Why Most Business Owners Fail To Cash Out For Top Dollar

Often business owners will only realize the problem in their business structure when it comes to exit, and that is because suddenly they realize rather than paying zero tax, now suddenly they might have to pay a whole heap of tax on their sale.

Okay, so we're going to be talking about growth today. That's when your business starts to move. That's when the cracks quickly turn into some serious problems, and we're going to be welcoming back Joanna. She's a seasoned commercial lawyer, managing partner at Aspect Legal, and someone who's probably worked with thousands of different businesses, helping them to grow, acquire, and exit their business. For those who've been following along, we've had Joanna come and talk to us before, and she's written a really great book called Buy Grow Exit, and, um, she's podcast— she's got The Deal Room and also Talking Law. And last time we talked a lot about exiting and how people can go wrong if they don't correctly structure. And today we're going to really dive into scale as you're starting to grow, what things can go wrong that can kind of really take away from your business's value. She brings over 20 years experience, if, uh, I think I'm correct there, Joanna. And you've been doing this for a little while, and perhaps I'll hand over to you. You can guide us through being a smaller group. Yeah, we'll make it a little bit interactive. Initially it was, I think, 7 points I think we were going to cover through, but I'll let you run from here.

Yeah, great. Okay, all right. So I'll share like a slide deck, but we'll— I think we'll make this more interactive than, you know, it just being about slides. But I guess just from the outset, I'll just give a little bit of an introduction to where— why I think this discussion is really important. So essentially, growth is the most vulnerable stage of a business, and I have seen countless businesses look like amazing businesses on the COVID hit high growth. Oh, look, I've put my own hand up. I don't know how I did that. I don't know how to take my hand down. Um, seen countless businesses go through this sort of like high growth period but then ultimately blow themselves up. It's— and look, it's a classic story, and I'm sure the people in the room who are systemologists will have seen this play out multiple times. And of course, that's why this whole discussion around systems is so important, because business infrastructure in itself is very vulnerable, but there's elements that, from a legal perspective, that can support all of the work that you're doing from a general systems perspective. And I think the real value for us is how we combine this concept of a systems thinking approach with legals. Because the reality is most people don't talk about legals as being about a system, but getting the right legal infrastructure in a business is actually all— like, getting it done right is all about systems. So that's a way that essentially the things that we are all focusing on, the things you're focusing on, tie so perfectly into the legal side. But just one other thing that I'll say, I'm talking about here about 7 landmines that can blow up your business. But actually, you know, let's say probably my experience, you know, at least 50% of businesses we deal with will have every 10 years some sort of major event that will bring them close to the brink. That's sort of a normal thing. I'd say really only 5% of those businesses, maybe 10%, actually completely blow themselves up. Most of them scare themselves at this point, have to walk back 3 steps and then start rebuilding again. But the true thing that impacts every business owner, whether they're, you know, even if they're not part of the crew that have actually blown themselves up, which of course is worst-case scenario, is just these decisions that you make along the way that deplete your exit value. The problem is most people, when you're building a business, have absolutely no idea what— if you want to liquidate this investment in your business at the end of the day, what those small different decisions are that you could be making along the way that will make the difference between a business that's saleable, a business that's not saleable. And I deal with— I mean, we deal with hundreds of businesses a year who are selling. Or who are buying. So I promise you, I see it at the coalface. I see at the coalface the business owners that come in and say, that's it, I want to sell my business. And the businesses who have understood what I'm about to go through with you, um, and a systems focus are the ones who have a choice of buyer, um, much higher multiples, um, and a much cleaner exit. And the people who haven't understood it Sometimes accidentally business owners will get this right, even if they've not fully understood it. But mostly it's about having your system from an infrastructure perspective, from a legal perspective, an accounting and a finance perspective, and an operational perspective that is well thought through right in the beginning that actually builds you value rather than leaks value when you get to the end gate, whatever that end gate is. So that's sort of the overlay that I'd like us to use as the focus here. So my focus is trying to make sure you don't blow yourself up. But as I say, it's a much broader— it's a much broader opportunity than simply not blowing yourself up. So very quickly, a little bit about me. My name is Joanna Oakey, Managing Director of Aspect Legal. We're a commercial legal practice, award-winning, have won the Best Boutique Legal Firm for the last 2 years in a row. We have a podcast all about buying and selling businesses, and I have a book called Buy Grow Exit. So I promise you, we have run this space. I've been in this area for more than 25 years watching businesses buy, grow, and then exit. Um, so I, I really like everything I'm about to talk about today comes from 25 years of being in the cold space of seeing this. Time and time and time again and actually seeing, you know, the businesses that can really take off at exit. Okay, all right, so, and quick note, podcast if you want to listen to it, The Deal Room Podcast and Talking Law, which you will find on Apple Podcasts or your favorite podcast player, anywhere where you normally listen to all of this stuff as you're running along the beach or whatever you're doing while listening to podcasts. And here is the book I'll send you a link to it later on. And of course we'll give you a, um, discount code if you're interested. But, um, here's a statistic that I love. Um, NAB released this in the last couple of years, but they, um, assess that 70% of privately owned Australian companies will gain new owners in the next 5 years because a principal major shareholder is approaching that retirement age. So what does it mean? You need to be aware right now of what you're doing to build your business for exit. You also need to be aware of the opportunities for acquisition as part of growth, and you need to ensure you do this without blowing yourself up along the way. So, um, as I go through some of the things I'm talking about, and in particular, um, I want to talk to you about a couple of, um, stories of, um, clients that really stuck out in my mind, but I want you to be thinking, how do you ensure you're building value as you grow? Like, what are some of these decision points that you could be making along the way that will make a difference that I'm talking about today, and how do you avoid landmines that could blow up your business along the way, because obviously that's the worst case scenario. So if we're starting with the worst case scenario, um, I'll talk to you about my client James. And interestingly, um, I met James when I was a junior lawyer, so this was years and years ago, but it is the most It's the example that sticks out most for me when I'm thinking, what is it that I'm trying to achieve here in Aspect Legal? What is the real, real, I guess, warning for all businesses? And it all comes back to James because it was such a critical part of my journey as I understood how important it was to make the right decisions from a legal infrastructure perspective. So basically, James was growing this fantastic construction-based company. He was doing really well. He had approached advisors to get advice on how he could get himself out of the business. I'm sure you all understand that thought process. Get himself out of the business because he was overwhelmed by running the business for so many years and he wanted to build it for exit. So they're sort of normal thought paths. The suggestion to him was that he had a key person risk in himself. What he needed to do was bring on a general manager. So James brought on a general manager, sort of spent a lot of time onboarding the general manager, and then started to really wind back from the business. And so he thought, job done, brilliant, how wonderful is this? Um, and it's the classic advice that anyone who's in his sort of stage of business is often given. Um, but what happened was this general manager had sort of taken his eye off the ball. And so what had happened over time is suddenly we ended up in client, a much higher client concentration in a few key clients. Those key customers started paying late and the business had been going through a growth phase. So it had been investing heavily in growth and hiring a lot of people, investing in, in some assets. And suddenly it came up to this point of a cash crunch. So James came in and said, here's all the problems. My largest customer has got liquidity issues and hasn't been paying me. I've suddenly realized we've got this cash crunch. What do I do? And so we jumped on, um, then we started the legal process. Um, but the problem is the legal process. When you come at it at the point he had, which is very, very late down the line because he hadn't recognized it because he hadn't been close enough to what was going on, um, was too late. He ended up, um, before we could do anything substantial, he ended up seeing his accountant who sent him to a liquidator who said, you've gotta get this company in liquidation. So he went into liquidation, but then he had personally guaranteed a lot of things. And so he then went into personal bankruptcy, um, and then he started getting death threats from some of his suppliers. So all of these staff that he'd built up over all of these years ended up without a job. His company is in liquidation, he's in personal bankruptcy, um, he's getting, uh, threats from, um, his suppliers. One of the suppliers, um, he owed like more than $300,000 to, and, and they were not, you know, obviously not happy. Um, and then, um, and then his wife left him. So I don't think you could actually come up with a worse, you know, sort of scenario than that, right? And he came into, um, he came into my office, and I was like— this was sort of in my third or fourth year of law, so it was really early on. And, um, he sat in front of me and he just burst into tears. Um, and I just like, that moment stuck with me because I, I left the office that day thinking, if only someone had have got in sooner with him, if only someone could have set up cash flow systems where he had had his eye on cash flow, where he had the right terms and conditions in place with his customers, where he had the right reporting mechanisms with his general manager, um, where he, um, had early warning signals, which is part of what I'll talk about here. So he could see in advance these problems creeping up rather than it just being something that he only saw at the last minute and then it was too late. All of this could have been saved. Um, and so this is a lesson I want you to take, like forevermore into, from a Systemology perspective, you work with your clients, you know how dire it is. It's so important to help our clients get these systems set up to ensure they have— and I'll talk soon about the 4 things that I think are important because it's not just contracts from a legal perspective, it's the systems that sit behind the contracts and it's the early warning systems that we put in place so that we know when something isn't going right so that we can jump in. So there's the story. I really hope you remember the story because I always hope that James's story, that the silver lining in some point in his story is that other people learn in the future and don't go through the same sort of phase. So as I said, growth is the most vulnerable stage of a business. But if you manage it well, this is what will make the difference for you of number one, being able to stay in for the long haul, long haul, and number two, actually having a really valuable asset to sell at the end of the day. Okay, so then we get into the 7 legal landlines. Here's a link, um, if you want it for the notes that we're sending through, I don't know, or we can just send them through, whatever you want to do. Jess, maybe you can put that in chat because I can't copy and paste it. But, um, cash flow. So cash flow is one of the most critical landmines, I think, for growing businesses. Um, obviously in the story of James, it was really obvious how cash flow became an issue. Um, and I, I think for any business, um, that is being off, uh, honest with itself, it will— every business will face a point, um, of cash flow issue. The question is, what has the business owner done in advance to get ahead of those issues because it is one of the most preventable landmines. So I'll introduce you to this concept and I guess like let me pause now and let's start moving over to it being more interactive. First question, how often, I guess from a systemology perspective, do you come in and you see cash flow issues sitting there in the business? Like, surely this is something that comes up quite a bit, or is it not really there so much for your issue, for your clients?

Once you look under the covers, it tends to be, but oftentimes people are coming thinking it's a lead and sales problem. Oftentimes that seems to be the first thing that a business owner tends to think will solve all of their problems.

Yeah. Yeah.

Uh, then you kind of look in a little bit deeper and you're like, ooh, we're not managing the finance side of things. So tipping more in isn't going to necessarily help you.

Yeah. Yeah. That 100% right. And, and the issue with cash flow often is that it becomes a surprise because business owners quite often are really focused on top line revenue. You know, that's a number that most business owners will know very well. Profit, EBITDA, maybe, um, they'll understand, but perhaps less well. Cash, um, of course business owners are used to looking in their bank account, but I, I find the gap often is this: business owners generally don't understand cash flow cycle, um, until they've actually come in and had problems and then had to come and unpick things. I, I don't know if that's sort of the, um, what you guys see. But the problem with cash flow is that if cash is flowing through slowly, i.e., services have been provided, but there's some reason for a slowdown in cash flow, which can be number one, the systems and processes in, um, in getting clients to pay fast. Then there's a real system around that in terms of how you deal with when you invoice in the process, how you follow up, what sort of regimen you're using in terms of a balance between statements and reminders versus calls, you know, actual something that is different to normal statements and reminders, and then sort of personal follow-up letters. And all of this I think should happen as a system because otherwise it can become very clunky for a business to follow. So there's a way you can have a cash flow sort of follow-up system, but there's a few things that need to be integrated into that. And one of the things is NPSs or client surveys, because actually the reality is that cash flow often comes from— it usually comes from one of three reasons. So cash flow issues other than sort of your own sequencing in when your balance of incurring costs versus invoicing timing. There's that element, but the other 3 elements are really all about the pattern you get your customers into. So it's all about training your customers, the performance standards of the business or quality standards. And what I mean by that is customers will start slowing down on payment if they're not happy with what has been delivered to them. So like an early performance measure like client surveys will actually usually give you insight in advance into cash flow problems that might be creeping in. So, and the third one is actually building the right things into your contract so that you can take a harder stance on non-payers. And that includes, you know, making sure you have things in your contract that allow you to charge interest, that allow you to pass on enforcement costs. So you can actually then bring out the stick if you've got really problem payers. So anyway, I think with all of sort of my answer to all of these areas, and we'll talk about it as we go, but my answer to all of these areas is from a legal perspective, what most lawyers will do, you go into a lawyer And usually lawyers will have sort of only one or two things that they'll offer. One is usually contracts, and two might be some sort of, like, legal letter recovery process, whatever. But I see the infrastructure from a legal perspective for a business that you're setting up as far deeper. What you're looking at is, well, what are our contracts that we need to set up? But that's just the first question. What are the systems and processes that you need to create around those contracts to make those contracts work? Because we all know contracts— okay, lawyer drafts up a lovely contract, fantastic. Send it out to someone, do they even read it? Probably not. Or do they put it in a drawer? Do they just tick it and scroll through without reading it? The answer is yes. So what are contracts actually doing for you? Usually people are just using contracts, so if they want to sue someone, they've got someone— something to go and refer to. Does that make sense? But I see it from— contracts are your opportunity to set out how the relationship will work between us. And then we need systems and processes in the background to make sure we're actually doing it. And then we need to watch out. We need to have systems in place so that we can see if something is not going right, so we can come back and change the system. And then we need to train the staff who are implementing the system. And all of this sounds complex, but it's not complex. It's just that I don't think there's a lot of point in a contract sitting in its own— on its own in a silo. What you actually need to do is create the system around it that ensures the contract is part of your process in the business and that you're actually implementing what you say. Does that make sense?

Oh, hey! I know you're tuned in right now, so I'll keep this super quick, but you like awesome YouTube videos, don't you? Well, there's not really that many YouTube channels that create great content about how to systemize your small business, so I want to make sure that you catch every video that I publish. So if you haven't already, firstly, give this video the thumbs up and then go ahead and subscribe to my channel. You can even hit the bell notification to make sure that you're the first to know when I publish anything. So go ahead, do it right now. I'll wait a sec and then I'll transfer you back to the video. I love that, and it actually fits very well with the way that we talk about the idea of the systems champion. Like, the systems champion is not the systems police. Their job is to get all of the infrastructure in place, get the systems and processes sorted so that the management or the enforcement can be done, and we can kind of lean back on the system and say, oh, but we said this, or we did that, or this was our approach and we escalated this way. So I kind of feel like that marries very well from a legal perspective as well, which it really is just another form of enforcement on something that maybe has gone up a level beyond what management might handle.

100%, I completely agree with you. And I think you're 100% right, Dave, in that— and this is why I've always felt that the system, you know, the systemology approach, the concept of systems ties in so well with what legal infrastructure should be in a business, because contracts on their own honestly won't do anything except for give you— if, if you decide you want to litigate, or if you decide you want to tell someone that your position is right— give you something else. Do you know what I mean? But you don't want it to get there. No one wants to end up in litigation. Your whole role is to make sure we're designing the process so disputes don't occur, so that we're not ending up in litigation. Because litigation, if anyone has been involved— and I don't know, have any of you ever been involved in litigation. Um, lucky you, perfect, excellent. Um, but litigation is very expensive, and the problem is it's, it's one of those things where you just can never absolutely be sure if you're throwing money into something that will, um, that will get you the results you're after or not. It's a very uncertain sort of process. So we want to set things up so we don't need to get there, and we want to set things up so that ultimately when we look to sell business in the future, we've got this strength from systems that are supporting the business from a legal infrastructure perspective. Okay, all right. So the second thing I just want to talk very briefly about is key person risk. The very classic situation when we deal with business owners that are having difficulty selling their business or who are very disappointed in what the market is telling them their business is worth is that there's key person reliance. So there's reliance on the founder. That's the— and, you know, obviously working with the Systemology approach, this is a whole idea, you know, ensuring that there's not this key person risk. But one of the things dealing with key person risk with systems is super important. Dealing with key person risk by simply appointing someone as a general manager, which is what happened in our case of James, if you do that on its own without the systems behind it, you're creating a whole new body of risk. So I think that's, you know, really important to think about from a perspective, and once again, you know, from a systemologist perspective when you're talking with your clients, you know, when they're thinking of staff being a certain position or staffing being the answer, it's really important to bring them back and ensure that it's staff underpinned by systems. And I look at it also from the perspective of how do you ensure your staff who are, you know, who are responsible for some of these key areas that you're trying to move from yourself to others, don't become a key person risk themselves, but are looking at the business from an owner perspective rather than an employee perspective. So it's sort of like changing perspectives, and you can do that through, number one, you need the right contracts in place. And when we say contracts here, what we're actually talking about is, you know, number one, making sure that people that you have put a lot of, or the business has put a lot of effort into and emphasis on has got some really clear restraints. We don't want those people running off and taking clients, taking suppliers. So that's one area of exposure. So our employment contracts need to be strong. But the second thing is being strong about performance metrics and requirements and possibly even building in long-term incentive plans so that you're dealing with people who are thinking like an owner. I have got information that I can provide you guys or maybe another session in the future that may be of more general interest, Dave, about phantom share schemes, which is sort of a way of giving equity-type ownership to key staff without actually— without having to deal with shares. So that's something that— and I think sort of when you're looking at how you build up the key personnel, thinking about how can I build in this long-term approach? And as I said, sort of phantom share schemes, it can be a way to do that. But that's a whole sort of discussion in themselves.

That was something that just came up recently with Renee Kelly, who's kind of known in our Systemology community. She runs Lime Therapy, and she's just had an exit, and part of it was, um, giving some of the key team members shares in the business. I think there's a private equity component that came in, and then the private equity actually installed that to make sure that the key team members would stay, and that was a really important part of her exit.

Exactly. And it's, it's a great, so buyers really like to see things like that set up in a business as well, but it's key. It's not just so, so the first thing is, well, how do I do it? How do I set it up? Is it shares? Is it share type things like phantom shares, or is it a mixture of what we call STIs and LTIs? So short-term incentives and long-term incentives. So. We can look at all of those sorts of things, but a really key thing is, okay, so we've got, okay, which structure do we want to use? But the key element that must sit beside that is what are our performance metrics? Like, what are we expecting these people and these divisions to achieve? And, you know, I think a lot of business owners also don't have that clear. So it all fits in because it's not just about— there's two components about building this from a long-term perspective. It's about building that motivation and the shared reward, but there's also about building clarity about what success looks like. And then it's about building in the right management systems to be able to watch, see the figures, and understand how someone is sort of responding or performing in that role. Does that make sense? And so from a legal perspective, once again, it's about, okay, we need to build this in from a contractual perspective. We need to work out what our short-term and long-term sort of approach is. And then we need to build in systems and processes so that the reporting follows the requirements that we have or our expectations in that role. And also the reporting so that we can see if things are going wrong in the business in areas that we've already handed over. Okay, so then— so that's sort of talking about key staff. Here we're talking more generally about employees as a whole. And whilst I've got this as the third landmine, it could very easily have been the first landmine. We see a lot— we see a lot just generally with business owners ending up in some sort of employment law issue at some point. And I think the reality is that every single business at some point will face some employment law issue that feels significant. I once had a podcast guest— and actually I've had this discussion with many business owners in the past— who have said that it's actually really a rite of passage for businesses of, you know, who've sort of hit over the $1 or $2 million to have employment law disputes at some point. So the question is, how do you set yourself up to, or how do you help your clients set themselves up to minimize the the fallout when this happens. Um, and, and just one thing I'll add to this in the exit scenario. So business owners who are exiting, we see misunderstanding of, um, employment law issues come up. Like I'd say in half of the deals we're on. So it's a really classic thing and probably in around about 10% buyers coming in and due doing due diligence and identifying problems. That the sellers didn't know that they had. So you don't want that. You want to be ahead, you want to, and you don't want, you know, you don't want to be dealing with an employment law dispute that could have been avoidable. To be honest, some aren't avoidable, but there's a lot that you can do to try and minimize your risk as much as possible. So where do the issues come in? Departing employees taking clients and staff, poor performance or unfair dismissal. And I see those as sort of two separate things because there's the risk that you terminate a staff member and they'll bring an unfair dismissal claim because it's incredibly easy. They pay $50 or $70 or whatever it is to the Fair Work Commission and off they go, off and running with an unfair dismissal claim. But the flip side of this is business owners who are too scared to properly performance manage their teams. Or their staff or problem staff because they're scared of an unfair dismissal action. So both of them are just as problematic as each other. Taking action and dismissing someone but then ending up in an unfair dismissal claim or not taking action and letting a poor performing team member just continue. And I'm sure, once again, you know, I don't know in your own businesses or in your clients, businesses, we see this concept of poor performance come up again and again, right? We're dealing with people, and if it's just a regular issue, but if what you really need in the background are these, and I'll talk about it in a second, but it's the same rhythm as what I've been talking about all along. You need the right contracts in place. That's the first thing. Many businesses, I think, in the phase that we're talking about right now often have contracts that they've just brought in from, you know, before they started up the business or taken them from someone else or got it from some online thing, but they're not representative of where the business is today. So that's the first thing, having the right contract in place, but also having the right system. So if you identified poor performance, you know exactly what process you need to go through, um, to deal with the employee. And it's also about making sure We know our probationary periods. We're making quick decisions within those probationary periods because that's our least risky sort of time to take some of this assertive action with a staff member that's not performing. So our issues, employees taking clients and staff, we deal with that by tight contracts. Poor performance, unfair dismissal, we just talked about that. That's a systems and process perspective, from a legal perspective, underpayment claims, incorrect classification, breaches of legislation. That's about education and training in your team. I'll add one more here because it's very, very topical at the moment. Offshore contracting. I'm sure you've all heard about the recent issues and risks that are sitting here now in Australia with offshore contracting. Huge risk area. I was speaking to a friend the other day who's got a sizable business, and they have got, um, two actions underway at the moment from Filipino, um, team members bringing unfair dismissal claims against them. Um, more than— I think the claims are more than $300,000 that this guy's, um, looking at right at the moment. Um, his exposure, uh, apparently there's a barrister in town at the moment that's just taking all of this work on no win, no fee. So just really important that we're coming back and looking at this area right now because it's a— it's something that can be dealt with by the legal process. Super important that we're all on top of it. So, yeah. Alright. Oh, this is— I just wanted to show you some of the headlines. These are CBA to backpay staff $3 million for missing Tea breaks. McDonald's faces $250 million back claim in federal— in the federal court. And I guess my question to all of you is, you look at all of this and you think CBA with the legal teams and the legal knowledge they have at their hands, McDonald's with the same. Like, if McDonald's and CBA aren't able to get ahead of this, we have to believe that all of our business, our clients are probably exposed in this area as well. Because some, you know, and I just, it's not to scare you, but it's just to say this is a real issue and it, most business owners, what happens is they're very laissez-faire around things like this until a dispute happens. And I'm not sure if you've seen this, a dispute happens and suddenly it's like, oh, holy hell. Okay, now I understand this is serious. And so what you need to do is you need to jump on that though. When something comes up and there's suddenly this dawning that there is a gap in your system, you can't just sit there and say, oh, hold on, that turned out okay. Oh, we're good. I'll come back to that in a few months' time when I have time. It's a signal that we need to jump in. We need to work out where the gap is and we need to patch it. Okay, so I've already talked about the solutions. Next is IP. So IP is a really interesting thing because IP, you know, by its nature is intangible. So it can be very hard for business owners to even understand, well, what is the value in my IP in the business? Elizabeth, you said you're in marketing and operations management. So a lot of what you do, I would say a lot of your value probably sits in IP. Would you say that's probably right? Yes. Yeah. Yeah. And Martin and Reed, the clients that you deal with, do you deal with clients that have IP as sort of one of those possible core elements of value in the business. But IP meaning like the name, the brands that they use, even things like the client base, the methodologies, the way they go about doing things. Yes.

Yeah, for them it depends on the client.

Yeah, yeah. And I just think once again, like I said it before, but the reason why this skips the mind often is because of the intangible nature. So often we're quite good, we far better at picking up, you know, issues with something that is concrete in the business, far harder to pick up issues that relate to intellectual property and intangibles. But I think one of the first things to think about in this area is it's one of the greatest opportunities for systems, the work that you're doing with businesses. In fact, a lot of the protection in intellectual property Like, there is the protection in intellectual property through contracts and registration. So if there's trademarks that are being used, it's like one of the cheapest insurances that you can get for a business because a trademark from beginning to end, if you're using lawyers to guide you through the process. So let's say that's the most, you know, that sort of including sort of that professional fee side is only around about $2,000 and that gets you protection for 10 years. So I call it one of the cheapest sort of insurances you can have for the business because at the end of that 10 years, you pay something silly like $300 and it just keeps rolling over every 10 years, you know. So it's like super cheap. It's something that then allows a buyer to really attribute value in the future. Um, and it's a way of really protecting the business. So that's the first thing. Um, and contracts, play a role in here from the perspective of it's just really important to get this concept of chain of title right. And chain of title means who is actually the creator and who is the owner of the intellectual property. And we set that all up in a contract. If it's employees who are creating the IP or is it contractors, you have a slightly different approach. But just as long as we've got these like magic clauses in the agreement, we've sort of got the legal setup. But there's so much more than that. Most of our other types of intellectual property can be protected through systems and processes. And this is where we say, okay, well, when you create something, how are you keeping a record of that sort of chain of creation over time? You know, and often when we'll go in and do sort of IP chain of audit audits on our clients, and we might be doing that, say, for example, they're coming to a sale. And they're worried that a buyer is going to come in and say, okay, well, you've got a lot of value sitting in your intellectual property, but how do I know your business is the owner of that intellectual property? What we want to show is that history of creation. Who created it? Where does it sit? What have we done to make sure it's sort of protected, that our— that people aren't just going and talking about things that are commercially sensitive? So all of this is, if you've got the right training in place, if you've got the right systems and processes, it's actually free. Like, it's, it's free to protect, but you ultimately, like, other than the minimal costs I just talked about with trademark registrations, the rest of it is protected for free. But it's just, you got to get the training, the systems and processes in place. And then ultimately, you have someone that's looking at coming and buying a business, you can show them this with real clarity. Here's the, here's here's what protects this value that you're paying money for. I'll tell you a story. We, um, we came in to help a business, uh, I think it was last year. And this business, this business had been with us, um, for, for a while, but, um, just we had, they'd only brought us in for a few sort of key things and they'd grown from really small to, um, really high performing in a super short period of time. Um, and we, we did one of our annual reviews as we do each year with some of our clients. And they grow massively in this period of time. We came and we did an annual review and asked them about what their game plan was now for the future. And they were thinking of selling and actually they'd been tapped on the shoulder and offered, I can't even remember, but I think it was in the tens, like $10 million or something, just amazing. But the buyer want, you know, one of the things we were sort of nutting through was I was saying, well, what's the value in this business to a buyer? and they're saying, you know, do I let them come in and do due diligence? And the value was in intellectual property. And it turned out unwinding where the business had been over the period of time that actually what they'd been doing in that past year is they'd had all sorts of different people offshore, people creating IP for them and people all around the shop creating IP, but none of it had actually been assigned to the business. So they've been paying all of these people and they've been using things like Upwork and all of those sorts of things, but they just hadn't been thinking about, hold on, if I want to sell this ultimately, how am I going to prove the value in it? And what we did then was we sort of unpicked it all and we built these deeds of assignment that essentially meant that the IP was assigned so that we could set it all up. So a buyer comes in, opens the hood, we can now show a clean story. Yes, We are the creator and the owner of all of these and the economic owner of all of this IP. But if they had done that before, if they had opened the hood before we had been able to put those agreements in place, like they just— I think the buyers would have come in and said, okay, that's got no value at all because we can't protect the IP that's been created. Does that make sense? So it's just about getting all of that stuff right at the beginning. And by the way, they were super lucky that these people agreed to sign all these deeds. That we'd sent. And we built sort of some things to sort of make it sweeter for them to sign. But these people on the other end of the transaction, if they realized how much value was sitting there, we may have had a bit of a problem at the time. So anyway, it's all about setting it up right from the beginning. And I think from a systemology perspective, I don't know what questions you ask and what you work through, but certainly if someone is creating IP and using any sort of contractor, offshore person, whatever, anyone who's not an employee, what agreements have they got in place? It's, it's sort of like a super simple fix, but it has to be there right from the beginning. Um, okay. The next landmine is business structure. And I see this over and over and over and over and over again. Um, often business owners will only realize the problem in their business structure when it comes to exit. And that is because suddenly they realize rather than paying zero tax, now suddenly they might have to pay a whole heap of tax, um, on their sale. So there are ways that we can get ahead of this. There are ways and, and, you know, there's sort of a couple of tests, but one core test that everyone should understand is the $6 million net asset value test. And that is a test that every business owner should understand. You should understand how it works. And you should be going back to your accountant and having these discussions, um, on, or from a Systemology perspective, your, your client should be having these discussions with their accountants to make sure their accountants are very cognizant of what is your structure right now. If you were to exit right now, what does that look like from a tax perspective? Can we, can we get you down to $0? And if we are approaching this sort of magic figure, there might need to be, it might be a good opportune time to relook at the structure of the business because there might be ways that we can deal with the cost base. Now I won't talk, that probably all sounds very confusing and maybe once again that's a subject of a future sort of thing, but it's just, these are the questions that you should be asking along the way. About tax, but the second bit is flexibility. So for example, many business owners will set their businesses up, their accountants will tell them to set it up using a trust. They use a trust structure. They decide at some point in time they want to get, sell some of the shares out of a family trust structure. You, it's a very difficult process. You'll have to restructure before you can have anyone else come in and own any of the shares. So that's just one classic thing where we say, okay, if we can get ahead of it, quite often what happens is people come to us and say, okay, I want to sell part of my shares, or an employee wants to buy in for part of the shares. And we look at it and we say, okay, well, your structure is not set up for that. So we're going to have to do a restructure now and then sell. And the problem is a restructure takes time because there's bits and pieces that have to happen. And if you're trying to do that at the same time as you're trying to transact, so get the employee in to sell, buy shares or someone else to buy shares, it all becomes a bit murky. So this is the sort of thing that you should be reviewing on an annual basis. Every year you need to sit down and say, is my, the structure of my business the way it is right now reflects where we are today and where we want to be in the next 5 to 10 years? If not, what's the path that I need to be following? And the questions behind that relate to tax, they relate to exit, and they relate to flexibility in the way that you're running your, your, um, business. Does that make sense? Um, and I guess I haven't even asked for questions. Um, I hope it's because it's not boring, but does anyone have any questions? Does any of this sort of come up in your thought process in your own business or when you're dealing with, um, your client?

Um, we get some clients that ask and come to us thinking about exit, and that's one of the reasons they're thinking about systemizing, because they've heard rule of thumb you're going to get a higher multiple if your business is systemized. Yeah, um, we're obviously not always exit planning specialists. Our real specialty is maybe addressing one or two of the landmines you've talked about and, um, really installing that first line of defense, which is systems. So I mean, we focus on removing key person risk. I mean, that's a big one around process. And then also, whether we're consciously aware of it or not, I mean, you've really just spelled it out here. And I popped a comment in the chat there where I was kind of like, it feels like systems are your first line of defense when it comes to avoiding any legal issues, and contracts are kind of like your last line of defense.

Yeah, that's true, and they have to be there, but you want to run— you want to lead with systems, not legal.

Yeah, so it kind of feels like we're, without even knowing it, we're actually helping to install a lot of the infrastructure that reduces the likelihood of legal issues. And I mean, that is in line with a lot of our thinking that systems effectively create space and then space creates opportunity. Yeah, because if you've got systems in place, you're reducing errors, you're trying to head things off at the pass before it actually happens. And issues actually bubbling up. And if we get to that early, then obviously that buys the business owner more time to then tackle when these challenges do come up. Because in business, there's always going to be the big unexpected situation, and you just need as much margin for error and as much wiggle room to then think light on your feet, adjust, and navigate through. It's always leaving it till the last minute gives you less options, less space, and that's typically when you have the biggest explosions.

I completely agree. But the one other thing is sort of this early warning signal thing that I talk about when, uh, because I, I'm sure you'll see this at points, you'll see with your clients that you're working with, a problem comes up, but a problem needs to be a trigger for— a problem is always an early warning sign. If the problem has some tie to the legal, a legal fix. It's just, it's super important that it's not, okay, well, we'll come back to this in 6 months' time. Because I find that when businesses are in a growth phase, when one problem comes up, quite often a whole heap of problems will soon be in line soon after it. Does that make sense? And so it's like, okay, we'll take these problems as early warning signals. And I come at it from the perspective, and I'm sure you guys too, a problem is an opportunity. It just means that there's a system, that the right system isn't in place or a system needs to be resolved. But from a legal perspective, it becomes even more important. And I have a slide on key contract disputes, but we're not going to have time to get to that. But it doesn't really matter because it's those things where you've got a client complaint, you've got a client that's slowing pain, you've got NPS scores that are low, you've got an employee that's threatening to go and bring some sort of claim or whatever. All of these things say, okay, we have got a gap in our legal systems. We need to come back and fix it. And generally it's always a fairly easy fix. It's not an easy fix once the problem has already arisen. So that's, you know, like it's always sort of, um, a stitch in time saves nine. Um, and you know, from a legal perspective, it's just about not ignoring those, those little warning signals that are coming up. Um, yeah. And just on business structure, one thing I didn't mention is business partner disputes. This is a key one. Once again, comes up a lot at exit because You know, we have clients who come in where one partner wants to exit and the other doesn't, or one partner wants a particular— has a particular sum in their mind, another is more flexible. But this is where, you know, shareholders agreements and getting all of that very clear at the beginning will really help down the line. So I just think it's part of, you know, every business as part of their annual review should be really looking at these sorts of things. Um, talk very quickly about, um, contractors boots. We don't need to talk about that anymore. And, and just sort of in the past, last minute, regulation and compliance. Super boring topic, I get it. But this is where we can also see, uh, a bit of risk. And organizations, you know, here's sort of like the key areas that, um, that businesses can get themselves into a bit of trouble around. All of these, the answer to all of these are, you know, number one, just have the right contracts. And some changes recently in the unfair contract terms legislation mean that quite often businesses right now who haven't reviewed their terms of service in the last sort of 3 or 4 years probably have problematic clauses in there. So, you know, it's just about keeping these up up to date. Um, but the rest of these are all about just having the right systems and processes in place that you can, um, run through the organizations and the right training. So the right people in, in the organization understand how the Personal Property Securities Act works, for example. And I don't know if you guys know how it works, but that Personal Property Securities Act— long name, I get it— but is the opportunity for businesses who are owed money by their customers on credit accounts to be able to enforce payment terms if there's a solvency issue. So that's where, like, understanding the PPSR, for example, and the PPSA is actually a critical part of cash flow because if you have all of this in place, it gives you a lot more enforcement capability right from the beginning. So all of this sort of ties in together But ultimately the message is, number one, I don't even know if I've got the message here, but anyway, prevention and cure. Yeah, prevention is a lot cheaper. Number one, it's just all about, I think, businesses having an annual review where you just run through— actually, I won't talk about our process, but essentially where you talk about, well, first you need to identify value in the business, work out how to protect it. You need to build in prediction system, and that's the early warning systems I've talked about, with the whole aim of preventing risk and ensuring that you're protecting value in the business so it makes you, um, valuable at exit. Um, and so every year, these are the things that a business owner should be looking at in their legal process. They should be looking at Well, what's the structure in my business? Does that meet who our business is today and where we're headed in the next 5 to 10 years? How do we deal with our customers at the moment? Have we got customer payment issues? Have we got customer complaints that are happening? Have we, you know, have we revised our terms and conditions in the last sort of 5 years so that it matches the way we run our business today? Today. The team, it's, you know, do we have the right employment contracts in place? Are we aware of changes in what's happening in various areas like dealing with offshore teams, in dealing with onshore teams, performance management? And it's sort of about working through each of those areas in the business every year and just assessing where are you at right now? Where's the opportunity and gaps for improvement into the future? Bearing in mind our legal infrastructure is built not just from contracts, but the systems and processes that underpin them, and by the training that the right members of the team are getting to make sure they're implementing these areas correctly. And that's pretty much it. Hopefully it was somewhat useful. I guess just the one last thing, and I probably say this every time I do anything with you, Dave, but I just— it's the opportunity for businesses in the SME sector that I just feel is so regularly missed, the opportunity through acquisitions. And just very quickly, it's time, we're at time, so I'll finish, but I just want to tell you about a client that we working with right now. This client, we've just finished, um, sort of 2 acquisitions for them. We're, we're about to help them with another acquisition, but this business started from a, um, it was a family business actually. It's been around for 40 or 50 years. Um, and, um, it, it grew really slowly in sort of like the first, um, 10 to 20 years and, and then it sort of hit its flow, but then It got into this idea of acquisitions in the last 6 years. And I've only come to, they've come across my path in the last sort of 6 months, I think. And as I said, we're really busy in acquisitions for them, but they did a couple of these. They did one acquisition that was little and it went really well. And it added, like, I think at the time they told me it added something like 30 or 40%. to their business. And then they went, oh my God, what a great idea. Maybe we'll do another. And now, like, they, they actually, this is what they do. They're just constantly out looking for acquisitions to, and, and the, this beauty. And if you've got a copy of the book, you'll see on one of the pages I talk about why acquisitions are so incredible because it's, if done right, they don't just increase your own, like the value of a business comes through. Um, two metrics. One is, um, the, uh, profit. So, and then the second is the multiple that you apply to that profit. So, so, you know, like if you've got a normal sort of business these days, not heavily systemized, um, you might have a 2 or 2.5 multiple. So let's say you're making a million in profit, 2.5 times a million is your business is worth 2.5 million. Makes sense. But you go and do a number of acquisitions and now suddenly you grow. Let's say you build and you buy another business that has, um, $1 million in profit. So you bring that in. Now you've got, um, a business that's now worth $5 million. Makes sense, but it's not worth $5 million. It's probably worth a multiple of 3 or 4 now because of the size, because Sophisticated buyers, corporate buyers, institutional buyers, you know, buyers who know what they're doing will buy— are far more likely to buy larger businesses, and businesses— and that impacts their multiple. So when you multiply a higher multiple, say 5, 6, 7 times your EBITDA, suddenly you've risen the whole value of the whole box and dice. Does that make sense? We just worked with, we worked with a business recently, actually it was a, it was a veterinary practice and they, they had done this. So we'd worked with them a year or two before in a small acquisition. So a small acquisition, I think they paid 1x profit for that acquisition. Do you know the multiple they sold for? So, and it was $1 million EBITDA. So you know, it was still sort of a, you know, a smallish business, reasonable size. Does anyone want to throw out there what multiple you think they could have gotten? I'm using it as an example, so it's probably a strong multiple. What do you reckon? What was that, Martin? 4, 5, higher? 8. Higher. 10. Sold at a multiple of 10, that's $10 million. So a year before they bought, sorry, a 1 million abitda. So I'm telling you, you get this right, it can be incredible, the sort of value that you bring. I'll tell you just one last thing and then we'll finish. I was having this conversation like literally Friday last week to a business owner. Who's, um, who came to me and he said, hey, yeah, I just want your help. Like, um, I've heard about you, I know, I want to talk, I want to get your insight or ideas on this because here's the thing, I'm thinking about either buying, selling or buying. And I thought, isn't that a funny thing? Like, I'm either gonna, I can't decide if I go, I'm gonna do something, I'm either gonna sell the whole thing or I'm gonna buy something. But his, his thing came from Uh, some of the things that I've been talking about here, I mean, he didn't get it from what I was talking about, but what I'm saying right here is he, his business is at sort of a painful size right now, but he knows, um, the multiple he could get for his business and the value that it is right now. And he knows how much more value there is in the market from some certain buyers if his business was a larger size. Um, so, you know, and anyway, so that's what I'll leave you with because This is where the real opportunity for value lies. I think for many, so many of our clients, could there be an opportunity for them in getting the system? You have to get the systems right before you go into this acquisition path though. And this is why what you guys are doing is so important because you go buy a business and I've seen this before by, uh, where people go and buy a business, bring it into their existing business. But then it's just got holes everywhere, and then the whole thing doesn't work because they're bringing it into a system that doesn't work. You get the systems right, you build the ship so it's strong, then you go and add value by acquisitions. And that's where the real magic is, I think.

Um, I think this is an area that systemologists need to focus more and more on because anytime you can justify to a business owner that, hey, this is how much you're going to pay to get me to do this work, and here's how much additional value we're going to add to the business as a result of that work, the sale becomes much easier. We've been working on quite a few different calculators. I'll drop one into the chat here, uh, and Systemologists can kind of play around with that one, but it's a business valuation calculator. So that way you can play around and it's, it's very crude. I think Joanna might see it and go, wow, you're missing a lot of things here. But as a starting point to kind of just create the gap between where you are and what is possible through systemization and the value that you add makes it so much easier to sell to someone and go, oh wow, Really quickly, without blinking, we can add an extra $400,000 value to your business. And if they're coming to you thinking about exit, or maybe you're marketing towards people that are looking to exit, I mean, Joanne has just shared with you the playbook. Systematically work your way through the 7 landmines. We'll share this recording. Share this with your clients. Take the recording and say, hey, watch this. and I want to walk you through making sure that you have solid process in place for each one of these landmines and will significantly increase your value if you're on the journey to exit, which every business should. I know, I feel like we'll probably have to have a part 3 with Joanna. There's always so much to cover. We are running a little bit over, so we'll perhaps call it time. Make sure you scan that. I'm just trying to see, I should have pulled out my copy of the book. I have it on my shelf just here. It's a great book. It's just filled with little tidbits on each of the key stages by Grow and Exit. So Joanne, I'll let you maybe have the final word and yeah, we'll wrap.

Thanks so much, Dave. And yeah, this book, everything that I've just talked about, essentially I've just put everything I know into this book. It's like, it is The Playbook. So it's a way to work through it. If you've got clients who, you know, you think could benefit from having an overview of the business, you know, we have free consultations where we can sort of talk to them about, you know, the sorts of ways to build infrastructure, the legal infrastructure. But my door's always open. You know, you got any questions, please just reach out. I'm just all about trying to help any of the business owners that we're dealing with, that we're dealing with and that you're all dealing with, be armed for the future. Because I just like the stories like James, you know, really ripped me to shreds. But as I said, there's just sort of like this incremental loss for business owners along the way, even if it's not a huge landmine. So it's good just for us all to be cognizant of where those opportunities are for business owners to get their stuff sorted, um, and protected.

Very good. Well, thank you so much, Joanna. Pleasure as always. And, uh, yeah, I'm sure there's a lot of takeaways from today, so we'll leave that there. And time to get to work, everybody. Thank you so much again, Joanna. We'll talk to you guys soon.

Thank you.