It was a pleasure to be invited by the founder of The Dealmakers Academy and business acquisition strategist Jonathan Jay to join him on his private jet to Rotterdam and hear him speak at a conference for European entrepreneurs and SME business owners.
I joined four other businessmen looking to learn more about his process on company acquisition strategy and we came away with a masterclass on how you should look to build a pipeline, build a deal team and go on to structure the deals you’ve selected.
A transcript of his keynote speech to around 1,000 delegates is below.
So, in the next 20 minutes or so, I’m going to show you some of the things that we do over the UK to apply businesses, without using any of our cash, and the techniques and the strategies that I’m going to be showing you are in fact techniques and strategies that you can use anywhere in the world.Johnathan Jay, The Dealmakers Academy
The video is above and the transcript follows below.
I’ve spent the last 23 years, buying and selling businesses, and I spend one day a week at the moment, teaching other business owners how to do this. And the other four days by businesses moment, we’re averaging one business, every 10 days so. So one business acquisition, on average, every 10 days. And the interesting part of all of these acquisitions is that we’re not spending any of our own money. So the question to you is, if you could buy a business without spending any of your own money would you do it?
If you could do it, how many businesses would you buy if you didn’t have to spend your own money? (A lot of hands go up) All right. As many as you could. Because why wouldn’t you? Now, when we buy a business, we’re solving four problems.
1. The Growth Problem
The first problem that we’re going to solve is the “growth problem“. So the growth problem in any and every business is that you reach a certain point, and the business hits a plateau. It doesn’t seem to grow any faster so you run more Facebook ads you do Instagram, you hire more salespeople. And whatever you do the business just doesn’t seem to grow. And if you are entrepreneurial that is a very frustrating situation to be in. Because you’re stuck with a business that just isn’t exciting anymore.
So, when we buy a business, we solve that “growth problem“. Let me give you an example. Let’s say that it’s taken you five years to get to 5 million pounds or euros of sales, and you’re kind of stuck in that plateau, and you want to get to 10 million, to 15 million, to 20 million. Now you can do that via organic growth, more salespeople, more advertising, or you can say to yourself, let’s find a business that does 3 million in sales, 5 million or 7 million.
By buying that business suddenly we’ve doubled the size of our company overnight. So we can solve the growth problem by acquiring companies that are the same size, or larger than our own, and we can get that growth in the next 12 months, rather than waiting for years for it to happen organically.
2. The Speed Problem
The second problem we can solve our acquisition is the “speed problem“. Now if you’re anything like me, I look in the mirror in the morning, and I don’t see a face this getting any younger, and I’m in a hurry, I want to do things now I don’t want to wait years and years and years, and if you spent years building a company, and you feel the same way as me. You want to get that growth as quickly as possible. You don’t want to wait years, so how long does it take to buy a business?
Well, people have different opinions about how long it takes to buy a business, but in terms of the number of hours that you, as a principal of the acquiring business, put into it, maybe hours on the phone or emails or meetings. The answer depends on whether you have a process, you say, if you have a process to buy a business that is an awful lot faster than if you don’t have a process. If you don’t have a process you make it up as you go along, you think about it all the time you use trial and error you make mistakes, you take one step forward, two steps back.
I think that if you don’t have a process is going to take up to 100 hours to buy a business, but if you do have a process that we can shortcut this 100 hours, I have been an averaging 20 hours of time to buy a company. That’s 20 hours of me on the phone, emails and meetings, I outsource all of the accounts, I outsource all of the due diligence, I outsource all of the legal work because that’s not my skill set. I’m not qualified to do that.
Let me tell you what I do as a business partner. I set the strategy, what types of businesses are we going to buy. How many of them we buy, and when we buy them. I then do the deal sourcing the deal sourcing is looking for the right businesses to buy. Now, something which I think you should bear in mind is your successes of business buyer is partly going to depend upon what we call deal flow.
This is how many deals, you have in your pipeline. Now, if you’ve only got one deal in your pipeline, do you think the pressure is on to make that happen? You feel a certain amount of pressure to make that deal happen, don’t you? Well, you don’t want to be that person who’s under pressure. So, if you can develop a pipeline of deals if you can develop deal flow, then it does several things.
It makes you an outstanding negotiator, you see you’ve got deal flow, and if that deal starts to not look like the best deal or the deal you don’t want to do – you can walk away, you can say no. If you’ve only got one deal in your pipeline, you can’t say no because all that hard work is going to go to waste. And you’re back where you started.
Right now I’ve got 153 companies in my deal pipeline. 153. Some I haven’t spoken to yet, they’ve contacted me about me buying their business, but I haven’t spoken to them or we couldn’t get hold of them for some reason, they were on holiday or whatever. We’ve got some that we’re getting to the point where we’re thinking we’re not sure if we really want to do this, it isn’t the best year, we don’t think so, we’re not sure.
Some we’re speaking to and have had the first meeting, second meeting or third meeting with, and some of them we’re at legals with. You see when you’ve got 153 businesses in your pipeline, you can say no very easily because it doesn’t matter. Because there’s always another deal. Does that make sense? So there’s always another deal to go to.
The second thing that good deal flow does to help you is it allows you to make comparisons between businesses. So, if you’ve already got one business to look at. You don’t know whether that’s a good business to buy or a bad business to buy. But if you look at six businesses, all in the same sector, and you compare their financials, and you meet six owners. You could start to decide which are the better businesses that fit your strategy fit your personality, and fit the outcomes that you want.
So I spend my entire week talking to business owners and meeting business owners face to face, to find the right deals, but if I only had one deal in my pipeline I couldn’t do that. 153 are constantly replenishing. I never run out of deals. The most problem that we’re solving is the “growth problem“. The second problem is the “speed problem” because we can buy a business in the next six months and double the size of our existing company.
3. The Hassle Problem
The third problem that we’re going to solve is the “hassle problem“, the hassle problem is that typically when you have a business and you’re the operator of it is this; there’s a lot of hassle in your life! Where does the hustle come from? Ironically it comes from the people that you pay every month, they create the hassle and the stress in your life. It’s crazy but it’s true!
So right now, with the businesses that we’ve put together in a particular sector over the last few months, we’ve got 120 staff. So we’ve got 120 people on the payroll. There are in different parts of the UK, and I’ve only ever met three of them. And the three that I’ve met don’t have my email address, they don’t have my phone number. I don’t have contact with them. You see when you start buying businesses, you must be very very careful that you don’t create a job for yourself. Because then you just multiply the hassle factor.
Now in this particular sector that I’m creating is Children’s Day nurseries, so children’s education from 18 months up to four years. I didn’t have any qualifications in that sector. So I had to hire people who did. So I got myself an incredible management team. They’re dealing with builders and refunds. They’re dealing with the staff, we’re on the last day of the month right now and this is when staff typically quit their job,
The last day of the month is when they see their paycheck go into the bank so they quit on the last day and so I know that somewhere in our portfolio of businesses, there are one or two resignations today. If you’re the person who receives the resignation letter or email, then that could spoil your weekend. You’re thinking about how you’ve got to hire more people and do the interviews.
I don’t even think about that. I sleep so well at night. Because the hassle is someone else’s problem. You see the fourth problem that we’re going to solve – we’ve done growth, we’ve done speed we’ve done hassle but the fouth problem we’re going to solve is the “money problem“.
4. The Money Problem
Now we might say all day long that we’re in business because we love the business and we’re passionate about business, but we also want to make some money. We want to make a little bit of money along the way as well. In fact, somebody else might want to make a LOT of money, along the way and there’s nothing wrong with wanting to make a lot of money, why not?
If you can add value if you could buy businesses and if you could sell businesses. You deserve to make a lot of money, but what most operational business owners do, is they turn up at the office every day. And at the end of the month, they pay all the salaries, they pay all of their suppliers, and they see what’s leftover. So what’s left over is theirs. They then say well, while it wasn’t a very good month this month, next month will be better for me, every month is going to be better than last month. Next month will better, next year will be better.
But when you start thinking like a dealmaker, when you start thinking like a business buyer, sure all your staff get paid, all your suppliers get paid, but there’s a lot more money for you to get paid as well. And the richest people in business are not the operational business owners who turn up every day, the richest people in business are all the deal makers, all the private equity people. They are the people who buy businesses and let other people have the hassle and the operational problems, they let other people deal with those details and they make the most money.
So if you’re going to be in business for the next five years, 10 years 15 years 20 years for the rest of your working life, then why not be in business in such a way that allows you to make the most money during that time? Believe me, your children will thank you for it. So we’ve solved the growth problem, we’ve solved the speed problem we’ve solved the hassle problem and we’ve solved the money problem. So how do we do this?
The Three Rules of Business
There are three rules when buying a business. The three principles if you like, of buying a business and they’re important principles because if you follow these principles you de-risk, every transaction. Let me tell you the last thing you should be doing when buying a business and Business Brokers will disagree with me but this is what I believe.
I believe that when you buy a business, you should not be risking your family home, you should not be risking your life savings, you should not put everything on the line for one that acquisition.
Rule Number One
So the first rule is, when we buy a business, we’re going to buy a business, either with no money down on completion, or none of your OWN money in the deal. We’re going to get other people to finance it, or we’re not going to put any money in on completion.
This is the complete opposite of what people in corporate finance tell you when they say that you need to borrow the money and use your house as security and put everything on the line to have skin in the game. Well, it’s not their skin in the game as it’s your skin in the game. So rule number one is, you’re not going to use any of your own money.
Rule Number Two
Rule number two is, you’re not going to borrow money from a bank. You see, if you go to a business broker to buy a business, they’ll say what do you have any equity in your house, borrow some money against the equity in your house and give that money to the seller of the business. They’ll give you the shares of the business, you now own the business, they take all of your money and go off on a world cruise, which is wonderful for them. Not so wonderful for you.
So every transaction that we do, we de-risk the transaction to the point that if something does go wrong, it’s not going to ruin our lives.
The Third Rule
The third rule is that when we buy a business we never ever manage it ourselves. Because if you manage it yourself you’ll run out of time, you’ll run out of energy, you’ll run out of patience, you’ll start to hate it and you’ll wonder why you ever bought it in the first place.
We have a very aggressive growth plan in the UK at our centre, we will have 30 transactions under our belt by the end of the first 12 months and 100 over the next three years. Physically, I could never manage that myself, it would be crazy! You have to have a management team to run it all for you. Otherwise, it will drive you mad. Does that make sense?
So rule number one, we don’t use our own capital, rule number two we don’t borrow money from a bank and rule number three is we don’t manage the business ourselves.
Some Recent Example Acquisitions
So let me give you some examples of how we fund an acquisition, without using our own money. I’ll give you a very quick rundown of a few of these methods. So the first type of business that we buy that doesn’t involve any of our own cash is what we call a distressed business. Now you might think why would you want to buy a distressed business because a distressed business has to have, by definition, problems.
Why would you want to buy problems? Let me tell you why. What one person thinks is a problem in the business another person thinks is an opportunity. What one person thinks is a problem that they just cannot solve another person has found the answer two years ago, you see someone else’s problems are not necessarily your problems.
I like businesses where the business owner says oh my goodness, all these problems – I’ll just hand you the keys, take the business from me, because I don’t want these problems anymore and I look at those problems and I think to myself, I can solve those problems. Those are easy, easy problems to solve. So that’s the first type of business that we look for.
Just to give you an example of this two days ago, I agreed a purchase of two small businesses they had a total revenue per annum of about £850,000 and I’m buying both of those businesses for a pound each because the owners have reached the point where they are distressed, and as a result the business hasn’t performed very well recently.
However, they’ve got the sales there. They’re just not running the business very effectively. So I’ll take over the keys I give them one pound, and I own two businesses or pound each, and I’ve got £850,00 just like that. Sounds easy right?
Well, it’s a little bit more complicated than that as you’ve got to understand how to do the due diligence work and the legal work, but it can be done, and every single one of us can do this, if we know how to do it, how to find the deals and how to structure it all.
So let me give you another example of a transaction that doesn’t involve any money of my own. So there’s a business that we’re buying, but the price that we’ve agreed for the business is £2.3 million pounds. Now in the balance sheet of the business, there’s £1.6 million pounds of property.
So we’ve agreed upon completion, the day that we take legal ownership that the owners will receive £1.6 million pounds for the property. So they walk away with 1.6 million pounds, minus any debt that might be on the property. The balance of £2.3. million £700,000 is being paid for the business itself, for the business that produces a profit.
We agreed on a structure where we pay that £700,000 over a five year period. So here’s a question. Where does that £700,000 come from? The bank? No. Does it come from your pockets? No. It comes from the cash flow of the business that we’re buying. In other words, the business is financing, its own acquisition.
A quick question for you. If you could buy a business where the business funds his own acquisition, how many businesses would you buy? As many as you can find! So you may be asking yourself, Jonathan, you’ve missed out on a very important part. What about the £1.6 million for the property you forgot you forgot how you get the £1.6 million for the property.
Well, although I’ve bought the property I’m not interested in commercial property. So I’ve found a property investor who wants to buy it. So it’s his £1.6 million that goes to the sellers on completion, he buys the property, I then rent the property from him.
So I’ve just done a £2.3 million pound acquisition and how much of my money went into the deal? Zero. But you might be thinking Jonathan you’ve got legal fees, you’ve got due diligence fees, you’ve got accountancy fees, you got tax advice. Yep, I have, do I pay those out of my own pocket? No!
I don’t pay all of those invoices, they go to the company that I am buying after I’ve bought it and that company pays all my fees. So how much money did I put into this deal? Absolutely zero. And this is what I do every day, every week, every month. I spend four days a week doing this type of deal-finding, finding them, putting the deals together and I spend one day a week, teaching it.
So, this is what I do and this is how I do it, completely contrary to what a lot of people will tell you. A lot of people will tell you that you have to go and raise the finance, you have to sign personal guarantees, use your property as security. The bottom line is, anyone could buy a business. All you’ve got to do is go and borrow the money, use your security, write the check, and give the money to the owner of the business and they will give you the business in return, anyone can do that.
However, my suggestion. My slightly controversial suggestion is that that would be a really stupid thing to do. Because you’re going to run out of money. You’re going run out because it doesn’t matter how much money you got, you’re going run out of money. So why don’t we structure, every deal that we do how I’ve just described?
Then you can buy one business, two businesses, three businesses four businesses, let someone else manage them, and you just enjoy the cash flow from those businesses, every single month. And then once you’ve got three or four or five or six businesses in the same sector to merge them into one larger business group and make millions of pounds from the sale. That’s what I’ve done, time and time again. Over the years and I hope you can too.
About Jonathan Jay
Jonathan is acquisitions and business strategist, with 30 years of business experience and multi-million-pound exits. He also helps successful business owners grow their company by buying other businesses and his ‘Business Buying Strategies’ podcast is the world-leader on the subject of how to buy a business.
Two new videos are posted every week on his YouTube Channel – including interviews with successful dealmakers, advice and tips.
Jonathan works with a select group of business owners to help them reach their business goals faster with a focused M&A strategy. They meet as part of a group and he teaches his successful process. You can find out more information about the here.