of this can to deal fatigue.

00:38:15:13 - 00:38:19:07 And as the man himself walk a table says, time kills deals.

00:38:19:07 - 00:38:22:25 So how do how do we

00:38:22:28 - 00:38:24:32 you know what the practical tips for keeping the momentum going?

00:38:24:32 - 00:38:28:09 How do we ensure that we're still reaching those key details,

00:38:28:12 - 00:38:32:07 but without dragging this on to the point that we're jeopardizing everyone's

00:38:32:07 - 00:38:34:00 sanity and the deal itself?

00:38:34:00 - 00:38:37:19 Yeah, I think have the contracting agreement

00:38:37:19 - 00:38:41:11 upfront, have that discussion about we'd like to get this done in

00:38:41:14 - 00:38:44:26 more things being equal and set the target date.

00:38:44:31 - 00:38:47:31 It can move, but you set a target date, everybody gets around

00:38:48:01 - 00:38:52:20 the good guys behind the eight ball on that one.

00:38:52:23 - 00:38:54:21 So I would set

00:38:54:21 - 00:38:57:22 granular kind of milestones along that journey

00:38:57:22 - 00:39:01:18 and say, I'd like to have this vehicle populated by

00:39:01:21 - 00:39:04:21 and first part of the spa by

00:39:04:21 - 00:39:07:21 and we'd like to have, you know,

00:39:07:27 - 00:39:10:30 answers to our first round of questions from the media by, you.

00:39:10:30 - 00:39:15:26 You can, you can break this down into a logical kind of cadence.

00:39:15:29 - 00:39:18:11 I think it also helps, particularly with your home team, in fact,

00:39:18:11 - 00:39:22:01 perhaps only with your home team to agree on the materiality threshold.

00:39:22:01 - 00:39:24:04 So, like, you know, your lawyers will look for everything,

00:39:24:04 - 00:39:25:22 your countless will look for everything.

00:39:25:22 - 00:39:27:05 By all means find things.

00:39:27:05 - 00:39:29:25 But let's agree there's going to be a materiality threshold.

00:39:29:25 - 00:39:32:10 Two things we're going to want to fix in aggregate, right?

00:39:32:10 - 00:39:36:10 And if we took over this threshold and suddenly there's like, you know,

00:39:36:13 - 00:39:38:33 there's a jeopardy to the deal, to the tune

00:39:38:33 - 00:39:42:07 of like a third of the deal value of stuff you've uncovered.

00:39:42:10 - 00:39:44:01 Right. Probably time to call it.

00:39:44:01 - 00:39:45:16 But if you found me, stuff

00:39:45:16 - 00:39:49:01 that's cumulative would be only like point 3% of an impact on the deal value.

00:39:49:08 - 00:39:54:01 Maybe we could just deal with that later because just not it's not disrupt

00:39:54:04 - 00:39:55:19 the deal,

00:39:55:22 - 00:39:57:02 keep the momentum going.

00:39:57:02 - 00:40:00:14 So I think it's important that your team know your risk appetite,

00:40:00:15 - 00:40:04:21 know where your redlines are, and know that the focus is on trying

00:40:04:21 - 00:40:09:23 to get this deal done by certain date calls help so called both.

00:40:09:25 - 00:40:10:23 Well, certainly

00:40:10:23 - 00:40:13:30 I think it's always good to put the home in the way of any team together

00:40:13:32 - 00:40:17:02 on a call to account for their progress, an issue

00:40:17:02 - 00:40:20:16 that could be fortnightly as things get nearer to a deadline that becomes

00:40:20:16 - 00:40:25:13 weekly, possibly than twice weekly, you know, about an hour at a time.

00:40:25:16 - 00:40:28:18 Just going through these my obstacles, this is all suppose

00:40:28:19 - 00:40:31:27 I guess, you know, software development, standup, right?

00:40:31:27 - 00:40:33:11 These are the things that I need to knock over.

00:40:33:11 - 00:40:34:17 This is what I've achieved.

00:40:34:17 - 00:40:36:15 These are the things I need to help with.

00:40:36:15 - 00:40:38:13 So those calls can be really useful.

00:40:38:13 - 00:40:39:33 But it's no more complicated than that.

00:40:39:33 - 00:40:45:13 So expectations understand your risk appetite and communicate

00:40:45:15 - 00:40:47:27 on the point of of materiality and risk appetite.

00:40:47:27 - 00:40:49:12 I think that's really, really interesting point.

00:40:49:12 - 00:40:52:24 And one thing I find really interesting is, you know, if we compare startups

00:40:52:24 - 00:40:55:24 to two acquisitions, as we do obviously in the CTA movement,

00:40:55:32 - 00:40:59:04 when you found a startup, you go into it knowing that only one in ten succeed

00:40:59:05 - 00:41:01:33 and people take that risk on and they say, you know, it's not going to be me.

00:41:01:33 - 00:41:03:26 You have to be confident yourself

00:41:03:26 - 00:41:07:00 in that sense, but you go into it knowing that there is that big risk.

00:41:07:03 - 00:41:09:23 So you wouldn't expect that to be zero risk when acquiring a company

00:41:09:23 - 00:41:11:07 or you shouldn't. I think.

00:41:11:07 - 00:41:13:07 I mean, obviously, you know, you have to set a threshold for that.

00:41:13:07 - 00:41:16:09 But to go into this and expect it to be, you know, 100%,

00:41:16:09 - 00:41:19:15 it's I think is probably a little bit naive.

00:41:19:18 - 00:41:21:04 Yeah,

00:41:21:07 - 00:41:23:29 you need to have a bit of a war chest

00:41:23:29 - 00:41:26:08 or at least some headroom in the working capital of the business

00:41:26:08 - 00:41:27:32 you're acquiring to weather a storm.

00:41:27:32 - 00:41:30:09 And storms are inevitable. Right?

00:41:30:09 - 00:41:35:11 So yeah, I think you have to be realistic about it

00:41:35:14 - 00:41:38:28 and just deal with the punches as they come.

00:41:38:31 - 00:41:41:16 Yeah. Okay. Well, such.

00:41:41:16 - 00:41:43:08 Okay.

00:41:43:08 - 00:41:47:08 Next topic is one that I've been into quite a lot recently

00:41:47:10 - 00:41:51:33 I'm trying to learn more about is data rooms organization.

00:41:52:02 - 00:41:56:20 So perhaps not the sexiest topic, but a really important one nonetheless.

00:41:56:23 - 00:41:59:23 I mean, it's not sexy.

00:41:59:31 - 00:42:01:08 I mean, to some people they aren't.

00:42:01:08 - 00:42:03:16 To me they are, but that's what I do.

00:42:03:16 - 00:42:07:22 Well, I'd rather read one of those.

00:42:07:25 - 00:42:08:02 Okay.

00:42:08:02 - 00:42:10:18 Well, let's let's get you a rundown on that then.

00:42:10:18 - 00:42:13:07 What does an ideal data room look like for an SMB acquisition?

00:42:13:07 - 00:42:13:15 You know,

00:42:13:15 - 00:42:16:04 how do you again, we go back to that same point,

00:42:16:04 - 00:42:16:32 how do you make sure that you're

00:42:16:32 - 00:42:20:06 hitting all of the right details without drowning in unorganized paperwork,

00:42:20:06 - 00:42:23:10 asking for more than you need, slowing down your team who are having

00:42:23:11 - 00:42:24:12 to read through all of this stuff?

00:42:24:12 - 00:42:26:10 Where do you find that balance?

00:42:26:10 - 00:42:29:01 Probably asking somebody here who is ers

00:42:29:01 - 00:42:32:01 more on the side of I'd rather have it and know it.

00:42:32:08 - 00:42:34:11 Yeah. Than than not to have been told it.

00:42:34:11 - 00:42:34:22 Right.

00:42:34:22 - 00:42:38:09 So less is not is definitely not more for me

00:42:38:12 - 00:42:41:08 I think I think more more is more.

00:42:41:08 - 00:42:44:30 And just having the proper resources to devour it and summarize.

00:42:45:01 - 00:42:49:20 Of course we live in an age now with catch up in other realms

00:42:49:20 - 00:42:53:30 and you know, stuff that can do analysis and surfaced key salient points

00:42:53:33 - 00:42:55:02 at a rate of not.

00:42:55:02 - 00:42:59:13 I personally think M&A due diligence is going to be transformed

00:42:59:13 - 00:43:00:05 over the next few years.

00:43:00:05 - 00:43:03:20 There's already like a number of tools that are emerging to do this.

00:43:03:22 - 00:43:04:08 The challenge

00:43:04:08 - 00:43:08:32 there is obviously making sure you're not giving open AI all of the video

00:43:09:01 - 00:43:13:02 and, you know, contravening your NDA.

00:43:13:05 - 00:43:16:22 But my point is get the get the information,

00:43:16:25 - 00:43:20:14 have the resources to summarize it,

00:43:20:17 - 00:43:23:21 you know, a prepared stellar with a comprehensive data

00:43:23:22 - 00:43:26:17 and maybe someone that's been well coached, well advised with a

00:43:26:17 - 00:43:30:12 with a good advisor or have gone through this process before,

00:43:30:14 - 00:43:33:10 it can expedite a deal pipeline if they've got stuff

00:43:33:10 - 00:43:36:10 where it should be in a sort of logical order,

00:43:36:14 - 00:43:39:04 then that's a dream because you can get stuff done early.

00:43:39:04 - 00:43:43:13 What slows you down is having to ask, having to wait, rinse and repeat.

00:43:43:16 - 00:43:46:04 That's so super time consuming and often multi.

00:43:46:04 - 00:43:50:00 That's costly because you got lawyers on retainer during that process.

00:43:50:00 - 00:43:52:25 So I think

00:43:52:25 - 00:43:53:27 you can,

00:43:53:27 - 00:43:56:16 you can preempt the problem by sending your checklist and saying

00:43:56:16 - 00:43:58:01 these are the things I want in the day

00:43:58:01 - 00:44:00:21 before, by early like heads of terms agreement.

00:44:00:21 - 00:44:01:03 Right. Okay.

00:44:01:03 - 00:44:03:32 Before we even get the lawyers to meet each other, these are things I want.

00:44:03:32 - 00:44:05:07 Here's a diagram. A link?

00:44:05:07 - 00:44:09:28 Yeah. Go, Mr. Seller. Populate that.

00:44:09:31 - 00:44:12:04 Not just a Google drive.

00:44:12:04 - 00:44:15:05 Make sure it's a robust one that's properly organized

00:44:15:05 - 00:44:16:24 with an audit trail and all that sort of stuff.

00:44:16:24 - 00:44:20:08 Because post the deal that's going to matter to both of us, but

00:44:20:11 - 00:44:23:26 populate this with these things, please,

00:44:23:29 - 00:44:28:11 and then get into the work of having to unpick them

00:44:28:11 - 00:44:31:26 and read them and summarize them and look for the gremlins.

00:44:31:29 - 00:44:33:19 So it's an it's an important part.

00:44:33:19 - 00:44:36:19 You can't shortcut it

00:44:36:26 - 00:44:39:23 and it will be proportionate, the complexity of the business,

00:44:39:23 - 00:44:44:28 but you can certainly get the other side to prepare early for it.

00:44:44:31 - 00:44:47:16 I feel like with all this talk of gremlins, we've got a kind of biz

00:44:47:16 - 00:44:50:03 crunch mascot sort of cooking up in the background here,

00:44:50:03 - 00:44:53:28 sort of just don't feed enough middlemen.

00:44:53:31 - 00:44:56:31 Going back to your point about, you know,

00:44:57:00 - 00:45:01:12 lambs and due diligence, I can totally see a kind of marriage of human in the loop.

00:45:01:12 - 00:45:05:06 Obviously wouldn't cut out your advisors and legal team, but that going

00:45:05:06 - 00:45:08:06 through the mounds of paperwork and looking for,

00:45:08:08 - 00:45:09:25 you know, certain points, I think obviously you don't

00:45:09:25 - 00:45:13:04 want to feed everything to chat CBT but and then align with a well-trained

00:45:13:04 - 00:45:15:01 vet to database that knows about due diligence.

00:45:15:01 - 00:45:17:24 I can totally see that absolute chance for in the coming.

00:45:17:24 - 00:45:22:10 It's coming, but there are already tools that are emerging for this.

00:45:22:10 - 00:45:25:30 It's it's a wonderful time to be alive, frankly.

00:45:25:32 - 00:45:26:21 It really is.

00:45:26:21 - 00:45:29:12 But I see AI as an enabling technology.

00:45:29:12 - 00:45:35:00 It will augment the humans, it will supercharge their productivity.

00:45:35:03 - 00:45:36:21 That can only be a good thing.

00:45:36:21 - 00:45:41:07 Yeah, that's always my my case with AI is, you know, don't look,

00:45:41:07 - 00:45:45:18 it is replacing people just helping this people get more work done quicker.

00:45:45:20 - 00:45:47:11 You know, we want the same amount of humans in the loop.

00:45:47:11 - 00:45:49:16 We just want them to get more done in that time.

00:45:49:16 - 00:45:52:16 Yeah, well said that, man.

00:45:52:21 - 00:45:56:17 Okay, next up is the commercial buzz is financial view.

00:45:56:17 - 00:46:00:11 So beyond the numbers, how do you assess the target markets positioning on that?

00:46:00:11 - 00:46:04:21 We touched on the earlier competitive landscape, customer relationships.

00:46:04:24 - 00:46:07:07 You know how much should this be part of your due diligence?

00:46:07:07 - 00:46:08:16 SCOPE?

00:46:08:16 - 00:46:10:29 Yeah, like I said, it's not done as frequently

00:46:10:29 - 00:46:14:07 and as diligently as it could be done.

00:46:14:09 - 00:46:18:05 I think that's largely because, you know, lots of acquirers,

00:46:18:05 - 00:46:23:06 the institutional acquirers don't necessarily have the resources to do it.

00:46:23:08 - 00:46:23:33 You know, I'm

00:46:23:33 - 00:46:28:22 seeing a increasing number of like post-merger integration companies

00:46:28:22 - 00:46:32:13 that are there to help post the deal

00:46:32:16 - 00:46:34:27 who are also offering pre deal

00:46:34:27 - 00:46:37:27 kind of market diligence thing,

00:46:37:28 - 00:46:39:08 which is interesting. Yeah.

00:46:39:08 - 00:46:42:33 So like it's difficult to do that certainly market sizing

00:46:43:02 - 00:46:47:09 for more esoteric kind of niche markets can be quite difficult to do.

00:46:47:12 - 00:46:48:28 You're going to go to your Gartner's

00:46:48:28 - 00:46:51:28 and your data Gardners and people like that for,

00:46:52:02 - 00:46:54:24 you know, your bigger industries and get ideas about Pega

00:46:54:24 - 00:46:57:24 and who the big players are and you know, direction of travel.

00:46:57:27 - 00:47:02:20 But you know, for a smaller SMB space that's a bit more tricky.

00:47:02:23 - 00:47:05:11 So I think

00:47:05:11 - 00:47:07:18 a competitor analysis is a good place to start.

00:47:07:18 - 00:47:12:13 So, you know, get the seller to tell you who their biggest competitors are, get

00:47:12:15 - 00:47:17:03 someone in your home team to go in, pull out the accounts on those competitors.

00:47:17:12 - 00:47:19:33 Have a look at, you know, whether those competitors

00:47:19:33 - 00:47:23:29 are substantially bigger or smaller than the company that you're buying.

00:47:24:03 - 00:47:27:30 Try and almost come up with a just purely on revenues alone, come up

00:47:27:30 - 00:47:32:10 with who the players are and where your target company is sitting

00:47:32:10 - 00:47:33:16 in the pecking order

00:47:33:16 - 00:47:36:29 that that will tell you hopefully some kind of proxy for market

00:47:36:29 - 00:47:40:23 share market share as an approximation because you've got these different layers

00:47:40:23 - 00:47:42:23 of the value chain like what's a wholesale price

00:47:42:23 - 00:47:45:13 versus a retail price versus a manufacturing price.

00:47:45:13 - 00:47:48:07 Who you know, how far is that that brand permeated.

00:47:48:07 - 00:47:52:13 But anyway, if you look purely at revenues amongst your competitors

00:47:52:13 - 00:47:57:15 and you'll get an idea hopefully of where you sit,

00:47:57:17 - 00:47:58:31 if budget allows

00:47:58:31 - 00:48:03:16 a small NPS exercise, a Net promoter score exercise could be really useful

00:48:03:18 - 00:48:08:26 If you pick off, let's say 1020 of the noteworthy existing

00:48:08:26 - 00:48:13:15 and potential customers in the space, even if your seller isn't serving them

00:48:13:15 - 00:48:18:16 currently, you'd love to know how those stakeholders, how those potential

00:48:18:16 - 00:48:22:11 existing customers rank on an empty space is purely

00:48:22:19 - 00:48:26:29 the players in, in the space.

00:48:26:32 - 00:48:27:05 Yeah.

00:48:27:05 - 00:48:30:24 It's a great idea to canvas for that sentiment

00:48:30:27 - 00:48:34:06 and get the sentiment indicator for both the business

00:48:34:06 - 00:48:37:06 you're going to buy as well as the competitors.

00:48:37:14 - 00:48:40:02 I think also if you've got one eye on the future,

00:48:40:02 - 00:48:43:22 I think having a solid understanding of the competitive landscape

00:48:43:22 - 00:48:47:07 is super useful because you may be looking to do a kind of lateral integration and,

00:48:47:10 - 00:48:50:03 you know, acquire one of the competitors to get greater market share.

00:48:50:03 - 00:48:53:23 And I think having an eye on that from the start might be useful to

00:48:53:26 - 00:48:56:08 completely agree if you're planning a roll up or you know

00:48:56:08 - 00:48:59:29 you're doing a buying build, this can only be useful down the road.

00:48:59:32 - 00:49:00:25 Absolutely.

00:49:00:25 - 00:49:03:19 Okay. So we

00:49:03:19 - 00:49:06:03 have gone through, you know, the main bulk of this.

00:49:06:03 - 00:49:10:01 Let's talk about post diligence next steps.

00:49:10:04 - 00:49:14:12 So once you you know, identify these issues or opportunities,

00:49:14:15 - 00:49:17:25 how do you sort of fold those insights away into a final deal terms,

00:49:17:25 - 00:49:19:25 you know, price adjustments, earn outs?

00:49:19:25 - 00:49:23:08 Or at what point do you decide to just walk away?

00:49:23:11 - 00:49:25:04 Yeah,

00:49:25:04 - 00:49:28:12 I think Dgd's largely getting comfortable with

00:49:28:12 - 00:49:32:17 with the company that you're buying and the risks that they attracts.

00:49:32:20 - 00:49:35:12 Some risks are dealbreakers, as I mentioned, particularly

00:49:35:12 - 00:49:39:04 where there's been duplicity or evasion in the process.

00:49:39:04 - 00:49:43:16 I think those are things that are fairly difficult to come back from.

00:49:43:19 - 00:49:47:17 But actually if you just identified that maybe there's, you know,

00:49:47:20 - 00:49:52:21 there's more working capital required to weather a potential curve,

00:49:52:24 - 00:49:53:15 you know,

00:49:53:15 - 00:49:57:07 you need to make sure that there's more money being left in the business

00:49:57:10 - 00:49:59:26 or that there's a greater risk that what you think

00:49:59:26 - 00:50:03:33 you're buying is dependent on future growth.

00:50:03:33 - 00:50:05:26 And that might not be forthcoming.

00:50:05:26 - 00:50:08:18 You know, you need to have those conversations, as I mentioned,

00:50:08:18 - 00:50:14:05 about how that affects the deal

00:50:14:07 - 00:50:15:00 structure.

00:50:15:00 - 00:50:17:11 For want of a better phrase,

00:50:17:11 - 00:50:21:01 you know, your road to Alpha is going to be

00:50:21:04 - 00:50:22:23 impaired potentially

00:50:22:23 - 00:50:27:14 and so some of that risk should be shared by the seller.

00:50:27:21 - 00:50:32:00 You know, we are where we are largely because of their efforts.

00:50:32:02 - 00:50:36:02 This is a good litmus test, again, like with the seller, to determine

00:50:36:02 - 00:50:37:21 just how strongly

00:50:37:21 - 00:50:40:21 they believe in the robustness and the sustainability of their business.

00:50:40:29 - 00:50:44:15 Because if if there's a contingent aspect to the deal

00:50:44:18 - 00:50:47:10 that is dependent on

00:50:47:10 - 00:50:50:03 the company's continued performance,

00:50:50:03 - 00:50:53:30 and this is a way to reveal whether the seller

00:50:53:30 - 00:50:56:14 really believes that there is going to be a continued performance.

00:50:56:14 - 00:51:00:21 Right, because they're going to bet X amount of their exit on it

00:51:00:23 - 00:51:02:24 if you attach it to an earnout.

00:51:02:24 - 00:51:04:05 Yeah, a fairer.

00:51:04:05 - 00:51:09:02 Now, I don't think it's I mean, look, gone are the days of Martin Sorrell and

00:51:09:05 - 00:51:10:20 WPP making

00:51:10:20 - 00:51:14:21 everything contingent on continued growth of the agencies that he wrote up.

00:51:14:21 - 00:51:16:26 I mean, that was just chef's kiss.

00:51:16:26 - 00:51:22:17 But today people are a bit more savvy and, you know, they're well advised.

00:51:22:20 - 00:51:23:30 And so,

00:51:23:30 - 00:51:27:04 yeah, I think a contingent earnout that is like, look,

00:51:27:04 - 00:51:29:07 it needs to do the same as last year or more.

00:51:29:07 - 00:51:33:30 We might even be generous to say that 95% of last year or more.

00:51:33:33 - 00:51:34:29 But, you know, you don't

00:51:34:29 - 00:51:36:26 want to be more generous than that and you don't want to say

00:51:36:26 - 00:51:38:23 this needs to double in order for you to get your own out.

00:51:38:23 - 00:51:41:00 That's a bit unfair to get to that.

00:51:41:00 - 00:51:44:00 But something that is somewhere between those poles.

00:51:44:05 - 00:51:48:11 I think if the seller truly believes all of what

00:51:48:11 - 00:51:52:10 they've peddled to you in this process, that the company is robust

00:51:52:10 - 00:51:58:02 and is going to continue to flourish, then they'll take some of that risk on.

00:51:58:05 - 00:52:01:03 Yeah, I think that's a good way of sidestepping the hospital pass.

00:52:01:03 - 00:52:02:15 As you put it.

00:52:02:15 - 00:52:05:10 You know, if they know that that that crunching cycle is coming,

00:52:05:10 - 00:52:09:06 then they would be so happy on the on the earnout.

00:52:09:06 - 00:52:11:01 So, yeah, that's a really smart move.

00:52:11:01 - 00:52:12:06 Yeah, fingers crossed.

00:52:12:06 - 00:52:16:19 And that's a good way of being able to to test.

00:52:16:22 - 00:52:19:22 So yeah, I think that's all I probably have to say on

00:52:19:22 - 00:52:23:29 that matter is just use what is revealed in the process,

00:52:23:32 - 00:52:28:32 in discussion with the seller and come up with a deal structure revision

00:52:28:32 - 00:52:34:00 if necessary that both sides carry some risk.

00:52:34:03 - 00:52:34:18 Excellent.

00:52:34:18 - 00:52:35:30 Well, thank you so much for that guy.

00:52:35:30 - 00:52:38:30 I think that was really illuminating stuff.

00:52:38:32 - 00:52:42:17 I think I feel more confidence going and carry out due diligence now.

00:52:42:17 - 00:52:44:15 So hopefully our listeners do too.

00:52:44:15 - 00:52:44:25 Great.

00:52:44:25 - 00:52:47:26 Well, I mean, look, we're trying to give back to the community.

00:52:47:26 - 00:52:51:18 We're trying to, you know, help empower more SMB succession M&A.

00:52:51:18 - 00:52:54:29 Like it's important that you deals get done.

00:52:54:31 - 00:52:57:17 You know, there's too much deal failure during due diligence.

00:52:57:17 - 00:53:01:18 So I think often there's a lack of preparation by either side.

00:53:01:21 - 00:53:02:24 On the on that note.

00:53:02:24 - 00:53:03:22 So while we're talking,

00:53:03:22 - 00:53:06:10 you mentioned that you have a kind of due diligence checklist.

00:53:06:10 - 00:53:09:18 If listeners if you're interested, then drop us a comment or send us a message

00:53:09:18 - 00:53:11:26 and see whether you'd like to make that something shareable.

00:53:11:26 - 00:53:13:20 Obviously,

00:53:13:20 - 00:53:16:23 a kind of abridged version of that they can use for themselves,

00:53:16:23 - 00:53:18:18 but that's something that people would find useful.

00:53:18:18 - 00:53:19:29 Do you happen to share that?

00:53:19:29 - 00:53:20:19 Yeah, of course.

00:53:20:19 - 00:53:26:14 But it's also part of the curriculum sort of assets and resources that you get

00:53:26:17 - 00:53:30:16 by participating in the acquisition incubated with this kind of course.

00:53:30:23 - 00:53:33:33 Good opportunity to mention that I guess that we, we have this recently

00:53:33:33 - 00:53:37:07 launched eight week intensive program.

00:53:37:10 - 00:53:41:19 It's designed to fully prepare you with all of the tools and capital

00:53:41:19 - 00:53:46:16 and knowledge that you need to go from sort of spreadsheet to deal complete

00:53:46:19 - 00:53:50:17 to really complete your first acquisition, get it over the line.

00:53:50:20 - 00:53:53:19 We we are using the acquisition incubator

00:53:53:19 - 00:53:58:08 as a real kind of catalyst to get deals done.

00:53:58:11 - 00:54:00:22 Yeah, and we're of the mind that it shouldn't take two years

00:54:00:22 - 00:54:03:22 to find a good company in this day and age with tools like this crunch.

00:54:03:24 - 00:54:09:00 So yeah, we're seeking applicants at the moment for our cohort of six

00:54:09:03 - 00:54:13:26 handpicked, ambitious entrepreneurs, probably, you know,

00:54:13:28 - 00:54:18:03 business school graduates or career changers out of corporate people

00:54:18:03 - 00:54:21:31 that have got a hunger for operating a business

00:54:22:00 - 00:54:24:23 and a hunger for equity and owning a business.

00:54:24:23 - 00:54:29:00 We we want to help you and we want you to participate.

00:54:29:00 - 00:54:31:12 So come apply.

00:54:31:12 - 00:54:35:08 It's at acquisition dash incubator dot com.

00:54:35:11 - 00:54:36:33 I'll make sure the link is in the description,

00:54:36:33 - 00:54:38:30 the video share on all of our social as well.

00:54:38:30 - 00:54:42:02 I'm incredibly excited about this and I really love

00:54:42:05 - 00:54:44:16 it feels like kind of putting our money where our mouth is because we want this

00:54:44:16 - 00:54:46:07 to be more acquisition entrepreneurs out this.

00:54:46:07 - 00:54:49:17 Why not help shape a new cohort of them and hopefully they can go out

00:54:49:17 - 00:54:51:27 and spread the word, spread it further and further and further.

00:54:51:27 - 00:54:54:10 And that's what this is all about. Yeah, let's get more deals done.

00:54:54:10 - 00:54:58:09 Let's get more exits for these baby boomer owners that need to pass the baton

00:54:58:09 - 00:55:00:18 on to a new generation.

00:55:00:21 - 00:55:02:04 Absolutely.

00:55:02:04 - 00:55:03:20 I'm okay with that.

00:55:03:20 - 00:55:04:21 We're going to wrap up the episode.

00:55:04:21 - 00:55:09:09 We'll move to questions for the live audience in the community.

00:55:09:11 - 00:55:10:22 Thanks, everybody, for listening.

00:55:10:22 - 00:55:15:00 And this, Garthwaite says, Keep crunching, keep on crunching, folks.

00:55:15:03 - 00:55:16:27 So you say, I.