#270 The Entrepreneur's Guide to Profitable Exits with Darryl Bates-Brownsword

0:00:01 - Mehmet
Hello and welcome back to a new episode of the CTO show with Mehmet. Today I'm very pleased to have with me joining me from the UK, from Oxford specifically, darryl Darryl, thank you very much for being on the show. The way I love to do it, I keep it to my guests to introduce themselves, because I believe this is the best way for someone to get introduced. So the floor is yours. 

0:00:22 - Darryl
Thank you, and that way you don't have to read out one of those horrible scripts that people have to provide you, don't you? I'm Darryl Bates-Brownsword. I run a business called Succession Plus. I run the UK operations. The business started in Australia and what Succession Plus do is we work with those small and medium-sized business owners, so businesses with sort of 10 to 250 people, and we work with them, with the owners of their business, so that they can prepare their business so they're actually ready for exit will in advance of any anticipated event, and that way they make sure they're the one in five businesses that actually do get sold, rather than you know, or the four out of five that when they do try and sell they fail to get a deal. So Succession and Exit Planning, working with business owners so they can exit like a boss. 

0:01:15 - Mehmet
That's great, darryl, and thank you again for being here. Maybe it's a little bit a traditional question and you've been asked a lot about it, but what brought you to this space? Definitely, like, what was the journey to be on something which is, honestly, you know, I think it's very normal because you would be helping, you know, small business owners and maybe founders, in getting the exit. So what was the trigger for you to be in this space? 

0:01:45 - Darryl
Yeah, look, it was a natural pathway really, mehmet. I've been working with SME business owners. I start my background is I started as a mechanical engineer and I worked on power stations and, frankly, I wasn't very good at that. So I got into consulting after a few years and since 1999, I've been working with SME business owners, doing consulting and coaching and helping them to grow and I was applying all of the, I guess, methodologies and skills that I'd learned in that corporate space. What I learned and I, over the years I worked with many business owners and seeing them grow and prepare, and they often had an approach of going hey look, if I grow my business, I get to a size and then hopefully someone will come and tap me on the shoulder and say that I'm interested in acquiring your business. And I saw that happen a lot of times and and yes, they'd sell their business, but part of the conditions of that exit process because they weren't fully prepared and properly prepared for exit, they were required to work an earn out sort of strategy, and an earn out is basically not on their terms, it's on the buyer's terms, and what I just observed time and time again is that earn outs and entrepreneurs are basically like oil and water, they just don't mix. And most of the business owners I saw working those earn out agreements, they just weren't completing them, either because the goalposts were changed or they just couldn't stand working with someone else. Working with someone else after so many years running their own show just didn't work for them. So I figured there has to be a better way. We have to help them set up and prepare their business so that they are ready for exit. And and I just started researching and I ended up joining the, the Australian business, through an old connection contact slash friend of mine and I said let's bring the business to the UK. So that's how it started. It's it's, kind of a new industry. 

A lot of business owners are not aware that they should be preparing their business to be exit ready. But if you know, if you say to most business owners, hey, look, you need to be working on your business and not in your business, they'll all give you a knowing nod. That's a concept they're familiar with. But most of them just aren't familiar with having to prepare their business in advance and by default the tendency is to leave things to the last minute. They'll say, hey, I'm not planning on selling my business. Yet you know I'll sell it next year and then I'll start getting ready. And they're just not aware that it really takes two or three years to get things set up so that they can actually maximize the valuation of their business and get that exit on their terms or exit like a boss. 

0:04:30 - Mehmet
That's a very valid point you brought, darryl, because I think the landscape changed because back in the days people wanted to do this business that lost for generations and you know they want to build some kind of legacy, kind of things. But I think you know the time have changed a lot. You know, and today, because I talked to a lot of you know people on both sides, like founders and investors. And the number one question that comes sometime what's your exit plan? Like, what are you planning to do with your business? Like, are you planning to make it public and then you exit yourself as a founder? Are you planning to sell it or merge it with another company? So why it's important, like not any time before, to get prepared for exit from day one. 

0:05:23 - Darryl
It's a great question and I take your point of looking back because you know, historically you know, someone had started business and their kids had come and take it on from them, which is a great theory, it's, you know. But kids, you know, as parents, we want our kids to go on and do things better than us often and they go and get educations and they go off and find their own way and they have different interests than taking over the family business. As entrepreneurs, as business owners, we set our business up and we we may fall in love with our business. We start it because we're passionate about it, because we want to make a difference. And a lot of people say look, daryl, I don't plan on exiting my business and I go sorry, I've got news for you Whether you want to or not, you're going to be exiting your business one way or another. When you do exit that business, you want to make sure that what happens after you exit is exactly what you hope would happen, whether that be looking after your family with you, if your family can continue on, and just the ownership of the business. You want to make sure that the employees and the future of the business is clear and not ambiguous because you've suddenly passed, let's say, the ownership I don't know. 

And what business owners struggle with is they always have those competing tensions between your legacy. I want to leave a legacy and I want to maximize value, and there's nothing wrong with that. They've worked hard, they've taken risks, so they're the competing tensions that business owners need to work with. One of the other things that they're often really interested in is hey, look, I want to look after my employees. My employees help me build this business. How do I acknowledge that effort and reward that effort of all the employees? And employee ownership structures are becoming more and more popular and especially here in the UK, the employee ownership trust is becoming more popular a way of exiting business, but it's not without its risks. 

Again, with an EOT, one of my concerns is that the founders are often still taking all of the risks, much like an earn out period after the business has changed hands. So the reason you want to get exit ready well in advance is to make sure that the deal does go through, because buyers who are looking up to acquiring businesses. They've got many choices. They've got lots of choices of what they can do and they want to take the easiest way possible and if your business is not easy to do a transaction with or if it's full of risks, they'll move on to the next business. So if you're a business owner and you're hoping to get tapped on the shoulder, you want to make sure that when they do that deal the business is set up so the deal can proceed as quick as possible because you've identified and addressed all of the risks that a potential buyer may perceive and when you have done that, you'll get a great value for your business. I know it's a long answer, short question. 

0:08:38 - Mehmet
No, that's fine. That's fine, darrell. Now let's take it step by step. I love to decompose things. So we just agreed now that they business owners, small business owners, founders, entrepreneurs they have to have this end in mind. Now, of course, there will be some stages and phases, so when I would say is the best time to start for this exit, let's start from there. 

0:09:15 - Darryl
Well, I'm going to say today is the best time. I think you captured it beautifully when you said begin with the end in mind, which is Stephen Covey's second habit, I believe, if you know how you want to exit. Most business owners when they start their business, they've got an idea. They're bringing a solution to market where they want to see an impact, so they want that solution to benefit as many people as possible. So that means they want to scale their business when they need to get to. If they in the early days, in the startup period, they need to be making sure that they're getting as many clients as possible and focusing on revenue growth and then profit growth At some point. 

Now most business owners never get out of that mindset. They continue. They just keep going through that growth cycle or just growing, growing, growing, whether it be sales, revenue or profit. They just keep thinking in that mindset I've got to keep growing and there's nothing wrong with that. It's a good thing to do. 

If you're starting to think about exit, what I encourage business owners to do is go okay, let me evolve my mindset thinking just one step further and start thinking about valuation growth or asset growth, but let's call it valuation growth to reflect the valuation of the business. 

Now, every time they go through a growth or planning cycle, they can start to think about what impact does this have on the valuation of my business? Now, the things that are going to influence the valuation of the business are the things that are going to make it more exitable or more attractive to be acquired. So if you make that mindset shift, as you can, early on, you'll start thinking about the valuation of your business. Now. Doing this has a nice little side effect. When your business is attractive to be acquired and it's exit ready, it is more profitable and it is a more enjoyable business to run, so that makes it easier to run and manage and own as well. So the sooner you do it, you're gonna have a more enjoyable lifetime as an entrepreneurial business owner in the interim. But all the benefits are there from a profit and growth perspective and valuation perspective. 

0:11:35 - Mehmet
Great, and this will bring me to the next question, actually, darrell. So from buyer's perspective, what do they look at Like? If you want to mention, like I said, the top three, I would say things, or let's say, kpis. I don't know like signals from the business that they say, hey, you know what, this is a good business. I need to be following these guys and put an offer on the table. 

0:12:09 - Darryl
So they look at a lot of things. I don't know if we can see that and how, if I can get the focus right. Yeah, we can there, we go, there we go. So that's just the inside of our business card and we can share this with your listeners with the download or whatever works for you. But we follow a process. 

We've identified this 21 topics that business owners need to look at to make their business more attractive to be acquired, in other words, attractive from a buyer's perspective. So what are the buyers looking at? They want to. Everything relates to risks to a buyer. They want to de-risk it as much as possible. So what are the risks of them acquiring the business? Well, the big one is just how dependent the business is on the owners or any other key people. What key dependencies are there in the business? Now, most people will talk about key dependencies on the owners, but we're going to have a look at other key people in the business. If it's a small business, how many key people are there in the business? As the business grows, the appropriate number of key people will increase. So we want to just make sure that there's enough key people in the business, if you like, so that they're not so key. So then we'll have a look at how well systemized and documented is the business. Does the business have keys, methodology, systems and processes? Are the clients and customers of the business? Are they coming to the business to get the product or the service or the methodology that that business is known for? Or are they coming to the business because Joe Blogs works there or Jane Doe? Are they coming to the people or are they coming to the methodology? 

Then we want to have a look at the staff. We'll have a look at the staff. Is the staff turnover consistent or are the staff loyal and they locked in and they long-term and we got low staff turnover? What's the revenue constructed like? How is the revenue constructed? Is it lumpy or is it consistent, predictable and reliable revenue flow? We want to look where the clients come from. The owners will be going. Where are the clients coming from? Are all the clients being sourced from one area, from the website only, or are there multiple channels? A lot of professional services go there proudly. 

All of our business comes from referral. From a buyer's perspective, that's a really weak answer because it says referrals are unpredictable and referrals are dependent on key people. Referrals are being referred to individuals, which just lock in key people. We talked about process. The next thing we want to have a look at is there any IP in the business? Is the business got any IP or IP intellectual property that is protected or the business is known for? Then we want to start to have a look at how scalable is the business. Can the business plug and play elsewhere? Does it have a brand associated with it? Is the brand connected to the intellectual property or is it just based on personal reputation of individuals in the business? Is that reputation disassociated with the individuals and become associated with the brand? 

There's seven key things that business owners really look at, or they fall into those seven categories. Just to quickly summarize because I didn't label them. First one is revenue. What's the revenue look like? What's the loyalty of the people? What's the staff make up, look like Systems and processes? Is the whole business documented? Everyone is doing things the same way. Ip is the next one, or product. Have you got a product that you know on for? What are your routes to market, your channels to market? What's your brand? Is the 6-1 and is the business scalable? Can I plug and play and re-duplicate or replicate the business in several areas, so they're the headings that a buyer will look at After. So there's a lot to this. After they've ensured that there's governance and good record keeping and everything is legally in order, all of your compliance and hygiene factors are in place. 

0:16:23 - Mehmet
Yeah, of course, that is like, as we say, the basics. They should be part of any business, which is, of course, bookkeeping, legal and so on. Now, what I'm interested in from your experience, like, do you see, or is there a way? Let me ask it this way so there's something what we call selling the business. So I sell the business, and sometimes we hear about what is known as merger and acquisitions. Right, so, from the area you deal with, like, is it like completely sell the business and let it be run by some new owners, or selling it to become part of, maybe something bigger? 

0:17:11 - Darryl
So there, what I think you're talking about is the various options you have when you exit. Exactly, yes, let's talk about that. 

Yeah. So who do I sell to? So what we explore is when the business owners and we start to do some exit planning, we go. Let's first thing we need to do is check in on your energy. What's your energy like? And the owners of the business can be, have an energy or a mindset of. I've taken this business as far as I can, or as far as I want to. I'm good, I'm happy, I've got my retirement planning all under control. I just want to hand over the reins to the next generation, whether that be the management team, the new owners, whatever it is, I'm good, I'm happy to step down. I'll assist with the transfer to make sure everything goes smoothly. So there's a gradual step down. So we group all of the you know a certain number of exit options in this step down category. 

Another category and number of options fit into when the energy of the owners is you know what. We've taken the business thus far, but we're not done yet. We've still got more to do. We're really excited about what we can achieve. What if we got some investment in and we scaled the business up? We stepped it up and then went out with a bang, went out with a yee-ha type of thing, get everyone involved. So there's some exit strategies where they want to step up so they might get some funding in and then crank it up and then sell the rest of their business. So there's two different things, two different groups of options based on the energy of the owners. 

Unfortunately, there's a third set which we call fade away, and that's when the business owners didn't plan or think about their exit planning until too late and they realized that they've got nothing to sell. There's just no equity in the business, it just represents too big a risk for buyers, or there's just no asset there for anyone to grab on to. So step up, step down or fade away are the three broad categories. And then the next sort of layer, if you like, depends on where the business is in its stage. A small business will only be attractive to you know, get some mum and dad type investment from family and friends. As they get a bit bigger they'll become attractive to a trade buyer who's just a competitor, who wants to really take access to your buy, access to your clients, rather than build it up themselves. 

And what we aim to do by working with our clients and get some good, solid exit planning up front is what we can do is we can work with the business to make it attractive to a strategic buyer and when I say strategic buyer, I'm talking about someone who may be coming in from another country who's just looking to get access to a new marketplace or access to a new product and put this new product through their distribution network, or vice versa and they're just saying, hey, look, we can either invest and build from scratch or we can buy. 

And if we see an existing player here whose robust sound got a great reputation, it would just take us too long to build that up, so let's buy it in and it's a strategic fit for our business and where our portfolio potentially. Yeah, so we're looking to. Ultimately, the ultimate outcome is to sell to a strategic buyer and in some situations, the founders of the business might get two bites of the cherry, where they sell half of the business, which is different to an earn out, but they sell half, and then three years later they're part of the management team growing the business to the next phase. Then they'll sell out in two or three years time with that step up type of approach. 

0:20:55 - Mehmet
That's great, that's great, darryl. Something came to my mind just now, because you mentioned about the founders or the owners. 

I'm sure you have seen this many times in your business. Sometimes I hear from people and I know from family and friends as well when you build a business yourself, you become sometimes very attached to it and you become so emotional about it how or what these business owners should do so they can de-attach their. I can understand, by the way, I can understand, as they said. It's like a blood and sweat to build this business and you spend a lot of time, but the time is now here for us to sell. What should we do to become more agile to do these let's call them sometimes tough conversations. What advice can you give here, maybe from a psychological perspective or maybe, of course, being pragmatic also during the negotiations? 

0:22:13 - Darryl
The first thing you can do with being pragmatic during negotiations is you get a team with you. If you try and do this yourself, you're crazy. You may be great at selling your product, but when you start thinking of your business as the product and you're only ever going to sell it once, you make sure you get it right, you get the right legal team, the right corporate advisors alongside you to go in and play bad cop if you like and negotiate on your behalf, because they don't have emotional attachment to your business. Now, I absolutely get it. Business owners do. They become attached to their business. It becomes like their baby and they treat their business like their baby. And, especially when they've been running it for so long, they do get very attached and sometimes that's especially true if their name is associated with the business. They see their name on the wall of vans, trucks, buildings and what have you. They feel a connection to that. 

Now what we need to do is what we know about entrepreneurs is that entrepreneurs are very visionary people. They're dealmakers, they make change happen. So for an entrepreneur to be able to let go of their business and move on to whatever's next in their life life after work, or new venture, new opportunity, whatever it is, they need to have a vision of what's next. So one of the things we do is we'll work with the business owner or the owners to help them identify what's next for them so that they can see a vision and start to form a vision of what they're moving on to after their business and entrepreneurs, once they see that they start running towards it, so that helps them let go of the business and move on to something new. 

Otherwise, they're always going to be struggling and they'll be getting in the way. We find that's the biggest hurdle when they don't know what they're going to do next. That's the biggest hurdle to them being able to energetically complete the deal, and something always happens. Something always gets in the way of them completing the deal because they just don't know what they're moving on to. So I think that's the biggest tip Know what they're going to next, and that'll help them let go, because one of the other things is that business owners, entrepreneurs, founders, basically control freaks and we need to help them overcome that as well. So sometimes coaching and support will help them get through that. 

0:24:34 - Mehmet
Oh yeah, indeed, they are control freaks. I can say that with all confidence. I would say Now, you gave some hints about how they can get the best. Okay, so you mentioned this in a sense, you said they can have some lawyers to play bad cops and so on, but I'm sure also they would be useful to maximize the size of the deal. Let's say Now in general what other strategies business owners they can use so they can get the exit on their term, both from financial perspective and from terms and conditions. So what are some of the strategies that they can use? 

0:25:24 - Darryl
Well, I think the best strategies have the right corporate lawyers on your team, an experienced lawyer who can make you aware of all of various terms that are being proposed that the buyer puts to you and help you negotiate with what's reasonable and what's not reasonable. They can advise you on what terms are normally seen out there in the marketplace and, as I say, because the owners, if they're only ever going to do this once, they're just not familiar with what terms are reasonable and unreasonable. So, yeah, I think the best thing is having that team. The other thing is doing all of your homework in advance. If you've addressed all of the risks, as we were discussing earlier, and made the business less dependent on you, made the business more resilient, having it systemized, demonstrating that you've got a management team in place that can run and set strategy and complete strategy, then the business is fairly robust and resilient in any case, which means you've got half a chance of attracting a good strategic buyer. 

But you still need the right team in place. There's no getting around it. You don't want to be doing this yourself. You're going to do it once in most situations. Do it right, spend the money on the right team, because if you don't, you may find yourself with exposure and liability and warranties for years after you've exited the business. So yeah, there's still plenty of risks if you don't get it right. Absolutely. 

0:27:07 - Mehmet
And this is common sense in my opinion, because you don't want, especially if it's the first business that they are selling so they need to be surrounded by expert people so they can guide them. So 100% on that. Now let's have a little bit of a look into the future. So how are you seeing, or you're expecting, this landscape of selling businesses? How is it going to be evolved? Are we going to see more business owners prepared to really exit? What's happening in that? That's a really good question. 

0:27:51 - Darryl
I think over the next 10-ish years, max, we've got the baby boomers filtering out. So over the next 10 years you've got a massive transition of wealth for what the baby boomers have built over their lifetime and their careers and there's thousands of businesses that are going to change hands. Coming up behind that you've got the Gen X, who are pretty close to baby boomers, but then you've got the Gen Ys and the next generations after that who I think, have some different attitudes. If you just have to look at the way they expect to be employed, their approach to employment, you'll see that the generations after the baby boomers, they're quite happy to keep changing roles every year or two. So mindset and approach to business ownership is going to change. Well, is changing, and that's where employee ownership I think is going to continue to have a big impact and an increasing impact. 

I can see more businesses being exited to things like EOTs and a complete exit. So instead of just having a portion of the business that's employee owned, I can see over the next five to 10 years just more and more businesses go down that route where they complete an earn out. So they go down the employee ownership route and they basically do a self-controlled earn out, so selling to the employees of the business. It's friendly buyers. It's the annoying management team that you know and you can ease yourself out of that. We can use the step down strategy that we talked about earlier. I can see that being more and more. We're already seeing it picking up in popularity today, but I can just see that continuing to be a pathway for many businesses being sold and I can see it being a structure for businesses being started to set up some. The structures will evolve and develop so that they're quite easy and affordable to create on startup. So I can see that happening as we move forward. 

0:30:16 - Mehmet
Definitely, daryl. You know, like, and again, you know things are changing very fast and I can see also people to your point. They don't want to stay in the same place for long time. This is definitely. I'm seeing it everywhere. Funny enough, it's even happening with, you know, the, not only with the millennials and Gen Z, let's say like, even with the previous generations. So even these guys, they started to figure out, hey, like, why I'm stuck like 20 plus years in the same place, or you know. 

So it's now rarely you see someone get stuck over there and everyone is looking either to start their own business or, you know, being part of something small. And I think, yeah, this, this some you know it would be nice to see. You know what you're saying about. You know when the owners will sell to the employees, which is the best, because I think it's a win-win for everyone from that perspective. So we talked about a lot of things today, but you know, like, if, if, some, if you want to give it like an advice to you know, new entrepreneurs who are starting to build the business today. 

Like what do you tell them about? You know all. You know the thing that we talked about. If you can, you know, summarize it in any like two, three minutes as an advice for people who can at least start it. 

0:31:46 - Darryl
Sorry, mehmet, has my screen altered at your end? I've just had a Okay, yep, do you want me to answer it? So final advice for business owners who are starting to think about succession allow yourself enough time. What happens with businesses that are preparing for exit? If you really need to get three years of preparation under your belt, we're talking about getting your financials, getting a good patris to your financials. 

Buyers will look back beyond. You know three years or more. So you want to have your financials to predict and get that pattern of revenue and growth so that your the future is is looking like it's going to continue on that same path. What buyers are looking for is they want assurance that the trend in revenue and profit growth is going to continue. So you need to give yourself enough time to prepare if you really want to get that exit and minimize your risk post ownership change. 

So really, the biggest takeaway that I want owners to take away from this is to give yourself enough time and start looking at getting ready three or more, if you can, years before you even plan to exit, because the biggest reason you want to start now is because what most business owners miss is if they're exit ready, then they'll be ready for that unplanned approach where someone just comes and taps you on the shoulder that you weren't expecting, and if they come and have a look and go, hey look, I'm interested in buying your business. If you're already exit ready, you've got a half a chance of completing that opportunistic deal, even though it may not be ideal timing. It will have caught you off guard, but if you're ready, you may be able to take advantage of the opportunity of a lifetime. 

0:33:44 - Mehmet
Great, great, great, Darrell, great advice this is a question I asked at the end when people can find more about you? 

0:33:54 - Darryl
Succession Plus or successionplus is our website. So if you just go to successionplus you'll find us. We've got. We're on LinkedIn. I'm on LinkedIn. If you see my name there on the screen, there's only one of me on LinkedIn, so it's a fairly unique name. So if you just search for that name on LinkedIn, you'll find me, and then it'll be easy to get in touch from there. 

0:34:20 - Mehmet
Don't worry about that, darrell, because usually I put the links in the show notes. So no worries, so the audience can easily find that Anything I missed, anything that I should have asked. 

0:34:35 - Darryl
Look, I think you've asked some good questions there. You've covered from when should we start planning? You know the benefits of planning. I think the end of getting an exit plan is that you will actually be able to exit on your terms and you'll de-risk your exit. I think that's the biggest thing that perhaps we glossed over is you want to de-risk it for yourself as much as anything Like once you've done the deal. You don't want to be hanging around the business for two or three years on an earn-out. Deferred payments are a different matter. You just get the monies more guaranteed and you don't have to be as involved in the business. But if you've got some sort of earn-out demanding your attention for the next three to five years, it's just all. The risk is on you because you no longer own the business. So the more planning, the more we can de-risk it for you. That's probably the biggest tip that I can share that we didn't really cover, but I think you've been pretty thorough. 

0:35:35 - Mehmet
Okay, good, I'm happy to hear that from you, darryl, and again, thank you very much for your time today, and I think this is a topic we didn't cover much before. It was just one question, sometimes in a whole episode, but today the whole episode was around. You know exit plans and which is, I think it's very important aspect for any business of any type. But, because you know the show, we focus on first-time founders, on entrepreneurs in any field, but mainly also like technology. So this was very I mean, even for me, like I learned a lot of things today. Thank you for the information and the knowledge you shared, darryl, and, as usual, this is the way I ended all my episodes before. So if you are new here, you just passed by. Thank you for passing by. I hope you become a loyal fan. 

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