Go Do Deals

The Entrepreneur's Guide to Buying & Selling Businesses

Jeremy Harbour

• Publisher: Morgan James Publishing
• Year: 2020
• ISBN:
  9781631952944
• Topic: Business
• Subtopic: Mergers & Acquisitions
• Index: Business

Go Do Deals provides entrepreneurs with a practical method to source and buy companies without having capital and without borrowing lots of money.

For those who are ready to take the next step on the entrepreneurial ladder and make the shift from customer to shareholder value creation, Go Do Deals shows them how to:

• Bypass the brokers and find businesses that are NOT for sale
• Find, approach, and have positive conversations with potential sellers
• Structure deals so that they do not need to contribute cash upfront
• Choose the right deals and avoid buying themselves a job
• Know the best time to exit or sell their business

Buying a company can double one's business in an afternoon, free them from the treadmill of staff and customers, and avoid the blood, sweat, and years of start-up pain. It's time to Go Do Deals.

PART ONE

WHY YOU SHOULD GO DO DEALS

Sometimes you win. Sometimes you learn.

A Note on Rewarding Value Creation

The world is not fair. Inequality is a global issue. Its presence is hard not to notice, as it is in every political speech, on TV, in films, and especially when you travel. Yet global living standards have risen exponentially. Don’t believe the media: levels of absolute poverty have been coming down year by year, and globalization has much to do with the elevation of living standards.

The real issue isn’t poverty or living standards: inequality is about the perceived unevenness of the distribution of wealth, with the super-wealthy getting wealthier. It is relative poverty that drives the politics of envy.

Real equality is about equality of opportunity, and we have made leaps forward in this regard. Over the last thirty years, there has been a massive change in wealth and—more importantly—in wealth distribution. When I was growing up, the richest person in the world was the Sultan of Brunei, and the Queen of England was one of the twenty wealthiest people in the UK. Today, there is only one hereditary billionaire in the Sunday Times Rich List top ten, and the majority of billionaires and multimillionaires are self-made in one generation. This is unprecedented.

But this is still only 1% of the 1%, and there is a very long tail on the graph after that. All governments and political commentators talk about the problem of inequality. The recent populist movements are driven by a frustration, felt globally, that there seems to be a glass ceiling for most and unlimited riches for others. This frustration gets directed at rich people, immigrants, governments, secret societies, or anyone else people can think of. All governments can seem to come up with is variations on the idea of taking money from people who work hard and take risks in order to give it to those who don’t. It has been demonstrated again and again throughout history that this model is not sustainable. There has to be a better answer.

For entrepreneurs, it is like a bet you can only lose. If you fail, you lose everything; if you win, you lose most of it. Entrepreneurs are society’s change agents.

Nearly every life-changing breakthrough or innovation has been born of the mind of an entrepreneur or has been commercialized by an entrepreneur who has made it work. These people bet everything—their relationships, their health, their money—because they want to change something. When they see an itch that needs to be scratched, they scratch it. When they see a problem that can be solved, they solve it. When they solve these problems, they get paid. That is value, and that value is created by entrepreneurs every day.

Ultimately though, these problem solvers are not rewarded. Global capital has become detached from value creation. In any mature economy, SMEs represent around 50% of GDP and 95–99% of private-sector employment (depending on where they are located). SMEs are vital to the economy, job creation, tax contribution, and the health of the economy.

I believe we can take control of wealth and investment, and that we can eliminate the bank’s intermediary role in controlling the money supply and the government’s role in wealth redistribution. We can also get thousands of new wealthy entrepreneurs solving the world’s biggest problems instead of fighting every day against a system that is completely skewed against them.

As an entrepreneur, it’s your duty to do deals. In this section, we’re going to look at why you won’t make money running your business, why it’s OK to be a novice, and how you should position yourself as an investor.

Everything we need to do this is already out there. We just need to get on and do it. We can be caring, compassionate, and capitalists. They are not mutually exclusive.

Now, go forth and do deals!

CHAPTER 1

YOU DON’T MAKE MONEY RUNNING BUSINESSES

Running a business is for schmucks.

Entrepreneurs often fall into the trap of thinking that you have to work hard at running your business to get wealthy. I’m going to show you that this is not necessarily the case. It’s still hard work, but your hard work should be invested elsewhere, so that you can see truly spectacular results in short periods of time.

You might think you have read all the books on buying and selling businesses; however, rather than focusing on practical tips and entrepreneurial ways to acquire and sell businesses, they focus on the need for expert accountants and lawyers to broker the deals. At the Harbour Club, I share with my delegates practical tips and advice from my personal experience using relevant examples, which have been implemented and proven for more than twenty years.

Look at Richard Branson: at the early stage of his career, he executed a huge deal that was his game-changer. He made his money when he sold Virgin Music to Thorn EMI for roughly $960 million. Before that day, he admits he was borderline insolvent. Another example is Brian Acton, co-founder of WhatsApp. Brian made his money when he and co-founder, Jan Koum, sold WhatsApp to Facebook in 2014 for $19 billion.

Both of these well-known entrepreneurs only became wealthy when they sold their own business or acquired and sold another business. Businessmen and women who have secured real wealth are usually less operationally involved in their businesses, leaving them more time to think strategically about the bigger picture.

Deal Deep Dive: The Telecom Company

In 1997, I started a telecommunications company. After running the business for a few years, I started to notice that, every week, I was being approached by other telecom companies who wanted to buy my business. Interestingly, they all had one thing in common: they had no money—well, none that they were willing to give me. What they did offer were deal structures with what I call “jam tomorrow”(an empty, useless promise of something that will never arrive or be fulfilled) and a solution to some of the pain and problems of running a business, like ironing out cash flow, dealing with staff, finding customers, providing capital to grow, and locating flashy office space.

The telecom industry is especially acquisitive because everything is duplicated in telecom companies. When you combine two telecom companies, there are now two offices, two finance directors, two billing systems, and two IT systems. A two-plus-two deal can equal ten after you take away all of the cost base from one company. For this reason, most telecom companies have a mergers and acquisitions (M&A) strategy in place alongside their organic growth strategy.

So why wasn’t I thinking like this? After all, I too didn’t have any money! Maybe I should be the buyer and not the seller? Why was I still asking people the more operational questions like, “How many mobile phones do you have?” I wasn’t thinking strategically. I wasn’t acting like an entrepreneur. I was basically a glorified salesperson. In the end, I met with many potential buyers but couldn’t decide on any deal. It was like being at a restaurant with a huge selection of meals on the menu; it’s impossible to choose, and you end up not ordering anything. My thinking went full circle, and I thought, “I’m going to be the buyer.” So began my journey to acquire another business.

Now I had this new idea in my head—I’m going to buy a business! I needed to have conversations with people about buying businesses. I needed to have strategic conversations, and I needed to get in front of a lot of people, so I went networking.

At one networking event, I came across another telecom company based in Slough in the UK. They’d been going for thirteen years, had some really good customers and supplied lots of companies on the Slough trading estate. One of their customers was Nintendo. I was pretty young and unconvincing at the time, so it was lucky for me that the owner had a perfect storm of motivations for selling. His three urgent and pressing needs helped me to break my deal virginity and get that first deal done.

The owner’s three motivations to sell were as follows:

1. 1.The ticking time bomb: He operated from a retail outlet close to the Slough trading estate (the largest business park in Europe with over 500 businesses and 20,000 employees) and most of his customers were businesses in the area that appreciated the proximity. We were based close by, but we operated from an office, delivering phones to our customers or having customers pick them up them from us. We didn’t need to be a retail establishment, and we weren’t wedded to the idea of operating from retail premises. The lease on his shop was about to expire, and the landlord had decided to bulldoze the building and turn it into apartments. He had a ticking time bomb—he needed to be out of the premises within a specific time frame and was furiously looking for a new space.
   Finding a retail outlet in this area was difficult because of the expense. The owner of the telecom company needed a rent deposit up front, fit-out costs, and, of course, the relocation expenses. He’d estimated it was going to cost him around $70,000 to move. The business in the previous year had made a net profit of $12,000, so the next few years’ profits were going to be eaten up by the forced move. He wasn’t relishing running the business for another five years of his life just to stand still.
2. 2.Frustration of changing goalposts: At the time, there were only two Internet service providers, Cellnet and Vodafone. Vodafone had a specific third- party channel approach to its business, using dealerships and intermediaries. They looked after their dealer base. Cellnet kept changing focus: at one point it would be very third-party channel-focused, then it would go through a direct channel focus, then it would move back to a third-party focus. The telecom business was with Cellnet, and the rules and operating procedures changed regularly. The owner would quote a customer for a particular product or service, and a couple of months later, when the customer said yes he could no longer deliver it at the price they had agreed. This created unmitigated frustration.

Business Breakout: Vodafone

Vodafone went on to become, at one point, the largest mobile phone company on the planet, while Cellnet always struggled, eventually having to rebrand. It was bought and sold a couple of times. The path that Vodafone adopted was definitely more successful and their model was very acquisitive. They would create third-party relationships; the unhealthy companies would go bust and Vodafone would buy the good ones. They used deals and acquisitions as a way of integrating vertically with their supply chain without taking all the risk. The marketing and investment in systems that the service providers had to do did not appear on Vodafone’s balance sheet, but, if they worked, they became part of Vodafone’s success.

1. 3.Shiny object syndrome: This is something all entrepreneurs suffer from, in that their favorite business is always the next one. They want to rush out and deploy the idea they just thought about in the shower. And when they start that side hustle, that extra business, they end up loving it more than the old one. Their thinking is: “I’ve been running this business for thirteen years, it takes up all my time, it’s stressful, it’s hard work, but this new thing could be worth a gazillion dollars in the next five minutes if I just had the resources and the time to focus on it.”

In this particular case, the owner of the telecom business was buying two-story row homes in the area near his shop and converting them into duplex apartments. Whenever he did one of these conversions, he made about $70,000 profit. He was doing a couple a year, but he would have been able to do around six a year—and massively improve his income—if he had more time and wasn’t sitting in the shop all day waiting for customers. He loved doing those property conversions. It was that passion that got him up in the morning. Becoming free to pursue this passion was a powerful motivation.

Those three motivations—the ticking time bomb of lease expiration, his service provider driving him insane, and the fact that he could make more money if he wasn’t running the telecom business—were enough to drive him to do the deal.

So, we had a deal, but my next challenge was that I didn’t know how to buy a company. At the networking and breakfast meetings, I would zone in on the accountants and lawyers and quiz them about buying a company. I would pepper them with questions: What actually has to happen? How do you transfer the shares? What forms do you fill out? What legal contracts do you need?

Business Breakout: Buy the Company

The overriding principle, all the lawyers told me (and I must have spoken to a dozen), was, “Don’t buy the company. Buy the assets of the company because there could be skeletons in the closet.” (We explore this topic fully in the Harbour Club because now I don’t believe that’s the right way to do it. In most of the deals I do, I do buy the company—particularly one in a distressed situation—because you can then control any bankruptcy process and, if there are skeletons in the closet, you can work to get rid of the skeletons. If you’re not in control of that process, then it can cause much trouble further down the line.)

Back then, I was told to just buy the assets, so that’s what I was going to do.

An asset purchase agreement was a bit like using a sledgehammer to crack a nut, based on the size of this particular deal. So, after various discussions, we decided that the easiest way would be to write a letter of agreement that we would both sign, specifying what assets were being sold, for what price, and on what terms.

We sat down and drafted the letter. He wan...