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

Jim James: 0:01

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 files. We are going to talk to Darrell Bates Browns-Sword, who is the UK CEO of a company called Succession Plus. We're 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. Darrell, welcome to the show.

Darryl Bates-Brownsword: 0:38

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

Jim James: 0:49

Well, but also plainly, you're not originally from Oxford, you're from Australia, right? 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, 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 and some guidance on what they could look at if they're looking at exiting their business. So, darrell, tell us first of all to sell or to find a succession. Which is better? Which?

Darryl Bates-Brownsword: 1:47

is better. You've asked. You started with a really tough question. I don't think there's an absolute answer whether we should sell it 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 that We've got the balancing act of? 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. Look, they get. Sometimes these guys, these business owners, entrepreneurs, get tired and they get stressed by their business and they want out. They go. Look, I just want to sit on a beach and drink peanut collardas. That just becomes a really nice aspiration. The reality is, in two weeks sitting on that beach, they're going to get bored, stiff and they're going to want to do something else. 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, 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 two-step process. How do I succession, then exit, what's my timeframe that I'm going to do those, and how do I plan and structure it so that, when everything comes, I'm on the front foot and I'm doing it on my terms?

Jim James: 4:01

Daryl say. You mentioned a couple of things there and I like to take those in some kind of sequence. You mentioned timing. I am 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 pina coladas and feeling you know the warmth of the of the bar me and get the towels ready and starting this process with the company like succession plus?

Darryl Bates-Brownsword: 4:34

The more I do. This I'm gonna say as soon as possible, because having a business 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 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 you know their mindset is well, I'll just keep growing it and 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 increase 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, yeah, I the worst case scenario. I think you need to allow three years to start planning your exit journey so you prepare your financials and get everything in order. But the best case scenario is now. Let's start now so that I I know the sort of records. I've got some board history. I've got some governance, I've got all of the systems and processes, I've got structures in the business. I've I've mapped my, my I p, all my intangible assets. I know that you know 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. Yeah, 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 you know they. They ask for information and it just takes too long to get it, so they get fearful Because they go. If I haven't got this information available, what's the rest of the business look like?

Jim James: 6:16

Tell, 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 five to seven minutes summary so that anyone that's thinking about x-tink and take some quick notes?

Darryl Bates-Brownsword: 6:38

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 gonna move on to next. So there's a big red flag, if you like. The way we look at it, succession plus as 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 be next ready. Those 21 steps are broken down into five stages. So let's talk about the five 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 one of the clues to us is what, now we've got some realization about what the business is worth to someone else, we can have some assessment is 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 is, when you talk to business owners, you go hey, look, at some point you're gonna exit. Do you have a valuation in mind? Some people go look, I want to sell my business for x just because there's an aspirational number x, 510, whatever it is, 20 they've got a number of what they want to sell the business for. Some of the number where they go, hey look, the business owes me. So you know I've invested 20 years in my life building this video 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 what they might solve their business. A buyer couldn't care less about what you think that you want from the business. The buyer is 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 tied it up, all the financials, we've got it operating at best practice, so we the profit side of the business, the revenue tied it 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, ie 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 one. Let's identify the value. We then move on to stage two and go hey. Stage two 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 in order. 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, or 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 three is all about maximizing the valuation of the business, and that'll take really a minimum of two years. But 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 an 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 four, I then move on to stage five 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 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, the third generation blows it. Well, if we see this in time, we can go look, 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. What are the different advises I need to work with throughout those five stages, because they change as I go along the way. So that's it, the five stages Identify, protect, maximize, extract and then manage value for my business.

Jim James: 12:46

That's so comprehensive. That's wonderful and really reassuring as well for anybody listening. I'm sure that there are these five stages, not just a sort of a haphazard, as you say. Put together a PowerPoint 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 also. It's a fundamental one if you do want to get out. Not every company can find a ready buyer, an external buyer, sometimes. That often comes with an earn out anyway, which can tie the owner into the business for three to five years. So can you just take us through that then, daryl?

Darryl Bates-Brownsword: 13:38

So we can have an earn out. We can have an EOT, which is an employee ownership trust, which has become popular in the UK since 2014,. And we could have an MBO, where we're 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 three 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 right through to listing it. But I reckon, from an energetic perspective, they fall into three main categories, and the first one is where the owners have 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 do want to go and drink. Our Pinnacle Art is 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.

Jim James: 15:35

I want to go out with a bang.

Darryl Bates-Brownsword: 15:36

Let's go 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 all. We'll just go out and stall. So let's step it up. Let's crank it up. We're going to go for the three, five 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. Let's step up and 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 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 there are the two common ones that we deal with. The third 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 businesses is too revolved around me. It just depends on me too much, or I miss some industry changes. Blockbuster videos are 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 back down and fade away. 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, ie 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 get that heads up in that planning and go well, this is going to happen over the next five to seven years. How do I do it tax effectively and I can still plan for a fade away. So the energy is going. 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 is at.

Jim James: 18:22

And Daryl, what about communication? Because there's 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 team, but obviously they need to let it be known and be prepared. How do you counsel that?

Darryl Bates-Brownsword: 18:48

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 go look, the owner is getting a bit older, they've got to be thinking about it? I'd be thinking about it. What do they do it? 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, sunday 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 let's status quo. 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 fewer people as possible, and our experiences in 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 what have in the business that extend way beyond a management team. You really can't afford to let them know. The deals fall through. If they get worried and start thinking about 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. If we start sharing information ahead of time, we'll create a whole lot of stress and worry with people. They'll lose it focus, they'll lose attention, revenues of dip deals go south and deals fail. And then all that stress for no reason. As hard as it is and this will be really tough on business owners who've 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 risk 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 seem fit. 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 doesn't 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.

Jim James: 21:52

Darrell Bates Brown Sword. 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?

Darryl Bates-Brownsword: 22:07

Briefly, is that because I've been babbling on too much and I'm asking what's the matter?

Jim James: 22:10

I don't want to be impolite, but I just I try and keep the show to 20 minutes.

Darryl Bates-Brownsword: 22:15

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. The sooner you start this, the better. 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 pill. The business isn't dependent on your involvement on a day-to-day basis. As soon as possible.

Jim James: 23:05

Darrell Bates brand sword in Oxford. I told you smart people were in Oxford. How can people find out about you?

Darryl Bates-Brownsword: 23:12

Look, our website, successionplus, 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 where it all started, or the other site Way to Find Me is LinkedIn. There's only one Darrell Bates brand sword on LinkedIn.

Jim James: 23:40

Darrell, thank you so much for joining me, and that message about getting started seeing the exits before you enter the business is really sage advice. Thank you so much for joining me on the show today, thanks for having me, Jim.

Darryl Bates-Brownsword: 23:53

I've enjoyed our chat.

Jim James: 23:55

Well, me too, and I've learned a lot. And if only I'd known what Darrell has shared today when I started my first business back in 1995 in Singapore, I would have, 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 Darrell 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 listen to, and until we meet again, I just encourage you to keep on communicating. Thanks for listening.