32. Selling A Building Company With Kevin Lovewell

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Hello and welcome to the Professional Builder Secrets podcast, a podcast by the association of Professional Builders for building company owners, general managers, VPs and emerging leaders. Here we discuss all things running a professional building company from sales, processes, financials, operations and marketing. Hello and welcome. We have another exciting episode from the Professional Builder Secrets podcast. I'm joined today by Kevin Lovewell, Director of Negotia Group. Kevin, thanks for being here today, mate.

It's a pleasure.

Bosco Tell me a little bit about yourself, your career and background. Kevin it seems very interesting. And what does Negotia Group do?

Personally, I've led a fairly adventurous life. I was a builder's laborer and didn't like being the bottom of the food chain. So I decided at about 25:26 that I needed to get some sort of profession behind me. The only one I could think of that I would never be unemployed was accountancy. So I did my accounting degree, I worked in corporate management, I've worked in the building trade banking. I've traveled the world using my MBA and negotiators. I suppose the end result, it's not quite the entry to retirement, Bosco but it's the thing that I wanted to do because I like doing it rather than things I have to do because I've got to raise kids, pay a mortgage, pay a car off, things of that nature. So negotiae business brokers and business valuers, the things that I like doing most.

It sounds like you've been able to merge your craft in a situation of circumstances. So I was going to ask you, how did you start assisting residential home builders with their exit plans and their sales? I'm sure this wasn't something that you woke up one day as a young kid and said, I'm going to help people with their sales process and the acquisition process. So how do you stumble across this industry?

I'll tell you a secret. I was the only one amongst my brothers that wanted to be a builder. So it's the closest I could get, Bosco without actually holding a hammer in my head. My father was a builder, my brothers, his father was a builder. I was always in the wrong place at the right time and that's how I ended up in Accountancy, wondering what I was going to do. So I've worked in and around the building industry. I like it. I'm familiar with the language of builders. Also a closet renovator. Love sharpening chisels too.

That's really interesting. What types of residential home builders should consider selling their business practice? Do you have a wish list or a checklist? When a builder says to you, am I the right fit?

Well, let's frame it in the context of normal business investment. Good businesses always sell. Average businesses sell. When average businesses are ripe in the market, poor businesses will never sell. And if you're a poor business in the terms of building and construction, you've got to improve yourself. You've got to get better with systems and processes. If you're an average business, you will sell in periods where that business or that industry is ripe for the picking, and that's not at the moment. And if you're a good business, you will sell. And a good business is systems and processes. It's longevity in the market, it's connection with buyers and sellers, it's connection with the suppliers, it's how you run your business, how you measure performance, and that you are actually achieving, not just making money, but you're keeping the money that you're making.

When's the best time to consider selling your business too?

Well, that's a simple one, Bosco. It's when you're ready to sell, when you've decided that you wake up in the morning and you're not enjoying going to work. And I must admit, that was me in an accounting practice. It's why I'm in business valuation and business sales now. If you're planning on retirement, the best time to start thinking is two to three years out. If you're planning on making an acquisition, the best time to make the acquisition is two to three years before you actually want to crystallize that with your own sale. So it's always a good time to be making your strategic plans or developing your strategic initiatives to improve what you're doing. But the best time to sell is when you want to get out and.

Who is generally looking to acquire these businesses as well. Obviously, you're looking to help someone transform and look at an exit play. Where do you go to look for these businesses and are they builders or businesses owners that should get into that space?

Bosco the present environment, the market at the moment is the people who are seeking to move their business either by virtue of they need more staff, because staff is one of the big issues in all Businesses and all industries or those that are seeking new markets. So if you've got something that you could consider a niche in terms of your clients, your suppliers, even geographically, the people that are buying are people that want your business for those two purposes or one of those two purposes.

It's really fascinating because I went through an acquisition process overseas before I moved to Australia and I've always wanted to ask this question. Is there a checklist that every residential home builder know about selling their business? You know, do you have something that is sort of their reference point that they can look at too?

Yes, there, there are always those mental checklists. But I think one of the very first things that people should think about is look at your own business and say, would I buy my business? You do that sort of audit on your own systems and performance. If you would buy your business, you've got a fair clue that, that other people might find you attractive. But if you look at it and you say, I've got to get out of this because I just don't know, I don't know what I'm doing, I don't know where my next dollar is coming from, you'd be in that graph that I suggested as a, you know, you're not a good business. So that audit on your own business is the first thing on your checklist. But there's only three other real things. You've got the revenue generating capacity and how it comes from a variety of different areas. You've got a gross profit margin that is close to or exceeding industry averages and you've got a net profit margin that is competent, as in it's more than the sum of the parts.

And for our listeners out there, let's get into the meats and potatoes of this interview. I'm just curious what goes into the sale of a residential home building business? I've always been curious. I've always wanted to ask this question. I'm sure there's a bunch of processes, but what are some of the key things that a residential home builder should be aware of?

Well, the important element is know what your business is worth and why. We always do a written assessment of market value. It's one of the primary pieces of paper that helps us help our clients understand what's your strengths and your weaknesses, the opportunities and the threats. It firstly gives them the opportunity, whilst the business is on the market, to start improving, not maybe to make the business more valuable, but certainly to make it more saleable. So have a fair understanding of where the market is because there are Peaks and troughs, there are trends. What is my business worth and why then the systems and processes that are evident in the business, how will the new owner actually run your business when you're not there? So systems, processes, documentation, these are all really critical elements of the selling process. And then you've actually got to find not just a person with the money in their back pocket, but they've got to like your industry. In our industry, they've got to have the appropriate licenses as well. Those people have a choice of businesses. We've got to make it compelling that your business is the one they should buy or should acquire for these reasons. And they're the value builders in a business. So if you know what your business is worth, they have a fair idea of what your business is worth. Due diligence today, Bosco is more invasive, more particular, more people putting their finger in than it ever has been at any time prior to this.

And is it fair to say that if you know your systems around your business better, it could potentially have a quicker sales process? Like generally, is there a timeframe that one can estimate when they can get their business sold or it really just depends on the market?

That time frame is an important question. If we move outside of South East Queensland, for example, the timeframe starts to get bigger because there are fewer people looking to purchase if there is financing involved. We know in today's environment the banks are particularly evasive and particular when it comes to lending money. After all, they're spending all their available time and money and resources in lending for the construction of a house. Why would they lend for a business when they can lend on housing? Now governments industry bodies are telling the banks they've got to have greater depth and penetration in the small business market. But that is not happening at today's market.

And how does that impact the staff and the assets generally? Do you find that there's a trend where people will want to keep the staff and keep the assets? Do you find that that's something that's a full sale where typically the assets are display. When you look at a traditional sort of acquisition play, where do the staff and the assets fit in?

There's a mergers and acquisitions saying that the majority of mergers actually destroy business value rather than adding to it. And in today's environment, even more than in the past, staff are vital. You won't sell your business if you can't guarantee that there are some staff involved because we know that trades based businesses are always starving for labor and without that labor, the business is actually dead. In the water. And as I said earlier on, it's one of the two prime reasons why acquisitions and mergers are occurring at the moment. Because they want you starved.

You've told me a little bit about the sales process. Is the process very similar to buying a home? What comes first? What comes second? Are they similarities to buying and selling a home or is this a completely different blueprint?

It is completely different. It's like trying to drive a car blindfolded. Sometimes there are the owners who say, my business is particularly vulnerable to the environment, so therefore I've got to be invisible. Nobody's got to know that the business is on the market until it's sold. Now that's one particular end of the spectrum. And then there's the. You can advertise it on directories, you can put it in the newspaper. That's a business that's somewhat easier because the buyers actually can tap you on the shoulder rather than the other way around. The process starts with what is my business worth and why it then is gathering all the necessary documentation. The job's not finished until all the paperwork is done. And in our vault we could have Perhaps up to 300 documents that will be necessary for the due diligence process. Then there's the negotiations. Now, in negotiations at the moment, Bosco, as with due diligence, the depth and breadth of what the deal might look like is pretty intense. It could be anything from a share purchase, which has always been pretty rare, but sometimes they're becoming more to the fore to a business asset purchase to a buy in and a acquisition. Work in progress in the building industry is always one of those points of conjecture and it's pretty tough. So you also end up sometimes with long contracts, as in they become unconditional, but there's still three, four or even six months to go. Then there comes settlement and then there's the post settlement work as well. People forget that the onboarding of a new business, you might double in size and there's workarounds that have to be done that you fail to anticipate. Sometimes that's where people like me who understand the process are really, really important because we are that extra pair of hands where business owners don't know what they don't know.

And is the negotiation group responsible for the handover? When we talk a little bit about the handover as well, who does the handover? Typically, if you're selling to another business, and I've always wondered what happens when you've got a new chain of management who's Actually training them in the background.

Well, this is these projects that people forget about. Bosco ads are very important. The actual settlement. Like we get to contracts and we do the negotiation and we working with the buyer and the seller determine what those special conditions are. And in Queensland we can actually produce the contract for the sale of business. More often than not we do in small to medium enterprises. The solicitors get involved and they're the people that effectively do the handover. They've got those checklists about. Is the electricity account changed over the phones here, you know, the car registrations and the road worthies. Don't forget you need road worthies on cars. Are they all performed? And then when contracts are at, let's say the unconditional and due diligence is complete. I always recommend to buyers, run your payroll as if you've got these people on board. Run it at least twice before you actually have the total responsibility of the payroll just to check to see that you get the same answers that the seller's getting. So even little projects like that, that's where I'm closely involved with both parties at this point. I'm not working for the vendor per se, I'm just trying to get the deal over the line and ensure that people don't forget about those little bits and pieces that you've been talking about.

Well, it sounds like you've been doing this for a long time. And what I love about this interview so far is there's so much to consider and there's so many unspoken conversations that if you don' really pay attention to this or have the right expertise, you could land into a lot of trouble. And so I really wanted to ask this other question here which was what are some of the challenges and blind spots that come with either selling a home business or buying a home building business as well? When it comes to the trends out there, what are some of the things that people should be really aware of?

Keep your foot on the accelerator whilst you are preparing to sell. I have a funny story. One particular client decided to sell. We engaged with a prospective purchaser. Contract was signed and the seller and wife and three children went on around the world trip. That around the world trip cost them about $30,000 in actual cash and about $150,000 in lost capital. So point number one, keep your foot on the accelerator. You've still got to behave as if there's a long term plan in position. Secondly, it's the staff, you've got to keep the staff under control. But the unofficial grapevine will bite you if you're not prepared to answer questions honestly and ethically, as they invariably do as they find out, because the purchaser wants those staff. They want them unstressed. So you've got to come clean and you've got to talk when the moment is right. And I suppose the third issue is those myriad little things that you take for granted, such as your workers compensation bill, your web page, domains, all these things have to be handed over, and the elements on their own are fairly simple. When you add them all up, there's a lot of work.

That's true. And what interested you in specializing in this industry, outside of the fact that you secretly had a passion for construction and building and everything else when it came to the actual advisory process? Was this one of those things where you got into business, you helped a business get acquired, and you're like, I actually love doing this. At what point did you realize that this was your life purpose?

I think it's from the accounting and consulting type roles that I played. I have a legacy of clients and businesses basically in or around the construction industry. It doesn't mean that I haven't sold other businesses, but I'm most well known in the building and construction game. I understand the industry, the language, and it's pretty well poorly serviced as well, simply because it's much more difficult. Work in progress, as we've talked about, is one of those issues that unless you've been there, done that, you don't understand what work in progress in a construction company is.

The only reason why I know it is because I actually learned about it in the podcast when I was actually picking Russ and Andy and Skye's brain, and we actually had an episode dedicated to this as well. And I learned about the tax implications that came with it too. Right. And so you learn about it, but it's almost like an unspoken dialogue.

Well, doesn't Russ say that that's one of his most viewed podcasts? Because it is so topical and forgive me, but there's an awful lot of accountants that don't reconcile work in progress as accurately as it should be done. I would say at year end. What number do you want me to put in? Oh, yeah, let's do that.

Well, and that's probably why Russ likes you, because he's always made fun of poked fun at the accountants law office. But look, I mean, look, we could talk about the accounting aspects till the cows come home, but yeah, it's an interesting. It's definitely an interesting topic that most people don't consider because there's really not a lot of awareness about it. And that's really what prompted me to learn a little bit more about it. Now, let's talk about the industry a little bit. What are you doing in the current market and landscape to aid home builders for a better future? Is the advice to a young home building owner and a veteran home building owner the same? Is the resources the same or is it sort of a different journey for both?

Well, yes, the landscape is changing. The environment has changed. Since February, March of 2020, supply lines have become difficult to manage. And it's not just the supply lines of the normal lumber and roof trusses, it's the supply lines for porcelain, tiles and things of this nature. Building trends are altering. There's a growing awareness that certain trades, such as bricklayers, are going to be scarce and you have to actually plan to be able to put a house together, maybe change some of the construction methods that you're using. There is not an awful lot of R and D in the house building industry. Anybody who can create a niche for themselves in the context of contracts and supply and build is going to create value for themselves, Bosco. And anybody who believes that they can create a niche, either geographically or in a particular area, such as micro homes, small homes, homes built in factories, homes built in pods, all these are now on the board, so to speak, in the context of building a house, it's not the construction process, it's always the end result. People want to have a house they can call a home, and if you can produce that for them, it's going to be a wonderful opportunity for new builders, for the builders exiting. The important elements are, you can't run a construction company with a hammer in your hand. Those guys out there who insist on being the jack of all trades, you're doing yourself and your business value a disservice. If you are purely technical or purely operations focused and you are an owner, you are certainly not an entrepreneur. And I hope people don't get too offended, but I've said it before, you can't run a business with a hammer in your hand. Bosco. You have to be able to control your business, not your business control you. If you're working at 9 o' clock on a Sunday night, we know which direction that is.

Yeah. And it's that old saying about are you in the business or on the business as well? Right. So at the end of the day, you've got to play to your strength as well.

Well, this is the toolbox that APB have Been successfully selling now for a few years and I think it's a remarkable set of achievements that so many builders have taken on board exactly what they're preaching, because it's been being said since I was a builder's labourer on my dad's blocks of dirt on the Sunshine coast in the early 70s.

Yeah, no, totally get it. It's one of those things where the association of Professional Builders mission is to really transform the industry and change it for the better and break away from the stigmas and revolutionize the systems that come with it as well. My next question is a favorite question, and I love asking this question because everybody gives me a different lens and perspective. So my question to you is, where you are today, how do you view the future state of the residential construction industry? What's your perspective of the future of this particular space?

I believe a rising tide lifts all boats now. In that context, it is going to remain profitable to the good builders. In that context, further development. There's always going to be government underpinning of the building and construction industry in Australia. It is so fundamentally basic and necessary to our economy. But that doesn't mean that you can forget about the fundamentals. Good cash flow, paying attention to your contracts, your forward risks. Bigger businesses are going to find it easier in the next three to four, five years. So. So you can be small or you can be very big. The guys in the middle of this, those ones that do, say, 15 to 20 houses a year, are going to find life difficult, get bigger, because the economies of scale and the ability to have high turnover, low margins, is a whole lot easier when you're double the size that you presently are.

So it's also about thinking about what the end is in mind and where do you want to go and how do you want to get there is a bigger question to ask people too.

Well, yeah, not everybody wants to be a mega corporation. There are those like me, who are quite comfortable with four staff. There are those who do have a plan. If you want to put a strategy in position, give yourself sufficient time to reap the rewards of that strategy, then put your business on the market. Don't put your business on the market and say, this business can be here, it can do that because nobody's buying the promise of future revenue.

So if you look back now at your illustrious career and you had to go back in time, what advice would you give a younger version of yourself? And more importantly, what advice do you give the builders out there that are looking to buy or sell a residential home? Business people that are listening on this particular episode, what advice do you have for them as well?

Look carefully at the business. There are the fundamentals of business ownership, the business model, and if it's ticking more boxes than it's crossing boxes, it's certainly something that you should be doing. You can always build a business from the ground up. It takes time, it takes a whole lot more effort and a whole lot more concentration. As a young builder in today's market, technicians start businesses, but professionals, entrepreneurs sell businesses. If you're going to stay in technician mode, be comfortable where you are and you'll close the door in 20, 30 years and you'll give your chisels to your son in law and you'll move on. But if you want to be an entrepreneur, you've got to wear the hat and have the attitude of an entrepreneur. And I think that's the guidance for young tradies who are going to start business. Being a tradesman is a great thing and it's a great investment in future value, but you want to harvest that value. You've got to actually be more than a tradesman, you've got to be an entrepreneur.

When you go back in time and you look at a younger version of yourself, what's that advice that you give yourself?

Looking back, that's a pretty difficult one because I'm not one that actually takes a whole lot of time in retrospect, but I do remember walking onto a block of land and holding the string and putting the first profile peg on and then walking out after we hand a set of housekeeps to a proud owner. You don't get that sort of thrill from balancing a set of books. Maybe I should have been the one who became the builder rather than the two brothers.

Oh, we talked about that perfect handover experience as well with the crew at apb. And it was such an amazing episode where we talked about, you know, what goes into the handover process as well for a home. And it's a whole different world out there.

Oh, yes. And the real beauty of any business is if you enjoy getting up in the morning and doing what you're doing. And I've always done that, whether or not I've been in corporate accounting, Chief Financial officer. I was a GST guru once upon a time as well. But I've always enjoyed the challenge of solving problems, of finding solutions and making my own life a little bit easier. There's nothing much that I would seek to change or advise the young me. Maybe don't get into that car Accident.

What does your day look like today? As a financial whisperer, as I like to call it, what does that entail typically and how many clients or home builders you're dealing with on a week to week basis?

I spend a lot of time actually on the phone talking to people, either trying to tap people on the shoulder and say, are you interested in this type of investment? On behalf of my clients that I'm representing or indeed out there investigating businesses. I do a lot of valuation work, so my day is determining. Very early in the morning, we have a meeting between the partners and the staff. What is on our agenda every month? We have a Saturday morning cup of coffee and that's our strategy session for the month ahead. We're always looking at our marketing costs, we're always measuring bums on seats, we're always measuring the important KPIs of our business. But we trust the process. We know that there's going to be another call. So most of my day is actually trying to satisfy the clients I've got rather than get new clients.

And how do residential builders work with you? If they wanted to come to you for advice on selling or acquiring a business as well, what does that relationship look like?

Not overly complex. The very first point is people would phone us if they're thinking about selling or if they're reaching the conclusion of their deliberations and they do want to sell. We help them with what is my business worth and why? Within a system to actually gather the necessary information, prepare their business for sale, we walk through all the issues that could happen, might happen, should happen. We give them the timeline, we give them the necessary help of being that person. Business owners are skilled and experienced in running their businesses, but when it comes to time to sell, that's when they need the services of somebody who can answer the questions, who can take that burden off their shoulders. And we are that extra pair of hands. And then there's always the fielding of calls, then helping people to frame what it is they want out of a business. Is this the right business for them? The negotiations follow and then it's, you know, the legalese of the funding, the finance handover. You got to get in the trenches with your client. And that's, I think, what we pride ourselves on. Bosco, we are in there. We always have a weekly phone call with our clients. We keep them in the loop of what's happening or not happening, who's talking, who's not talking and who's arrived, who's disappeared. So we try to make the journey as comfortable as possible. Even if there's 101 questions that are going to be asked that they might not anticipate, we've at least done it before.

Well, my final question, and this has been a really insightful interview, so I think I could talk to you about this process for hours. But we'd love to have you back in the future. But my final question for you is what do you love the most about the work you do today? Is it that discovery, the evaluation of the business? Is it the working with the client and hand holding them through the process? Is it the coaching? If you look at all the different entities that you play and you play quite a, you know, you're wearing different hats as well, what do you love the most today when it comes to this particular process?

I suppose, Bosco, apart from the fact that each day brings different sort of challenges to it, the important element is the service we provide. That intermediary between buyers and sellers is an institutional service. Broking hasn't been around an awful long time. It's only like the 50s and 60s, 1950s, 1960s, where broking in Australia became a profession and an industry in its own right. And being that intermediary is a very, very trusted position. Somebody is handing you their child, for want of a better word. And they built it, they created it, and now it's got to be handed over and they want to see it. They want their legacy to be there in 10, 15 years. They want to hand it over to the right person. So I'm fairly proud of the fact that people can return to the scene of the crime, so to speak, and see a business that they built, they created going on to bigger and better things. When a transaction is successful, it is a wonderful experience for both buyer and seller.

Kevin, I want to thank you for your time today. This has been an absolute pleasure getting to know a little bit about this world that you live in. It's amazing to play the process of being a fly on the wall and seeing this come to life. So really appreciate all the insights and we really want to thank you for your time today.

Bosco, it's been a pleasure. Thank you.

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