Olive Insights

Sarah Petty (00:01.831)
welcome to the Olive Insights podcast.

Michael Kerr (00:05.164)
Sarah, how are you?

Sarah Petty (00:06.806)
I'm very well, thank you. Well, great to have you here today. Now, Michael, you are the founder of Kerr Capital. Can you tell us a bit about what your business does and who you serve?

Michael Kerr (00:21.026)
Yeah, I started Kirk Capital 20 years ago. I did a lot of what you might call traditional business broking, but the focus...

for the last five, six years has really been on helping owners get better prepared for a sale. So I do a diagnostic and I do a lot of work on what's the business worth today? How can you improve it to make it easier to sell later? If in fact, that's what they wanna do. So that's my core. I also deal with a lot of owners who get approached out of the blue to sell their business. This happens a

Sarah Petty (01:04.482)
Yeah, yeah, absolutely. And I think that expertise is going to come in handy for us today because I've got you on the podcast to help me answer a listener question relating to the sale of a business. Because yeah, this is something we come across as a goal for many business owners in the work that we do as virtual CFOs. So I think it'd be great to give two perspectives on this and hopefully help this business owner.

Michael Kerr (01:31.576)
Yeah, yeah, let's rock and roll.

Sarah Petty (01:35.672)
Great, all right, well let me read this out. So this is from business owner James who says, I've been running my business for about eight years and starting to think about a sale as an exit strategy. How do I know if my business is sellable and what would make it more attractive to a buyer? So I'm sure you come across this question a bit. I definitely come across this question a bit. So I'm keen to understand from your side Michael.

Michael Kerr (01:59.448)
you

Sarah Petty (02:04.692)
What are the key factors you see that determine if a business is actually sellable?

Michael Kerr (02:11.736)
Okay, there's a lot of detailed things that come up.

What I wanna talk about, I guess, is two or three really high level themes given we wanna get people thinking the right way. So is it, the biggest issue is when the owner leaves, what happens to the business under the new ownership? So how detachable the owner and the business are is a very significant one, probably the most significant. So what changes? So to make your business sellable,

Sarah Petty (02:46.242)
Yes.

Michael Kerr (02:49.999)
you need to ensure that you take as much risk out of it as possible.

Then I guess you go to things like, you know, it's sellable. That implies that there's a price of value that can be agreed on that gives the owner a fair return and the buyer a fair return on their investment. So sellable, you could have all these, you could have all your IP sorted, you could have your staff lined up, you could have all your customers signing off on agreements or whatever

it might be but to make it sellable has got to be a good investment for the buyer. So I think that getting to understand for James, he's some years out from selling but understanding value today

and then knowing what you can do to increase the value and buyers are happy to pay for more value provided it's a good return on investment for them. as a subset of that, it, there are,

The one thing about preparing a business for sale that I don't think gets enough attention is who you actually going to sell the business to. I think a lot of exit planning is about this mythical buyer that is rational and, know, but there are all kinds of different buyers. having a good long hard think about value today, how you can increase it.

Michael Kerr (04:31.872)
And who's more likely to buy your business? In some industries, only industry players will buy it. So you kind of narrow the pool and...

So there's gotta be, take the owner out, what happens to the business tomorrow? So there it goes to the staff stay, do you have good processes and systems? Do you have tight customer relations? Not too many dominant customers. mean, there's a list of things you could roll. there, but they're really important ones at a business level, at an industry level, you are a part

of your industry and if you're in an industry that is being disrupted or then you know your sellability is impacted as a business in that industry.

Sarah Petty (05:23.17)
Yeah, yeah, so it's knowing where you sit in the context of that industry as well.

I think the point on the being able to take the business out, a business owner out of the business is a really key one. I mean, this is something I come across as well. And often where business owners get stuck at various levels of their scaling journey, if everything is coming through the business owner, all the knowledge is sitting in the business owner's head. It's obviously going to be very hard to extract the business owner from that business at the time when they're looking to sell.

And this is this is common and you know, I'm even thinking of my own business It's not gonna be as easy to do that right now. So it's something you have to consciously plan for as a business owner How do you think business owners can start thinking about that because it can be really daunting to to know

Michael Kerr (06:03.65)
Yeah, yeah.

Sarah Petty (06:17.678)
How do you extract yourself from the business? Is it starting to document, you know, processes? Is it hiring the right people? Where would you start or advise a business owner to start with that?

Michael Kerr (06:29.652)
Look, you're right about founders and owners being central and in fact that some just love it and life without their business could be a bit of a struggle or a bit of a battle. look, is, think, looking at this business objectively,

Sarah Petty (06:43.559)
Of course.

Michael Kerr (06:54.644)
as a set of employees, including the owner. What is the owner? know, kind of the owners are dominant in a lot of small businesses. So they fill the gaps, they drive the business, they're the rainmaker or the product guru or whatever. So you've really, I think you've got to take a detached look at the business.

design an org chart around the roles that are needed to support the business to do the best it can do. And you put staff in place. And if the owner's going to exit at some point in the future, you've got to have the right kind of staff in the right roles supporting. And if you're an owner who can elevate out of the day-to-day and say, well, there is a period of time where I'm going

be central to my business but I am going to grow myself out of that role but it does take defining those roles to kind of have that capacity to think about that way so it's yeah then then you go if you get an org chart it's a set of people if you have some really good processes

Sarah Petty (07:58.584)
Yeah.

Michael Kerr (08:05.75)
They're the kind of, you get an A for doing that stuff. you know, for the owner to really think long and hard about, you know, aside from being the owner, it's like putting another hat on, where's the best use of my resources, not where I feel like I can be the, you've got to look at it rationally and from afar to what's the best thing. And we all have different skills and

Sarah Petty (08:23.767)
Hmm.

Michael Kerr (08:35.694)
talents and it should the business doesn't care about personalities it cares about who's a really high performing business will have the right people in the right roles and it's whether you're an owner or not doesn't really matter it's what the role requires and the business requires.

Sarah Petty (08:49.826)
Yeah, absolutely agree with that. Now when a business owner is looking to sell a business or even, know, they may get an offer out of the blue, they're always looking for the highest value that they can get for their business, right? So what do you see as some of the top value drivers that can increase the sale price or attract better quality buyers?

Michael Kerr (09:15.416)
Yeah, look, in terms of value drivers, you go through the process of establishing a value for a business and a lot of the work I imagine you would do, I've read some of your white papers and things, it's about, a lot of financial reporting is about getting ready to prepare tax return. So it's lumpy stuff.

So it's hard to know if you don't dig down what the real value drivers of the business are. So you've really got to break your account, your finances into a lot more granular level so you can make better decisions about business units within the one business or products within the... So it's getting away, but I think those historical financials...

Sarah Petty (09:50.061)
Yeah.

Michael Kerr (10:13.098)
and evaluation are a proxy for what the business might do in the future.

So if you get all that analysis right and set a value, then you as the owner understand where you should invest your time and energy to make the business more profitable, because you're the right levers rather than just growing sales or putting on another resource to do something. I think in terms of specific value drivers,

Break the valuation down, it typically comes from a combination of the earnings in the business and the multiple. so earnings, you just gotta keep making sure your business is as efficient and as profitable. I think where the real leverage and upside comes from is growing in multiple.

And if you don't know what a multiple is and you're aspiring, I assume a lot of people would, but if you don't, you need to understand that. And what effects that is.

how confident the buyer is about the prospects of the business going forward. you've got to be in the right, you you've got to be in an industry, well, you might be in an industry that's dying and still need to get out. So you still need to pay attention to all the things. you know, do you have a distinguished brand or reputation? Do you have a good team

Sarah Petty (11:36.782)
Mm.

Michael Kerr (11:59.238)
of people, you have good processors, do you have a broad diversified set of clients, customers. They're probably pretty, you know, value drivers and but you know again, if you're about to be completely disrupted and this is

AI is disrupting by the minute a lot of businesses and lot of owners aren't even aware that that's going on. yeah, from a buyer's perspective, they're buying, yeah, the owner wants to maximise the value, the buyer wants to make it good investment.

There's a balance between the two and the more time that the owner has, the better understanding they have of the business today and how to drive it for the next two, three years or five years, the better.

Sarah Petty (13:07.554)
Yeah, and I think there's a good point you made there because often people think looking at EBITR is the sort key metric and that's the only thing that's going to get them the evaluation they're looking for but you listed out a couple of things there that are more intangible.

having the right team if you've got a really great cohesive team and a good culture, where the industry is going as a whole. Sometimes it's things about the relationships that you have within the industry with your customers, the diversity across the customer base as you mentioned, like all of those things are adding value to the future value of the business. And I think sometimes business owners aren't thinking as much about that.

And one thing we often talk about with clients is the...

every dollar of revenue as well isn't made equal. So yes, you can keep focusing on growing sales, but you know, is that with a customer that you could potentially have a long term relationship with and therefore that dollar of revenue is much more valuable to you than the client that's going to spend a couple of weeks with you and then you you have to start again. How much money are you spending to acquire that customer? So maybe that's been a very expensive dollar of revenue to acquire versus, you know,

where you've been able to get that through referrals or your reputation in the market or that type of thing. So I think you're right, it's broader than just looking at a one financial metric. There's a lot there to go into assessing the valuation of a business.

Michael Kerr (14:40.44)
Yeah, look, it is, and I think for a lot of owners, they call it management accounting or that more granular level understanding of their business is the work that you do is, I'm often struck at what is, someone comes along and says, I've got a business turning over $5 million and I'll make 500,000 or whatever, but then when

really dig into it it's actually it's often two or three quite distinct business units within and they

Sarah Petty (15:17.516)
Yeah.

Michael Kerr (15:21.192)
The level of compliance and the busyness of running a business day to day, I can see why owners just go, get me out of here. I'll focus on sales and should be okay. But really, when you do dig into it, you say, you could actually, you could split the business, you could sell off part of it, or you should actually just forget about that bit of it. For them, it's just their business.

Sarah Petty (15:30.54)
Yeah.

Yeah.

Michael Kerr (15:50.858)
and they, you know, it's only when you get an external perspective that they go, well, yeah, I'm actually a bit of retail, a bit of wholesale, a bit of online, a bit of, you know, repairs or something. Yeah, it's quite fascinating.

Sarah Petty (16:03.534)
Yeah, that's it. Exactly. All right. So let's say they move further down the track and they've actually got an interested buyer. What is actually involved in preparing to sell? Because I think a lot of business owners haven't been through this before and really don't know what those next steps are.

Michael Kerr (16:23.128)
Yeah, well what it isn't is signing an NDA and giving away a whole lot of information without understanding who exactly it is that is interested and why. Of all the work that I do, not understanding who should buy your business or who's interested and why is probably the biggest area of least area of focus, but probably the got the most.

terms of getting a good deal done in the most efficient time that's where you get some real upside. So to prepare to sell, look get clear for you as owner that you have a sense of what

fair value is today if you were to sell tomorrow. So that means you know do you know someone put the check down are you actually happy to walk away at that price and do something else or but you've got it you've got to tell a really compelling story about the business so like if someone comes if someone comes to you typically they're they know something about your business already but

You've still got to prepare a story about the business. It's called an information memorandum or something similar technically, but it's really, it is a business story. So it's the A to Z of the business. so that's important to be able to explain how your business works. Again, not saying you just give that away, even if you've got a non-disclosure agreement, you might have a teaser or one-pager just to high-level summary information.

You know, you've got to have your financials clean, sorted, easy to understand, presented in a way that doesn't give away all your trade secrets, but explains how the business works.

Michael Kerr (18:27.188)
If you're going, I think you've also, something that really, I mean, you've gotta line up a whole lot of information so that the buyer or buyers can access that information at the right time in the right way through a data room. You might have stages for that, so you release a bit more of it, but you're also gathering a lot of information about who they are and why they're interested.

You've got to look right back at the start. You've got to a good advisor Because try if you get approached out of the blue There's some really incredibly competent capable owners, but It's still you've got to have the takes a lot of time. I think you get you get drawn into things that you know take you away from your business, which is Sometimes that's

a strategy or a tactic, but you really got to be able to say, have a trusted advisor or a team of advisors, good accountant, good lawyer, but someone to actually lead the negotiation that's removed can help manage the emotions that you go through. that's probably where you started, but if you're going from ground

Sarah Petty (19:34.316)
Yeah. Yeah.

Sarah Petty (19:45.645)
Yeah.

Michael Kerr (19:53.258)
up to sell you've got to think about where you're going to who should buy but where you're going to possibly where you're going to promote the business for sale if it's that kind of business where you do need to promote or you start to build a database of all the buyers in your industry or competitors or people in the business in the supply chain. there's got a few mechanical

mechanical things and also I guess having the right team around you to, because selling business is emotional, just like that chart up there, you know, it's so, know, up and down and yeah, you need some experienced colleagues along the way.

Sarah Petty (20:41.938)
I think it's like anything in business, right? If it's the first time going through it, often it's best to get the expert advice. Even when you're starting a business and you've never done that before, getting the right advice so it's set up in the right way is really important. So when you're at the other end and ready to sell, you've never been through that experience before. You want people who can advise you because it's just inexperience and lack of knowledge. So you want those right people on your team.

as you say, these things can be quite emotional, even if you think you're not that type of founder. This is often your baby that you've built up over time and it can be really emotional to let go of that. So having someone that can guide you through that process between you and the buyer in a really objective manner, I think is really important too.

Michael Kerr (21:19.948)
Yeah.

Michael Kerr (21:32.888)
Yeah, look, is emotional. is, know, ego can get in the way as well. And everyone has, you know, that's some of that. That's why you're in business, because have some belief and but there are so many other things that can happen along the way that

It can bounce around it can take longer than you think That you should you think it should have taken but it's also just all these other stakeholders in the sale. It's your staff It's your customers. It's your friends and family and loved ones like Every you know, they're friends and family if it's known you're selling a business. They're famous for saying also has you know, how's the sale going? It's like

Sarah Petty (22:07.596)
Yeah.

Michael Kerr (22:20.022)
you know, that can really wear you down. you need to have a kind of an understanding, have someone to go and talk to. so what do I say here? Because planning communications to all those people at the right time is vitally important to getting a deal done. yeah, it's a deeply...

Sarah Petty (22:22.06)
Yeah.

Michael Kerr (22:45.458)
It's a deeply personal thing, even though it's talking about business, it's deeply... yeah.

Sarah Petty (22:50.21)
Yeah, absolutely. Yeah, yeah, I can see that for sure. So for someone like James, who's a few years out from a potential sale still, what should he be focusing on right now to make the business easier to sell when the time comes?

Michael Kerr (23:07.052)
Yeah, look, I think another kind of high level thing to think about is that a lot of what James should do is things that are about making the business better, more profitable, easier to run.

but not just for a buyer. Like that may be the objective to sell in five years time or, but this stuff is, I see that there's some, any exit planning, any thinking about that is a good thing, right? How to.

do I have an asset of value? Is it transferable or sellable? But kind of some owners tend to think they can put that off and come back to it later. But it's stuff that you should do anyway and if you do it really well

Yes, it makes it more sellable, but it also potentially makes it more keepable. The reality is lot of businesses, there's a time and place when the owner's going to move on.

There are, I've seen businesses that have invested in some things, businesses got, they've fallen back in love or they've decided that they can run it working a quarter of the time they used to so they don't need, they don't have the same urgency to cash out. They can keep the business, they build a team. So, yeah, for James.

Michael Kerr (24:57.43)
you know, looking at the, I guess the runway of the staff, you know, so if he's gone in five years, can the buyer reasonably expect to get 10 years out of the staff or, you know, whatever's the right number? you know, will they all, will all the customers and will all the staff...

Sarah Petty (25:12.458)
Mm. Mm.

Michael Kerr (25:22.552)
stay happily involved in the business. So whatever you need to do to start to prepare the business so that there's a smooth transition. I mean, I think I talked about a few of those things. It's like getting your numbers right, showing that there's a pathway to growth. That's ideal if you can demonstrate that the business has got more.

more in the tank and it's not just saying look we've been tracking along here and all but we can see how you go to there you've you're better you know if you can show each year pushing some some better numbers through and that's there's momentum then you you've got a higher running space and you can your multiples higher

because you're in growth rather than static. For James personally, thinking about an advisor, tracking really closely whatever industry or profession he's in, what other deals are being done? You you're years out, you really gotta make that a competency to understand how deals are done in your industry, who does them.

what values, et cetera. Have a good team. Have a timeline. Have an ideal timeline, but be prepared that's gonna... It might come early, because you get a knock, which happens with good businesses. It might take longer.

Sarah Petty (27:01.442)
Yeah.

Michael Kerr (27:03.352)
Think about a plan B as the owner, not necessarily because you want to do plan B, but because in the negotiation if you only have one option which is to sell them, like all those other good things aside, your demand and supply comes into play and you have less strength and power in the negotiation.

Sarah Petty (27:29.016)
Yeah, absolutely.

Michael Kerr (27:30.796)
But yeah, they're the kind of things. The one thing I did want to just before we move on was to say that one of the owners preparing, thinking about selling.

A lot of owners, if they haven't been through the process before, will think it's kind of like selling a house and it's not. You can draw some pretty, you can draw some nice pictures to say, you repaint it up and they do all these things. But the value differences in real estate's gonna change hands within a band of...

5-10 % like sometimes auctions blow out but businesses it's not it's nothing like that you can have you can not sell for years you can you one buyer can say the business is worth a million another one two and a half million so it's it's just get that front and center as well it's not the same as buying and selling a house

Sarah Petty (28:29.518)
So true, yeah.

Sarah Petty (28:40.62)
Yeah, very good advice because I think if you haven't been through that, it can feel like that. But yeah, very different process. So look, to wrap up, I've got my five tips from a virtual CFO perspective that might help James and any other listeners who are thinking about selling. So jump in Michael, if you've got anything to add. We have covered a little bit of this anyway.

Michael Kerr (28:46.444)
Yeah.

Sarah Petty (29:04.706)
But number one, I would say is just always having clean, consistent financials. So buyers want to see reliable financial information if you have to spend, you know,

weeks and weeks cleaning up your financials and searching through and making adjustments, then it's going to be a bit of a red flag. You want information that reflects the true performance of your business. So make sure your accounting records are up to date. You've got regular and accurate reporting and across your profit and loss, your balance sheet, cashflow. And the other number one, this sounds really straightforward, but making sure you've got separation between your personal and business expenses.

I also see that too often that you know they're looking to value the business and yet it's completely murky because the business owners expenses are sitting within the business accounts and yeah a simple one but keep them separate.

Michael Kerr (30:01.548)
Yeah, the less of those adjustments you have, the easier it is for someone just to focus on the business and not get caught up in private motor vehicle expenses and whatever.

Sarah Petty (30:10.029)
Yeah.

Sarah Petty (30:14.176)
Exactly, Yeah.

The second one I would say is if you can have some sort of recurring predictable revenue model that is much more attractive for a buyer. So the more predictable it is, the more the buyer can see the future value. Now, obviously this depends on business models, but it can be hard if there's very short term contracts and the business owner or the sales team are having to constantly chase the next deal. So I have seen this work.

where there are longer retainer models or subscriptions or long-term contracts that gives a little bit more certainty around future revenue.

The third one is, you know, we talked about this at the start, but your business shouldn't rely heavily on the owner. And if you haven't started thinking about that.

all if all the relationships, the knowledge, the day to day decisions, it's all coming through the one person, then it's really hard to remove them from the business. And again, that's quite a red flag. It's seen as a real risk in the business. And, know, you might be having

Sarah Petty (31:29.528)
fantastic financials and high profit margins and all of that, but if the buyer can't see how the business would work without you as the owner, it is really going to devalue the business.

Michael Kerr (31:41.206)
Yeah, and just quickly, the other thing that sometimes that risk is mitigated by the buyer saying, can you stay in for a lot longer than you would like? there's the time, and it's practical, but it's really hard for an owner to work under a new regime or a new...

Sarah Petty (31:53.549)
Yeah.

Sarah Petty (32:06.146)
Yeah. Yeah.

Michael Kerr (32:06.966)
leadership style so you know it's I've seen it work well I've seen it work really badly and it's stressful

Sarah Petty (32:15.938)
Yeah, yeah, so I guess if it's something that you're not wanting to do and stay on to see the business through after the sale, then that is an important thing to think through. Number four is knowing your numbers and your story. You mentioned this too, Michael, but it's not just about knowing your EBIT numbers, but buyers want to understand why the business performs as it does.

what's driving the growth, what are the potential risks, what are the opportunities potentially post-sale. So it's not just knowing the numbers, but knowing the story and the narrative behind the numbers and being able to explain your business model. Because again, sometimes that can seem really complex and it all makes sense in the business owner's head, but from an outsider perspective, if you can't understand how the business operates and where the value is, that can be really...

That can be really hard as well.

Michael Kerr (33:10.572)
Yeah, it's got to be, you got to move it more and more to a standalone entity that has an explainable reason for being and an explainable story about where it's going.

Sarah Petty (33:25.196)
Yeah, yeah, absolutely.

And then my final one is if this is something that you're thinking about as an exit strategy, start early and get the expert help early. So, you you mentioned this, can take, it's not just, okay, I've decided to sell six months later, you know, we sell the business all good. It can take 12, 24, 36 months. Sometimes you get partway through a deal and it all falls through. So it just really depends, but get the right advice around you early, the right

team and prepare in advance so you're ready to go through that situation even when it occurs.

Michael Kerr (34:06.104)
There's no better way to get a better result than allowing more time. And it's easy to put off. But again, if you think about it, like, if you have to sell a place, a house, can clear it if you keep pulling the price down. At some point, you'll sell it and quite quickly, businesses, you can pull the price lever and

Sarah Petty (34:13.998)
Yeah.

Michael Kerr (34:36.128)
If you haven't tapped into the right type of buyers, it'll just sit there for years.

Sarah Petty (34:42.272)
Yeah, yeah, absolutely. All right, well thank you Michael for all of your insights and information today. If people would like to know a bit more about you and your business, where can they find you?

Michael Kerr (34:54.84)
They can go LinkedIn, Michael Kerr and my main business website is kerrcapital.com.au So be pleased to chat to anybody if they want to reach out or just to connect

Sarah Petty (35:12.174)
Great, all right, we'll put all of that in the show notes anyway so people can reach you easily. And if any listeners would like their question answered, you can submit via our website or through the link that we'll also put in the show notes. Thanks a lot for your time today, Michael.

Michael Kerr (35:27.906)
Thank you, Sarah. All the best.