The M&A Advisor Trap — The Red Flags Sellers Miss

Jeremy Harbour Thank you for having me.

Jacob Oros So we're gonna talk about kind of the M&A marketplace and choosing an M&A advisor. Why do you think this is an important topic? We could talk about just about anything here given your experience, but why do you wanna talk about this?

Jeremy Harbour Yeah, I guess, look, if, if you talk about, you know, the conversations I have every day, and the situations I find myself in every day, particularly with people who are exit-focused or trying to— somebody trying to sell their business, one of the most common challenges we have is around the whole advisor community. And it starts with, with the brokers or the corporate finance companies. And but it trickles down into the whole kind of advisor web. And I think there's a lot that businesses should do before they take on an advisor. And then I think when they do take on an advisor, there's some definite criteria they need to look at when selecting one, because people tend to go with the one that says they're going to sell their business for the most money. And it's a bit like only investing in the thing with the highest interest rate.

Jacob Oros Oh, that is a horrific trap.

Jeremy Harbour Yeah. But it's, you know, I, you put yourself in their shoes, you know, most people, you know, most people haven't sold a business before. So a lot of people that you find trying to sell a bit, it's kind of look at it a bit like retirement, you know, which is you work your nuts off your whole life and then you have one opportunity to sell your business and, and retire. And, and really to sell businesses, you know, you, you'll, you're always gonna make some mistakes the first time around. You know, you'll make a few less mistakes the second time around. after a while, you know, you get more and more efficient at it. And so having it as the last thing you do in your career is incredibly imbalanced from a risk perspective. But if you are where you are and you do have to sell it, then having good advisors can make the difference. But unfortunately, they can also make the difference the wrong way. It's a toss of a coin, isn't it?

Jacob Oros It is. Is it really misaligned incentives, do you think? Is that the most important thing, ensuring that your incentives are aligned?

Jeremy Harbour Yeah. Well, look, of course, aligned incentives are important. I've come across a lot of brokers who appear to really only make their money taking listings. You know, it's the listings that keep the lights on because they're charging a fee upfront.

Jacob Oros Yeah. There's a couple of very well-known firms I won't name, but they charge $30,000, $40,000, $50,000, $100,000 upfront and promise the sky in terms of the value that you can get.

Jeremy Harbour Yeah, and that's the pitch. You know, they come in, they tell you, you know, your $3 million business is worth $8 million. So of course you hire them instead of the guy that says it's worth $3 million. They charge you the 30, 40 grand upfront because they've got this list of people that are just dying for a business exactly like yours.

Jacob Oros Ooh, this, the secret list.

Jeremy Harbour It's the whole secondhand car sales thing. I've got 50 people that want a car just like this. You know, it's, and then You know, as we were just discussing off air beforehand, they tend to then wheel in all of their friends at this point. You know, so what you really need is a patents lawyer and what you, you know, what you really need is this due diligence firm and all this other stuff that they then try and get you to spend money on that they're clearly getting a cut of. And yeah, I mean, literally, so we came across— I'll give you a direct case. I came across a business the other day, super simple business. It was a physical shop that sold solar panels and they specialize— and solar is quite cool and trendy. Yeah. So You think it's quite a like a modern thing, but it's been going. This has been going for 15 years or so, and they specialized in solar panels for camping. So basically, it would run a kettle or charge your phone or this kind of stuff. It's like a cool little thing you fold out, and that was kind of their specialty. And they were doing about $10 million a year in revenue. So it's a pretty small company, but not bad. You

Jacob Oros Know, probably a million or two in EBITDA, right?

Jeremy Harbour Yeah. And they and they'd grown over the years that their website had become you know 80% of their sales. So 80% of the stuff was ordered online, and occasionally people. Would come in and actually buy from their physical location. So it's a predominantly online business. A broker came in, told him it was worth a gazillion dollars. They bought the home that they were going to retire in, which was overseas. His wife moved to the home overseas, and he's left trying to sell this business for 4 or 5 times more than it was really worth. And of course, some people are getting close to his number, but it's all vendor finance. It's all, you know, back-ended, and he can't see himself remotely managing that kind of a handover when, when he's in another country with his wife. And anyway, it was for sale for 2 years. So for 2 years, he separated from his wife with this business for sale. And, you know, I guess anyone would have told him, okay, allow a couple of years anyway. It's not a bad time horizon. But when, when you're missold, you know, you think it's going to do. And the, the URL for his website comes up for renewal. He doesn't renew it. He just lets it expire, locks the door, and goes to join his wife overseas. It's insane, but I'm seeing more and more baby boomers do exactly this. They can't get the unrealistic price they've been promised, and so they just wind the business down, lock the doors, walk away. Whereas there was a price, there was a deal. It would've happened at, if all the expectations were correctly set at the beginning.

Jacob Oros Jeremy, tell the audience about your Experience buying and selling companies so we know where your perspective is coming from.

Jeremy Harbour Yeah, absolutely. Look, I'm an entrepreneur who figured out I could buy businesses without using huge amounts of capital because I was in a, in a, the telecoms industry in the 1990s. And basically it was very frag— very fragmented. The only way to grow really was through acquisition. And so I kind of learned from other people that were trying to buy me how I would go and buy someone else. And I did like a, a little bit of a roll-up. I bought some other random assets, some other businesses in other sectors. So I figured out how to buy them and then I sold one and had the epiphany, which is you don't make money running businesses, you make money when you sell them. And so I had been kind of empire building and trying to own everything without realizing that actually that's not the game. The game is the exit. It's the capital event that changes everything. And so I kind of pivoted into a buy-sell kind of process where I would buy companies that either had some distress or needed some work done or weren't prepared for sale. just like the guys I've been talking about, these baby boomers that haven't prepared their business for sale. So you could pick these businesses up for not a lot of cash upfront, put them in a more sellable place, and then remarket them for sale again.

Jacob Oros So like a PE firm strategy with your own capital?

Jeremy Harbour Like a PE firm strategy, but well below the PE radar. If we bought one doing $20 million of revenue, that was a reasonably big deal for us at that time. So it was all Yeah, fairly small companies. And we did a lot of distressed— oh, I did a lot of distressed stuff, around 50 distressed transactions during the global financial crisis because I sold that first company in 2006. So 2008, '09 came along after that and the whole world was on fire. So there was lots of opportunities there.

Jacob Oros What's it like doing those deals, by the way? What's it like doing the distressed deals?

Jeremy Harbour Yeah. Do you know what? I really enjoyed it. I was buying businesses for a dollar. that business owners were convinced were absolutely screwed. But my 20 years of being an entrepreneur, they were in way less shit than I was in. So my, my normal operating level of, you know, bootstrapping was way ahead of what most people could tolerate, clearly.

Jacob Oros So you could— what you could afford to weather the storm and they couldn't.

Jeremy Harbour Yeah. The tolerance for bootstrapping, I think, is the better way to describe it. It's that kind of— because it's not, it's not particularly fun. But what I found out was that when you go into a business, you didn't get into trouble, life is so much easier than if you, if you're the one that got it into trouble. So if you didn't get it into trouble, you can have much nicer conversations with creditors, much nicer conversations with staff, 'cause you're kind of there trying to resolve issues.

Jacob Oros You're trying to, you're the savior.

Jeremy Harbour So you don't, you don't take on all the baggage. But don't get me wrong, about half of those businesses that I picked up failed. They didn't come out the other side, but it's, it's low risk. The ones that succeed are 6 and 7-figure outcomes and the ones that fail. Now, in that particular time in the world, you could do a lot of deals. So I think now if I was looking for distressed companies, I could, I could have a meeting every week. In 2009, you could have 5 meetings a day. So it was a very rapid learning curve because there were just so many opportunities all at the same time. So, so I'd probably got 5 years of experience in that 18-month, 2-year kind of window. So that was very useful. It gave me a lot of transactions.

Jacob Oros And you do deals both in Europe and US, correct?

Jeremy Harbour Yeah. Yeah. So predominantly we're probably about 70% skewed to the UK still. You can probably tell from my accent, I'm one of those tea drinkers that you kicked out all those years ago. What, 250 years ago now? Yeah. So, but so yeah, there is a weighting towards the UK, but yeah, we do deals in the US, in Canada, We've done a few in other random places as well.

Jacob Oros Off topic, but what's the biggest difference between the 2 markets in your opinion?

Jeremy Harbour That's a great question. I mean, so in the US, I've always found I needed to be there to get the deals done. So actually physically turning up and going to meetings really helps with the transaction. With the UK, I can get it all done over Zoom. The scale in the US is completely different. You know, I always give this example of a swimming pool. Company I spoke to, and they were doing $50 million a year installing swimming pools. If you were doing $50 million a year installing swimming pools in the UK, you'd be the number one in the UK and you'd cover the whole country. When I asked these guys, you know, what geography do you cover? And they said East Houston. So the scale, the scale in the US is an order of magnitude different. I mean, pretty much every state is bigger than the UK in terms of its domestic market. Bear in mind, the UK is still the second biggest market for a lot of industries. So it's the second biggest insurance market in the world. It's the second biggest legal market in the world, second biggest financial market in the world, bond market.

Jacob Oros Other professional services, it sounds like.

Jeremy Harbour Yeah. So, you know, US is number one and the UK is number two in a lot of areas. And yet order of magnitude Bigger in the US.

Jacob Oros Do you still find that it's difficult to do deals virtually in the US? Because we've, I've, we've operated virtually for 15 years at this point, and I think after COVID things changed quite a bit.

Jeremy Harbour Yeah. So we, we have as well. We, we, we started, well, we started in 2016. We got our Zoom account in 2016 and, and started doing everything virtually. I was living in Singapore at the time. I think the US thing with us is because I'm not American. So I have an extra rung of trust to overcome that a local would not have to overcome in much the same way as I've done deals in France and Germany. But actually in France and Germany, it's really tough if you're not French or German. But there it's more of a xenophobia thing. The Americans and the Brits, we're quite open to doing deals with people that, you know, speak our language with a funny accent. If you go to France or Germany, they're really particular about dealing with French or Germans, there is that element that just makes it a little bit more challenging. So I think, yeah, I think for me the US thing is more about not being American.

Jacob Oros Yeah, human side of M&A. It's a whole nother topic.

Jeremy Harbour Yeah, exactly. Look, there is only the human side to M&A because ultimately the deal comes down to, you know, the 2 people that are doing the deal together. And people only do business with people they like, know, and trust. And if you have a bad feeling about someone, It'll come back eventually in the transaction later on.

Jacob Oros So it's a bad idea to hire an M&A advisor that lies to you upfront about what your business is worth. Ironically.

Jeremy Harbour Yeah, that's, that's, that's a starting, that's a good starting point. Yeah. I mean, just, I think filling a room full of advisors, I think as a business owner, you should be the one that speaks to every prospect who's interested in buying your business. You know, advisors for sure, they can get rid of some tire kickers, they can thin out the numbers, but you should speak directly to the people that are looking to, to to buy the business.

Jacob Oros That's what we do. We do an interview with the seller and we let the buyer listen to that. We don't quote unquote sell the business. If I was buying a company, I wouldn't want to hear it from the advisor. I'd want to hear it exactly from the owner.

Jeremy Harbour Exactly. You'll, you'll, you're finding people that might like something like that. And yeah, it's just like a house, you know, you are better, you are, you are better at selling your own house than any real estate agent is ever going to be. And a business is way more complicated with way more things they need to understand.

Jacob Oros So What mistake do most owners make if they're selling their business and they get no advice from a professional in terms of how to present it?

Jeremy Harbour I think deal structuring. So understanding how deals are actually structured and how earnouts work, how deferrals work, how other kind of, you know, acquisition instruments might, might be part of a transaction. Because I think people sometimes get a little bit unrealistic around, I'm not gonna do any handover period. I'm not gonna, you know, I'm gonna walk out the day you write me the check and I want a check for the whole amount.

Jacob Oros What about in terms of explaining their business? The first, say the first conversation.

Jeremy Harbour I explained the business. I wouldn't say there's like a common mistake. I mean, there's all the really obvious things like—

Jacob Oros Selling yourself too much and not the company.

Jeremy Harbour Yeah. Basically making yourself look like you are too important to the business because people love to talk about themselves and love to talk about how great they are and how wonderful they are at what they do and how

Jacob Oros Much potential there is in this business. And no other business in the world has that amount of potential and the buyer should—

Jeremy Harbour I've never met an entrepreneur that hasn't thought that. next year is gonna be their best year ever. That's just the entrepreneurial condition. But pricing that in is obviously a challenge. Well,

Jacob Oros Welcome back to M&A Talk with Jeremy Harbour. Jeremy, this is a really, to me, it's very fascinating. The, the overall M&A marketplace, the marketplace of buying and selling companies. What is your perspective on that from an efficiency standpoint?

Speaker C How efficient is the marketplace and what are the gaps or opportunities within the market?

Jeremy Harbour Yeah, it's massively inefficient. I mean, the first thing is just the universe of potential buyers and the universe of potential sellers, because there are lots of big— there are lots of, or a lot of very small companies and there's a few very big companies. And if you look at the potential universe of people that can buy those businesses, it's the opposite. There's tons of people that can buy the big ones and almost nobody that can buy the small ones. So If you're a small business, there was a there was a broker in the UK that went public recent or not recently, but they went public not too long ago, and they had to publish a prospectus. And of course, in the prospectus, it went into great detail about what they'd actually sold. And it turns out eight percent of their clients sold their businesses.

Speaker C Eight percent?

Jeremy Harbour Eight percent, yeah.

Speaker C Of the clients that actually took on and engaged with, an eight percent success

Jeremy Harbour That they took on ended up selling their business. And this is one of those multi. you know, multidiscipline brokers that charges a fee upfront. But you know what, I think in the general wider market for smaller businesses, you know, the sub-$10 million revenue businesses or sub-$5 million revenue businesses, that's probably about right in terms of they're pretty hard to sell.

Speaker C Let's talk about that. Let's talk about the business broker market and the M&A market. So I got my start when I was, boy, I must have been 19 or 20 as a business broker, quote unquote, selling really small kind of mom-and-pop shops. That marketplace is very deceiving because it has such an insanely high turnover. You have a lot of firms— I wouldn't even call it a firm— franchised offices that try to sell a franchise. And hey, you want to get into business brokering? And 2 weeks of training and there you go.

Jeremy Harbour Yeah, there's a very low barrier to entry and it shows.

Speaker C No barrier to entry. Every single one is a generalist. The processes are terrible. The training is horrific. It has almost nothing to do with the company that you hire and everything to do with the individual that you hire. And they have these terribly misleading sayings like, you know, we're the largest business broker firm in the United States, or lying about their success rate. And it's— the deception is, is incredible. But what, what has your experience been with that market? So we're talking maybe, let's call it a million in EBITDA and less. What's your experience been with that?

Jeremy Harbour Yeah, so I think my most popular post on LinkedIn was a picture of somebody holding a pot plant and it said business brokers should always carry a pot plant to compensate for their waste of oxygen. So, and the feeling's fairly mutual because I mean, I have, I have an M&A community called the Harbor Club. And part of the Harbour Club, apart from being a community, is around education, and it educates buyers of businesses. And of course, a business broker's worst enemy is an educated buyer. And so as a consequence, you know, we have a we have we we have a love. No, actually, we have a hate hate relationship. I'll just put it that way. And the feeling's mutual. They're not bringing any value to the party. And you know, as already pointed out in the first part of this discussion. Often it poisons the well to the extent where people who should be retiring are not retiring because of the business broker's intervention in the in the whole kind of transaction. And it's interesting as well. You mentioned you know that sub one million ebit. That's the kind of messy end of the market where perhaps you know they they could be playing. But you're finding bigger businesses that really should have a corporate finance firm that should have maybe even investment banking you know kind of advice who are still going to. You know, some business broker that sells for you know forty different kinds of of business. You can buy a printers or a or a fish and chip shop. It's insane.

Speaker C And don't get me wrong, there are some very good brokers out there. Very, very good.

Jeremy Harbour The ones I found seem to work are ultra specialist. I remember coming across we were looking at some businesses in the it was a niche of engineering, and within this niche of engineering, we found this broker. And basically, he knows that, you know, the whole universe is probably like there's 150 of them, and he knows all of them, who's sold, who's for sale, who's buying, who's retiring. I mean, he literally, he knows the 5-year plan of all 150 of these businesses that are in with, you know, in his particular niche. That kind of a broker, I wouldn't dream of trying to sell a business in that sector without going to him.

Speaker C Let's define some terms here. We've got business broker, M&A advisor, and investment banker. How would you differentiate between the 3?

Jeremy Harbour Yeah, so I mean, obviously, it's probably a scale thing, isn't it? So I mean, a business broker, you probably do, you know, for physical premises-based, you know, businesses like small retails, you know, beauty salons, restaurants, bars.

Speaker C Very often local in your specific local city.

Jeremy Harbour Yeah, that kind of a business.

Speaker C Maybe a million in EBITDA and less.

Jeremy Harbour Yeah, I think, I mean, obviously it's always risky using terms like that because if you found a software as a service business doing a million of EBITDA, it's a different animal to a printer doing a million of EBIT.

Speaker C Well, I think a good rule of thumb is the buyers you deal with, generally individuals and not institutional buyers.

Jeremy Harbour Yeah, exactly. I mean, at a million of EBIT, you're well into trade sale, aren't you? There'll be a queue of people that have got the capacity in a trade sale environment to buy that business, and it's worth them doing the due diligence to actually do it. And, but yeah, I think above that, yeah, probably even above half a million of EBIT, you're probably just getting into the realms of having a conversation with a corporate finance company or an M&A advisory firm.

Speaker C There's a big gray area there. I'd call it half a million to a million, $2 million in EBITDA where

Jeremy Harbour You're too small but too big. Yeah.

Speaker C Exactly. Both brokers and M&A advisors. Yeah.

Jeremy Harbour Because the M&A advisor's gonna be a bit expensive for the size, but it's the only place you're gonna find that strategic buyer potentially.

Speaker C Now, how would you define M&A advisor?

Jeremy Harbour Well, so I, I would call them like a corporate finance company here in the, in the UK. But it's basically, they tend to be boutique and they tend to be, a little bit specialist, but not as specialist as that engineering guy that I described. Probably a bit more broad in terms of the areas that they cover. But they will actually bring, you know, whereas a broker will list you and then hope for the best, an M&A advisor should be telling you what you need to look like in order to appeal to the audience that they're gonna put you in front of. So there's a bit more of a process before putting you for sale.

Speaker C Usually auction process, correct?

Jeremy Harbour Well, a process of preparation, making sure that your data room is together so that when somebody comes and looks, it looks right. That, you know, you are coached on how to hold the meetings, that you're coached on what to say, what not to say. That they, and that they have a good process or a good system for putting you in front of the right buyers so that you're not just a bolt-on to something else, but there are some potentially good strategic acquirers in there.

Speaker C So they probably deal with institutional buyers, PE firms, family offices, and so forth. Much more knowledgeable in my experience, much more connected with professionals, attorneys, accountants, QV providers, and so forth. What other attributes do you commonly see in, in, in M&A advisors versus, call it, a broker?

Jeremy Harbour Yeah, again, I, I would still come back to this, making sure that you're, you look right. That curb appeal thing and that preparation piece of the, of the puzzle, I think is the biggest thing that's left on the table for brokers is they just, I mean, they will just list you and then start sending people that are interested in buying the business. And, and sometimes there's just glaring obvious things that aren't, not right that need to be fixed. You know, I mentioned putting personal exp— you know, too many personal expenses running through the company, not documented properly, systems and processes and all of those kind of things. But I mean, there's, there's a million books and podcasts and things on the topic of preparing a business for sale, but it's astonishing how many people still come to market not being even slightly prepared for a sale. You know, when you ask them for, I dunno, an insurance document, they have to ring their insurance company and get it rather than having it in a paper room somewhere.

Speaker C I'd say the process is also much different. Your typical broker goes and lists it and advertises it, whereas an M&A firm or M&A advisor will prepare a list of buyers, go through an auction process. What's your experience been with that?

Jeremy Harbour Yeah, I've not had any experience of being beauty paraded through a shortlist of buyers actually. So yeah, it would be nice.

Speaker C Now what about investment bankers? That term is used very loosely because M&A advisor is kind of clunky. If you're using it properly based on your definition, how would you define that term?

Jeremy Harbour Yeah, so investment banks are the Goldman Sachs, the UBS, those kind of guys. And so if your enterprise value is $300 million plus, or you might get away with something, you might get away with $100 million plus if you already bank with them and you're a good Private client, and and you have a good relationship with them. But yeah, if the enterprise value is over typically three hundred million for the for the meatier ones. Now there are also a bunch of boutique investment banks, the smaller players who will do those kind of twenty million plus kind of transactions, which is starting to tread on your toes in terms of scale, you know, trading on the advisory side of things. And again. Quite often the investment banks have the benefit of having lots of private clients who can potentially be buyers. Again, they're often providing custody and things like this for public companies, for family offices, for other institutional capital holders that they have those deep, slightly deeper relationships with because they're clients. Now, investment banks are often accused of playing both sides because if you are selling stuff to your own clients, who are you representing? The person that you're selling or the clients that you already have. And, you know, we hear this all the time with IPOs where, you know, the pre-IPO all goes to a very small group of friends of the, of the board of directors and nobody else gets a look in. So, but yeah, I would say investment banking is at that end of the market.

Speaker C And they tend to provide a broader range of services, don't they? Like fairness opinions, raising capital and so forth.

Jeremy Harbour Yeah. I mean, raising capital is a huge part of what they do. Yeah. And then obviously all the capital markets side of things. I mean, I guess investment banks are probably best known for taking companies public.

Speaker C What's your biggest irk about advisors in general?

Jeremy Harbour Yeah, I mean, it's a really disorganized market and there's so many irks. I mean, one of the biggest challenges when you're buying a business, because we deal with mainly owner-managed businesses, and so owners will tend to use lawyers that they know rather than lawyers that would be the best for what they're trying to achieve. And I mean, particularly we do a lot of stuff in the capital markets with public companies. And if the lawyer does not understand securities law and does not understand public companies—

Speaker C They'll learn on the job. Yeah. Going to pay 10 times the price.

Jeremy Harbour It's painful. So, I mean, you know, we even have like a stable of recommendations that we can give to people of lawyers who know what they're talking about. And we just have that honest, frank conversation with them. Look, this lawyer is not on our side. We don't hire them for anything. There's no conflicts. But this is a list of people we know understand what we're trying to achieve.

Speaker C If you had an attorney that, very experienced corporate attorney, maybe he's done 5 M&A deals in their life and he said, hey, I'll do it for free, and it's your buddy, how much would you charge him?

Jeremy Harbour So, I mean, look, on all our deals we have in-house counsel, so we do all of our legal work in-house. So it's always the vendor's team that is the challenge. And I mean, look, we've learned a lot of lessons over the years. I mean, one of the key things that you should always do is coach the other side on how to appoint a lawyer, because you need to give really clear instructions to your legal team. Otherwise, they will naturally adopt the broadest possible brief with the largest possible fee structure attached to it. So you need to get really, really strict with how you actually engage with them in the first place. Don't— you're not hiring them to negotiate. You're not hiring them to do anything other than make sure you don't get yourself in trouble with what you've kind of agreed to. And the other thing is just doing walkthroughs on Zoom, you know, like, like having a Zoom call with all hands, with the buyer, the seller, the lawyers on both sides, everybody all on one call, and go through the entire draft agreement line by line, paragraph by paragraph. It can take a couple of hours or more as a first time around, but it will save a fortune in legal fees because you'll automatically bring up the stupid things that they want to correct because the first 4 or 5 letters that go between lawyers are pointless. It's like marking homework and adjusting grammar and things like this, you know, so you can deal with all of that. Plus you can put some red lines around stuff. You can put some things that are negotiable, some things that are non-negotiable, why they're not negotiable, why it's written in this way, what you are trying to achieve with this paragraph, you know, et cetera, et cetera.

Speaker C I got a purchase agreement the other day and It was from a real estate purchase agreement, and it was drafted as if the agreement would be signed pre-closing. And if we would've just sent that to the attorneys, they would've run with it. My God, that would've cost tens of thousands of dollars for each party.

Jeremy Harbour Yeah, I think AI is to blame for a lot of this. Yeah, they're just hitting go and they're not even reading it. They're just sending it first.

Speaker C Well, I called the buyer and I said, is this your intention? Do you really want to sign this before the closing? Because that's going to be really complicated. It's not the norm for a deal like this. He said, well, oh, I, you know, I'm used to doing real estate deals. That must have been a mistake. And that's what I've noticed with purchase agreements is there might be something in there that the buyer attorney, whoever dropped it in there from a template, and you ask them about it and they're like, oh, I didn't notice that. No, that's a mistake. Let's ignore it. And that could easily turn into a giant dispute or redlining back and forth.

Jeremy Harbour I sometimes wonder how deliberate this stuff is because I think they— I mean, obviously, look, the Law of incentives. Yeah, they're paid by the hour. So what do you do if you incentivize hours? You get lots of hours. So I mean, we had we had one not too long ago where they sent a draft sale and purchase agreement, and it was for like a retailer for a corner shop. You know, all of the description, and and this was a completely different kind of business, and it it was obviously so bad that it would have to be extensively redrafted. And so I think what they wanted to do was to create a document that would go backwards and forwards a hundred times. and run up the most possible fees they could for a simple sale and purchase agreement, whereas there would be a template for the type of business that they were, they were selling that wouldn't need huge amounts of redrafting. And so I wonder how much of it is deliberate sometimes.

Speaker C That's actually a great test when you're hiring an attorney, give him the wrong template and see if he starts running with it.

Jeremy Harbour Yeah, yeah, yeah. Or if they go, this is a ridiculous document. Yeah. What you've sent me is a letter of intent.

Speaker C Been there, done that. And welcome back to M&A Talk with Jeremy Harbour. So Jeremy, the loaded topic here of choosing an M&A advisor in a nutshell, What's the secret there?

Jeremy Harbour Yeah, so look, I mean, obviously the people I deal with, I'm buying their company. So I, for me, it doesn't matter if they have an M&A advisor or not. But I know from selling businesses myself that, yeah, brokers are not bringing the value. If you are the right sort of size, you do need to go through a process. And I think the first thing is to educate yourself in terms of the market, what other businesses in in your sector, in your geography are kind of selling for. Try and understand what sounds realistic, what sounds unrealistic. And also just look at some of the kind of business preparation kind of books or websites, or there's tons of YouTube content, there's tons of podcasts. Probably your podcast is probably quite a good resource for this, which is the kind of things that you should do to have your business ready for sale. And go through the motions of doing some of that stuff because a lot of this stuff it's quite common sense, but what is it they say, you know, common sense isn't all that common. So just things like having a data room put together, actually drafting the bones of an information memorandum that you could actually use as a starting point. All of these things will make it easier for any advisor to understand your business and, you know, how sellable it is now and what you can be expected to get for it. And it will probably also save you in terms of external consultants fees once you engage them, because you can spend a lot of money doing this stuff and it's actually all stuff that can be done with your own internal resources for not really incurring any additional costs. So the first thing I would do is probably prepare the business at a high level for sale and then start reaching out to some. Obviously, if your industry has a specialist, you may have already been approached by somebody to try and buy your business. So are they still active in that space? Are they still in that sector? And Yeah. Start to build a shortlist of potential advisors that could help you and speak to them. And I think like Jacob was saying with brokers, you know, it's all about having a good person, of course, in brokers, sorry, it's all about having a good person. I think with M&A advisors it is as well. I mean, there's going to be a person you're going to have to work with through this process. So—

Speaker C Oh, absolutely.

Jeremy Harbour You know, there's a human element to this of finding somebody that you can see yourself spending the next year, year and a half with. Sorry. There's nothing—

Speaker C 100%. What do you think about taking an M&A advisor for a test drive? Because we do something like that where for $1,500, we'll do an assessment of your company and maybe like half those people run off and go implement it and maybe never contact us again, or in 3 or 4 years reach out. But what are your thoughts in terms of dipping your toes in the water with a firm before you commit?

Jeremy Harbour I think it's a really useful exercise. I mean, I, I often say to people, you should always be for sale. You should always be looking for potential buyers because it actually creates all the right habits for running an efficient business. So yeah, doing those kind of things. I mean, we have a lot of people approach us just to find out how much, you know, they could get for their business.

Speaker C Jeremy, let's talk about some of the myths. There's myths that some of the firms spread around the marketplace. The buyerless myth. What are your thoughts on that one?

Jeremy Harbour Yeah, this is the secondhand car sales technique, isn't it? When you advertise your car for sale and they ring you up and they go, I've got somebody that'd be perfect to buy your car, but you need to be advertised on our platform. So if you just pay this, you know, $29.99, we'll put you on our list and I'll send this guy over to you. It's the same exact scam, which is I've got this queue of people, they're dying to write a check right now, but we have to have you on, you know, we have to have you listed. Let's get you listed and then we'll start promoting. I mean, most of them just advertise it on bizbuysell.com. So, you know, they'll, they'll take a few, a few thousand dollars off you and spend 30 or 40 of it on an advert. So yeah, and they're not really doing that much more than that.

Speaker C Now, to be fair, there are some industries where the buyer list is valuable. That specialist, like you mentioned there, that's valuable. I think that's That's very rare though. That's for industries where there's maybe a few hundred players. But I would say if you're in more than one industry or niche, your buyer list is probably not worth much.

Jeremy Harbour Yeah. And, and look, there's some industries where there are very active private equity rollups going on. So, you know, it changes all the time, but veterinarians and then dentists and then real estate, you know, lettings agents and things like this. And there'll be a rollup in that space where somebody's just coming in and hoovering everybody up. I mean, really in those situations, there's no point being represented by a broker or an M&A consultant if you're going to sell to one of those, because the price is the price. It's a cookie-cutter transaction that's going to be put in front of you. You just get your advisors to go through the small print. But if you want to sell outside of that, and we see this a lot with like marketing agencies, for example, there's so many marketing roll-ups, but of course all these marketing companies They're not like dentists or doctors. They're, you know, really unique and they have a completely different approach and completely different type of client. So they don't necessarily homogenize.

Speaker C We did one of those last year. We got, ooh, probably 25 LOIs.

Jeremy Harbour Wow. Cool.

Speaker C It was brutal. Very high customer concentration. So there was an issue, but—

Jeremy Harbour Yeah. But if you're doing a roll-up, customer concentration's less important because you're gonna just dilute those customers with your own. customers or with the next deal or the deal after that. So you can get away with selling to a roll-up if, you know, with a, with a high client concentration. But, but of course they're gonna want to back-end a whole bunch of the, of the money, which is understandable. But, but you'll still get the price, which is important.

Speaker C What about the success rate myth? We have an X percent success rate, we have an 80% success rate or an 82% success rate.

Jeremy Harbour Yeah. I mean, look, unfortunately a lot of businesses come to market when it's a bit too late, don't they? When there's an actual necessity to sell rather than a desire to sell. So if you can ever sell, if you can ever sell at the point where there's a desire to sell, you've got a massive advantage over all the people that have died, who are dying, who are about to die. You know, there's a whole raft of other people who are in a position where they really have to sell. And so I think the success rates get juiced a little bit by the fact that they're pretty much going to take an offer that comes on the table. So simply getting the business away isn't necessarily what you could classify as a success. It's a closed deal, it's a transaction. And of course, I guess both parties were happy, so you could argue there's some success there. But yeah, unfortunately, I think a very high percentage of businesses that come to market Haven't thought about the timing. The timing has come to them.

Speaker C What other myths do you commonly see when it comes to M&A advisors?

Jeremy Harbour I think, you know, particularly in where we are in, in the owner-managed businesses, you know, sub-$50 million revenue, it's actually really a buyer's market. And I think people believe that there are tons and tons of buyers and almost nobody for sale. And And, you know, they believe they're in a unique position. And actually there are thousands of companies just like theirs, and there's not that many people that can potentially buy them. And I think people walk away from deals because they think there's a better one just around the corner because they think there's plenty more opportunities. And more often than not, there is never another opportunity to sell And the one that got away gets away.

Speaker C When it comes to valuation, this is, I think, is a very important question. How do you know if your advisor's telling you the truth?

Jeremy Harbour Well, I mean, look, the, any business is worth what somebody pays for it. And the only valuation that matters to the taxman is what somebody actually paid for it. And so if somebody buys it, then the advice was right. That was the price. And I wouldn't just listen to your advisor on the price. I would sanity check it a little bit. I mean, looking at comparable deals is always a good place to start. And you can, in very small deals, look at things like bizbuysell.com's annual report, which will give you some comparables in different industries and, and things like that. Unfortunately, when you talk about comparables, people always pick the crazy one.

Speaker C The ones that you specifically exclude when you are appraising.

Jeremy Harbour Exactly. The one that you would strike out when you're doing the median. Yeah. They just go, well, that one sold for 40 times earnings, therefore I'm worth, you know, so comparables can be dangerous, but it's very useful to start to dive in a little bit into comparables where you can find appropriate data. And I mean, there are so many different drivers to valuation, whether it's purely an earnings perspective, i.e., how quickly a buyer can recover their money from a sale, And I always have to just point out to people that if you are asking people to give you money, effectively what they're looking for is a risk-weighted return on their capital. And at the moment, the risk-free rate in the US at the time of recording is about 5%. So that's like 20 times earnings. So you can get 20 times earnings taking no risk. You have to have an order of magnitude discount on that to take the kind of risk that you get inherent in a business. Now, of course there's opportunity, but opportunity is what you make of it. You have to take the business over and you have to deliver on that opportunity. And so this is where earnouts and deferred payments and things kick in.

Speaker C Right. Or get a piece of real estate at maybe a 12 multiple or invest in the S&P 500 or stock market at—

Jeremy Harbour Exactly. Yeah. You get a piece of real estate with a 10 cap, you then, again, from a risk-weighted return on capital, that's the norm in that sector. So again, if you're going to staff and customers, which are horribly unpredictable. I mean, you lose 2 key employees or 2 key customers in most businesses, and the dynamics of that business changes quite dramatically. And the point of purchase is the point of maximum risk for that event to happen. So when you buy the business, that's the moment in time where those staff will leave or those customers will leave. That's the inflection point. And so this is what I often say to people about doing heavily leveraged buyouts, is you're effectively betting your house on a business where you're paying the star employee to leave, and you're potentially creating this perfect storm of challenges ahead of you. So yeah, you have to be very careful in those situations.

Speaker C What are your thoughts on, and this is a loaded question upfront, Fees. We charge our firm nominal fees, maybe $5,000, $10,000 upfront for actual work done. There's other firms that might charge $50,000 for a valuation that they can spit out from a piece of software. But what's your experience been with upfront fees?

Jeremy Harbour Yeah. Do you know what? I'm in so many areas in life, I found that people that are selling you hard on fees often don't then deliver. And the people that have very much a risk-balanced approach tend to be the ones that deliver to the point where, I mean, we do, we quite often do capital raises around our public market stuff. So we'll be doing a pre-IPO fundraise or raising funds into a financial instrument or into a fund. And we have so many people that come to us for capital raising who want a fee and so many people who, who don't need a fee. And the people who don't need a fee always outperform the ones that have charged the fee. upfront. And one of the things that's worked quite well for us, and it sounds like you do this already, is when somebody comes to us and says, we can raise you a gazillion dollars over the next, you know, 12 months, is we ask for proof of life. Go, okay, raise us $100 grand. If you can raise us $100 grand, we'll engage you and we'll pay your upfront fees and we'll do all the things that you, you've asked. And you'll have a mandate to go and try and do some more. Because let's face it, if they can raise $100 million, they can pick up the phone and get someone to put $100 grand into something, can't they? And invariably you never see 'em again. So it's,

Speaker C Put your money where your mouth is. That's a good point. Yeah.

Jeremy Harbour And it sounds like what you're doing with your walkthrough, your, your kind of $1,500 tester is a bit of a kind of proof of life. Get a bit of experience of, of what it's like before you jump in both feet first.

Speaker C Now, what's the secret to working with an M&A advisor once you hire one?

Jeremy Harbour Yeah, I mean, look, it depends on the mandate that you have with them, because if they're charging you by the hour, then it's trying to get away with with only using 'em for the things that you absolutely have to. But most of the ones I've seen are, are pretty generous with their time once they're engaged and pretty much unlimited. And so use them like that. Use them as an extension of your business. Use them as a non-executive director to your business who happens to know about M&A. Because yeah, the more you can keep them educated, the more you can update them. I mean, I, you know, we work with companies that we are taking through a process of IPOing or direct listing or taking public. And I'll catch up with them sometimes and they'll tell me something that's so fundamentally important to the story that we're telling. It's like, how on earth did I not know that? You know, it's like, so having that person almost, you know, in the camp with you is a lot more useful 'cause they need to live and breathe the business in the same way you do.

Speaker C Very good advice. Now, Jeremy, as we wrap up the show here, what do you think the takeaway point is?

Jeremy Harbour Wow. So I think, yeah, if you're doing more than half a million in revenue, use an M&A advisor. Don't rush, by the way. I would say don't rush to build a deal team. I think everyone's obsessed with this idea of a deal team, having the lawyer, the accountant, everybody all engaged and up and running ahead of time. By all means, select some professionals, but don't engage them until you have a deal to engage them in, or you'll just be accruing fees for no reason. And also, they'll want to throw their 2 cents into every conversation you have, and that will just lead to more fees and more challenges. So yeah, choose wisely, choose carefully. You only get to sell it once. So try and do the grunt work yourself at the beginning and then hire carefully.

Speaker C Priceless advice, Jeremy. Thank you. Let's plug whatever you have to offer.

Jeremy Harbour I mean, look, you can follow me on social media, jeremyharbour.com or harbour.jeremy on Instagram. And actually, if you go to harbourclubevents.com, so it's spelled the same way as my surname, H-A-R-B-O-U-R, harbourclubevents.com, we have a 21-day free email thing on there that you can subscribe to. I think it says at the top of the screen, free course. Just click on that and And every day for 21 days, we'll send you an email that takes you through a different step of the process for buying and selling businesses.

Speaker C What is Go Do, one of your books? What's that about?

Jeremy Harbour Go Do is a book I wrote in 2012 about starting businesses. And Go Do Deals was a book I wrote that was actually a Wall Street Journal bestseller. When Obama was number 1, I was number 3. And it's about buying owner-managed businesses. So how to do acquisition entrepreneurship, really. Thank you.

Speaker C Priceless advice, decades of experience there summed up in about 45 minutes. And Jeremy, appreciate you coming back on the show. That's Jeremy Harbour. And Jeremy, thanks again for joining us.

Jeremy Harbour Wonderful. Thank you very much.