Robert Craven and Jonathan Jay discuss Buying and Selling
VIDEO: 53:08 mins
AUTHOR: Robert Craven and Jonathan Jay
In this interview Robert talks to Jonathan Jay. For over 20 years, Jonathan Jay has bought and sold companies, restructured groups, bought out competitors and successfully completed private equity deals both buy-side and sell-side.
Robert and Jonathan discuss:
Schoolboy errors when buying and selling
The process of buying and selling
Restructuring accounts
Buying an agency without your own cash
Transcription:
Robert Craven 00:07
Hello, welcome to the GYDA Talks. I'm absolutely delighted today to have as my guest, the wonderful Mr. Jonathan J, who I've known we were just talking before we turn the recorder button on. We've known him for about 10 or 15 years. Hello, Jonathan.
Jonathan Jay 00:22
Hi, Rob. Good to see you again.
Robert Craven 00:25
Great to see you. So just very quickly, just outline will outline what you're doing at the moment, Jonathan.
Jonathan Jay 00:33
So if I was to summarise the last 21 years in business, it's, it's as every business career has, you have, you have your highs, and you have the not so highs, and all of the highs have been where I've been selling, and buying businesses. And I've really, in summary, I've really made my money from business, from buying businesses at one price, or buying several small businesses, combining them and then selling them as a larger business. And I've always made more money from that and I've ever made from actually owning the business, which is completely counterintuitive to what most business owners do, they feel that owning the business is where it's at, or an actual fact, you could approach business in a different way, and buy and sell and have a lot more fun with a lot less stress and make more money as well.
Robert Craven 01:28
Whoa, Jonathan has a lot more fun and a lot more success. I mean, it's like a red rag to a bull. Though, there's a whole bunch of people listening to this right now who are sweating their little cotton socks off work. I mean, we're recording this, at the end of May. So it's kind of COVID times everyone's spent the last eight weeks, furloughing, getting bills, money getting bounced back money getting ready to make people redundant. And then you come up with that, I do have a lot more fun. It's like, they will, like, come on you real estate real estate realism.
Jonathan Jay 02:08
The thing is, I think it is accepted isn't it that if you buy a business, your revenue, and the corresponding profits suddenly goes up overnight. So if you've got a growth plan, where you want to get from 1 million a year to five, from five to 1050, whatever it might be, the fastest way of doing that is not to acquire one new customer at a time, which is the organic process, but to say how do I acquire 100 customers or 200 customers? Or, you know, even if you work with higher value customers, how do I go from 12 to 24? And right now, we're entering a world wide recession, now is the time to instead of battening down the hatches and I'm hoping it is all going to be over soon. And it won't be saying how can I buy something that can expand by this, I mean, just in the last half hour or before, before I came on the on the call with you, my colleague phoned she's just been to see a business the owner wants out, and they just want 10,000 pounds for the assets. Forget the profitable train. And this is like a 500-550,000 pound a year business, but just 10,000 pounds for the physical assets, because they want to pass the lease over and walk and walk away. Now that's a business that you can buy with a credit card. So we're moving very quickly on it. So you've got to know when you see an opportunity like that, how to do it, what what legals you do need to do and which you can dispense with simply because we haven't got time for all the fancy stuff, we just want to get a deal done and and own that business before someone snaps up the bargain.
Robert Craven 03:58
So many things going off in my head. So firstly, there are and and I'm coming across a number of them, distressed businesses, businesses where essentially, bearing in mind the time that we're in at the moment, they haven't got deep enough pockets to survive until Christmas, okay. And even if they do have deep enough pockets to survive until Christmas, they haven't got a model that they think is going to be applicable in the new world. And even if they do get ticks in both of those, they don't have the funnel, the old sales funnel with potential customers to feed them to get through. And even if they have that they haven't got the will or the passion or the desire to trade all the way through 2021 to end up in a place which is further back, possibly than they are now. because they're going to end up burning 200,000 pounds keeping the business afloat so so I totally get that. Does that mean that those businesses haven't realised it? Or does it mean that you need to go and fish and find them? What's the what's, what's the strategy,
Jonathan Jay 05:17
We fish and find them. And we do marketing, I suppose you could, you could describe it. We do marketing to find businesses to buy. And the number of responses we're getting, which was always good. I mean, we've generated in the last 12 months 345. Inbound inquiries from businesses in one particular sector, that's not broad, broadly, there's just one very nice sector that wants to talk to us about selling their business. Now, a whole chunk of those are just not what we're looking for, they're in the wrong location. The seller's expectations are unrealistic. So just like with any sort of prospecting campaign, a lot of those prospects just aren't going to be relevant. But who cares about that? Because all you need is two or three, and I've bought seven businesses in the last eight months, all from those prospects, and we've got a pipeline to take us up to Christmas. And then you'll get the surprise ones like the one that happened this afternoon, where it's like I said to my colleague who's sitting out in the car outside this business, I said: Go back and tell her I mean, this is not the way to do it. By the way, I'm not I'm not suggesting. But as I said, Tell the owner. And we'll transfer 1000 pounds right now, but she's not to talk to anyone else about it, you know, we were bought because we want exclusivity. Now the risk is you lose your 1000 pounds. But quite frankly, I'd rather risk that the not not have an opportunity to add an extra half a million revenue to our group. For the sake of buying some tables and chairs. Yep.
Robert Craven 07:00
So, can we just clarify what you're doing at the moment, Jonathan, because it's kind of a different bit going on, especially from my knowledge of you. Online. You're in your own right, Jonathan J Incorporated, you're buying and selling businesses in order to grow the size of the pot. That one thing?
Jonathan Jay 07:28
Well, so over the years, I've as I said, in my intro, I've bought and sold different types of companies, also in the digital marketing space. And my, my current project is in the early years sector, which is Day Nurseries to you and, and it's a fragmented sector, there are lots and lots of players, again, a little bit like this sort of the, the marketing space, you know, some do better than others. But the operating process for each of these businesses is fundamentally the same. So we are starting with a very good operating process. And we're buying businesses that fit the geography and the size that we're looking for. And as a result, growing a group via acquisition rather than the very hard work or starting something from scratch.
Robert Craven 08:20
Fine. But you're also I also see that you're showing people how to do such stuff. Is that right?
Jonathan Jay 08:28
Yeah, so the nursery business is the business. That's my time. My lifestyle business, if you like, is I run live training programmes, and in the last month, Zoom programmes out of necessity. But interestingly, I've now got clients in North America and Canada, in Brazil, as a result of doing this. So I run training programmes for business owners who want to really understand how to make an acquisition smartly, without personal risk, without risking their own cash in a way that they can grow their business without having to re mortgage the house to do so.
Robert Craven 09:12
You're gonna tell us how to do it.
Jonathan Jay 09:14
I will answer any question you'd like me, so I'd be very happy to be an open book on this.
Robert Craven 09:20
Okay, so there is there so I know there's a whole bunch of people going, Oh, the leaning. So let's just run it through the scenario. The whole load of agency people out there who have excess cash, it was prompted by you this I saw a link to a message from you saying, oh, so if you had 50,000 pounds of bounce back money, what sort of business could you buy with it? Which I just thought was just brilliant. I mean, because it's like, I mean, Dan was busily busy claiming my money. While on a zoom call, I might add seven questions. Yes, yes, yes. No, wait 25 minutes. 50,000 pounds? That yeah, the serious side that obviously you can't draw that out for yourself, but, but the people thinking, I really want to buy a business. So firstly, what are they? What are the schoolboy errors? We'll start off with? What are the schoolboy errors of people in that mindset? Because what I'm seeing is when I talk to them and say, so what are you looking for? It's like, oh, I don't know, something I could, it'd be nice if they eat. You very rarely get someone. I'm looking for someone in the SEO space with 10 to 15 staff with recurring revenue of in excess of 5000 pounds a month, or whatever the numbers are. So what are the schoolboy errors
Jonathan Jay 10:52
In buying a business and in generally buying a business? Okay, so first of all, the first port of call for anyone who is uninitiated about buying a company is to go to a website, there are websites with 1000s of businesses listed. And or to go to a broker, they've all got websites as well. So the first port of call for most people is just to go to their laptop, Google businesses for sale and find all these brokers. However, you know, these brokers are experts in selling business at different levels of expertise, I have to add, but they know more about selling a business than you know more about buying a business, you are at a massive disadvantage. The second disadvantage that you're at is that you're now in a competitive space. We've all walked into an estate agent and expressed interest in a property and they say, Oh, we did three viewings yesterday, you better get in there quickly with an offer. And you don't quite know whether it's true or not. But if you fall in love with the property, you don't want to risk it. So who knows if we overpay because of that. But business buyers overpay, because the entrepreneurial nature rises to the top and they think oh, my goodness, I need this, I need this, I need this. I want to buy this, how can I find the extra money? The next error is that the broker will lead you to believe the way to pay for this business is with cash on day one. That's a little bit like an estate agent saying, Well, if you want to buy this million pound flat, I hope you've got a million pounds. And everyone would say, well, that's just ridiculous, you get a mortgage for 85% of it, don't you. But when you buy a business, all that common sense goes out the window, and people think you just got to you've got to cough up the cash on day one. When you don't, because you can structure deals in many, many creative ways. Brokers don't like this because it's harder work for them. And it's a lot easier if someone rolls up with a you know, they've sold their house in London, they've got a big chunk of cash in the bank. And, and as they say, a fool and their money as soon parted. And they think oh my goodness, right, we'll just get that money out of their bank account into our clients. And of course, we get 56-78% of that as well. So, these are the sorts of mistakes that people make if it's strategically incorrect, right from the start. So you put yourself in a competitive scenario with someone who knows more about it than you do. Who then tells you this is how it works? And you've got no you've got, you don't know whether that's correct or not. But to you it sounds convincing. So you go along with it. And before you know it, they're asking you, and this is absolutely true. Rob, they asked you for copies of your bank statements, they want to see your pension fund, they want to see your ISIS because, you know, if you're showing them the money, believe me, they will spend it for you. So that's why the people that I work with do it completely differently. Because you're just placing yourself in such a disadvantaged position from the very first moment.
Robert Craven 13:58
Okay, so that's some of the cardinal errors. So is there a five step process or? Or a model that you can work, work, work to?
Jonathan Jay 14:13
Yeah, there's a process. I'm not sure if it's five steps, but I'll give you a process. So the process is you could very specifically say I want to buy this type of business of a certain size in this geography. But typically, what happens then, is that you're limiting yourself massively. And that's when I have people come to me and say, I've looked for the ideal business that I want to buy. And there's only three of them. Well, that's like saying, I want to buy a house. But I want a house that's red brick, but semi detached. It's got to be on this road and it must be on the left hand side of the street. This end of the street. I mean, you're limiting yourself so much, what are the chances of one of those homeowners selling you their property. And if there's only three businesses that you could possibly buy, you have to be extremely lucky. Now, luck always plays a part in everything. But we can't count on luck to be a reliable strategy. So I always say start nice and wide, because you can narrow it down later because you thought that you didn't want to buy a business in Harrogate, because you're based in Leeds and Harrogate was a little bit too far for you. But you know what, once you've been over there, once you think, actually, this is quite an easy drive, it's easier than I thought. So if you limit yourself too early, then your chances of success diminish dramatically. So I would say start wide. Second thing is put together a mailing list of all those businesses. And you can do this from a number of sources. I mean, the obvious sources are, you know, all the company house data that's put together by Experian, and credit safe and all these people, Yellow Pages, data, subscriber lists from publications, you're really anywhere you can find, when I was selling a digital business, I got my receptionist, who didn't seem to do very much. Do just sit there and go on to Google, and Google all different search terms that I gave her and go past page 10, past page 20. And she put together a list of 1000 prospective buyers, and we sold to one of those 1000. So once you've got your list, you want to contact your list. And I have a superb letter that I use that can be adapted to any, any sector, and you send the letter out. And within 24 hours of that letter going out the door, the phone starts to ring. And then I just talked to people. So that's when you discover that the business in Harrogate that you thought you would have absolutely not been interested in, actually, you know, what could actually be a good business to buy. And then you start to discover that maybe it's not just businesses identical to yours, maybe it's complementary businesses. So if your SEO, maybe its video production, or social media, then you can start to put together a digital marketing group, as opposed to just doing one thing. I mean, it's horses for courses, and there are different strategies. But I mean, this is, I'm speaking, quite genuine here. And then you have the conversation with the business owner. And the conversation has to fulfil certain criteria, because you need to establish your credibility. Even if you've never bought a business before, you've got to sound like you've done 100 times. And I have a 14 point checklist that I follow, that actually gives me a structure that I use, even now after doing this for years. Because I don't want to miss something out because my mind goes blank, I was distracted by something. And I forget. So I always have it written down. I then arrange a meeting, if they pass my 14 point checklist. And that meeting, I prefer to do face to face. I can also do it by zoom, it really, it's probably not quite as effective, being able to have a coffee face to face, but it's better than not doing it at all. As a result of that, I will know how much they want for the business, how to structure the deal, whether it's a realistic amount. So by the end of that 45 to 60 minute meeting on Zoom or face to face, I know whether a deal is likely to happen. I then want to have a second meeting. So it's slightly more than five points. But I'm nearly finished. And now I have the second meeting. And the second meeting allows us to get two heads of terms, which of course is the pre contract to the main sale and purchase agreement. And a little little interesting thing about this, Rob is that everyone thinks that negotiation of the price and the terms happens before you sign the heads of terms. And everyone thinks that's where all the negotiation is. It's not true. Because at that stage, you haven't done any due diligence, we only know what they've told you, and half of what they've told you isn't true. So in actual fact, the heads of terms are not really designed to nail down prices and terms that come later in the 12 week process between there and the sale and purchase agreement. The heads of terms are designed to get you exclusivity so that they aren't talking to anyone else. And that is the sort of way I like to stack the cards in my favour because now they haven't got anyone else to talk to you. They can't because they've signed a legally binding agreement. But for one pound I bought the exclusivity for the next 12 weeks. And now it's just me and then and all the other stuff comes later.
Robert Craven 19:55
Okay, so talk to me about morality. So there are how have been players in the distressed business field where despite their arguments, it was felt by some people watching them that the way in which they hoodwinked or took businesses from people who are in vulnerable positions with possibly not in keeping with other people's morality, be quite interested to I mean, do you just? Do you just see business? or D or, or other lines you won't go across? Or are you, I'm not asking you whether you're a pastor or not. But I think it's really important.
Jonathan Jay 20:46
So you've got to have a willing seller, yeah. Well as being a willing buyer. And the way I typically structure deals, which are over maybe like a three or five year period, I have an ongoing relationship with that person. So I've got to be absolutely open and transparent about everything that we're doing, and the way we're doing it. Because, you know, it's not like we sign the contract and never see each other again. And in many cases, we're actually leasing their property from, so we become their tenants. So having a good relationship is really, really important. And I I know of people who, for one of a better word, they steal someone's business. And I think that that's what you don't need to, why would you why would you need to do that? Yeah, I've just told you. I've been offered the assets of a business for 10,000 pounds. I mean, do I really need to grind that lady down to 4000 pounds or 3000 pounds? No, just give her 10,000.
Robert Craven 21:54
There is a wolf. There's a Wolf of Wall Street type mentality that some people have where they would, they would always, you know, there's always a negotiation of always screw down the better price bla bla bla. And it's partly created by that apprentice nonsense.
Jonathan Jay 22:10
But testosterone fueled approach to Yes, yeah, I've got a completely different approach. And this is what I do with everyone that I work with. I always say, if they do not like you, they will not sell to you. They have to like you, and they have to trust you. And they have to want you to be the next custodian of their business. This is a relationship. And what I like to do is use the people I buy a business from, as a reference to the next people. So I say, Look, we did a deal with John. Six months ago, why didn't you? This is my mobile number.
Robert Craven 22:47
So they become your ambassadors. Yeah, give them a call. And they're in the network as well. Because that's what they do. So they go, they go to conferences. And so what's happened to you? I've sold to this guy, Jonathan Jett. What's he like? He's a good guy. Oh, have you got this? Okay, right. Because obviously, if you took the other approach of being the doing the bastard thing, if like, I know I know, Fred bloggs bought my business. I know I've now talked to a few people realise he totally screwed me over. So yeah.
Jonathan Jay 23:20
So I'll give you, I always want people to say that I've been fair. As long as everyone feels that it was fair, yeah, that is the word that I take pride in, in people using in a description of what we do. And in my current sector, and I say current sector, because once you've got these skills, you can move around and, you know, enter new sectors as you wish. But in my current sector, there is one particular player, a very, very large, very successful chain, who have a reputation. Now bear in mind that I've never sold them anything. I never bought anything from them. But it's a reputation that the day before the deal is going to be signed, they dropped the price dramatically. I, for example, there's a private equity firm that has a similar reputation that they will drive the seller to such levels of stress that the seller practically agrees to anything and in the last few hours.
Robert Craven 24:28
Now, you know.
Jonathan Jay 24:30
It's right for some people. I could never advocate it because the whole point of buying and selling businesses and having a less stressful life is that you could not generate more so it's a no, there's a whole bunch of people wanting to kill you because they feel that you took advantage of them in the deal. And there are you're right there are people out there that do that. There are people out there that suggests that is the way to do it. And you know, and some of these people It's all about testosterone and everyone's an idiot and everyone's stupid. And I think it's, I think it's just unpleasant. I mean, I actually had someone messaged me on LinkedIn. And he was asking you a question about, about business sellers. And he said, how do you deal with these morons? And I messaged back and I said, I'm sorry. I said, I didn't call people who said, as a business, a moron. I said, I'm sorry. I'm sorry. I've been watching too many videos on YouTube, and I've got all pumped up, I thought, well, you can get pumped up, but you're being pumped up with some really negative, negative energy there.
Robert Craven 25:32
Yeah, it's really bad news. When people think their customers are stupid. That's like, it's like, it's not. It's not. It's not clever. Right? So we have a system. We've got the schoolboy errors kind of out of the way. Is it? Is it as is it? What's a bit dismissive? Because I think what, what, what often happens, Jonathan, you and I have been in, helping people to grow businesses. For decades now. As we've both had a conversation about several times, what lots of people do is they say, this is where you are, this is where you are now. And look at me, I'm richer than your wildest dreams, just follow what I say. And you kind of go hang on a second. You talked about having one member of staff, and now you've got 100, but you've kind of missed out all the details of the bits of bits in the middle. So what's so, what's the stuff in the middle that people need to kind of be aware of?
Jonathan Jay 26:38
Well, shall I discuss this from the perspective of a case study? Yeah, perfect. So I went to a dinner, I was invited to a dinner, I can't remember the occasion and I can't remember the location. But I remember talking to someone before the dinner started. And he said, which sectors do you have an interest in? And I said, digital marketing. And he said, Do you know X, Y, Z companies? And they're very, very successful, they're backed by private equity, I believe they make 4 million pounds EBITda, you should check them out. And I hadn't heard of them. But I googled them in the taxi on the way home that night, and then loads of companies house to see who owns them. And then the next morning, I put that company name into LinkedIn, and found that I was connected to their marketing director. Now I tell you what was going through my mind at the time, I had a digital business that I wanted to sell. And I thought, well, this guy's private equity backed could be the perfect acquirer. And then I found that the owner was actually a private equity firm known for his buying build. So they would be completely normal for them to buy another similar company to lock them together. So I was just I was connected to the marketing director. So I sent him a message to them. Hi, Tom. We don't know each other, we connected on LinkedIn. I think we're in a similar space. Would you like to come into the office and have a coffee, and we can talk about collaboration? See what synergies there are, and being in marketing, you jumped at the idea of synergies and collaboration. So he came down to the office and I, we chatted, we did all the report stuff. And I said, what will happen if we put these two businesses together your business and our business? He said, Well, you're talking to the wrong person, you just speak to Kevin Kevin as the CEO. So two weeks later, Kevin came down to see me now in the interim, I'd asked my corporate finance lady to contact the private equity owner to find out whether they'd be interested in buying. And she came back with a negative, she said, No, they're not interested in buying. In fact, they want to get out of this sector. They're more interested in selling so okay, not the opportunity I was expecting, but it could still be a good opportunity. So when Kevin the CEO came to see me, I already knew that they were interested in selling and didn't know whether he knew this yet. It turns out he did. And he said, Look, Jonathan, we're not really interested in doing mergers and that type of thing. We'd be interested in selling to someone if you're seriously interested, you could be the person. So I said, Yeah, absolutely. So you need to go and see our Chairman Alan. So I met Alan at a motorway service station on the M one, all the finest places. And Alan had all the figures in front of him and he said, Look, I'll show you. I'll show you the whole business. But I don't want you to see anything negative from what I'm about to show you. And that's usually the precursor to something incredibly negative about too bad to be said. So he showed me the p&l for the last 12 months. It made us 300,000 losses and 5 million of revenue is up but don't read anything negative into that. Interesting, and he showed me the balance sheet, and that was negative 20 million. He said whatever it is, anything negative in the back. Now, the thing is, I've done a little bit of background work on looking at the business, I did a mystery shop, I spoke to one of their salespeople. And I think I'd figured out why they were making a loss. And I would always say to someone, never buy a loss making business unless you know why it's making a loss and how to turn it around. Don't think you're going to figure that out later, figure it out before you play, because if you can't figure it out, now, you don't want to risk not being able to figure it out later. Now, the reason I had 20 million negative in the balance sheet was because these private equity owners bought it five years earlier, for 15 million pounds. So they've made a decent sized acquisition for a business in this space. 15 million pounds, and the accrued interest, hence the 20 million and the balance sheet. So Alan said to me, Look, Jonathan, I know who you are. And I don't want you to think for one moment that we're going to sell you this business for a pound. Don't you're the one pound guide. I don't think for one moment, or another one pound guy. I mean, come on. It's a little unfair, he said, but we're not gonna sell you this business for a pound. And he's absolutely right. They didn't sell me the business for a pound, they actually sold me the business for two pounds, because I bought the shins. And I bought the loan, note that 20 million pound loan Note for a pound. So now the business owed me 20 million pounds, which is fine, because I wasn't recording the debt. So it was safe. And I owned, owned the shares for a pound. We then spent six months restructuring it. And I actually had to buy seven, it was maybe eight, seven or eight businesses to get the one that I wanted. And this daisy chain of companies, I ended up actually owning 50% of a digital agency in Brisbane, Australia. I phoned them up. And I said you don't know me, but I'm your new partner. And they said, Oh, and then when the same sentence, they said, Oh, well, could we buy you out? I said, yeah, yeah, I am happy that make me an offer. It wasn't crazy money. But it wasn't, wasn't bad for a phone call. So we restructured the group, which is a fancy way of saying we got rid of all the old companies put them through an administrative process, we extracted the value, which is again, a fancy way of of saying we got all the good bits out all the assets, we left all their liabilities, they had all manner of tax cheats the correct word here tax avoidance schemes set up, which were probably good at the time. But the HMRC were all over now. And we ended up with a shiny new company. In actual fact, I put it into a I bought a digital agency a few years earlier, which is 30 years old, and I popped it in popped it into that. And then I had a new entity without all the sins of the past. Did what I mentioned earlier, got sent out 1000 letters, interviewed several potential buyers, found a buyer, put a deal together and came out of it with a very strong seven figure sum. So my two pound investment 11 months later turned into, and I'm saying this in a deliberately, hazy way because clearly there's a confidentiality agreement about the exact figure but a strong seven figures some 11 months later. And that's what I teach people how to do or part of what I teach people how to do.
Robert Craven 33:26
So how so brilliant story love the story. How does because of the skill set of my clients, yeah, is it in a working email, email. In terms of the E Myth is working in the business, they run an agency, they may work on the agency, but they're, but they're trading. And as I always say to people, if you want to make money you make money by cutting deals. And one of those deals are cutting deals is joint ventures or those deals are sales is about cutting deals. As you said at the top, you don't you don't make money by trading, whatever it is 100 pound an hour. So a lot of a lot of 100 pounds or so a lot of cups of coffee you need to sell in order to make some money. So So and a lot of these guys and gals are really bright, you know that. One of the reasons I really liked them is because they're very, very bright, but they don't have this business acumen that you've accrued and acquired. over a number of years I'll be civil. I interviewed Tom Peters last week. And I said we were talking about leadership and I said to Tom, tell me what is the best one. How can you become a great leader? And he said, I'll tell you what, Rob, the one thing you need to do is select your parents. Which is, which is right, because great leaders have been parented really well, but how? How can people fast track their understanding?
Jonathan Jay 35:17
I will tell you how well first of all the strategies, if you like, can be learned. So they're available to learn. So they are not something you're born with. And I'll let you into a secret. So I do a lot of interviews. And this is the first time I've ever said this in an interview, I guess, because I feel safe with you, Rob. I mean, 1200, our agency lead. I tell you what it is, I stack the cards in my favour. So I structured the deal, I pay a price, I do everything I can say, even when I make mistakes. The success at the end extinguishes them. So let me just say something slightly different. I'm not sure how clear that was, because I'm not used to saying this out loud. So I make mistakes, I get things wrong. But you don't notice it in the scheme of things. Because everything is not one mistake is big enough, because I've got a structure that allows me to always win. Yeah, I get that. I get that. So there's seven or eight going on at any one time, if one does fall over. The other will support it. Yeah, absolutely. And it's all about corporate structure. And you never want to buy another business in your own name or via the company that you own. So getting the right corporate structure, which allows you to sell parts of the business in the future. I mean, that's always very useful. It also allows you to close down parts of the business without infecting the rest of the group. So that's one thing, I always structure a deal in such a way that I never overpay, because everyone's so worried about overpaying. I would rather agree a fair price than then have two months of haggling. I'd rather agree to a fair price. Let's get the deal done. And you've got various mechanisms for adjusting that price. If there are things that you weren't expecting, the most obvious one is the completion accounts mechanism that you can use. I have, you know, I minimize my professional fees by using the same lawyers and doing it in a bit of a cookie cutter sort of way. So we don't have to reinvent the wheel each time. Yeah, my due diligence. Likewise, I know exactly what I'm looking for. And so by doing all these things incrementally, they add up to a process where I don't want to say you can't lose, but the Any, any, anything that goes on toward it doesn't really harm you doesn't hurt you. And I think that the fear that people have when they buy a business is that they are betting quite literally the house on it. Because they're borrowing hence the house, second mortgage, second charge personal guarantee. None of my people do that. Because if you know, if you have enough tools in your toolkit, you don't need to use the hammer to buy the business. If you only got a hammer, everything looks like a nail. Thank you. What was that phrase? You flipped in there about restructured completion? Oh, so yeah, so the completion accounts. So let's say your statutory accounts are March 31. And you're buying the business in September six months later. So you're relying upon a combination of statutory accounts and management accounts to give you a 12 month view of trading. And quite often, because management accounts are internal documents. They can be constructed and all manner of ways. Sometimes they're constructed in such a way to present to the buyer, a rosier picture, shall we say, than the reality. But only when you're in the business? Do you discover these things. So typically, within 60-90 days, I would like to push it out to 90 days, although the other side's lawyers always want to do it in 30 days, I push it out to 90 days. And the other side's lawyers want the seller to put together the completion accounts. I always want the buyer to put together these are the little things that you learned over the years on the buyer to put together the commission accounts. And then as a result, that's when we discovered that I wasn't paid last month and that's when we put it all together. And as a result, we find that any negative position of the completion accounts, we then use that to offset any deferred future payments to the owner and therefore we don't ever overpay. So for example, one I did last year. The, the, in actual fact the deferred element and it wasn't a fortune, it was like 100,000 pounds. The seller will not be receiving that, because the time has taken us to put together the qualification accounts. We found, for example, there was a dilapidation spill on one of the properties and you put all these things together. And actually, it was slightly in excess of 100,000. In actual fact, she owes us money. So, if you don't know this, then you just go and sign the contract and say, I've got what I've got. And there's one thing that they've misstated the accounts in one year. So there's a warranty claim there. So you've got to know this stuff. Otherwise, you just kind of accept what you're given. But everyone thinks their lawyer is going to support them. Well, no, I mean, once you've, once you paid their fee, which is typically due on completion or shortly after, then they're gone. They're not thinking about you anymore. They're not sort of checking up with you and making sure it's all gone, right. Yeah, they've gone. So that's why you as the owner, as the acquirer need to be. Just why is that you need to be at the counter, you need to be a lawyer. You just need to be streetwise about how to do this sort of thing.
Robert Craven 41:17
And presumably now is a great time to be buying.
Jonathan Jay 41:22
Oh, yeah, if you want the best price, the best terms, the most motivated sellers, more businesses coming onto the market than ever before. Yeah, absolutely. Now is the time. It's not to say I'll think about it next year, when I'm not so busy. I say learn the skills get mentally prepped. So when you see the opportunity, you don't have to then go: Oh, right. There's a business to buy. How do I do it? Again, I'd say get knowledge.
Robert Craven 41:47
If you saw, I've been looking at Accenture and Harvard Business Review and all the all the big wigs and McKinsey talking about the survivors that the Thrive is coming out of all the past recessions. And every time it's as well as cutting the fat. And focusing on the muscle is also mergers and acquisitions. Get your head up, see what's out there, see what you can do that can strengthen or broaden or broaden what you're doing. So we're coming up to the end quite soon. What's your advice to sellers?
Jonathan Jay 42:26
What's my advice to sellers wanting to sell right? Yeah, three things. First of all, you never want to sell when you need to sell? Yeah, don't do it. When you think oh my goodness, I'm retiring in eight months, I need to sell now. So that you've suddenly played into the hands of a savvy buyer, so I'm, I'm kind of is it gamekeeper term. The second, the second thing is, is that you want to sell your business, when it's on a natural growth curve. The mistake that people make is that when they start thinking of selling, they say, Okay, if we're going to sell in 12 months time, we're going to cut all the costs, I won't draw any salary, and we're going to go hell for leather to bring in new clients. So our sales, our cost increase our profits, amazing. And that's what we're going to sell on a multiple of that profit. A buyer who knows what they're doing will say, Well, this is just nonsense. Look, you had this nice steady growth curve, and suddenly it's spiked. We don't believe it. It's not sustainable. It's not going to happen again next year. You're all that cost cutting was. We need to reintroduce the cost at some point. And we need to pay someone to replace you. So don't yeah, there's a saying that. I'm not sure how politically correct this is. But there's a certain saying that everyone, everyone goes on a diet before the wedding, we all want to lose a little bit of weight before the wedding. Can I still say that I'm not sure if I can also lose a little bit of weight before the wedding. Everyone wants their business to be a bit more profitable for them to sell it. But a buyer is going to look at the past, not just at the right now. And the third thing I would say is about getting a business ready to sell is to get your finances straight, is to be able to answer any question about churn. Any question about margins, any question about the percentage of staff to revenue of outsource to insourced? Yeah, whatever it might be. Because as soon as a buyer sniffs a weakness in your fingers, they will borrow into that. And they will make your life a nightmare. And I'm saying this not because I do it to people because it's being done to me. So I sold a business to a private equity firm 13 years ago, and I remember that being the most stressful six months of my life because once they got home they ordered something they would not let go. And it makes you feel as though your business is worthless. And I don't want that to happen to someone else, which is why I'm giving that piece of advice now.
Robert Craven 45:12
Final question. I mean, firstly, this feels like it should be part one of a three part series of interviews, because there's so much going on. Just you know, the space, you know, the agency space. I mean, what would be your final words of wisdom, what would be your final, what would you implore agency owners to be doing, especially now we're recording this in May 2020. So it's, it's COVID times?
Jonathan Jay 45:43
Yeah, I've been looking to buy businesses with recurring revenue, or businesses that you can turn into recurring revenue streams, because that future visibility over income will drive your exit value up. So I would be looking for lots of small businesses that you can buy at small multiples, and I've actually got a really neat way of buying this type of business. That means that you don't have to spend a penny of your own cash, you don't have to go and borrow money, it's very hard to borrow money to buy this type of business, because he has a cashflow play, there's no assets to leverage. So I'd be looking for smaller businesses, that you can buy very, very low multiples, that you can stitch together over time to create a larger business with a strong recurring revenue stream. And I'd be doing that now. So when confidence starts to return and, and you want your buyer to be big enough to use money from their fund, or to be able to borrow the money easily. And you need to have a business that justifies someone else borrowing millions of pounds to buy it.
Robert Craven 46:53
Okay, so I can't leave you there. Because you just you just, again, a little a little dangle without spending any of your own money, just just give us a paragraph on that.
Jonathan Jay 47:04
It's so good. Is it really boring? Just 30 seconds, but let me just say, I can go on, I've got I've got time. There's definitely some ways how do i summarise this. So the challenge with buying smaller digital businesses is always going to be visibility, because their management accounts are going to be shocking. It may be non-existent, because they're run almost like lifestyle businesses, even if there's half a dozen staff run like a lifestyle business. So your ability to to actually ascertain the true value is really, really difficult. So you can actually buy that business on a revenue share. And I choose the word revenue very carefully. And I don't say profit, because profit is easily manipulated. And people get very worried about you know, what if I say I'm going to, you're going to pay me 20% of profit for the next three years, all you have to do is put a management charge in and there's no profit, but it's all artificial. And you're kind of like taking advantage of me. And I always prefer a revenue share. Because if you know what the margins are, or what the margins could be with your ownership, and you pay a percentage of the top line, all you have to do is effectively show bank statements every quarter when you when you pay your revenue share over to show this is the revenue that's come from your customers into that particular bank account over the last three months. And our percentage that we paid to you is this amount. And here's the money, it allows, you could do a deal like that, in principle in one conversation, because it is fair. And if you present a fair opportunity to someone to exit our business and receive a revenue stream over the next three years or four years or five years. It is like the way I pitch it is money for nothing. You sit on the beach, you look at your phone, oh my goodness, more money arrived. And I didn't do anything for the last three months. Don't ever have to go to the office ever again. Now, why would someone accept this as opposed to a lump sum payment? Because everyone wants a lump sum? Well, you've got the best excuse ever. Look at the world. It's a worldwide recession. No one's lending. No one will give me a million pounds to buy your business right now. No one will. But I can pay you a million pounds over the next three years. And if you're so confident all these customers will keep on spending money and will increase their spend. Because you just told me how wonderful businesses were going to be later in the year. It is always going to be more wonderful than actually you might get more than a million pounds. And what sort of royalty would that be? I'm looking for the right word. Sorry. What percentage would you pay for the revenue broad brush broad brush picture what it might be? Well, I prefer to do it on a sliding scale. So year one is more than it is in year three. So it reduces over time. Why? Because year one, we're still feeling your influence in the business. People are still talking about Jack, the owner, and maybe all you can help out with a couple of questions. Year two people are starting to forget you. Yes. Through that and who you were. Yeah. Is now us.
Robert Craven 50:22
So what, what sort of numbers 10%, then 5% and 3%.
Jonathan Jay 50:26
It's legions, let's say it's SEO, or, or some sort of pay per click management, where it's incredibly high margins, it's just a time cost. Then you could be doing 40% on year one, you could be doing 25%, year to 15%. Year three, wow, it could be the thing is, every deal is going to be different. And it comes down to your ability to negotiate that. Because you might say, Well, look, I might give up 40% of the revenue in year one, but I get 60% of the revenue. And if we're working on a 75% margin, I've got 25% cost. That means I've got 35%, I've got 35%, I've got 35% remaining. And I'd rather have 35%. I've got no upfront costs. I get my legals done for a few 1000 pounds, I can get the deal done by the end of the month, and hey, look what I've just and what you've done. You've added all the revenue, you've got the payment going out, but you may have just added a million pounds annual revenue to your business.
Robert Craven 51:30
Suite. That is lovely. I like that. Our time is up. That has been an absolute blast, or I knew it would be Jonathan. Whenever we've worked together we've had immense fun and laughter.
Jonathan Jay 51:46
And red wine. We have indeed, Yes.
Robert Craven 51:49
And that today has got my brain going. Certainly the people listening, watching will go: Oh, wow, this is this is this is interesting, because this is certainly fascinating conversation. After this, people can see how they can contact Jonathan. And all I can say is a huge thank you for your time and for sharing so openly. This has been absolutely fantastic. Thank you very much, Jonathan.
Jonathan Jay 52:18
Thank you for the invitation. Rob. Thank you.