Your Key to Financial Freedom: Crafting a Winning Business Exit Strategy

Hello and welcome to this episode of The Unnoticed Entrepreneur. Today we're going to a city full of very smart people in the UK, not Cambridge, we're going to Oxford. Sorry for those of you that are Cambridge, uh, Cambridge Files. Um, we are going to talk to Darryl Bates, Brown's Sword, who is the UK CEO of a company called Succession Plus. I'm going to talk about the challenges that you've got as a business owner, whether to sell your business or to find people to take over from you. Darryl, welcome to the show.

Hey, thanks for having me on here, Jim. I'm really looking forward to this conversation because you've set me up there saying I'm from Oxford, but I know you're going to be the one asking the tough questions.

Well, but also plainly, you're not originally from Oxford, you're from Australia, right? And Succession Plus is A company originally founded in New Zealand. So, it's really an international advisory business. And I've no doubt that you're going to be able to manage all my tough questions, Darrell.

We'll give it a go.

Yeah. No, and you and I have chatted before. So, we know that your business, to sell it or to find a successor, we know that less than 20% of business owners actually leave the company with any money. from their hard work. So take us through the challenges and the decisions, and then we're going to talk later on about the methodology that you've got at Succession Plus that can give people some instructions, some guidance on what they could look at if they're looking at exiting their business. So, Darryl, tell us first of all, to sell or to find a succession, which is better?

Which is better? There you go, you've asked— you start with a really tough question. I don't think there's an absolute answer whether we should sell it or Or succession. What we need to get in our heads, what we want to get clear about as business owners is what do we want to do? What's our, you know, we've got the balancing act of, you know, do I want to leave a legacy? Do I want to maximize the business valuation? Where do I want to go? What do I want to do after my business? How do I know that my time's up here, so to speak? So, we go, Let's get really clear because entrepreneurs, if we're talking about entrepreneurs who started their business with a big idea, they're high-energy people, they're active people, they're not going to keep still. So, they're very focused, they're vision-oriented, they're forward-thinking, they like to know where they're going. And look, they get sometimes, you know, these guys, these business owners, entrepreneurs get tired and they get stressed by their business and they want out. And they go, look, I just want to sit on a beach and drink piña coladas.

Yeah.

Now, that just becomes a really nice aspiration. The reality is in 2 weeks sitting on that beach, they're going to get bored stiff and they're going to want to do something else. And if they don't know what that something else is next, they'll find a reason not to exit their business no matter how far they are through their exit journey. So, what we need to do is go, let's figure out what it is you want to do. And then how do you— what's your plan? What's your journey from the succession And then exit. Because succession, the way we look at it is succession is how do I get off the tools? How do I get out of the day-to-day? How do I get out of being an integral component of my business on a day-to-day basis? And then exit, so get out of the operations. And then exit is to leave my equity. How do I exit my equity, my ownership of the business? So that's the way we think of it is a 2-step process. How do I succession, then exit? What's my timeframe that I'm going to do those? And how do I plan it and structure it so that when everything comes, I'm on the front foot and I'm doing it on my terms?

Darryl, so you've mentioned a couple of things there and I'd like to take those in some kind of sequence. You've mentioned about timing and then really about sort of making yourself indispensable and then making yourself sort of replaceable. How long should a business owner give as a runway between looking at the piña coladas and feeling, you know, the warmth of the balmy air and getting the towels ready and starting this process with a company like Succession Plus?

Look, the more I do this, I'm going to say as soon as possible because having a business that's exit ready Doesn't mean you have to exit it. It means you've got all of your cards in order, your ducks in a row. Let me get my metaphors consistent. You've got everything lined up, ready to go so that if you are approached, you're on the front foot. A lot of business owners out there, their mindset is, well, I'll just keep growing it. And they think they're preparing their business, getting it ready by just making it bigger and growing it and having a history of profitable growth and increased profit. And that's part of the formula for sure. And that's a good thing to do, but it's not everything you need to do. So, the worst-case scenario, I think you need to allow 3 years to start planning your exit journey so that you prepare your financials and get everything in order. But the best-case scenario is now. Let's start now so that I know the sort of records. I've got some board history, I've got some governance, I've got all all of the systems and processes, I've got structures in the business, I've mapped my IP or my intangible assets. I know that if someone should just come out of the blue and bang on my door and go, hey, look, I'm interested in buying your business, I'm on the front foot. I just hear of too many stories of business owners getting approached and they're not ready. So the deal takes too long, the inquirer gets bored and moves on because They ask for information and it just takes too long to get it. So, they get fearful because they go, if they haven't got this information available, what's the rest of the business look like?

Darryl, I know that you've helped over 600 companies as Succession Plus. You must have a methodology of some kind. Is it possible to compress that into sort of a 5 to 7-minute summary so that anyone that's thinking about exiting can take some quick notes?

Yeah, so I've already touched on a couple of things that you need to get your goals and aspirations in order first because so many business owners don't know what they're going to move on to next. So there's a big red flag, if you like. The way we look at it at Succession Plus is we go, look, there's 21 steps required to get your business attractive and ready for exit and get you on the front foot and being exit ready. Those 21 steps are broken down into 5 stages. So let's talk about the 5 stages and just to give that contextual outline. The first stage is let's identify the value. Let's see where the value is in the business, what we've built so far. And let's have a look at that through a buyer's lens. I— what the business is worth to someone else as opposed to what it's worth to me, the owner right now. And look, one of the clues to us is, now we've got some realization around what the business is worth to someone else, we can have some assessment. Is that number of what it's worth to someone else greater than what the business is worth to me? And what I mean by that is when you talk to business owners, you go, hey, look, at some point you're going to exit. Do you have a valuation in mind? Some people will go, look, I want to sell my business for X, just because there's an aspirational number, X, 5, 10, whatever it is, 20. They've got a number of what they want to sell the business for. Some have got a number where they go, hey, look, the business owes me. So, you know, I've invested 20 years of my life building this business. I've invested all this time. It owes me. And they've got these numbers in mind what they think the business is worth to them or what their mate sold their business for. A buyer couldn't care less about what you think that you want from the business. The buyer's going to value the business as a commercial investment. So what we need to know is what the business is worth to someone else, what it's worth to you, and is there a gap? We also make an assessment and we go, hey, look, if we just, with your existing business, we tidied up all the financials, we got it operating at best practice. So we, with the profit side of the business, the revenue, tidied that up. What impact would that have on your valuation? And then we go, hey, if we made your business really attractive to be acquired and attractive to a strategic buyer, What impact would that have on the multiple? I.e., you know, the risk to future revenue, if we really reduce the risk to future revenue by building your intangible assets and what have you, then what impact would that have on the valuation? So we've now got some valuation formulas and valuation potentials, if you like, of what's possible with the business and then how far you want to go. So let's start with the groundwork. Stage 1, let's identify the value. We then move on to stage 2 and go, hey, stage 2 is all about protecting value, protecting what we've already built in place and protecting the business in case of an unplanned exit. And especially if we've got multiple owners in the business, we need to make sure that whatever happens to the future of the business and our families and the rest of the business owners, what happens should my untimely— I fall into the situation where I can no longer be involved. I want to make sure that everyone else is looked after in a way that I anticipate. So, I need to put that That's right. So I've now identified what's possible. I've now protected what I've already built. Protecting what I've built is like building a solid foundation. I want to build a house on a good foundation. So now I'm in a position to start maximizing the valuation. Now, what we need here from a business owner is we need to get a mindset shift because up until now they've been thinking about improving my profit, improving my revenue year on year on year. And we need to get that mindset shift from instead of just increasing profit, I need to be looking at the asset value of my business the valuation of the business and go, how do I increase the valuation year on year? So I'm now in a maximize value phase and I'm looking at all the things that will close those gaps that we identified in that first stage. So stage 3 is all about maximizing the valuation of the business. And that'll take really a minimum of 2 years. But, you know, the more time, the less stress, the less pressure you put on yourself and the more potential upside. Once I've then maximized the value of the business, I then want to go through and exit. So what I really want to do is how do I extract the value from my business? So what documentation do I need to complete a deal? What do I need in place? What do I need ready so that that goes through as seamless and smoothly as possible without there being any hiccups? Because the longer a deal takes, the greater the risk to that deal. So we want to make sure that once we're in negotiation of a deal, the actual deal, we can close that, get that deal timeline as short as possible. And we'll work with M&A advisors and brokers and investment bankers, and we'll partner with those guys to get all that work done. Once I've extracted my value, which is stage 4, I then move on to stage 5. And in the ideal scenario, my bank account is now far healthier than it's ever been. So I've got my business, there's lots of zeros in my bank account. And I've now got, you know, the wealth in my bank account, I've got a different type of asset I need to manage. I've now got hopefully generational wealth set up in my family. And I need to look after it. And we all heard the stories about the first generation creates it and the second generation sort of manages it, third generation blows it. Well, if we see this in time, we can go, look, I've, you know, we've created this value in my lifetime, let's set up the structures and the estate planning. Let's do that so that the kids, the grandkids, the next generations are looked after. And we've managed the value of our new assets as best we can. And what are the different advisors I need to work with throughout those, those 5 stages? Because they change as I go along the way. So that's it, the 5 stages: identify, protect, maximize, extract, and then manage value for my business.

Darryl, that's, um, so comprehensive. That's wonderful and, and really reassuring as well for anybody listening. I'm sure that there are these 5 stages, not, not just a sort of a haphazard, as you say, put together a PowerPoint, you know, when you're ready to get out. What about the difference between selling and the succession to your, let's say, your employee share owner scheme, because that's on your website. And also it's a fundamental one if you, if you do want to get out. Um, not every company can find a ready buyer, you know, an external buyer. And sometimes that comes with— well, it often comes with an earnout anyway, which can tie the owner into the business for 3 to 5 years. So can you just take us through, through that then, um, Darryl?

So, we can have an earnout, we can have an EOT, which is an employee ownership trust, which has become popular in the UK since 2014. Or it could have an MBO where just the management team or a team buys us out. But one of the first things we do, we said right at the very beginning, we need to identify value and we need to identify and work with the owners to go, what are their goals? Because what we found is that if you have a look at business owners, I reckon they fall into 3 categories when it comes to their exit planning goals and their energy. There's about 15 different ways you can exit the business from selling it to family and friends, you know, right through to listing it. But I reckon from an energetic perspective, they fall into 3 main categories. And these are— The first one is where the owners have, you know, taken the business sincerely as far as they want to go. They go, I've extracted wealth along the way. I've done really well out of the business. I'm tired. I'm just ready to go.

I want—

I do want to go and drink piña coladas on the beach. I'm ready to wind down. I won't use the R word, but yeah, we're done. So I'm happy to just gradually step down. So step down is the first category. I'll step down. I might gradually sell off my equity. Now, I might do that through by selling it to the employees as a whole through a trust, or I might sell it to one or two individual employees or It doesn't matter. But I'm going to gradually step down and hand over the reins and nurture the future generation of the business. It could be a family step down to the next generation of the family. But it's an energy where I just want to gradually step down. The next one is where the energy of the business owners is, you know what? We've built this business over the last 10, 15 years, whatever it is. We've done a good job, but let's go. I want to go out with a bang. Well, let's get one last hurrah. We want to crank this baby up. Let's go all in. Let's do what we can. We'll get some investment in. Let's crank it up. Let's see what's possible. And then we'll list it or we'll just go out in style. So let's step it up. Let's crank it up. We're going to go for the 3 to 5-year plan. Let's crank this baby up and then we're out. So that's when we've got a lot of energy left and we just want to go out with style. We're going to go for one last push. It's a totally different energy to step down. Step up. And, you know, they'll do what they have to do. They'll probably take more risk. They'll crank it up, but they'll go out in style and they'll go out with a bang. But, you know, they'll get everyone on board and they'll make it happen. Let's step up and we might get investment in and we'll exit out at a much higher valuation. I may not own all of it by then, but I'm going out with a much higher valuation. Now, they're the 2 common ones that we deal with. The 3rd category is unfortunately the one that I call fade away. Now fadeaway is, which unfortunately for the SME business market represents 80% of businesses out there because 80% of businesses that go to market don't get a deal because they're not exit ready, they're not prepared, they're not attractive to be acquired. They just represent too big a risk to the acquirers out there. So fadeaway could be the business is too revolved around me, it just depends on me too much, or I missed some industry changes, you know, and Blockbuster's probably the blockbuster Master Video is probably the best example that people will immediately relate to, have missed the boat. Or if you're a bit more my age, you might remember Olivetti computers or typewriters went to computers and they just missed the boat. So, I missed an industry shift and I didn't invest in the future or as I said, the business just revolves around me too much. So, I just gradually backed down and fade away. If the thing is, if I know that's coming and I've realized that I haven't built a business that is saleable, I'm basically self-employed. And I've seen self-employed people with up to 20 helpers, i.e., 20 employees, but it's still self-employed effectively. If I know that's the case and I am fading away, then I just work with my accountant to, you know, and get that heads up and that planning and go, well, this is going to happen over the next 5 to 7 years. How do I do it tax effectively? And I can still plan for a fadeaway. So, the energy is going, let's, you know, what's the difference between the different exits and succession? Well, succession is, as we touched on earlier, is just really the first phase. It's let me step out of the day-to-day responsibility. The different exits, still the approach to exit is based on where my energy's at.

And Darryl, what about communication? Because this is obviously a show about getting noticed. What piece of advice would you give entrepreneurs in terms of the messaging? Because if they talk about wanting to sell the business, that can spook existing customers and the team. But obviously, they need to let it be known and be prepared. How do you counsel that?

It's an interesting one because as much as we like to think we're clever and keeping things away from the staff and what have you, They look at our gray hair and they're going, look, the owner's getting a bit older. They've got to be thinking about it. I'd be thinking about it. What are they doing? So, I think if we clearly communicate that we have no plans to sell at this stage, but it's wise to get the business prepared for exit. We need to prepare because, hey, look, someday someone's going to open our door. What we want to do, Mr. Employees, is— We want to get the business exit ready so that it is as attractive as possible to get the best, attract the best sort of attention, which gives you guys more career opportunities. We've got no plans today. So, you know, let's status quo. You know, when, when, if they ask the question. The best wisdom and knowledge from all of the best corporate lawyers that I've spoken to in my ventures is they go, You need to keep people informed about your specific exit plans with as few people as possible. And our experience is it matches that. You need to have a management team, a leadership team who are aware, and you have the right incentives in place for them to get a good deal. And you probably want to keep them on in the business for the new owners because the new owners would really benefit from having that continuity. For the rest of the employees, assume you've got more than 25, 30 employees or whatever in the business that extend way beyond a management team, you really can't afford to let them know. A, the deals fall through. If they get worried and start thinking about, what if I don't like the new owners? What will they do with the business? Let's face it, as humans, when we don't know information, we make stuff up and we think of the worst-case scenarios. So, if we start sharing information ahead of time, we'll create a whole lot of stress and worry with people. They'll lose focus. They'll lose attention. Revenues will dip. Deals go south and deals fail. And then all that stress for no reason. So, as hard as it is, and this will be really tough on business owners who have built a really tight cohesive team and they've taken pride in being open with their employees for their whole journey and help them along the way. They just can't afford to tell them because of the risks involved. Now, what they can do is when they do sell their business, they can set it up so that if they want to, they can reward and thank their employees in any way that they see fit. But, you know, and I've seen that done a number of ways, but you really want to keep the people who are in the know as few as possible because employees get scared, customers get scared, suppliers get scared. And we know that fear isn't the best foundation for decision-making and making choices, and it's not going to be healthy for anyone in the long run.

Darryl Bates-Brownsword, make sure I say your surname correctly there. If there's one piece of advice that you'd like to give to an entrepreneur out there who is thinking about their exit, briefly, what would be your one piece of advice?

Briefly, is that because I've been babbling on too much?

No, I don't want to be impolite, but I just, you know, I try and keep the show to 20 minutes.

No worries. Hey, look, the biggest mistake is, look, as business owners, we all know it's important to get our business ready for exit, but we've got to get rid of that urgency need as well. The sooner you start preparing, the better, because that'll put you on the front foot and prepared and likely to attract unsolicited offers. So the sooner you start this, the better. And what I mean by start, I mean make structuring your business so that you aren't a key player in the day-to-day operations of your business. That's as concise as I can make it, Jim. Create your business so that you're not a dependent— or the business isn't dependent on your involvement. on a day-to-day basis as soon as possible.

Darryl Bates, Brown Sword in Oxford. I told you smart people were in Oxford. How can people find out about you?

Look, our website succession.plus is the quickest and easiest and the least spelling complications that you'll find me. If you're in the UK, you'll go straight to the UK portion of the website. If you're anywhere else in the world, you'll probably go to the Australian website, which is uh, where it all started. Or the other site— way to find me is LinkedIn. There's only one Darryl Bates Brownsword on LinkedIn.

Darryl, thank you so much for joining me. And that message about getting started, seeing the exits before you enter the business, uh, is really, really sage advice. Thank you so much for joining me on the show today.

Thanks for having me, Jim. I've enjoyed our chat.

Well, me too, and I've learned a lot. And, you know, if only I'd known what Darryl has shared today when I started my first business back in 1995 in Singapore, I would've, I think, been a much better entrepreneur today and in different positions. So if you're running a business, start to think about finding people like Darryl to talk with, to help you so that you can get prepared for your exit. And before we exit, thank you for listening to this episode of The Unnoticed Entrepreneur. If you've enjoyed it, please do share it with a fellow unnoticed entrepreneur and rate it. Review it on the player that you're listening to. And until we meet again, I just encourage you to keep on communicating. Thanks for listening.