Behind the Scenes of a Buy and Build

A few weeks ago, I mentioned that I started writing a book in 2019, to take readers behind the scenes of my very proactive ‘buy and build’.

Here’s Chapter 3, which charts the progress of some of the early acquisitions?- just reading this back three years later makes me feel exhausted!

You might want to attack this in bite-sized pieces!

Chapter 2: First quarter update

This is the first of four quarterly updates that will be included in the book. What they’ll look at are the acquisitions made in that quarter and the lessons learned in the process. This update looks at the first six of the intended thirty acquisitions in the twelve-month challenge.

The first acquisition

The first acquisition we made was testing!

The building

It was a very large nursery in Colchester, situated in a building that was purpose-built ten to fifteen years ago. The owner hadn’t invested in the place for a long time and it had become quite run down – it required considerable work to bring it up to scratch. There were other issues, too – for example, there were no children’s toilets downstairs, which is surprising for a purpose-built nursery.

So, we set to and renovated the building in an extensive fashion. Anything you could possibly think of that you could do, we did. We took out walls and we put in walls, we put in a new toilet block, we had to replace the floor and the lights, and obviously we had to redecorate. The refurbishment was pretty costly – it cost ￡120,000 and ran over by a month. It was a building project as much as anything.

Everything we did was necessary, but there were three main downsides to the way we did it: one, it cost a lot; two, it took a long time; and three, it was very disruptive to everyone in the building.

In fairness, it was probably not the best first acquisition, but we learned a lot from it.

For example, as a direct result of our experience, we decided that any future refurbishments on buildings acquired would be phased. We’ll start with the entrance and the reception area and one downstairs room, then stop. Six months later we’ll come back and do another room, and so on.

The main benefits of that approach are that we’ll be able to spread our resources – we can take the same amount of money and have an impact on lots of different nurseries; it won’t require the team to be in one place for a long period of time; and it will be far less disruptive to the people using the building.

The staff and Ofsted

When you have an owner who hasn’t been in love with a business for a number of years the staff feel it, and the staff in our first acquisition hadn’t been invested in or paid any attention in a long time. Quite often, owners who don’t want to own a business anymore are quite irritable, so the staff felt somewhat browbeaten, too. It took my childcare director, Linda, a long time to bring everyone up to a level of positivity about the business.

Now, all of this was compounded by the fact that two days after we took ownership, Ofsted paid a visit. This wasn’t about the change of ownership – they weren’t even aware that had happened as it takes a while for things like that to filter through the system. But they were due to make an inspection, they came in and did it, and they rated the nursery as ‘inadequate’. This was due to the reasons we’ve just been talking about – demotivated staff, very poor conditions.

Ofsted gradings are:

Grade 1: Outstanding.

Grade 2: Good.

Grade 3: Requires Improvement.

Grade 4: Inadequate.

As you can see, ‘inadequate’ is the lowest rating you can possibly have – it’s a disaster, you can be closed down, it puts you on a knife edge.

It also affects your occupancy because some parents will say, ‘I don’t want my child in an inadequate nursery,’ and understandably so. You lose children as a result of an ‘inadequate’ grading and we did, immediately. It also compounded the poor staff motivation as it dealt a devastating blow to their belief in themselves and the nursery.

So, with our first acquisition, everything that could go wrong did go wrong and it was a lot of hard work. However, despite everything being pretty disastrous in the early months, I think it’s going to turn out to be one of our best acquisitions!

We now have an outstandingly wonderful nursery, it’s the finest nursery in the area, it’s absolutely beautiful, and the first impressions are amazing.

As a result, when parents come for a show around they are now seeing something beautiful, modern, contemporary, clean, elegant, and we’re signing them up – our occupancy is starting to rise.

We spent four months doing that refurbishment and once the builders had gone and the environment had settled down, our childcare director, Linda, went in to start getting the staff trained. We did some weekend training and we were preparing for the next Ofsted visit. We knew it was going to be around the first week in December, so that’s the date we were working towards and preparing for.

You see, when you are rated ‘inadequate’, when you’re in that special measures category, Ofsted visits more frequently, and quite right, too. They’ll generally come back six months later to check where you are now.

We took our rating and the preparations for the next inspection seriously. There’s such a thing as a ‘mocksted’ – you pay someone, often an ex-Ofsted inspector, to come and do a fake Ofsted inspection. It’s like a mock exam set-up, and they’ll tell you which are the areas where you have to improve.

We had this person booked in for a Thursday in the latter half of November. The staff didn’t know the person was going to come in, but I knew by the end of that Thursday we would know where we stood for the real Ofsted inspection, which we expected would be happening a few weeks later in December.

On the Wednesday morning – the day before the mocksted was arranged to happen – Linda sent us all a WhatsApp message saying the real Ofsted was in the building! She was at another one of our locations in the north of England, but she jumped in the car and drove straight down there – a five-hour drive – to be present.

The Ofsted inspector was there all day – nearly twelve hours – which we reckoned was either a good sign or a bad sign. Eventually we learned which when we were given a ‘good’ grading. The top rating is ‘outstanding’, with ‘good’ coming in just beneath it.

Linda went back through dozens and dozens of instances where a place was ranked as ‘inadequate’ to see what had happened next. None had ever gone from ‘inadequate’ to ‘outstanding’; the highest that had ever been achieved was inadequate’ to ‘good’, and we had achieved that.

As you can imagine, we were thrilled. The hard work was clearly paying off. The staff celebrated – they’re now in a beautiful environment, we’d got rid of the stigma of the past and as a result, as I said, this could be one of our best acquisitions.

We have a flagship!

A hidden bonus

There was one little extra bonus. This was judged to be a 66-place nursery – we could register 66 children. However, when I went round it for the first time – which was after the acquisition, I didn’t see it beforehand – my first thought was, this is huge! I said to my colleagues, ‘Only 66 children … how is this possible? It’s a two-storey purpose-built building, and it’s huge!’ They measured up – there are calculations you can do according to the age group in the room and so on – and the outcome was that actually this is a 90-place nursery. So, we bought a 66-place nursery and ended up with 90 places.

Lessons learned

Dealing with this acquisition was trial by fire and we learnt a lot from it – and it was a tough one for the very first – but maybe it was a good one to get out of the way; it toughened us up for future acquisitions.

Because of the nature of the challenge we weren’t able to apply a lot of the lessons learned in the first acquisition to the next few, because they were going on at the same time, but looking forward, we can absolutely benefit from it.

To start with, I don’t think we necessarily appreciated the quantity of work needed, the amount of upset it would cause, and the cost of a refurbishment. Now, as a result of that experience, we’re doing phased refurbishments, which mitigates the risk.

We’ve also now got an eye on size. On paper, a nursery is registered as being a particular number of places, but is that number accurate? Think about it; if you pay for a 50-place nursery but it’s actually big enough to offer 70 places, you’ve got a bonus of 20 more children, and that can represent a considerable amount of money. It’s essentially a 40 per cent increase in size, which means potentially 40 per cent more income.

A child that’s there for five years could generate as much as ￡50,000 worth of income – so we’re talking tens of thousands of pounds of revenue.

Every additional place we can find adds additional income, and that hadn’t been in my thinking at all, at the start! Now we can say, ‘Okay, can we add additional places to our portfolio by remeasuring, reconfiguring, building out, building up? What can we do to take the asset that we’ve acquired and make it a more valuable asset?’

At 20 December 2019 we were at six nurseries. Obviously, we also learned lessons from acquiring the other five.

When you buy a nursery that’s hit a little bit of an issue, it can be a challenge. There’s an opportunity because you pay less for it, but you have to do more work. The large acquirers in the sector that are looking for nurseries to bring into their group want nurseries that are pretty much perfect. They have no desire to retrain staff to any great degree or to do extensive refurbishments – they might rebrand, but that’s about it.

So, the opportunities lie in these businesses that have seen better days and the trick is seeing past the here and now and spotting the potential. Now, here’s the thing, you buy the nursery because of the potential, the potential is your room for growth, but you don’t pay for the potential, you pay for the business as it is now, in reality.

A caveat is that if a business has seen better days then there’s usually a reason, so you have to be careful. If the reason is the owner, then by taking them out of the equation that has the desired effect. However, if it’s some other factor, such as there’s strong competition in the area, that’s a different matter.

We discovered that just a few streets away from one of the businesses we bought is an incredible nursery, charging the same price as us.

When it comes to competition, there are a number of ways to fight back. You can compete on price and drop your prices to attract people in, but that’s a terrible idea.

You can throw money at it and make your business as superbly impressive as your competitor but, as we’ve learnt, that costs a lot, it takes a long time and it’s very disruptive to everyone in the building.

You can do stage one of our phased refurb; do up the reception area and one room downstairs. Then, when parents come in for the show around, say, ‘This is the vision, this is what’s going to happen over the next twelve months. When the refurb is finished the fees will be going up accordingly but, of course, as you’re joining us now, we can fix those fees for you.’

Or you find other ways of competing that aren’t all about the environment or this beautiful nursery. The main thing here is that we need to look under the bonnet. Yes, that nursery looks great on the surface, but are there any pain points not being addressed for parents? If so, we have the chance to seize competitive advantage – and it doesn’t have to be about price and we don’t have to do the full refurb now, in a panic, so we look better!

It’s about being creative and not being intimidated by the competition. We maybe don’t have the strongest position at the moment, but we can still look at how we can stand up to them.

We’ve also learnt a lesson about Ofsted! Something we now take into account for a nursery we want to buy is when the next Ofsted inspection is scheduled for, because we want to know we’ve got a breathing space.

Ofsted is a minefield. It’s a government body and the rules seem to change all the time, depending on who you speak to, so having someone on the team that has a solid relationship with Ofsted is essential. As we become a major player in the sector we want a good relationship with our governing body, we want to always do the right things and, of course, doing the right thing for Ofsted means doing the right thing by the children as well. So there’s no conflict, but we’ve got to get through the red tape. I hope that as time goes on it will be seen that some of our acquisitions are the more lacklustre nurseries that maybe aren’t providing the most outstanding education and care for the children and we’re turning them into ones that do. This isn’t a purely philanthropic matter because it is a business and we need to make some money to pay everyone as well, but we want an absolutely outstanding product, because if you have an outstanding product then the good business stuff follows as a result.

Your strategy evolves as you go and you sharpen it up based on experience.

Looking ahead, one of our acquisitions in the next tranche is a nursery that’s currently closed. The owner owns a soft play centre and opened up a nursery with its own separate entrance at the end of the building. He spent an awful lot of money making it amazing – and it is amazing, we won’t have any refurb costs with that one – but then put in the wrong management team and the nursery failed. At that point, he just closed the doors because it was losing money.

So, we’re taking on great premises with a very supportive landlord who wants the nursery to be successful. We’re going to be using the soft play centre as a great marketing tool. There’s a constant stream of children going there so it’s a great place for us to advertise. It’s a different type of acquisition as we have to recruit the manager and start from scratch, so in future chapters we can look at how that works out.

So far, at least, there are no acquisitions that I regret. We’ve got really good locations, and that makes a difference. There have been times when I’ve thought wow, this is incredibly hard work, but if it weren’t, I suppose everyone would be doing it. Anything that’s worth doing usually requires some degree of effort.

However, having said that, I’m completely resigned to the fact that there are going to be some that don’t work out, and not always for the reasons you might think.

We’ve now got three nurseries in Colchester. The smallest one we always knew had a poor lease, but we were hopeful we’d be able to negotiate a new one. It turned out that we weren’t able to do that.

However, we’ve increased our numbers in Colchester. In addition to the first acquisition mentioned earlier, we have another nursery. Even if we close the small one with the unsatisfactory lease, we’re still ahead. We’ve actually got a larger business than we started off with, although across one less location. We now don’t have the refurbishment costs on that location; we’ve relocated staff, so no one’s losing their job, and we’re doing our best to relocate the children, as well. That might not be possible in every case, but we’re doing our best.

The team

I’m lucky to have built a great team to help with all the work involved with the project – I mentioned Linda, our childcare director, earlier – and to a certain extent that’s evolved as well.

You may have heard of the four stages of team development: forming, storming, norming and performing. Well, during those first acquisitions we had the forming stage – everyone came together. The three members of the senior team had worked with each other before, although I hadn’t previously worked with any of them.

Then we hit the storming stage and that’s when you realise how important not just someone’s ability to do a job is, but their personality, too. I found one of the key people increasingly frustrating, because we had a different sense of urgency about getting things done. I would say, ‘Let’s just get this done, we’ve made the decision, let’s make it happen,’ whereas he would want to involve everyone in a group discussion. There’d be talk but no action. Later, he’d get everyone to come back and buy into the decision, but the end result was exactly the same as if we’d just gone ahead and done it immediately! The whole process was protracted, the delay unnecessary, and when you’ve got targets and focus and you want to get things done quickly that’s just very frustrating. We decided to part company.

However, the gap was filled very easily. When people discover you’re on a mission, they often want to join in with that the mission. So, Sarah came on board and now we’ve got someone in that role who shares my idea of how things should be done, which is with a bit of energy and enthusiasm and focus and drive and passion, and all of those good things.

When you’re working to a tight timescale and have big goals to accomplish there’s only so much navel-gazing you can do, you have to just get on with things. I’d prefer to make a decision and follow it through. Maybe I’ll have to revise that decision in the future, but that’s better than making no decision at all and wallowing in ‘do we, don’t we’ land. Sometimes you’ve just got to get on with it.

So the team has gone through this formative evolutionary process, but that’s just natural and normal – and, in the end, you have a stronger team.

The hardest part is getting started – but once you do, you generate momentum and that momentum carries you on and over the bumps in the road.

If you’re acquiring a business, or a set of businesses, in another sector, lots of elements of the process are the same. As far as the team is concerned, you need someone on the financial side, someone on the operational side, and someone who’s specialist to that sector.

When I was pulling my team together I went out and had lots of coffees and conversations with people who I’d met on LinkedIn and as a result found the first member of the team. That person connected me to the second team member, then the second person connected me to the third team member. Again, momentum.

Also, if you’ve got a vision of what you want to accomplish you’ll find there are plenty of people who want to be part of that, they want to be part of something important. What we’re doing here is making history in the sector by creating a group from a standing start in a way that no one’s ever done. What we’re doing in twelve months, people typically take twenty, maybe thirty years to do!

It’s pretty revolutionary and that’s what makes it exciting and that’s what gets my colleagues out of bed in the morning … so they tell me.

Revelations

One of the early acquisitions was quite interesting. My operations director was talking to management and staff and said, ‘So, tell me, what reputation does this nursery have in the area?’ and they said, ‘Well, this is the place you send your children if you don’t want to pay!’

The operations director asked for more information – obviously – and this was the reply: ‘Everyone knows that our billing is so appalling you can get away with not paying and no one will notice.’

It’s incredible that anyone would run a business like that. However, it’s also an opportunity as, in theory, to drive up revenue, all we have to do is get the billing straight. Those people who haven’t paid for about a year won’t take kindly to getting a bill for twelve months, so I expect to lose some of the customers, but we’ll actually lose the customers who aren’t paying so it makes no difference whatsoever.

In another acquisition the owner was adamant that she wanted a consultancy agreement with us. She wanted to be a part-time area manager and, in actual fact, in the week leading up to completion, that issue was our main focus, it wasn’t the sale and purchase agreement, it wasn’t the property leases, it was this consultancy agreement. It went backwards and forwards, she wanted a certain salary and perks and an amount in travel expenses every month … we had to explain that travel expenses are related to genuine expenses that are incurred, not a set figure that you have an entitlement to. It’s not a profit centre, it’s there to cover a cost that you’ve incurred while you perform the role, so that went down well.

We eventually got there with the agreement and … we’ve never seen her since. She just lost interest. We wasted so many hours going backwards and forwards on something that, when it came down to it, she didn’t want. She just disappeared, no interest whatsoever.

Although we’ve learnt from that, if we’re faced with a similar situation again I don’t think we’d necessarily do anything differently. There was nothing wrong with our approach, you just get some flaky people who change their mind.

Another issue surfaced in one of the smaller Colchester nurseries. We knew that the seller’s husband had a role in the business, he probably wasn’t doing very much but he was taking a salary. Then we discovered that the cook is her mother-in-law, and that her daughter works in the nursery.

The daughter actually phoned up and said, ‘I work for you.’ She explained she was on extended maternity leave but intended to come back. None of this had been disclosed and, as they had different surnames, it didn’t jump out from the payroll.

Now, to be fair, we hadn’t asked the direct question, ‘Are any family members involved in the business?’

And we need to – there’s another we’re looking where we discovered that the maintenance person they kept referring to was the owner’s son. That only came out in due diligence, it was never disclosed in conversation that this person was a direct relative.

I don’t know if they think we won’t ask or find out, or they think it isn’t important, but of course it’s important – and of course we’ll find out.

We now have a rule that all family members resign at the point of completion because, quite frankly, you don’t want to buy a business and have all the previous owner’s family members operating in it. It sets up a massive conflict of loyalty from the staff, if nothing else.

Doing the deal

As you are actually going through an acquisition you uncover or reveal all sorts of quirky facets and behaviours. I’ve been in several situations where I’m baffled by how they panned out.

Think about it … you’ve got somebody selling a business, sometimes for a considerable amount of money, and they’re just never available. In my experience, when I’ve sold companies, I’m on it. It’s all I think about all day long. I get an email, I respond to it. The buyer wants information? Okay, they get it. They want a meeting? Okay, I’m there. But sometimes people just make it so difficult.

We’re dealing with an acquisition at the moment where the owner wants ￡2 million – he’s adamant that’s his price – but he will not come to a meeting to discuss his business.

He wants to know what questions I’m going to ask him; well, I’m going to ask him about the business that he’s selling, I want him to tell me about that business.

It’s remarkable how difficult he’s being about this meeting. In my head, I’m saying there are two million reasons for you to come and talk to me, but he will not budge and so it’s going nowhere. It’s absolutely crazy.

We had a seller in one of the earlier acquisitions who became unavailable every Tuesday and Wednesday. He wasn’t receiving WhatsApp messages, he was just unavailable. It got to the point where I had to say to him, ‘So, what is it you’re doing on Tuesdays and Wednesdays?’ We thought he was an Uber driver, that he had some other business!

Turned out he wasn’t an Uber driver, he was working in a pork pie factory. And owned a nursery.

Another interesting aspect to that one is that his daughter bought my book on how to buy a business, and then they started using my own tactics back at me! That was a little bit annoying, because I realised what they were doing and to a certain extent it might have worked!

We’ve had so many situations where the owners have been hard to get hold of. There’s another one ongoing where the wife, who seems to have all the financial information at her fingertips, is only available on Fridays.

When you’re trying to do a deal in a reasonably short period of time and someone is only available to talk about it one day a week – and quite often it’s the most inconvenient day of the week – it’s pretty frustrating. I can’t help but think why not make yourself more available, take some holiday, take some time off.

I think the issue here is that there are some sectors where the focus is not on running a business, the focus is on providing a service, and the business element becomes secondary to the purpose of the business. Consequently, you don’t get a particularly business-like response to requests for providing information.

We use an external due diligence firm. When they were doing due diligence on our behalf with one particular company, the owners actually refused to answer any more questions, because they had become so frustrated with the process.

My response was, ‘You want to sell your business and we’re trying to understand your business, and the signal you’re giving us by saying you don’t want to talk about it is that there is something you don’t want us to know.’

They insisted that wasn’t the case, but you can see why that was the assumption we made.

I think that selling a business is highly stressful for everyone, but especially so for some people.

I’ll be honest, I’ve been very stressed when I’ve been on the ‘sell’ side. As a result you can become quite short-tempered, because everything becomes very frustrating.

However, when you’re buying, one of the key attributes of a good business buyer is patience. Even if the seller wants to do the deal by Christmas, it probably doesn’t make any difference to you if you do, or whether you do it January, February or March. It’s when you feel an impatience creeping in that you start making poor decisions and relenting on points that you wouldn’t otherwise have given in on.

That’s another reason why, from a buyer’s point of view, deal flow is important. You’ve got to be patient, therefore to keep acquisitions flowing you have to have many options.

There’s another benefit of deal flow, too. Say you’ve got, for example, six potential deals on the go at any one time. Obviously, you’re not going to be all over them at the same time on Monday morning. You might not get round to deal six until Tuesday afternoon, because that’s the sequence in which you’re looking at those particular deals.

However, the seller of deal six might have been anxious since Monday morning because they haven’t heard from you. That’s unsettling for them – which isn’t always a bad thing for you when you are in this scenario.

I always make it clear to people that I have several irons in the fire. People need to know that you have options. The way they generally interpret that is that there’s only a certain amount of money to be spent and therefore you’re either going to spend it with them or spend it with someone else, which again has the ring of truth to it.

Problems with business valuation

Looking back at the early acquisitions there have been times when I’ve sat with my head in my hands and said, ‘I don’t believe it.’ Because it is unbelievable how much debt some people take on for a business that never has a chance of repaying it – and they personally guarantee the debt. It’s just absolutely dreadful. There have been times when we’ve sat here in the office and we’ve felt so awful for these owners, they’ve got themselves in such a pickle and this – selling the business – is their way out.

In many cases, and this is not exclusive to day nurseries, these are people for whom this business is their life, their baby, their creation, they treat their business with as much deference as they would their house or their family.

They put more and more money into it, and that isn’t right because after a certain amount of time, money should be flowing out of a business. But that’s not happening and they’re shoring it up with more and more cash … and then they’re incredibly surprised when someone says, ‘Actually, this business doesn’t have the value that you think it has.’ You know that’s hard for them to hear.

Every time I talk to an owner who has had a conversation with a broker I know that their sense of value is unrealistic. They have a figure in their head because the salesperson – they say it’s a professional valuer, but no – the salesperson on the end of the phone has said, ‘Oh my goodness, there’s a queue of people looking for a business just like yours!’

First of all they believe that, because it’s quite a flattering thing to believe, and secondly, they believe their business is worth a lot, which is also quite flattering. The problem is they completely forget the numbers. This is something that I encounter pretty much daily, so repositioning someone’s sense of value regarding the business they’re selling is quite important.

If a broker told them it was worth a fortune three years ago and it still hasn’t sold, then their value resets.

One of our early acquisitions had been with a broker for six years – they’d actually been trying to sell their business for six whole years. Part of the problem was the owner hadn’t terminated the agreement and so it had just rolled on. I don’t know the exact figure, but I believe they had to pay the broker ￡12,000 on the sale of the business even though the broker hadn’t been involved in the deal and hadn’t done anything in six years. Crazy!

Hiding the evidence

I talked earlier about some of the behaviours of people selling me their businesses; there have also been attempts to disguise things and hide them from me, be it business performance, debt, or whatever. Here are some of the other lessons I’ve learned, not just from this challenge, but also from earlier experiences.

First up, you don’t believe anything you’re told, you wait until you’ve got evidence. Someone selling their business is doing exactly that, they are selling their business, they are going to accentuate the positive, they’re going to ignore the negative, and I have never met a business owner who hasn’t told me what an incredible opportunity this is, that the potential is huge. With nurseries, they always say there’s a housing estate being built around the corner – everyone has a housing estate being built round the corner. If there is a bit of a negative, say the numbers haven’t been so strong recently, then it’s always because a lot of children have left for school, or the birth rate has fallen in the area. If you go and visit the nursery and it seems a bit empty, then it’s, ‘Oh, we’ve got a lot of illness at the moment.’ There’s always a reason, which is why due diligence is so important. Due diligence unpicks those assertions and uncovers the historic trend, rather than just looking at the situation on the day that you viewed the nursery.

Sellers are thinking, if Jonathan or his colleague come on a quiet day, we’ll tell them the birth rate’s gone down, or a lot of children have left for school, or there’s a lot of illness, and he might believe that because he’s not going to come back tomorrow and the next day and the next day. And it’s true, we’re not, but due diligence cuts through all that and just looks at the numbers, which allows us to ascertain whether this is a trend, whether it is a blip, or whether what the owner is saying is actually true.

Rather than ‘trust nothing’, perhaps the lesson is ‘check everything’.

Anyone who thinks they can sell a business without everything being subject to scrutiny is deluding themselves.

It’s like selling your house and hoping no one’s going to notice that crack that runs from the top of the building to the bottom, standing in front of it hoping you can divert attention away from it. Or hoping that somehow it won’t come out that there’s a new municipal waste centre with planning permission to be built nearby– it just doesn’t wash.

Your surveyor is going to see that crack and tell you how serious it is. Your conveyancing solicitor is going to run searches and find out about the waste centre. It’s their job to keep you informed and protected. And it’s exactly the same with due diligence when buying a business.

Understanding worth

Unfortunately, what often happens in the nursery sector is people get a figure in their head as to what their business is worth and that figure is aligned to their description of the business to you, the buyer. But when the description changes – due to the evidence showing the equivalent of the crack in the wall or the planned municipal waste centre – they don’t feel that the price should change because it’s still a great business.

One issue is that if they’ve been running the nursery for, say, ten or fifteen years and they set it up themselves, part of their sense of the value of the business must come from that. They equate all the hard work and the sleepless nights, and all the months they didn’t get paid because they paid everyone else first and there wasn’t any money left at the end of the month, and they feel they now should be rewarded for that effort.

And while I understand the thought process, the hard fact is that you’re not rewarded for the effort you put in, you’re rewarded for the business that you’re selling, so if all that effort was in vain, that’s tough. Unfortunately, the reality is that the business valuation now will reflect the fact that it’s not performing at the level that maybe it did ten years ago.

As a variation on a theme, I’ve got an acquisition discussion happening at the moment that involves a property, which they told us is valued at ￡900,000. We got in a Royal Institute of Chartered Surveyors valuer, which we always do, and the value came back at ￡850,000. That’s a variance of ￡50,000; they want a certain price but the value is 5% below that.

Now, their argument is that because of Brexit and various other different things house prices are at their lowest, so why should they sell at a price that’s at the bottom of the market when it’ll creep up over time.

First of all, house prices were at their lowest eight or nine years ago, and second, because you’re selling now!

If you want to get the price it will be in five years, sell it in five years. You can’t sell it today at the price you feel it will achieve in five years’ time, it just doesn’t work like that! It’s like eating in a restaurant and when they bring you the bill the prices are higher than they are on the menu, and they say, ‘Yes, that’s because over the next few years the prices are going to go up, so we’re going to charge you now what we think the price will be in five years.’

No, it doesn’t work like that!

So, they don’t want to let go of their property asset at a lower price than they insist it’s worth. I’ve said go and get your own RICS valuation. It won’t come in the same as the one I had done exactly to the pound, it doesn’t work like that, but let’s see what it does come in at and then we can talk.

And there’s a reluctance on their part to pay out ￡1,200 for an evaluation, even though there’s ￡2.4 million at stake.

Again, it’s, ‘I want ￡2.4 million for the business and the property, but that ￡1,200? Not sure I really want to spend that.’

When you’re buying a business it’s not just the mechanics, it’s all of these people issues that mean it takes longer than you intended, it’s harder work than you intended, and you’ve got to be good with people to be able to manage these expectations and misunderstandings and put your arm around their shoulder and say, ‘It’s going to be okay, let’s just get this deal done.’

More often than not, managing expectations has worked to get deals done, but there are still times when, despite all my efforts, the seller’s personal view of what their business is worth and my view are just too far apart. When that happens, I walk away.

You very quickly determine you’re just never going to agree and so you cut your losses. And it’s not a big deal. After all, when you decide to buy a property you don’t expect to look at just one, then buy it. You look at lots of properties, you have lots of disappointments and you have one victory – but that’s all you need, one property to live in. And it’s the same with businesses. If you just need one business to transform the size of your company then it’s worth sitting down with twenty or thirty people because that deal is in there somewhere.

My day-to-day role in this company is looking at deals, evaluating them and deciding whether it’s something worth pursuing or not, and usually it’s not.

As a result of the first six acquisitions my criteria have evolved, they’ve started to tighten up.

The more businesses you look at, the more you realise there are some you just don’t want, but that six months ago you might have considered. And sometimes you walk away.

In the last six months we’ve withdrawn from three deals, and in the case of all three we were at heads of terms.

The first was because when we gave close scrutiny we realised the location just wasn’t going to work for us, it was too far from anything else, and better deals came along.

With one we signed heads of terms and then they started to try to reposition the terms, to change the deal. This was after speaking to their solicitor who put into their heads the idea that they should have a better or a different deal to the one they had. They changed everything in their favour. However, the deal we shook on was absolutely fine. Now, if I went and changed everything in my favour I’d be a terrible human being, they’d say, ‘Jonathan, you’re reneging on the deal.’ Well, they reneged on the deal, so we just said no.

At the beginning of the challenge I might have been more accommodating. I’ve got a really big target to hit so I don’t want to lose those deals, but I’m not going to do bad deals just for the sake of it. People say, ‘How do you do good deals?’ Well, it’s because I just won’t do bad ones, I avoid the bad ones.

When you’re doing something at scale a few less-than-great deals are going to creep in because all the due diligence in the world doesn’t always show up every facet of the business, or there’s something that’s very well hidden, but if you do something at scale and you get a bad deal, it’s fine; you can lose one or two and it doesn’t make any difference. If you structure everything the way I show people to structure it, you’re not going to lose out.

As a result of that first phase we have a very elegant system for identifying the nurseries we want to make contact with in the first place, and shortlisting the most promising.

Our colleague, Anna, speaks to everyone initially. If she feels it passes our basic criteria check, I speak to them – and today I’ve got two to speak to.

As to the basic criteria check itself, it’s probably become more stringent. At the beginning you want to keep the funnel wide open, you don’t want to close too many doors or say ‘no’ to too many people. When you realise that you can get deal flow regardless of the fact that you’re saying ‘no’ to lots of people, that changes. You’re less picky at the start and become more selective as time goes on.

More, next time!

The next Business Acquisition FastTrack Course (on Zoom) www.thedealmakersacademy.com/fast

Dealmakers Live! – a brand new two-day live event in January www.thedealmakersacademy.com/live

Want me to help you with your first deal? www.thedealmakersacademy.com/meeting

The JJ YouTube Channel: https://www.youtube.com/c/TheDealmakersAcademy

The Business Buying Strategies Podcast: Business Buying Strategies from The Dealmaker's Academy on Apple Podcasts