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Anonymous

Cofounder and Former Commercial Director at The Access Group 

Software M&A: The Value of Brokers

Software M&A: People First

{audio:0:00:05} It’s a pleasure to have you with us today. Maybe if you could start by providing a bit of context to when you joined Access?

{audio:0:00:12} Yes. Actually, it’s a long history, but I was a founder of Access, in 1991. I left Access in 1995, for 10 years. I did international business development, with a PLC (Public Limited Company), during which time we did a couple of acquisitions. I left there in 2005 and then I was asked to re-join Access, specifically to look at acquisitions. That was still while we were in private ownership, in terms of shareholders. The founder of Access, the 50% shareholder, decided he wanted to retire and we decided to do a private equity deal, which we did in 2011. They, basically, bought out his 50%, leaving us other shareholders with the other 50%.

{audio:0:01:12} My role there, for the next four years, was purely acquisitions. We set out our acquisition strategy, we decided where we wanted to go and how we wanted to get there, with the whole point being to buy and build roll-up business, significantly.

{audio:0:01:30} In 2011, we were a £25 million business, making about £5-5.5 million EBITDA. Obviously, we wanted to grow that very quickly, over the following four to five years, which is the private equity period. I can’t remember the exact number of employees, but in 2011, it would have been about 220. By the time we got to 2015, it was more like 500 to 600, so it was a fairly rapid growth.

{audio:0:02:09} The private equity players came in and, clearly, they saw room to roll up different software businesses. Was growth slower in the core business?  What was the rationale for the buy and build strategy?

{audio:0:02:22} One of the drivers, in private equity, is to find what they call a platform business. Access is a classic platform business. We provided core accounting functions, such as payroll, purchase ledger, purchase ordering, procure to pay, general ledger and finance, with some other things that we had already built ourselves, which helped us stay inside of business, once we’d caught them, as a customer. We were a classic platform because, if you think about, an ERP system like that, you can add all kinds of things.

{audio:0:03:04} You can go down the employee health and safety route, HR, absence tracking. You can look at where that business has a concentration of customers. For example, we had a concentration of customers in the charity sector, so we then looked to go out and find software that assisted charities, which we could integrate with our own, to make it one offering. That’s why the private equity route was a good route. The easier route would have been a trade sale, but you take the money and you run. With a private equity, you don’t take any money. In fact, you lend them money. Actually, they lend you money, to lend to them. That’s the way it works, but the returns are much higher and the risks are, of course, higher.

{audio:0:03:56} The core value in that business, in the early days, was the stickiness with the customers that can allow you to build a platform business?

{audio:0:04:05} The things that people look for are the churn rate in the business. We had a less than 4% churn rate, in our customers, which is very strong. That would be one of the things that we would always look for in businesses that we were acquiring. How long do they keep a customer? Another key is how much recurring income they have. Whether that’s subscription based, support based, or something else.

{audio:0:04:29} At the time of the acquisition, Access was a renewal-based business, really, and not a subscription business. It was an annual license to run the software, so it counted as renewals, but it wasn’t a pure SaaS business in any way and didn’t provide a SaaS based product, as such. That was all to be done in the strategy, going forward.

{audio:0:04:54} Going back to 2011, when the PE owners come in, it’s clearly a buy and build strategy, what framework did you have in place to make acquisitions?

{audio:0:05:11} The first thing, which is quite interesting, is that before we met the PE company, we decided that, in order to sell the business at the best possible value, which actually works against the people that are staying, but it’s good for the guy that’s going, was to create a list of companies that we thought were targets. We had quite a long list of about 20 companies and we said to the PE company, if you invest in us, then we’ve got these 20 companies, almost lined up, and these will all be growth opportunities.

{audio:0:05:50} Looking back, we didn’t buy any of those companies; not a single one. Once we’d actually done the deal, we then had a much more strategic session about what we wanted to do. If you put the platform at the center, what are all the spokes going out, that you can possibly look at? We started dissecting the customer base. We looked at construction, we looked at charity, we looked at not-for-profit, generally, so a whole range of different possibilities that we could add on to the business. Then we went out to research and find out what companies fitted those criteria that we could possibly buy.

{audio:0:06:36} Everyone talks about the first 100 days after acquisition. In the first 100 days, we set out a strategy for, this is what we are going to do. We wanted to buy a payroll bureau, for example, which I thought would be very easy and turned out to be one of the hardest things to buy. It took us about three years to find one and buy one. What you think might be easy, isn’t; what you think isn’t easy, sometimes it is. That’s how we set about it.

{audio:0:07:06} Looking back, you mentioned that original list of 20 targets. Was that a mistake there?

{audio:0:07:13} Not really a mistake. We didn’t really have the time or resource to properly identify them. Before 2011, we had made a couple of acquisitions within Access. For example, we bought, very successfully, an HR business. We identified companies that we thought we would be attractive, but we weren’t in a position to pursue them because, by the time we had bought the HR company, we had no cash left. We were a very cash-generative business, but we had paid £4 million for the acquisition. We were only a small business, with about £6 million in the bank, spent £4 million of it. We didn’t really want to spend any more. It’s one of the reasons why the founder left. The remaining board of directors wanted to grow the business and the only way to grow it, fast, was to acquisition. The only way you could do that is by borrowing money and the founder did not want to borrow any money. That was his Rule 101. We’re not going to borrow any money.

{audio:0:08:14} Whereas going into private equity, they’re going to let you borrow as much money as you like, as long as you’re generating profit. The list wasn’t properly researched and we sold it to them as, these are ideas of companies we could buy, the kind of markets that we could go into. We did get quite a bit of input from the private equity company in the first 100 days, as to what they thought. It was a very collegiate process.

{audio:0:08:48} Going back to the decision-making framework, the first one you mentioned was the verticals? What KPIs would you use to double-check if the business was worthwhile your time? Were there certain hurdle rates that you had to meet?

{audio:0:09:07} We had a very strong organic growth in the business. We had about 12%, year on year, organic, so that’s what we needed to increase. We needed to get to about 30% growth, year on year, overall, to achieve the target.

{audio:0:09:25} Working backwards, first of all, we knew we need to achieve 18% growth, through the acquisitions. You start looking at the ones that are probably going to provide the best bang for your buck. There had to be some rules and one of the rules was that we couldn’t buy a loss-making business. It’s a shame, in a way, because obviously, a loss-making business, you might pick it up for very little money and be able to turn it into something. But because you are bound by some banking rules and all the rest of it, buying a loss-making business is immediately out of the question. So you’ve got to look for profitable businesses.

{audio:0:10:09} What we didn’t want to do was to dilute our own shareholdings, because if we wanted to borrow more money from the private equity company, they would want shares. Therefore, we wanted to do it through bank finance. We got a line of credit from bank finance and we had, initially, £10 million to spend, but you’re not going to blow all that on one acquisition. So immediately, you’re thinking, well, we could do two or three acquisitions at the £3 million mark. Before you even start looking at what you might buy, you start thinking about how much you can spend. Then you start looking at the verticals. We wanted to buy, if we could, SaaS businesses. This is 2011, SaaS has become a thing. It’s not fully accepted by everybody, in the way it is now, but it was a thing. We went for an absence tracking system, I think, was one of the first ones that we bought, because it was a direct bolt on to our HR system.

{audio:0:11:22} We then had absence tracking and HR, but we needed advanced absence tracking; absence tracking across teams, absence tracking so that people could see, not only necessarily that someone was absent, but they were out of the office doing something else or they were working on a different team. In fact, the product that we looked at in the end, was a product called TeamSeer, which we acquired. We paid about £2 million for it, if I remember rightly. That was a SaaS-based business and we paid it almost two times its revenue, which was a steal really, if you look back at it. If we were buying that business now, we’d probably pay double that.

{audio:0:12:10} That’s how we approached it – money first. The next thing you next hit is, you go out and you research these companies. We looked at, probably, four or five absence tracking companies. I would come back to the board and say, these are the possibles. We were always looking for off-market and we were trying to avoid advisor-led sales. Advisor-led sales are, generally, more expensive. We would get to the point where we’d say, we’d like to buy this and I’d be asked, is this the best one to buy? The answer actually is, maybe not, but it’s the one that’s available; it’s the one where he’ll sell, for a price we can afford and we can see that we can do something with that business and we can make it fly.

{audio:0:13:04} Going back to the decision of advisor-led versus off-market, is it a decision for the business to make whether you take the broker or the advisor approach, or you build a team internally, like yourself, to go and find those acquisitions? How do you weigh up the two?

{audio:0:13:23} I came out of Access in 2015. Since then, I’ve been working with a number of private equity companies, to help their platform businesses find bolt-on acquisitions. What everybody wants is off-market. I often get businesses come to me, they are looking for a broker and I’ll advise them and give them some advice where to go, because there are good ones and bad ones, as there would be in any business. But if you are in a buy and build, and you want to grow quickly, brokers kind of get in the way. A lot of them don’t add much value. At Access, we would get lots of approaches from brokers. And we did buy businesses where there were advisors, but not many, because they would always try and hike the price up. They would give the seller a false expectation of what might be paid. Brokers are good, in the right scenario. For example, a broker is great if you want to sell to a private equity company and you want good advice. But I get regular approaches to find businesses which haven’t got a broker or an advisor. Once they get an advisor, it just becomes a longer process. It’s a much quicker process without a broker. It’s hard for me to rate it, as such, because I much prefer that off-market strategy.

{audio:0:15:03} But you have to do the work? You have to network and be in the space, to be able to understand the businesses?

{audio:0:15:09} The phrase goes, you have to kiss a lot of frogs. I’m working with a business, at the moment and, in fact, there was a broker involved. I was asked to go and see if I could revive it, because they’d gone away. We did revive it and we’ve just done DD and we found that the detail that the broker provided was miles out. They’d shown a fairly good EBITDA but, in fact, once we’d done the DD, we found that, actually, there was no EBITDA. That is very, very disappointing and very, very expensive. Once we say yes, we’re going to buy, we’re just thinking, in our heads, we’re going to spend £100,000 now on financial and legal due diligence. To find out that the figures you’ve been given, by a broker, are wrong, it’s disastrous. It’s much better to have that direct relationship with the seller. Another business that I’m looking at, at the moment, which I’ve just done a little report on, my report starts with, this looks like a very well-run business; they’ve got a good accountant, they’ve got numbers. We know exactly what they’ve got and they’ve got strong cash in the bank. This will be a good company for us to talk to.

{audio:0:16:40} You touched on valuation and you mentioned that the first acquisition you made was roughly two times revenue, back then. What metrics or specific KPIs do you look at? You mentioned churn, recurring revenue. Anything else that you look at or what type of hurdle rates do you have?

{audio:0:17:00} People first. I have met quite a few businesses, have gone with our CEO and met them, good businesses, very profitable. We have walked out of the meeting saying, that’s a great business. I could never work with them. That’s the end of it. So, people first, every time.

{audio:0:17:23} What exactly, about people, do you look for?

{audio:0:17:26} When you go to acquire a business, you’re on a fast-track path. We want to buy that business, integrate it into our business. We’re looking for people to stay, not leave, so we’re a buy and build. Our question to companies will be, look, how much will it cost us to invest in your business, to double the size of it and how long will it take? Can we double the size of your business in a year? Two years? We need to double the size of your business. You have access to all our sales staff. Our class acquisition strategy in Access was, find a business that’s very profitable and has got a poor sales team. The owner is probably sitting there with £300,000 to £400,000 in the bank and you’d say to them, if you had unlimited funds, where would you spend it? They will almost always say, I’d get a couple of really good sales people.

{audio:0:18:30} So you say, why don’t you do that? You’ve got £300,000 or £400,000 in the bank. The classic answer would be, because I’ve done it before and it doesn’t work. They’re not very good. When we bring a big sales team to the table, who really want to sell their product, it gives us every opportunity and it gives us the opportunity to construct a deal, which works for them. In that smaller sector, where the businesses are turning over £1 million to £3 million, they’re all struggling for sales resource; they always are.

{audio:0:19:05} So people first. You look at churn and the quality of the product. We would always want a demo of the product; we want to know what platform it was on and whether that platform was sustainable. At the time, there was a lot of .net stuff that was going out of favor. Silverlight was going to be withdrawn. In fact, we developed a tool to convert Silverlight products, because there were so many, there were good opportunities to buy them and we knew we could convert them into a modern tech, quickly.

{audio:0:19:49} We wanted people to stay, generally. One of the biggest mistakes we made, once, was letting a couple of people leave. They had nothing to do with the business, day to day, but they left and the business collapsed. It took us six months to sort it out. That was one of our failures.

{audio:0:20:13} Is there a certain churn rate or a maximum churn that you’d look at or a maximum valuation that you would have, at that point?

{audio:0:20:22} For churn rate, we always look to see if they could get down to our 4%. We, ourselves, were working on a set of KPIs for our business, in order to sell it. If you do private equity, that’s what you’re trying to do; you’re trying to sell your business. So we didn’t want to buy a business that destroyed our KPIs. If they had a 10% churn rate, either we have to think that we can completely change that, or we wouldn’t buy it, because it would be affecting our overall churn rate for the business.

{audio:0:20:54} Metrics wise, you then come down to multiples of EBITDA or multiples of revenue. For a traditional business and in the early times of, maybe, SaaS businesses, we would be looking at EBITDA. We had a vision of what we would be able to sell our business at, in 2015, 2016 and we were always working on the fact that we bought the business, as ourselves, when we did the private equity deal, at about an eight, nine times multiple. As well as growing the business, we wanted to increase that multiple, because that is a big value.

{audio:0:21:39} So we always worked on the fact that we would start at 12 times multiple. If we could buy a business at seven times multiple EBITDA, or even up to nine, then we would always think we had an arbitrage, going down the track. If they came back with, I make £300,000, I want 10 times, that’s £3 million, we’d say, look, we are a business that is nine times the size of you and we only paid nine times. That’s all we got. So we can’t pay you more than nine, because if we pay you more than nine, it devalues our business. That was always a strong argument as to how we would get to a deal.

{audio:0:22:24} We would be trying to buy at a seven to nine times multiple on EBITDA. As we went down the track with SaaS, the key KPI there is growth rate. If a business could show that they were doing 30% to 40% annual growth in their SaaS subscriptions, year on year, and they had that track record for two to three years, then we would be willing to look at a revenue multiple for that business.

{audio:0:22:59} Now, I’m quite sure, as Access is now a very big business, a couple of hundred million quid, they can afford to buy a loss-making business. They would probably say, we’ll pay a revenue multiple, I don’t really care what your bottom line looks like, because you’re running your business at 50% a year, so we want some of that. But for us, we were also looking for it to be, at least, a profitable business and then we would pay two to three times revenue, based on annual renewal subscriptions.

{audio:0:23:33} What was the biggest challenge for you, pre-acquisition?

{audio:0:23:43} Biggest challenge would definitely be finding the targets. No doubt about it. Finding the targets and trying to track them down, to talk to them. If you’re talking to a business, it’s not that easy, you can’t ring the receptionist and say, I’m interested in buying this business. Can you put me through to the managing director? First of all, I’d build a list and probably would end up with quite a long list of about 50. In fact, business intelligence would be a good example, when I started with a list of 100 companies that did business intelligence. You’ve got to have a quick squizz at what they look like on their website and probably eliminate half of them straightaway, as being nothing businesses.

{audio:0:24:41} We would be buying, predominantly, UK businesses. We only ever bought one business from overseas, in my time, which was in France. You’d be looking at their Company House records, what the financials look like, who are the directors. Then you would try tracking the directors down on LinkedIn. LinkedIn is a key tool; couldn’t operate without it. They’ve made it a little bit harder, because you can’t send numerous in-mails and all the rest of it. But you’d track them down through LinkedIn. Then you’d try by phone. Phone is hardest because firstly, it’s quite hard to make a cold call. Secondly, you get a lot of, no, I can’t put you through to the managing director and no, I can’t give you his email address. Sometimes, there would be someone we just couldn’t get through to. Whether we liked it or not, there was just no way.

{audio:0:25:42} We might write a private and confidential letter to the MD. Very, very low rate of success with that. Good rate of success with LinkedIn. We would probably get a response rate of one in three. Of course, then you get a load of nos. No, we’re not interested. You get the, no, we’re not interested and it’s firm. You also get, no, we’re not interested, but we wouldn’t mind chatting. Then you have a chat and you find, actually, they are interested. Then you get the ones that are, yes, we’re very interested in having a chat.

{audio:0:26:23} So really, a lot of persistence is required?

{audio:0:26:27} Yes. You need a very good CRM database and you need to keep track of them. I have companies in my database, with dates going forward from now to a couple of years’ time. I’ve said to them, I’ll contact you in a year and let’s see how things have changed. You need a good CRM that you are going to track. I track about 2,500 companies. You’re trying to maintain some kind of contact with them, even if it’s just a, hi, how are you doing? You need to be organized.

{audio:0:27:08} I just want to look, in detail, at that process. So, you’ve found a company that you are really interested in. You want to make an offer. What is the biggest challenge in managing that relationship with the founder where you, effectively, want to buy their baby?

{audio:0:27:28} And it is their baby and you have to recognize that. You have to say all the right things. You say things to them like, I really understand that you only get to sell this business once, so you need to get the best possible deal you can. I understand that. You need to develop a really strong rapport with that individual, if you can. Get an NDA in place, a little bit of discovery of numbers, a meeting. You’re not going straight in there with an offer. It’s a process over two or three weeks, a month, maybe, where you’re just establishing whether or not you are interested, they are interested, whether you like them and all the rest of it.

{audio:0:28:13} Then, maybe, involving one of my other board members, to also meet with them, so they get an idea. I might invite them to go to our business and have a look round, just to get a feel of what our business is like. We’re a people business. All these things; you’ve just got to build a very strong rapport. Then the role of the person like myself is to, at least as far as the target is concerned, is to feel like an honest broker between them and the company. Again, you chat through with them what offer might be on the table and how that might be constructed. We were generally looking at doing earn-outs, because it lowers risk. We will always pay them. We did 18 acquisitions in my four years and we paid every earn-out out. Every business was done with an earn-out, barring one. There are no prizes for not paying the earn-out. If we haven’t paid the earn-out, we haven’t bought what we thought we’d bought. So it’s very important to establish that and make sure that the business was in a position to make the earn-out, with our help.

{audio:0:29:26} So yes, trying to establish that rapport and then discuss how you might structure that offer. Get some parameters from the board, from which you can negotiate within and then try and get it. We’ll go in with an offer. When we do, you can have a bit of a laugh and say it’s not enough and that’s fine. All I want to know is, are we anywhere near? Are we on the dance floor? If we can get on the dance floor, that’s fine. If we’re a mile out, just tell us, because if we’re a mile out, we’re not going to buy the business, as we know that the offer we are making is reasonable. There’s always room for maneuver, but if you want £10 million for your business and we’ve offered you £3 million, just tell us.

{audio:0:30:18} I’d also say to people, look just tell us what you want. It makes it easy. We’ll either tell you we can or we can’t. Oh no, I can’t do that; I think you should make an offer. In actual fact, when we sold the business in 2011 to private equity, we told them how much money we wanted. We didn’t want a pound more or a pound less and we got exactly that. When we sold the business in 2011, it was £50 million. In 2015, we wanted £250 million for the business, as our growth rate was five times. We said, we don’t want a pound more or a pound less. If you want to buy it for £250 million, you can talk to us. We ran a pre-acquisition process; we just let it be known, in the private equity world, because we were doing secondary deal, that we would sell the business for £250 million. Lo and behold, somebody stepped forward and said, yes, we’ll pay that. So we said, great; let’s do it. There are different ways of approaching it.

{audio:0:31:28} How did you, typically, structure the earn-out with founders?

{audio:0:31:33} It would depend on the type of business but it would, generally, always be a revenue-based earn-out. With a SaaS business, with subscriptions, it would be based on the value of renewals going to the end. With the TeamSeer absence tracking business, he had to hit a target by a year’s time of annual subscriptions and he would get his earn-out. But it was always graduated, as well. It wasn’t a cliff, ‘I’m sorry, you didn’t make it; we’re not paying you anything’. It was graduated, but on a curve. The further you got up the cliff, the more money you were getting, until you got to your earn-out. There was one business that was on £1 million earn-out and I think they got to £850,000. Good company, very nice person staying on in the business, we just paid him the earn-out, because why wouldn’t we? You don’t want him to spend the next five years of the business going, I wish I’d got that extra £150,000. In the grand scheme of things, it’s nothing.  But the value of a really happy person, who went, ‘wow, that’s amazing’, is huge. I can tell you, we’re in 2020 and we bought that business in 2013, and that person is very happy and still with the business and now an equity shareholder in the business, as well.

{audio:0:33:08} That’s the type of acquisition you really want to make.

{audio:0:33:14} So you’d buy your business, you’d say to the founders, we want you to stay on and run the business. Here are the KPIs or metrics that we need to hit, to grow our total business, the Access Group. We will pay you a wage, plus you will get equity or earn-out, based on the growth of your own business?

{audio:0:33:32} Yes. We didn’t do any equity in that first four years. We didn’t have any to give away. Whatever they were earning before, they would continue to earn. Whatever benefits they had, they would continue to get, unless they were taking ridiculous money out of the business. We would pay them what we would pay a good manager to run that business. They wouldn’t get any commission or anything, because everything was based on their earn-out. Their earn-out was on their revenue that they thought they could do and that would be a number that they had picked. They probably revealed that number, not knowing that that would be how it worked. We’d say to them, you’re doing £1 million now; what do you think you’ll be doing in a year? They’d say, we’re going to be doing £1.5 million. Our response would be, we’ll have our sales team on this, as well. Do you think you could do £1.8 million? Yes, we’ll do £1.8 million. Okay, we’ll base your earn-out on doing £1.8 million then.

{audio:0:34:37} Then we’d have line that says how much they’d get as they got towards £1.8 million and then we’ll pay. Additionally, we had a big target to get to, in terms of revenue. As a business, we needed to get to £60 million, £65 million revenue and about £16 million, £17 million EBITDA. We got the private equity company to agree to allow us to put an employee equity scheme in place, which, very non-generously, had to come out of our end; we had to give our equity away to do it. We had a big meeting and we selected about 20 employees who we felt were absolutely key to the business and we gave them performance equity-based result. So these were people who had no equity in the business, but if the business was sold above a certain number, they would then benefit. They’d be able to take shares and they could roll them over into the next, if they wanted to. That included one or two of these businesses that we bought, that performed very well and where people were staying on, they got to partake of that.

{audio:0:36:10} How long do you, typically, keep the earn-out for founders?

{audio:0:36:14} As short as possible. Generally, a year. Not less than a year, but two years is too long. Sometimes, we do do two years and we’ll pay out at the end of the first year and we’ll pay out at the end of the second year. But one year is a good marker.

{audio:0:36:30} After that, they are just a standard employee?

{audio:0:36:33} After that, then they can renegotiate their contracts and we’ll probably move on to some profit reward or performance reward basis, but it will change.

{audio:0:36:46} How do you keep the founder motivated, after that earn-out period?

{audio:0:36:53} I think, generally, you know, at the end of the earn-out period, whether that person wants to stay. Going back to the absence tracking company, the founder there said, ‘I’m going as soon as I’ve earnt the earn-out’. He was just upfront about it. We knew and that’s great, because we were able to plan for the replacement. I think, generally, you know whether a founder wants to stay or not. They tell you. You ask them their plans. If you get £4 million, what are you going to do? Do you want to retire? Do you want to carry on? Do you want to do a new business? People tend to tell you. After six months, you would know, whether or not they were the kind of person who wanted to stay. And whether we wanted them to stay, after the earn-out.

{audio:0:37:52} What was the biggest thing you learnt about dealing with people and looking for certain tendencies. Were there any techniques that you used to analyze people? You mentioned that Access is completely focused on people.

{audio:0:38:10} We never did anything like metric testing or anything like that on people. We took it on our own gut reaction to whether we liked people or not. When I think about it now, we didn’t do any health checks on people. Somebody could have a heart attack. Funnily enough, I did help somebody buy a business, a couple of years ago, and a month later, the guy had a heart attack.

{audio:0:38:43} Let’s say you’re at Access Group, you go to a meeting with a founder, when you’re speaking to the founder, what are you looking for? What tendencies or reactions are you looking for?

{audio:0:38:53} The tendencies and reactions that you are looking for, and asking, are how will you feel about working in a larger business? How will that affect you? You have worked for yourself, ever since you left school, for 20 years. How are you going to feel about it? It’s at that point that people will say, I’ll do it on my own; I don’t think I want to sell. Or some people will say, I’m really looking forward to it. What you’re saying to them is, if you carry on, at the moment, you are running your own business. You’ve had to worry about HR and payroll and administration. We’ll take all that away. All you have to do is focus on growing your business. All that admin that you never wanted to do in the first place, you don’t have to do it anymore. A lot of people go, wow, that’s amazing. That will just let me get on. And that’s what you see people do.

{audio:0:39:50} Or, as I say, some people will say, upfront, it’s not for me, working in a big corporate; I can’t see it. We’d say, you know what, try it, because you might find you like it. You get a good idea at that point.

{audio:0:40:07} So it’s about the integration of them into the larger business?

{audio:0:40:10} Yes, because we have to be very upfront about that. But there are things that we will always say to them as well, which is, look, we’re not going to change the name of your business, at least not at first. We bought People Planner and it’s got a good brand and all the rest of it. Why would we change that to something else? Keep the brand; it’s great. You like it. Customers like it. We’ll just put, ‘Part of the Access Group’ underneath. We’d say to them, what do you think about marketing? We’ve got this huge marketing department and they say, we’ve got this person and they’re really, really good and they’ve done my marketing for the last three years. We say, great; we’ll just integrate them into our marketing department. They can still work in your office, if you want. They might say, we’ve got a bit of a rubbish marketing person. Okay, we’ve got this fantastic marketing department; we’ll just put them to work.

{audio:0:41:08} People will ask about the future of their employees. We’ll tell them that the jobs at risk are administration because, obviously, we are going to do that centrally. If you’ve got an in-house accountant, ultimately, their job will be at risk. Marketing might be at risk, if they’re not any good. Apart from that, we will go to a meeting, immediately after the acquisition, with all the employees, where you present what you have done and we will be saying, please don’t start thinking you need to change your job. We need all of you to be here. Literally, we’re begging you not to leave, just because you now think something terrible is going to happen, because you’ve been bought. You just try, again, to establish rapport with the employees.

{audio:0:41:55} I’m really curious about your experience and learnings in negotiation. You mentioned one tip earlier, where you gave a bit of logic around that. You said, this is the multiple we got for our business; it’s much larger than yours, therefore, these are the boundaries. What other techniques do you have, in negotiating with founders, to sell their baby?

{audio:0:42:20} They might say, I want X for my business and you’re talking about less. The way to get value for your business is by earn-out. You talk them through the earn-out. The immediate reaction on an earn-out is that it is there to not be paid. The job gets easier, the more companies that you buy. We can say, we bought this business, please talk to them. And this one, please talk to them. The guys are still there; he’s just made his earn-out. We are genuine about that. Establishing the fact that you are genuine about what you say is important.

{audio:0:43:07} What you say and how you choose your words is very, very important. We were going to buy a business, where the choice of one word practically ruined the deal. I had met with the founder and his wife. We got on very well and we had breakfast. We’d got an offer in place. It was a very, very nervous seller and very strong wife, who wasn’t part of the business. But he wasn’t going to do anything unless she did something. They got a little bit tetchy about the whole process. We decided to have a meeting, there was a very difficult lawyer; the whole thing was very difficult. We sat either side of the table, to have a chat.

{audio:0:43:57} At some point in this meeting, she said, we thought you were a really nice guy and really clever and we wanted to do the deal. I said, we thought Andy was a clever guy. She took that really badly, as if I had said, we thought he was clever, but he isn’t. If I’d said, we think Andy is a clever guy, it’s a completely different story. She went off like a rocket. He did do the deal, but I didn’t do it. I had to step away. I apologized about four times, by email and by phone and said I had misspoken, which I had. But it just shows how one word can trigger a reaction from a target.

{audio:0:45:02} The difference between thought and think, I learnt a big lesson there.

{audio:0:45:08} What are the key points of advice from you, for young M&A directors or anyone negotiating a deal?

{audio:0:45:23} Establish rapport and be honest. You have to be honest. I will often say to the target, look, we’re sending an NDA, for you to disclose information to us. This is not a one-way process. You should ask me anything you like and I will do my very best to give you an answer. If I can’t give you that answer, I’ll go away and find that answer for you, because you only get to sell the business once. Make sure you are selling it to the people you think you are selling it to. Establish rapport, be honest and be open and you will find that people will be very honest and open with you.

{audio:0:46:08} How do you drive trust? Clearly, you can give them access to your own business, you can an NDA, but how do you build rapport and trust with them?

{audio:0:46:20} By revealing information, which is clearly true, which helps them. Telling them things you have done and backing that up with reality, like talking to other businesses we have acquired, showing them other businesses we have acquired and how they have grown. Talking about the growth of people in your own business. For example, I was able to say to people, look the guy who is the sales director of Access, of the whole Access Group, responsible for £50 million worth of sales, started on the phones, in our office, doing cold calls. That’s our sales director. The CEO of Access, used to work for me, as a software developer in another business, straight out of university. He is now the CEO of, at that time, a £50 million business.

{audio:0:47:12} We can demonstrate, as a business, that we can grow people and that they stay and prosper. We are responsible for a lot of mortgages and we understand that. People are relying on us, to pay their mortgage every month, so we don’t take risks. You can’t beat that kind of open, honest conversation. You meet somebody in the pub and you get on with them, you get on with them. If you don’t, you don’t. It is absolutely fundamental, being able to be open and honest and establish rapport.

{audio:0:47:50} Looking post-acquisition, and you mentioned that one of the key drivers of success and scaling the acquisitions was the sales unit. Some businesses tend to stay pretty small, because they don’t like to scale the sales unit. Can you elaborate on the impact that sales had on some of these acquisitions?

{audio:0:48:21} One of the fundamental numbers in our acquisition, would be the cross-sell opportunity. One of the things that we were always looking for in an acquisition is, how much of their software can we sell into our user base, which was massive? And how much of our software could we sell into their user base? When we were working out what we were willing to pay in the valuation, we would be looking at that cross-sell opportunity.

{audio:0:48:58} We would impress that upon the target because if they’d said they were going to do £1.5 million in revenue and we said, well maybe you could do £1.8 million, we’d say, we’re going to bring a sales team of 70 people to sell your product. What you’re going to do, is you’re going to present to our sales people, at the next sales meeting, and show them everything you’ve got. Then we’re going to dedicate a pre-sales person to that product and we’re going to dedicate a sales person to that product, who will be a specialist and they will be called in. All our account managers, in Access, all carried a target to sell other products and they would visit the key customers and they’d say, look, we’ve got this new product; it’s an absence tracking. I think it would benefit you to see it. That cross-sell would be a very important part and, again, it helps because they can then see that, well, that earn-out’s pretty easy to make, isn’t it? Suddenly, I’ve gone from two sales people to 60.

{audio:0:50:08} You’ve already mentioned the synergies that you typically achieve, in these types of businesses. The admin role, the marketing role, the finance division. Anything else that you would see? Clearly, there is cost synergies and revenue synergies that you have already mentioned.

{audio:0:50:22} Further down the track, you do get consolidated offices. We bought 18 businesses and I think we ended up with 12 offices, by the end of the four years. That’s gradually come down now, with relocation, but sensitive relocation. As far as I’m aware, nobody has lost their job, unless they said, I don’t want to travel more than 20 miles to an office. There are synergies, ultimately, and they do come through. If you go with private equity, our journey was 2011 to 2015.  The second journey was 2015 to 2019. During that time, you’re trying to boost your percentage EBITDA. We were achieving 17, 18 million, on 60. By the time you get to 250 million, you’re trying to break that 100 million, 125. So getting to more like 48%, 49% EBITDA. To do that, you do have to do some restructuring, as well. Hopefully, without losing employees because you need them. They are the life-blood of the business, anybody who is any good.

{audio:0:51:51} What were the biggest challenges, post-acquisition?

{audio:0:51:55} Post-acquisition, after we’d got a couple under our belt, we built quite a good integration team, which would be IT and HR related, principally. You really want to make sure that those employees don’t think about leaving. We would, literally, take one of our HR people, and they would probably sit in their office for at least a week and they would meet with everybody. Everybody is protected by TUPE (Transfer of Undertakings (Protection of Employment)), so they have employment protection. You can’t just go in and sack people; not that we would want to do that, anyway.

{audio:0:52:32} We needed people to understand they were protected. We can’t just change your contract. You have a contract. Look, when you are ready, if you want to, and only if you want to, you can have an Access contract. Why would you do that? Well, we’ve got healthcare and we’ve got this and we’ve got that and you can join this scheme. You can stay with your existing contract if you want, but this one is available to you, whenever you choose to take it. Nobody is forced into changing their contracts, but everybody takes the Access contract eventually, because it’s so much better.

{audio:0:53:07} IT would come in very, very quickly, because we want to give them an Access Group email address. We’d want them to feel integrated into the business, so get all their machines up to speed. Get them all on the latest versions of whatever software you need to have. We would always have a do, for the acquisition team. We would take them all out, feed them up, give them plenty of alcohol and all the senior board members from Access would attend that. It wouldn’t just be me. It would be the senior people at Access. Then they would come along to staff days and so on. Really working hard to integrate the people into the business and make them feel part of it.

{audio:0:54:00} Get them on the blogs and the threads and everything else that we would do, so that they feel part of the Access Group. Get them to buy the Access wear, wear the logo. A lot of work on people. Then on finance, we would, as quickly as possible, be putting them onto our finance. Again, that’s part of the team. It was great, because my role was really to get them over the line. Once I’d got them over the line, I could hand it to an integration and say, these are the people, this is the HR person and they will be in your office for a week. Then they will be here every month, for at least a day. All you’ve got to do is send an email to this person and they will be here to chat to you, if you’ve got any concerns.

{audio:0:54:49} We would do all of that and within a month, or two months, we would have that business properly integrated in and changed the website. Every customer would be contacted but the important customers would get a visit. You often find, in smaller businesses, they’ve probably signed the contract of the person they are supplying to. That contract will, often, have in it a term which is for change of control. If there is a change of control, we can cancel this contract. Obviously, we’re buying that, so we really want that contract to stay. So we go and visit the bigger customers, tell them that nothing is going to change. They’re dealing with the same people, it’s the same office. Nothing has changed, except they’ve got much more investment behind them. By the way, we’ve got all these other products that you might be interested in. Bigger customers will get a personal visit; everybody would get a phone call and a letter. Again, engaging the customers was important.

{audio:0:55:57} How would you summarize your key takeaways from working with private equity?

{audio:0:56:07} That’s a good question. They come in different flavors. I only work, really, with buy and build. Buy and build, I understand it, it’s a nice thing to do, because actually, you are moving people forward. There are a number of very nice private equity companies, mostly based in London, who really do work in that way and it’s great.

{audio:0:56:38} Then you get the other side of it, which is buy and strip it down. I’m going to buy this business and I’m going to separate it into three business units and I’m going to sell them all off. I’ve never really been involved in that.

{audio:0:56:57} I find them, certainly the five or six companies that I work with, to be extremely fair and honest, actually. That’s part of their success.

{audio:0:57:11} How would you advise the founders looking to work with private equity funds, on this buy and build strategy. How would you advise them to interact or engage with private equity firms?

{audio:0:57:29} I meet regularly, with private equity companies and it’s a bit like, you get to my age, and you think all the policemen and the doctors are very, very young, all the people in private equity are pretty young, too. Obviously, they look for talent and, I guess, I’ve never been through a process of being employed by a private equity company, but I reckon they must be pretty hot on how they interview.

{audio:0:58:03} But what about if you’re a founder and you have a platform business. A private equity fund looks to engage with you, how would you advise working with them on a buy and build strategy?

{audio:0:58:17} Before they’ve invested in you?

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