Marketing podcast, PreneurCast, is for entrepreneurs, by entrepreneurs. Author and marketer Pete Williams and digital media producer Dom Goucher discuss entrepreneurship, business, internet marketing and productivity.
This week, Pete talks with Jack Delosa, who supports entrepreneurs with his two main ventures The Entourage and MBE Education. They talk about the stages that every business goes through, and the challenges that entrepreneurs face in each of those stages.
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Pete talks with Jack about the challenges that entrepreneurs face at every stage of business
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Episode 074:
Interview with Jack Delosa
Dom Goucher: Hi, Dom here, and this week, Pete is interviewing Jack Delosa, founder of The Entourage and MBE Education. Two companies set up to help support and educate young entrepreneurs under the age of 40. In this interview, Pete and Jack talk about all different aspects of business: the stages that a business goes through from its foundation right the way up to an exit strategy, and everything in between. I’ll hand you over to Pete and Jack.
[Pete’s interview with Jack starts]
Pete Williams: Jack, welcome to PreneurCast. How are you doing?
Jack Delosa: Very well, man. How are you?
Pete: I’m doing very well myself.
Jack: Good, good.
Pete: Instead of me singing your praises, I always like to put people on the spot and make them sing their own praises. Do you want to give a bit of…
Jack: Which is a terribly awkward thing to do.
Pete: I know, I love it. It always makes me feel good at the start of the conversation to get on the front foot. But do you want to give a bit of your background and all that sort of stuff?
Jack: Yeah, very quickly. My introduction to business was quite stressful. Bought into my first company at the age of 18, and it went absolutely terribly. Going backwards for about a year there, not taking money off the table, losing money, all of that sort of stuff, working incredibly hard. I then went on to a second and third and fourth business.
But to cut a long story, what I’m doing today is we’ve got a couple of brands: one being MBE Education, which focuses on helping small to medium businesses raise money, buy businesses, and sell businesses; and then we’ve got a company called The Entourage, which is Australia’s largest educator and community of entrepreneurs under 40, doing our best to educate the next generation of entrepreneurs.
Pete: Yeah, and this is the really bizarre thing; those two things you just spoke about there culminated in how we know each other. It was really bizarre because back in one of your past lives, in one of those businesses, I was actually a client. My telco company did some stuff with you guys in a call center-type function. Then I was invited after speaking at an event in Sydney to come along to one of The Entourage events in Melbourne that you had recently.
I sat in there for a few hours and saw one of your presentations, which is what sparked the topic for today’s conversation. But it was at that point I kind of clicked; I was like, hang on, I knew who you were as part of The Entourage. And then it clicked that your history with the call center that we worked with six or seven years ago, I think it was.
Jack: That’s right. And that, yeah, I was probably about 18 or 19 at that time, so I remember you as the guy who used to ask me questions that I didn’t know the answers to.
Pete: Oh, man, I’m sure the tables are going to turn around a little bit in this conversation. The really cool thing that you spoke about in that presentation at The Entourage was about the stages of business growth. From what I see from the outside, one of the core themes with The Entourage is to help people have an idea for a business or somebody who’s just started out, whether it be an internet-based business or mechanics, or someone who’s manufacturing light globes. It doesn’t matter what business they’re in, you come along…
Jack: Correct.
Pete: … hold their hand, for want of a better term, and help through those growth stages to the point where, obviously, there’s an exit on some degree. Is that a fair analogy of what The Entourage is all about?
Jack: Yeah, absolutely. That’s exactly right. We look to partner with early-stage business owners who are either in the seed stage or start-up phase, or maybe even the growth stage of their business. We come in and have a discussion around how do we best help them commercialize this business, how do we best help them maximize the value of this business, and map out a three to five-year strategy, right through to the point of an ultimate exit, three to five years down the track.
Pete: The thing that resonated with me a lot, watching you speak, and we’ll delve into it for sure, I’m going to pull this out of you on the conversation today; so many people I know that I see and speak with, because I’m more about the marketing consultation stuff, and I take on odd client that I consult with and things like that; it’s very much about the ‘let’s get a client in the door.’
I don’t really necessarily directly, as my core focus, help people give that exit path, although I offer that same similar advice, and that’s something I really liked about what you guys are doing with The Entourage. You’re helping people just know the outcome of their business before they start. I always talk about knowing the outcome of your marketing piece before you start.
You sort of have that, “Okay, let’s have a clear goal of where the business needs to go,” and then backward-engineer the phases that you’re going to go through to get to that, and then make sure you put the right things in place. So when you do need to exit, you’re ready to exit and you’ve done the right things to get there.
Jack: Yeah, both are equally important. As an early-stage business, you’ll thrive or die based on how much cash flow you are able to generate in that business. So, in the start-up phase or the growth stage of a business, 80% of the entrepreneur’s focus does need to be on sales and marketing activities and bringing revenue through the door.
When we extend the conversation and talk about capital raising and exit strategies, we do that because, if you look at the BRW Young Rich list, or you look at any high-level entrepreneur throughout the world whether it be Richard Branson or Warren Buffett or Donald Trump, even Janine Allis be closer to home, an amazing Australian female entrepreneur who recently sold 65% of Boost Juice for $65 million dollars.
Pete: Not bad.
Jack: Yeah, that’s right. If you look at where a lot of these entrepreneurs are actually create their wealth, it’s often, the cash flow and the business certainly helps; but the number you see next to their name on a BRW Young Rich list is often tied to the value of their company or the value of the company they have just sold, in which case they have cashed out of it.
But yeah, it’s not very often you see their wealth tied to the cash flow they’ve been able to generate; it’s more about the asset value of the business which they’re in, or the business that they’ve just sold.
Pete: And that’s the importance—because I think one of the things you spoke about was the multiples of what business is selling for these days, and I’d love to explore that. That’s something we haven’t really spoken about on the show at all in these terms. So, having that clear direction of that exit because there’s cash flow.
There’s plenty of businesses out there that the entrepreneur, they aren’t as happy to have and just keep running them in the background, feeding them income. That’s what a number of my companies are doing for me, it’s just feeding me that cash flow that allows me to do the crazy shenanigans that I enjoy doing and ideas and testing new stuff.
Jack: That’s right.
Pete: It’s not necessarily an exit for me. The conversation today is not about this has to be the one way business has to go; but if you’re going to exit and you want to have a business that’s worth a lot of money that you can exit, you’ve got to be very strategic about it very early on.
Jack: Absolutely, and you’re absolutely right, mate. You mentioned The Entourage earlier, and The Entourage is a business that we haven’t set up for commercial purposes. You don’t start selling education to entrepreneurs under 40 to make money, if that makes sense.
You do it because you love doing, and you want to contribute, and you think it’s necessary. We do talk a lot about exit. My differentiator is, if you are in this business to make money, to make big money, then you might want to consider an exit. But if you’re in it for the love and the passion of it, then why on earth would you look to exit?
Pete: Yeah. With that thing, I remember one of the slides that really resonated with me that you spoke about; I know it’s going to be hard to articulate a slide over an audio podcast, but you had the graph of walking through the phases that a business goes through if they’re looking at having exit down the track at some point, whether it’s three, four, 15 years away.
That was the thing; I really like the way you articulated that on stage and I’d love to discuss that, and go through those phases and what you think the business owners should be focused on at those stages.
Jack: Absolutely.
Pete: Without that context and understanding, I think start-up entrepreneurs and even mature entrepreneurs who just have a business that is really just a job; people have heard this so many times but don’t really live it or engage with it. Your business is either going to give you a residual income with freedom.
It’s going to give you a big chunk of cash at the end, which is free, or it’s going to give you a permanent job which you’re stuck to. One of the things you guys spoke about, which is really cool, is how your mindset has to shift as your business grows. If you’re willing to have that exit, you have to change what you do as the entrepreneur. I’d love to go through those phases if we can.
Jack: Yeah, totally. And just on that, Pete, I’m more than happy to send over an image of that graph, if you like.
Pete: Awesome.
Jack: If you’re able to put it below the podcast or whatever so that the audience can see it. More than happy to do that.
Pete: Yeah, sure. We’ll throw it up on PreneurMedia.tv, which is where the podcast lives, together with all the show notes and archived shows. For those who are just joining us, PreneurMedia.tv is where the transcript of the show with Jack will be, and that graphic as well.
Jack: Fantastic, Pete. The mindset of the entrepreneur does need to shift throughout the different stages because what we’re doing in the start-up phase is very different to what we’re doing five years later in the exit phase, for instance. In the start-up phase, you’re the person doing everything.
You’re the admin assistant, you’re the sales guy, you’re the business development manager, you’re the recruiter, you’re the bookkeeper. You’re wearing all the hats. But as we go up this growth curve, and as we go from stage to stage, you should really look to dilute your involvement in the day-to-day operations of the business; and that does involve a change in mindset and a change in approach to how you approach the business.
Pete: Yeah, it’s also the things you put in place, too. Because if you know that and have this stage or awareness of the stages, that if I’m going to try and exit in five years, in three years into the business, I have to have this business doing this so I can focus on these things which we’ll speak about in a moment.
Which means, in Year Two in the business, you have to be doing certain things so you’re set up that Year Three gives you what you need to be able to do what you need to do. Now that sounds very esoteric and weird with that kind of talking through the stages and all. It’ll make sense in a moment of rewind at the end of the show. So yeah, Phase One, what’s the starting point for most businesses?
Jack: The first stage of business is obviously the start-up phase. Now, my favorite definition of a start-up is this: It’s a teenager that doesn’t know what it wants to be when it grows up. It wants to grow up, but probably wants to grow up in a hurry. It just doesn’t know what it’s going to look like when it does.
The number one challenge, which the audience will see on the diagram that we’ve given them, the number one challenge for businesses in the start-up phase is that we are simply uninformed. And what we mean when we say ‘uninformed’ is that our level of market understanding, our level of consumer insight, our level of product-to-market fit, our message-to-market fit is just simply not what it is going to be in Stages Two, Three, Four, or Five.
Jack: We say that the number one objective of a start-up business is to fail, and fail fast; meaning what you’re going to market with, chances are it’s not going to work the first time. So you want to do it quickly, you want to do it cheaply, you want to do it as lean as possible, and you want to learn from that.
And so, you’ll deploy a strategy, figure out what doesn’t work, bring it back in, make some changes, deploy another strategy, figure out what doesn’t work, bring it back in, make some changes. It’s just this constant cycle of iteration in the start-up phase, because we want to fail fast so that we can ultimately reach a viable business model before we run out of cash.
Pete: From my perspective, there’s two things you’re testing in that phase. I would suggest from my experience—and I love yours, because obviously, you deal with a lot of businesses as well; you’re testing the actual offer. And what I mean by ‘offer’ is the actual product.
What is the thing, the box of things you’re selling that obviously you have to change to meet the marketplace but also the message to your market, the actual mediums, the sales. There’s the communication; the way you sell it has to be tested as well. They’re probably the two things you’re continually refining at the same time as you’re going out, yeah.
Jack: Hundred percent. Yeah. And in this discussion, we’ll talk about building value and minimizing risk, and doing all those things. I’ve suggested, in the start-up phase, you don’t even think about that; you just think about what is the quickest path to profitability. That should be the focus in the start-up phase.
Pete: Yeah, completely agree. So once you’re going through that, and that might take six months, might take 18 months, might take a couple of years depending on the business, obviously; these phases aren’t necessarily a calendar period.
You don’t go, “465 days; I’m going to be stuck with this business model, and I’m going to go with that.” It’s obviously depending on the business of where you’re at, of course.
Jack: That’s right, that’s right. And you won’t necessarily go through Stages One to Five, either. The guys following along at home, if you look at the diagram; you’ve missed the capital raising in the third stage, you might actually raise capital in order to start up a business.
So it’s not even necessarily sequential. What I say is, every model is useful, every model is flawed. Let this be a guide as to what are going to be the challenges and what need to be the focuses throughout each stage, but you might do this in all sorts of orders.
Pete: Yeah, exactly. If you’re going through this hypothetical sequential manner, you fit in the perfect box; what happens after you’ve gone through that start-up phase from your experience dealing with all these companies? What’s the next direction?
Jack: At some point in the start-up phase, you’ll get that product-to-market fit, you’ll get that message-to-market fit. As you said, your sales letters and your communications and all that should start to line up. At that point, you’re heading to the growth phase.
This is where you’ll see your bank account and your profit-and-loss statements start to go up, which is always a lovely surprise after you’ve spent the start-up phase probably watching it go backwards. So, throughout the growth phase, what it’s about then is scale. How do we scale as effectively as possible?
If you have taken the time and taken the risk to find and discovered a viable business model, it would be such a waste to just let it sit there and take over generating $100,000, $200,000, or $300,000 in profit every year. If you’ve got that viable business model, your next focus needs to be how do we leverage this?
How do we maximize it and how do we grow it to its fullest extent? The number one challenge we see in businesses in the growth phase is that they are unleveraged. By that, we don’t mean that they need more debt; what I mean is that their sales and marketing strategy is unleveraged.
You’d know yourself, Pete, most businesses, most business owners might have one meeting with one person, another meeting with another person. They might have 10 meetings with 10 prospects in the hope of getting maybe one or two clients; in which case, they’ve invested maybe 10 or 20 hours and ended up with one or two clients.
So the number one strategy or the number one driver through the growth phase needs to be, how do we leverage our sales and marketing? I’ll give you two ways, very quickly, of how I suggest you do that. Firstly is through strategic partnerships. How do you partner with complementary companies that can drive your business on a continual basis?
And the second way to leverage your sales and marketing is through PR, which is something else I know that you specialize in. How do we get visibility and traction through the media so that opportunity starts to find us? Customers, investors, joint venture partners, staff—how do we put ourselves in a place of visibility where those sorts of opportunities start to find us?
Pete: Let me ask you this question, which is probably a different type of question: What is it that the calendar and the diary, the actual actions the entrepreneur’s doing differently between those two phases? Obviously, in Phase One, they’re very much face to the grindstone, writing the sales copy maybe, or at least doing a lot of the testing and the marketing and the back-and-forth and adjustments.
In Phase Two, they’re obviously putting more systems in place, maybe hiring more staff. Is that where that working on the business and growing the business comes into from a traditional sense in Phase Two, or would that be part of Phase One as well? Where does that fit?
Jack: In Phase One, you’re figuring it all out, and then you figure out the formula. You figure out, okay, I can generate this. I can sell it for this if I say these people will be interested in it, and hopefully, it’ll end in a purchase and an ongoing client.
In Phase Two, we’re looking at, now that we’ve got that, how do we start to ramp it up and make more noise about it, and gain more distribution through more companies or more media agencies? How do we get the megaphone and start to make more noise about it?
Pete: So, you’re hiring sales staff…
Jack: Absolutely, exactly right.
Pete: They replicate it, they’re doing that script. We talk about this quite a bit on the show, having replicable systems like sales scripts everyone knows works. These are the things that work to sell our offer to our marketplace. You have that in place and then obviously, you’re moving away from the actual face-to-face selling, and you’re worried about how do you fill up that funnel more.
Jack: Totally. The growth phase is where you should start writing—all of your systems, we spoke earlier about the need to dilute your involvement as you go through the stages. That should begin now in the growth phase.
If you’re bringing in more cash and you’re able to bring on more people, etc., then everything from operational systems through sales systems and marketing systems and HR systems should begin to be documented so that you can further dilute your involvement.
Pete: So, once you’ve done that and you’re [done with] your systemization, you’re going for that Phase Two, and you’re screaming, you’re getting much more leads and consumers and customers and prospects into your marketing funnel through the growth phase, and your business is now growing beyond just you; it’s giving you that expansion when you open a second office or a third office. What comes next in this particular model of growing to exit?
Jack: As a business grows, what is counterintuitive to a lot of business owners at this stage of the game is that growth devours cash. As you bring on more staff, as you need more infrastructure, as you need a heavier Web site, as you need a heavier online strategy, a lot of the time, more product, more logistics; a lot of the time, growth can devour cash.
So we then enter into a phase of capital raising, and this is where we might look at our external investors or external lenders that might want to inject some capital into this business to further fuel the growth and development of this business. Now typically, businesses will raise money for one of two reasons.
The first reason is that they want to accelerate their growth even further, and they know if I inject a $100,000 here, hopefully $150,000 will come out the other side. The second reason is to facilitate existing growth. So our growth curve is as steep as it possibly could be, we certainly do not want to spend any more money on marketing because we couldn’t handle any more customers.
But one thing we do need is we do need to shore up everything we’re doing internally to be able to facilitate the existing demand, which is coming into the business. So that’s stuff like investing in systems, investing in your web site, investing in more staff, etc.
Pete: Now, to think it’s, as you said, counterintuitive; and I’ve experienced this in some of my companies where you go through Phase One, it’s a little start-up and it’s making some good cash flow, and you talk about being eaten up while you refine that business model; but then while you’re straddling that Phase One, Phase Two, and even more so into Phase Two, the business actually starts spitting out some good cash flow and some good profits at the end of the day.
Not huge profits; but in terms of percentage of revenue, it can be quite enticing. You’re making those $100,000, $200,000 a year net profit, which looks really sexy and it’s great. Then you start deciding, “Let’s ramp this up even more,” and open an office up interstate or put in a major accounting software package that can run and optimize everything, and that sucks up a lot of cash flow.
And then you suddenly go, hang on, my business, six months ago, was making all this money, and I’m going through this phase to actually make more money. But I have less right now, and it’s very counterintuitive, and not, I wouldn’t say scary, necessarily, but that’s where a lot of businesses end up getting choked, and bottlenecked, and die.
They don’t have that awareness in place. The growth phase is almost more risky in some respects than actually the start-up phase; because the start-up phase, you’ve got nothing to lose. But once you’ve got a couple of staff and some systems; and even if you don’t have a couple of staff and systems, you just have yourself and your mate, or only three or four staff, hypothetically, and you’re making a couple of hundred grand a year; that’s more risky to lose than a job where you’re starting out with a part-time start-up.
So, having that awareness, going, “Hang on, I need to think about this and have some strategy in place of how I’m going to grow and how I’m going to fund that growth without strangling the cash flow and strangling the entrepreneur’s lifestyle and enjoyment for the business.”
Jack: That’s right. Thinking it’s scary, it’s the right way. I think it is quite confronting, whether you’re a personal trainer or a plumber or a consultant, or whatever it is you’re doing; it’s so common for people that have been now going through the growth phase to look back at the start-up phase and think to themselves, “I was making more money as a one-man band.”
At that point, the worst thing you can do is go back to being a one-man band because it was more profitable in the immediate term. And that’s where it comes back to having this foresight of the five stages that we’re going through because you really need to know where you’re going, what you’re building, and more importantly, why and who’s going to actually buy it at the end of the day. And that will keep you on track a lot of the time to keep progressing towards that ultimate goal.
Pete: Yeah, probably around the same time when you were doing some work with us at one of those companies you mentioned previously. A mentor of mine and my business partner at the time said to me, with one of his businesses, that he was having more fun and more enjoyment when he only had him and two of his staff as opposed to the 15 or 20 he had at that particular time.
I was like, you’re an idiot. How’s that make sense? And then, as I went through those phases for the first time myself, I was like, “Okay, I hear what you’re saying. The gray hairs are coming through in the mid-to-late 20s. That’s not smart. That shouldn’t be happening. I shouldn’t have gray hairs yet.
But no, you’re absolutely right. That something you touched on thereabout, I think it’s something you mentioned and that hopefully we’ll touch on in a moment, the statement that you need to know who you’re selling to. I don’t know if that’s relevant in the next phase, but I really want to hit on that because that’s something people don’t think about either.
Jack: Yeah, totally. Let’s firstly dive down into where we jump into the capital raising phase; or again, whether it’s this phase or whether we’re doing it at the start of business, it’s really important, at that point, that we understand the psychology of investors. It’s been proven; Wholesale Investor magazine survey their 10,000 investors on a quarterly basis.
The number one thing that prevents investors from investing into private companies in Australia is not the global financial crisis, it’s not the economic environment, it’s not access to capital, it’s not any of these things. The number one barrier to investors investing in private companies in Australia is, and I quote, not finding suitable opportunities.
Pete: That amazing, isn’t it? I remember getting on my iPhone, because—I apologize, and I’ll be completely open—I didn’t plan to come and take notes. I was invited to come along and check it out, so I thought I’ll sit there and might just enjoy the show, so to speak. But I was like, “Hang on, this is actually good stuff.”
I remember taking out my iPhone, opening up Simplenote and making that note about Wholesale Investor magazine and some of the stats you were saying. That’s such a solid advice because, again, it’s counterintuitive. Most people don’t think that, but it is. You’re having and building and articulating a good opportunity as a person trying to raise capital.
Jack: Exactly right. And when they say not finding suitable opportunities, what that is saying is that the entrepreneur going to have the discussion with the investor is not prepared. They haven’t thought through this deal, they haven’t thought through the offer to make it attractive for the investor.
So, Pete, I’ll just give you the three questions. This way, I can sum up how to prepare for a capital-raising phase is to run through what I call the three questions on every investor’s mind. Everybody answers these three questions. Most people do it in the wrong order, and most people do it in a very un-thorough type of way.
Let’s go through what are the three questions on every investor’s mind, and how do we get prepared for this phase? The number one question that an investor will think when they look through a potential deal is: will I lose my money?
Pete: Fair enough question to ask!
Jack: They are not yet thinking, how much money I’m going to make. They are not yet interested in the blue-sky opportunity. They are not yet interested in how amazing we think the deal is. The first thing they want is how risky is it. They’ve seen so many deals, they’ve invested in so many deals, and they’ve lost money on so many deals.
The first thing is, will I lose my money? Now, what an entrepreneur needs to do in order to combat this is, what the investor is going to be looking for. Number one is the experience of the entrepreneur. Number two is the team and the mentors that the entrepreneur has around him or her.
If you’re at the start-up phase or at the growth phase, it might be first business that you might not think that you have a lot of experience, in which case you need to develop a team of mentors and a team of advisors around you, and you essentially borrow from their credibility and their experience.
That is sufficient for an investor looking to invest in an early-stage opportunity. The third thing they’ll be looking for under, ‘will I lose my money,’ is proof of concept. How proven is it that there is a market for this? How proven is it that people will be willing to pay for a solution in this kind of a space?
Pete: And then the fourth thing, which is from my experience, a very far fourth, is, how much money will I make? That is the fourth thing I think about. You’re right there. I’ve been invited to a lot of angel investment dinners where I go and get a beautiful meal, nice red wine, and then four or five start-ups come in and pitch their deal.
I’m sitting there, checkbook in hand somewhat, some not necessarily, and then I’m thinking, “Would I invest in these companies?” It’s not necessarily about how much potential there is; because, yeah, the next iPhone app could make a couple of hundred million dollars and be Angry Birds.
But realistically, what has this guy got to prove himself? What’s his track record? [sounds like] Where has he been burnt? What hardship has he been through? What track record has he done to be successful? If I was going to open up [and pitch to] some investors, not to sound overly arrogant; and similar to yourself, it’d just be like, “This is who I am, this is the proof, this is the awards I’ve won, this is the credibility I’ve got, this is the companies I’ve built.”
If someone came to me and said, “This is my track record, this is what I’ve done, I’m going to start a new business. Do you want in?” Most people, if they’re smart, would invest just on that, ignorant of the actual idea. Ignorant in a good way. If someone’s got a track record, has proven themselves, and the concept has some validity; you’d back that horse, you don’t back the idea.
Jack: And that’s what I mean. The experience of the entrepreneur—if you can demonstrate awards, if you can demonstrate a track record, that is the number one thing on the top of the investor’s checklist in terms of what they’re looking for. Will I lose my money, that’s the first question. The second question they’re going to ask themselves: when will I get my money back?
What is the defined exit strategy, and is the entrepreneur committed to it? Then the third question the investor will ask, and only once they’re satisfied with the answer to the first two questions, the third question they’re going to ask themselves is: will I make money, and if so, how much?
That’s where we have opportunity. Once we’ve lowered their resistance and proven that, yes, we have some experience; or yes, we have a team around that has experience; yes, there is some proof of concept around what we’re doing—only then, once we’ve lowered the resistance, can we start to talk about the blue-sky opportunity and the expansion plans, and are we building any strategic value into this business.
These are the three or four potential buyers that might buy us in three or five years, only then can we start painting a picture of how much this venture might actually make in the future.
Pete: This phase, when you’re starting to raise capital, you actually need to have an identified potential suitor. I’m thinking from what you’re just saying there between the lines; part of the pitch to the capital-raising and investors is that this is the exit strategy, this is who we’re going to go after, this is why we’re going to go after it, this is why they’re going to buy it. Is that kind of the stage where you start thinking about that as well?
Jack: One hundred percent. A lot of the time, when investors invest into early-stage businesses or private businesses, they’re typically investing not for dividends. Of course, everyone likes dividends, everyone likes a share of the profits to be paid out every now and again—that’s the cherry on top. But they’re primarily investing for capital gain.
Meaning, I want to invest $50,000 dollars or $100,000 in a business worth $500,000 or $1 million, whatever it is; and then I want to see that business be sold for $5 million $10 million in three to five years’ time. That’s the beauty of small business and that’s what attracts investors into this space—the opportunity and the possibility of high capital growth in a relatively short period of time.
Pete: Yeah. Okay, I know you were heading towards that direction. So once you’ve got the capital raised, and you’ve eyed getting those investors on board, and you’ve raised that capital, what’s the next thing that the business owner needs to start thinking about and the phase they go through?
Jack: Now we come into Stage Four, which, as the guys playing along at home, we ought to see on the diagram, is acquisition. Obviously, the next phase is Phase Five, and that is exit strategies. What a lot of smart companies will do, and what we advise our client next to do in the lead-up to the point of exit is—we know that if we can sell a business for, let’s say four to six times its profits; so this business is profiting $200,000, we know that we can sell it for somewhere between $800,000 and $1.2 million.
Pete: Now that’s the multiplier which people might have heard. It’s a four times multiplier, it’s a six times multiplier.
Jack: Exactly right. Now, unfortunately, the average multiple a private business achieves in Australia right now is two times profit. Anybody that works with us achieves a multiplier of four times profit or above. We set the absolute minimum at four times. You shouldn’t be looking to sell your business unless you’re getting four times plus. Obviously, take into consideration your personal circumstances and all of that sort of stuff.
Let’s use this case of your business doing $200,000 profit. Let’s say we’re going to sell it for six times, we’re selling it at $1.2 million. If we know that we can go and find another business, and that business is doing $100,000 profit—and, as I said before, the average multiple that a business in Australia achieves is two times—now we can buy that $100,000 for two times, which is $200,000.
Jack: We then bring that $100,000 into our existing business that we’re going to sell for six times, and that $100,000 we’ve just bought for $200,000 is now worth $600,000 to us because we’re trading at and going to sell at a high multiple that the acquisition tag that we just bought. So now, rather than selling on a six times $200,000, which was $1.2 million, we’re selling at six times $300,000, which is $1.8 million.
Pete: Very nice.
Jack: With an outlay of $200,000, we’ve just added $600,000 to the exit price.
Pete: Now, I recall—I could be getting this completely wrong, you gave an example somewhere around the conversation of the acquisition phase, about an electrical company? Am I right?
Jack: That’s right.
Pete: Was it electrical? I knew it was some sort of trading. Was it electrical trading?
Jack: Absolutely. A guy called Brad McHugh is one of our clients in The Entourage. This capital-raising and exit strategy stuff is what we specialize in through our work with MBE Education, but we obviously do some of it in The Entourage as well. Brad was a 19-year-old electrician, started on a program in The Entourage with us. He was finding it hard to attract new clients because of his age. He was finding it hard to open new contracts.
So we ended up having the discussion that why don’t we just look for a business to buy and do it that way. You acquire a book of clients rather than needing to build them from the ground up. Brad found a business that was doing $110,000 profit every year. Business was selling for $100,000.
Pete: So one times multiple.
Jack: A great multiple to buy at. Wasn’t great enough for Brad. He went back and negotiated to buy it for $90,000.
Pete: I mean, never pay rack rate.
Jack: Well, that’s –
Pete: Never pay rack rate.
Jack: That’s right. So, he goes and negotiates $90,000. He raises $100,000 from private investors that were within his network. Most of the capital raisings that we facilitate come from the entrepreneur’s network or come from our network. We rarely need to go outside to ‘professional investors.’
Brad raises $100,000, buys the business for $90,000, doubles his client base, doubles his revenue, literally. We did that deal probably in over about four weeks’ time, doubles the size of his business in four weeks and had $10,000 left in the bank for operating expense. Very successful case study. A lot of this stuff, it is difficult.
There is a lot of detail to it. And if you are going to attempt it, you do want to be doing so hand in hand with an advisor. But when you do understand the process somewhat, and you do have a good team of people around you that can help you do this sort of stuff, it does become a lot simpler; so much so that a 19-year-old electrician with no business experience and no business education can go and acquire it in a month.
Pete: Two things. I’ve got a point to make, which is completely irrelevant to our conversation, and I’ve got a question for you. When you spoke about the tradie who wasn’t old enough to get business, it reminded that I think Dan Kennedy told me where he was advising a young—I’m pretty sure the conversation was a financial educator. So a young guy, early 20s, giving financial advice from stage.
Obviously, if his target market is the baby boomers, they’re not going to want to part with their retirement funds to a 22-year-old. It just doesn’t make sense. So one of the things Dan did was made that guy in that business hire a very old gentleman in a three-piece suit to introduce him on stage, to emcee the Q&A session at the end of the presentation, and a number of other senior people in three-piece suits to be at the back of the room to sign people up.
They sort of surrounded this young kid with elderly people, mature-looking people to give him their perception of expertise; that he was very, very smart, very well-educated and giving great advice. But obviously, there’s that positioning and perception. A random marketing suggestion that’s completely irrelevant to the show that I thought was pretty cool.
But a question that popped in my mind that I don’t know if you got an answer to it or not, but it might have popped in other people’s minds, is a young 19-year-old kid who goes and buys another company, is that part of Phase Four where, in acquisition but then you’ve got the whole management of integrating other companies?
I know a really good friend of mine who owns M2 Telecommunications, Vaughan Bowen, grew that business to multi-multimillion dollar ASX-listed company off the back of acquisitions and done it very, very well. For whatever reason, he’s been just brilliant at being able to acquire businesses and have them fit that culture and that workflow from the outside, and some on the inside, very seamlessly.
How have you found that companies you’ve worked with have gone through that phase of the actual, not only the purchase is relatively easy when you look at it from the outside, it’s negotiation and solicitors doing their thing; what about the business fit? Have you had any good stories, bad stories, case studies, examples around that at all?
Jack: It’s certainly easy when you’re looking at an acquisition which is complementary to a business you’re already running. So, in Brad’s case, if we were to look at this diagram, he was probably at the end of the start-up phase; meaning, he had worked out his business model, he was profitable, he knew what he was doing, he was just finding it difficult to scale.
He already knew what he needed to do in order to make the business work, he already had his culture, he already had existing staff, he already had existing systems, partly, through working with us, highlighting the need for all of that sort of stuff. So when it’s a complementary business and it’s a complementary acquisition; yes, there are always challenges in the integration.
But it is far easier than perhaps, acquiring a business in an industry which you know nothing about. Your mate Vaughan knows the telecommunications industry and the telecommunications business inside out. So, at that point, it becomes less about, ‘can I manage it,’ and more about, ‘how do I manage such rapid growth so quickly.’
Pete: And the crazy thing, too, which you didn’t touch on but people might not be aware of consciously, is that the really cool thing about buying a complementary business; in Brad’s case, if he spent $90,000 on this business that was making $110,000 profit a year, he’s obviously got $20,000 off the top straightaway in the first year back in his pocket.
But there’s generally a lot of economies of scale, so that operating cost to run that business that’s now under his umbrella would actually be a lot less because quite possibly, there was some extra capacity for his admin staff and his accounting team and things like that.
So, the actual operating cost of that business he’s taken on will drop dramatically and that $110,000 profit might have jumped to $140,000, possibly $150,000 that first year, not by any more revenue coming in the door, just lower operating costs because of economies of scale.
He’s technically not only bought a $110,000 business, but a $200,000 business if you look at the two times multiple. He spent $90,000, added $200,000 to his bottom line. Technically, it’s probably more. That $1.8 million is actually probably going to be more.
Jack: Absolutely.
Pete: I kind of got confused in the articulation there, but that probably made sense to people. I’m trying to do the math without a visual whiteboard.
Jack: Yeah, you’re absolutely right, mate. There’s two kinds of synergies when making a complementary acquisition. The first is, as they say, a cost synergy. We might not need two accountants, we definitely don’t need two bookkeepers, we might not need two receptionists.
I’m working on an acquisition at the moment where two businesses are going to merge into one office. That’s $50,000 a year off the costs of the business, and that goes straight to the bottom line. So, cost synergies are a massive one. The second one is revenue synergies.
There might be some services in Business A which Business B doesn’t offer, and those services can be flushed through Business B’s distribution and client base, and vice verse. Business B might have some products and services which Business A doesn’t, and therefore those products and services will be distributed through Business A’s client base and distribution.
So, you’re right. If the acquisition is done well, you buy at the right price, and as you rightly pointed out, if the integration and the ongoing management is handled effectively, there should be an increase in profit of the business you’ve just acquired.
Pete: Yeah, which makes those numbers look even more pretty.
Jack: Exactly right.
Pete: In this electrician’s example or anybody’s example, really, they’ve acquired a couple of companies, or one company, and they’ve gone through the acquisition phase. Then, obviously, the final step is the exit? Is that right?
Jack: Absolutely. Stage Five, we come into the exit. Now, the number one challenge we see with businesses that are going into the exit phase is what I mentioned before, and that is that they are undervalued. As I said before, the average multiple that most private businesses in Australia achieve is two times profit.
At this stage, you want to be aiming for four times profit or above. Now, we do that through a couple of ways. Firstly, simply having foresight of the exit strategy, let’s say one, two, three, or five years in advance, just as a byproduct of that awareness and that knowledge, you will have created a business which is inherently less risky, inherently less reliant on you, and probably more valuable, particularly if you’ve brought on investors and acquired businesses and all of that sort of stuff.
Things to keep in mind is: minimize the risk of the business, maximize the growth potential of the business; and in terms of actually facilitating the transaction itself, the more potential buyers you can identify, the more potential buyers you can engage in some sort of a discussion with, the higher they will drive the price. It’s no different from being at an auction.
The more bidders you have at an auction, the higher the price gets driven. So, if you can identify why your business represents as little a risk as possible, why it represents as much growth potential as possible, and that there are other people interested in buying this business, and they might be your competitors, or a combination of those factors will help drive the multiple in there to drive the price even higher.
Pete: Very, very cool. That’s basically it, those five phases. I think you’re right; that if you know you won’t have an exit in three, four, five years’ time, you have to identify who those potential buyers can be. I’ve seen plenty of businesses that I’ve worked with or consulted with or just seen that have grown to a ceiling. Then there comes that point, there’s no one in the industry for various reasons that could acquire them easily. There’s not an obvious buyer necessarily or…
Jack: Synergistic.
Pete: That’s the word I’m looking for, ‘synergistic.’
Jack: Want to jump in, mate…
Pete: [I would have spent] 20 minutes before I figure that one out. Synergistic buyer. You need to have that identified early so you can shape your business as part of that growth phase and acquisition phase to become more appealing for that person.
Jack: That’s right. We talk about the three customers, and that is that every business needs three customers. The first is who’s going to buy this product or service? The second is who’s going to help us sell this product or service. Do we distribute to wholesalers or do we distribute to retailers? Who’s going to on-sell it to a wide range of customers? And then the third customer that you should know for your business is who’s going to ultimately buy the business at the end of the day?
Pete: Are we getting, on a face value, some businesses that only have two customers? For example, to use this electrician example; he’d have obviously the customers he does the electrical work for, he’s got potential buyer one day. Would he have a third customer in that he’s not actually dealing with a retailer, he’s not a wholesaler or anything like that, or is there a third customer that most people don’t find obvious in that example?
Jack: The second customer in that kind of example is who I touched on in the growth phase, and that might be some strategic partners. In Brad’s case, he might have three plumbers, three bricklayers, some property developers, and some real estate agents—all funneling him work and driving him business on a continual basis. In which case he’s got, let’s say 12 complementary businesses which he has a good partnership with.
Pete: I’m glad you went there because that’s what I was thinking. So many people, they see themselves as the B-to-C-type supplier of whatever it might be and don’t think that strategic partnerships are a huge way of path-to-market even if you are doing direct B-to-C kind of stuff.
Jack: Exactly. That’s right.
Pete: Very cool, man. I really enjoyed that presentation that you gave. I know that presentation was part of a one-day overview event or a seminar that you guys put together. Is that how that all works? I literally ducked in there for a couple of hours after an invite from one of your team. I want to talk about The Entourage, what it is, and completely make you write checks you can’t cash. So, how does it all fit together, that one presentation? Because that was amongst a whole bunch of stuff.
Jack: Yeah, that’s right. That day that you came to was the Young Entrepreneurs’ Unconvention. The Entrepreneurs’ Unconvention is Australia’s largest event for entrepreneurs under 40. We were in Sydney a couple of weeks ago and we had over a thousand people come through the doors.
And you hear from people like Matt Rockman who founded SEEK, which today is valued at $2 billion, or Ruslan Kogan from Kogan Technologies who’s Australia’s wealthiest person under 30, and right through to young entrepreneurs like myself and Andrew Morello who worked on The Apprentice.
It’s just a good day where we come along here from some first-class entrepreneurs and take home some real actionable action points that you can start to put in place when you get to your desk on Monday morning.
Pete: I really enjoyed it. Unfortunately, I had other stuff planned that day and I thought I was going to be in the city, so I got the invite. I stick my head in the door, and I’m glad I did, because I timed it perfectly well with your presentation, which was great. I definitely took my iPhone out and took some notes myself. It was a bit of a surprise, to be honest, how actually enjoyable and how much education I got in the couple of hours I was there.
Jack: That’s great, man. Glad you came along.
Pete: Highly recommended, going along and checking it out because there’s definitely some good content and good context to learn about this as well. As much as I love and say all the time that business owners need to get out from under the hood of their business and start selling and marketing, get away from mechanics and the core of the business; you should be marketing yourselves.
That’s what we talk about a lot. But realistically, if you’re wanting to grow a business, that’s what gives you and sets you up for not just having a job. You have to be very clear about what your goals are going to be for the next three, four, five years, and what exit you’re going to have.
Whether it’s going to be a financial exit where you sell for multiple, or whether it is just an exit from the day-to-day business and just take the cash flow and sit on your cash at home or on your yacht. If it is what you’re interested in finding out more about how to go through the phase of an exit, which is one of the core things you guys talk about, I highly recommend getting along to one of your Unconvention days, which is a very cool name.
Very cool. We’ll put links on PreneurMedia.tv. To get the show notes for this conversation with Jack, there’ll be some links to the Web sites, and some dates for upcoming events. You do these regularly around Australia?
Jack: Yeah, absolutely. We do them six times a year—Melbourne, Sydney, Brisbane. Pete, the other thing that I can do, we’ve got a Capital Raising for High-Growth Businesses Whitepaper, which just outlines exactly what we’ve discussed today. It will probably almost be a transcript of this discussion. If you like, man, happy to send it over if you want to distribute it to the guys.
Pete: The more, the better. I’ll definitely throw it up there, and we’ll get to it and read it, because there’s definitely some good value in that for some education. Mate, thank you very much for your time. Good to connect after a few years, too, since we did some stuff together as a client of one of your businesses.
It was very, very cool. Actually pulled out some old e-mails, as well. Thought I’d go and see what some of the correspondence was six years ago. The last couple of e-mails I found, you were ill, and you were just saying you’re getting back on your feet after being sick. I’m glad you got over that little flu six years ago.
Jack: It’s a very small world, mate. I’d love to see these e-mails if you’ve actually got them.
Pete: I’ll forward them over. Thanks, guys, for listening, and we’ll see you next week on PreneurCast.
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Show notes + links:
Online:
PDF Download – Download Jack’s Capital Raising White Paper, which has his Stage of Business Diagram inside
http://www.the-entourage.com.au/ – The Entourage
http://www.mbeeducation.com.au/ – MBE Education
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