(EP 33) Jacqui Clarke: Built to Sell? The Hard Truth About Business Exits & Legacy Wealth

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Today I have the privilege of speaking with [00:00:30] one of my friends and partners from the Deloitte days, Jacqui Clarke. We met as partners at Deloitte Private, which was the arm in Deloitte that focused on serving medium businesses and high net worth individuals and families.

She’s been called Australia’s best kept money secret and as a personal and money management expert, she’s over three decades of experience helping high net worth families, individuals and business owners to manage and preserve their [00:01:00] wealth. Jacqui. Welcome.

It’s great to be here, John, and it’s really fun to connect with you this way.

Yeah. So Jacqui, we were talking the other day about one of your clients who’s just successfully sold out of their business for just under $200 million. And I thought there was clearly quite a story and some real learnings to share from that. So, can you tell me how’d you get interested in working with high net worth families and what does that really entail?

it’s a great question. [00:01:30] For me, what’s interesting first is I think when you work in a really big organisation like Deloitte, a lot of the excitement and noise is around really big companies like ASX listed companies. But the difference with private companies is that the owner writes you the cheque. So in terms of the value, the proper, it’s a much closer relationship, I think.

Absolutely. The second thing

for me is really family dynamics is something that I’m really fascinated by. Uh, and I’ve [00:02:00] enjoyed working with this sort of complexity of family dynamic. So I just felt, it just felt to me like the decision between ownership and decision making and what happens was, was often generated by that family dynamic or the people leading that in that role.

So it just felt really engaging. And, and the other thing, Is in many respects, you know, I would often be on the soapbox, so to speak, talking about how private wealth in Australia actually really [00:02:30] controlled what happened in our country. In the context of property ownership or whether it was retail businesses or manufacturing, you know, a lot of the big families actually really know what’s going on in the country, perhaps a little bit different to a listed company.

When we’re serving these, high net worth families and the owners of medium businesses, that nexus between what they spend money on, and what value they get is really tight. [00:03:00] And, you know,they’re much more acutely aware, of the value of every dollar.

So, so sometimes I found that they actually had much higher standards than some of the big ASX that I’d worked with, and large corporates around the world. and they’re certainly attuned into what’s going on around the economy.

The proximity to the decision making and the value that the actual value from the work you’re doing is so much closer and, and the relationship stayed [00:03:30] generationally or could stay generationally, which is different if you, your buyer is a CFO, for example, in a large corporate organisation, uh, often the family members were involved at any level with the decision to appoint

us as advisors or otherwise.

Yeah.

yeah, and, and I guess one of the things that, um, that I really enjoyed when I really focused in on medium sized businesses, which was now over 20 years ago, was. The fact that when [00:04:00] you were talking about an issue and a decision was made, the decision was made by the decision maker. It wasn’t being made and then pushed forward to a committee that was then going to, think about it for, 3, 6, 12 months. If they weren’t executing on your decision by the time you hit the car park, then the decision really hadn’t been taken.

Yeah. Agree. I agree. Absolutely.

And so that actually placed a hell of a lot more responsibility on you as an advisor to get it right [00:04:30] first time, because people were really responsive and proactive. And I found that a real privilege to be that trusted. and it’s something that I feel that I’ve, well, I hope with my clients, it’s something that I’ve really earned.

So we were having this, this chat the other day about a family that sold off a business that was, uh, a core asset and probably their life’s work. So how did that scenario come about with you and your client?

Well, there’s no overnight success story here. It’s a [00:05:00] hundred year old Australian business. there was lots of complexity in family relationships and it was genuinely a long haul. But I would say that the last three years has been very transformative. But you could genuinely say that over a ten year period.

There was a defined, change in focus or a shift in how the business was going to be managed. And probably the most critical thing that happened a decade [00:05:30] ago, was appointing a non family member into the role of CEO. Uh,

So for context, this is a business that was what, uh, national business. What was roughly its turnover?

a couple of hundred million as well, so, yeah, yeah.

So it was a serious business and it was in, in reasonably good shape, I take it. And, and then,

can I actually, can I say, just jump in there, not necessarily.

okay, well, so tell me a bit

[00:06:00] business, yeah, so over the time that I had been involved with the company, they had had to engage turnaround expertise, not once, but twice. Uh, because. And this is the difficulty perhaps with maybe not having the right person in the CEO role was the allocation of capital, uh, may not have been directed towards the highest use.

And so in those phases that the business went through. [00:06:30] It was really important to then, um, have somebody on board that could maybe take a little bit of the personal, you know, often in my work, there’s the business and the lifestyle assets and sometimes the lifestyle can take over and when you’re the boss, when it’s your family business, that’s fine, but when multiple generations and branches of a family are relying on dividends, maybe or profit, maybe that’s not always the best way.

So, Yeah, I think it’s important to say that the business had always [00:07:00] done well, but there were times when it wasn’t going very well and maybe the bank was, coming in and putting a lot of pressure on covenants because the performance of the business. So, yeah, it was a long journey, as I say.

so obviously we’re going to protect the innocent here and not disclose, confidential information and talk about the things, but, but so. We’re talking about a business in the manufacturing sector. It’s doing a couple of hundred million. if it’s a hundred years old, then by default, there’s been at least four [00:07:30] generations operating in the business.

And, I take it that, um, effective owner of the business for the owner of the business was the family, uh, but it was probably being led by somebody in their sixties or getting close to their seventies. Probably got a couple of kids. that are in their fifties, would that be about right?

And those, those kids probably had kids in their twenties, if I’m, my maths is any good. Is that sort of roughly the sort of the hierarchy of how it sort of fitted together?

Well, it was, it’s partly like that. It [00:08:00] was more complex than that, John, because there was, because there was multiple branches of the family. So there was someone in their 80s, somebody in their 50s. Uh, so like uncle, nephew. cousins, so really complex in that sense, because you think about today, if you had to make a decision today with your cousins, which is actually how this, came to being, that’s a big call, right?

If you’re not used to it, that

leads to a really key question. So, how did [00:08:30] the family can come to the decision that they didn’t want to be in this business anymore? And effectively wanted to cash out and what was driving that? I

do, I love that question again, in the context of the journey, I don’t think anyone ever thought they would sell or exit if the truth be known. But one of the strategic choices that the CEO made was a couple of years ago [00:09:00] bringing independent board members in.

Hmm.

So structuring a most formal board with independent Directors and actually the really critical point was over this last three years, which I say, you know, to any question you might ask around planning for an exit, you need that runway.

And three years is a minimum, I’d say. but actually in that three year journey. Unpacking what it would require to elevate [00:09:30] this business from a growth perspective. And actually what it came down to was we can stay like this and be profitable, but we may begin to, the business may contract due to our competitors growth, and, or we need to invest a substantial amount of money to remain competitive on the, in the longterm.

And if you don’t all have the skills, Where’s that money going to come from and then what does that mean? So you need to go and borrow money from a bank. You might need to sacrifice more dividends. You might need to [00:10:00] put your house on the line. So all these things started to create a picture of like reasonable overwhelm, I’d say.

If you’re sort of in your 60s and you’re thinking, do I really want to do this now? So that was really part of the journey for helping the family say, maybe it is time. That we choose an exit path. So recognizing, I guess, the what’s in it for me, but also what’s in it for the family. And does this make sense longer term for all of us?

Yeah. And, and so, that’s not an easy [00:10:30] decision. I mean, I had, I had effectively almost a completely independent board or they had a number of independents on the board. I take it there was still family members on the board.

Correct.

And, you know, that, that question around, and the question that often comes up with family constitutions is, okay, so how do families, and now we’re talking multi generations and also potentially multiple families across multiple generations, how did they go about that decision making [00:11:00] process?

Well, I do feel.

for it, but, but then actually having, collaborative, respectful conversations. how did that go about?

not so easy, John. and you know, I,

So they’re normal

yeah, exactly. I think the sad or the hard part is the family member on the board, they’re under a lot of pressure because they’re getting a message firsthand. One of the things that was an important step [00:11:30] was having the business independently valued.

So we sort of had a bit of a gate post, if you like to say, here’s where we think. If we were to exit where things might land for the family. And so you’re sort of taking that message out. I think that was a really important step. the other thing was some time in the past, but not a long time before we came to make this decision, there had been changes made to the shareholders agreement around the decision making, which enabled a majority vote.

to [00:12:00] carry.

to be, yeah, which wasn’t the case. There was a cast essentially, by one of the oldest family members. So that shift, but people took that responsibility really seriously as well. So it wasn’t just about rolling someone. It was about, are they on board? And at the end of the day, we’ve got complete consensus across the board, but again, you know, taking your time to present all the options and recognizing that the legacy.

factor here is so significant, like the [00:12:30] legacy, the meaning, the emotion. I can’t tell you how strong that was, um, which is partly why I think the business was around for so long.

Yeah. and that, that responsibility for legacy, I see time and again, coming up from the point of view of, you know, when I talk with business owners who’ve actually taken over dad’s business, or taken over grandfather’s business. and I’m not being sexist here, so, No, just typical [00:13:00]

pathway.

but, but the reality is when they take over a parent’s business, one of the overarching emotions that I see them carry with them is fear. Fear that they’re going to stuff up, fear that they’re not going to honour the family, parental, gift or bestowment, if that’s the right word. And also fear that they’re not going to do a good enough job for, for their siblings [00:13:30] and their siblings families. And then also they’ve got the fear of, who are they going to piss off in the family if they do have a bad dividend year and, and it wasn’t their, really their fault.

and, you know, often it’s, it’s not their siblings, but it might be their siblings significant others that are also participating in this whole decision making process. I’ve seen so many board meetings, uh, happen that actually don’t involve the CEO even don’t happen. with the CEO or the directors actually happening at, um, Sunday barbecues, [00:14:00] or the Wednesday night dinner for other family members.

So infact it’s quite convoluted.

Yeah, I think the other thing about pressure is really interesting and legacy because if someone in your family might have been burnt by that historically as well. So the expectation or that pressure to live up to somebody’s expectations and not being able to meet that can, because it can turn people off.

And I think for some family members, and certainly in this case, I think some didn’t want to have a bar of it. Others want to [00:14:30] really hang on, so you’ve got that whole sort of scope, if you like, to work out how do we find a common ground here or a thread that aligns everybody in the decision making. But I do sense, and I say it often, I’ve seen many failed business attempts of the next generation, of a lot of Australia’s wealthiest families where they’ve supported their kids to get into businesses and they’ve failed.

and I know that’s really tough.

Yeah. Well, it’s, it’s not just a function of genes that the business was [00:15:00] successful or that the person had good business sense. and so.

It’s all that intergenerational trauma, it’s the same thing, right? It’s like the, yeah, like the father’s father, how he responded. Yeah. Anyway, I’ve, I’ve seen it, too many times now.

Yeah. And, and sometimes it can be quite sad, but, but I guess that sort of starts to underpin the value of, having worked through the process of developing a family constitution with the family members. so that it actually sets up a structure and a framework and a [00:15:30] process whereby these decisions and the performance of the, the portfolio of assets can be discussed in a non emotional, non judgmental way, and hopefully start to make some decisions with, with a little bit of distance and impartiality, which is always pretty hard, particularly if you’re named still on the business.

Actually, yeah, it’s a really good point too, because John, I help a lot of families develop a constitution and it’s really [00:16:00] nice that families now are coming to the table wanting to develop a constitution, recognizing that things might not go so well, we need to have options for all family members, not just us as the founders, if we are, which I think is great in this context is more of a shareholders agreement.

Again, it’s been around a long time. Constitution is a road too far, yeah.

Yeah. And so that then sort of, brings us to the point. Okay. So they’ve made a decision, and you emphasised how crucial it is to have a [00:16:30] sort of a three year runway. So when they made the decision, okay, rather than. Put the houses on the line, borrow a hell of a lot of money and, it is, souped up and ready to compete hard, over the next two decades.

once I made that decision, where they actually exit ready, was it actually ready for sale? Did they have a three year record or independent leadership? they probably were skeletons in the closet, I suspect.

yeah, all of the above. So the answer is they weren’t exit. So at the time of [00:17:00] the family saying, yes, we’re ready to sell. They were almost exit ready. But the reality is the CEO was working very hard on developing a strong. Performing business. So in absence of any decision around an exit pathway, so actually behind the scenes, really, or in front, depending on which lens you’re looking through, there was a lot of work going into building a strong business performance.

And so part of the attraction of even for non [00:17:30] executive directors to come on board was that there was a strategic plan in place. It wasn’t about exit. It was about a business that would perform and provide dividends out. To its shareholders. So, so that was critical and the most important part. And I know you and I’ve talked about strategic plans, business plans.

We’ve both got the pet hate that people do invest time or either A, they don’t invest time in developing the plans, but B, they do them and they put them away. And so this is about, you [00:18:00] know, that living business plan and every decision was made around making this business more profitable. So every, you know, and, and these are, these are basic principles, increasing price.

Increasing volume, improving systems and processes. One of the key things also is building out the, the operational management capability. And, and you know, um, you’ll laugh when I say this, but this is all about playing to your strengths, right? Like the reality is the, CEO knew what his strengths were.[00:18:30]

And he made sure that he had, or, secured or recruited. People around him to support this ecosystem, if you like, that was heading for growth.

So there’s a big difference though, between, having a business sort of set up so it’s high performing and being ready and, you know, when I work with my clients, we always talk about, okay, what’s your exit strategy. And how do we get exit ready? And it’s not so much about having a [00:19:00] business that is going to go on the market in three years time.

It’s actually about a business that’s performing really well because at any point, if the right offer came along, then it would be trading at its highest value, but also by the same token. If the business is trading exit ready, which means it’s got an autonomous leadership, it’s actually got good operations and processes, it’s got documented procedures, it’s got clear markets, it’s highly profitable, it’s generating [00:19:30] good dividends, then that’s a business that’s trading exit ready.

And we want trading exit ready every day. That’s a business that we want to be an investor in. So it’s not so much about let’s get it ready for sale. It’s actually about let’s get it ready. So that if we had to sell it, it would be great. And if we didn’t have, if we chose to be an investor for another five, 10, 15, 20 years, then that’s going to be the fantastic business to do.

Yeah. No, I couldn’t agree more. And I think that was the secret here as [00:20:00] well. It wasn’t about, there was never a plan to exit.

Yeah.

just at a critical juncture, if you like, having developed a great track record, the question was, can we maintain this? Actually, no, it’s got to go this way or this way, but this way requires X, and this way is Y, and one of them wasn’t, one of them wasn’t exit, so I think that’s really important, John, because actually, I think you lose sight in your choices if you’re thinking all about exit.

Yeah, [00:20:30] absolutely.

yeah.

So the gun then went off, the decision was made and they started down the runway. So did they, did they think that, okay, well we’ll sell it next week. and we’ll be rolling in cash by Christmas or did they say, okay, we’ve now got a three year process.

Actually, it’s funny because I think the money coming in at Christmas is, the, they actually went through a really good process, which was analyzing, and this is really management [00:21:00] team. Which is actually analyzing the financial information of the preceding three years and looking at the differences in profitability and revenue and being able to create really good stories about that.

But at the same time is then looking at who the advisors would be that would help us sell the business. And so is it typical probably that you go and identify who’s got that strong or deep sector expertise that’s going to be the right person to pitch your [00:21:30] business, who’s got the great track record.

And so we went through that process, which was very powerful. And then, you know. Arguably a beauty parade but saying who was really on the money as in who were the people who’d had probably the last 18 months or two years or 20 years it didn’t matter but certainly recent successful transactions that were going to be the right people to support and somebody in this case who could handle a family dynamic. Because some people in [00:22:00] the M& A space aren’t great at that and can be quite frustrated by that. So you have to have a level of,Emotional intelligence and compassion. yeah and trying to think of a right word

to be calm and recognise again, the significance of legacy. It’s like, um, when you talk about a brand name and the question is, do we.

Do, do they get, do they buy it and then in a year’s time, do they destroy it? Do they, you know, off with it? So being sensitive to those dynamics is, was critical in this [00:22:30] process.

so, so they found themselves a great advisor. How did the sale process unfold?

Uh, well, it felt quick to me in the sense that when you’re hot, you’re hot as well. So I think in an industry context, there had been, A number of transactions and so the sense was that this was particularly good time and on around the traps, there had been [00:23:00] chatter or talk where there was interest and so it wasn’t a case of, you know, we’ll find a buyer.

There were multiple buyers

Yeah.

and there was very well managed bidding in that process. So it’s pretty powerful, right? Like, um, it gives me goosebumps when I think about it, and certainly in those early stages, and then you go through that monumental due diligence phase, and that’s like insane, you

I’m glad you didn’t underestimate the size [00:23:30] of due diligence. Monumental’s a really good, good starting point.

yeah, and look, think about that distraction, you’re trying to continue to have a business perform, and you’ve got everyone in your, all your key leaders, your management team, whoever it might be, completely focused on delivering,

Yeah.

through that process. So again, if you think about what we were saying before that operational excellence systems process, all of that sets you up really nicely for this not to [00:24:00] be the be all and end all of your day when you’re trying to sell a business and retain performance at the same time.

I’ve just been watching Charles in one business and Fiona in another business, I’ve been going through the due diligence process for the sale of their businesses. And, uh, both of them would say that probably 80 percent of their time for a year was spent basically just.

Serving or feeding the due diligence beast. and the, torrent of questions that [00:24:30] comes appropriately from the interested buyers so that they get comfortable that they’re actually making a sound and sensible decision. But again, You know, those, those operational systems and processes are actually also what helped the business continue to perform while they’re actually distracted for four days at a five or actually feeding somebody else’s queries and inquiries and, and telling the story and, doing site tours and, crawling over the numbers, et cetera, et cetera, et cetera, et cetera, et cetera,

Yeah, [00:25:00] it sounds, it sounds so similar and the other thing, John, is thinking about your long term customers, right? So the business is built on those relationships and so it’s, I’m sure it’s very easy to lose sight, which is we’re going, we’re exiting this way, but actually every step of this depends on that customer bank.

So how do you manage those and then scuttlebutt invariably can be out and about. Um, so you know, [00:25:30] how do you manage that? So that’s a critical thing is actually what’s the dialogue that you have running that’s powerful but continues to preserve those customer relationships, suppliers, customer relationships.

Well, and that’s one of the, the things that comes up every time there’s an exit process ended into is, so what do we tell the kids, i. e. what do we tell our staff? and what do we tell our customers and what do we tell our suppliers? And when do we actually tell them? Is it [00:26:00] before, during or after the transaction goes ahead, et cetera, et cetera.

And, and we know that it’s going to get out at some point because it’s only, you can only keep this thing secret for so long. I believe, you know, you’ve got your trusted small team, senior leadership team that they’re involved right from the start. But there’s always a question about, you know, how do we not scare the horses and so on?

So how did they handle that?

Well, I think we’re still allowed to say it, but you know, in my view, it’s not [00:26:30] over till the fat lady sings, right? So, yeah, I think that you have to keep your powder dry. Everyone has to be tight lipped. I think there’s an appropriate script, though, for, because you mentioned site visits before, which, it’s like, uh, no different to your,selling your home, and people have to come in and take photos.

Right. It’s like what’s going, you know, or a building, whatever it is, what people will say what’s going on. [00:27:00] So you do have to have a bit of a script, for those situations. But I think the other thing is we, we could be investigating our options.

Yeah.

But you want it to be really consistent. And I think that was one thing that was managed very carefully.

And also some information can be embargoed too. So if you’ve got, depending on if you have a private or a public, company buying you as well, they’re very particular about, Oh, we have to pay because of the ASX,

Yeah. Well, it’s market sensitive information.

absolutely. [00:27:30] Yeah. So, so navigating that process is pretty important. So having the right people around you and whether it is PR or otherwise, but you just got to think really carefully about that.

And trying to swear family members to secrecy, I think is actually the hardest thing because when you talked about, um, the barbecue, but it’s the dinner, the, you know, the weekend dinner that the kids hear about it and then it gets mentioned at school or university or at the local shops. Um, you know, someone says to a, 15 year [00:28:00] old or a 30 year old at the coffee shop, you know, Oh, we’ve heard some news about whatever and they’ve got to have something they can say or they know nothing Which is the other option is how tightly you keep to what extent can you manage it?

Look, there’s a limit I think to how tight lipped you can be but

It’s going to get out.

clear Set your expectations high, which is nothing gets said. We’re tight lipped. And you work the rest out.

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Yeah. What were a couple of the other major hurdles that you had to [00:29:00] straddle as you went through the sales process?

some things require government approval.

Hmm.

So some transactions do. In this case, because of

C competition type approvals or foreign investor approvals.

correct. So they were potential. Um, in this case, with the ultimate buyer, they weren’t so much of an issue. But the other thing was, um, things like subdivision of land or, contracts. So some contracts have in [00:29:30] them clauses that don’t let you substitute.

person who’s delivering the service. So navigating all of those things. So they, everything’s, went smoothly. But, you know, there’s always a bit of give and take as well. So then it might be a longer delay on settling, um, subdivision or a,contract that needs to be delivered by the existing team, all those kinds of things.

So it’s just finding it. There’s definitely a bit of give and take, uh, required at that level, but also not being so cemented in your position that a buyer [00:30:00] has to step away. Like you want to think of, as many people can think, how could we do this differently or achieve an outcome that is satisfactory for everyone? Yeah, so I, I mean, and they’re reasonable things because, you know, you just can’t get an answer on some things at the time you want to, you know, and I mean, I think of things right down to, the vehicles you have in the business, like if you’re a family member and you have a car that’s in the business, does that car go, was that on the plant equipment register?

Does that car go with, The new, what do you do for a [00:30:30] car? the building. What if you own the building? Do you stay? Do they rent it? What’s the period of time that they, that happens? So you can imagine there’s lots of, there’s actually, if you’re in a family business in particular, you start to figure there’s lots of little things in the detail.

Um, like Yeah, who, who, the cleaner, that cleaner might serve the office, might serve the family homes, whatever. I’m thinking of lots of things, but I think of basic things like your computer. then, then you come down to [00:31:00] the really tough decision of. An acquirer deciding who they’re going to keep.

Yes.

So, you know, how do you work through the critical employees?

You know, everyone’s critical and in a family business, even more so because of the relationship to the family or the brand is, I think, closer, stronger.

I would absolutely agree. I mean, there’s a, there’s, there’s a secondary level of trust, which Is different from an independently owned business. [00:31:30] A lot of the, a lot of the staff have been there a long time. They’ve been to weddings, they’ve been to funerals, they’ve been to

You bet. Mm hmm.

they’ve been to bar mitzvahs, you know.

And, and so that makes those sorts of decisions very difficult for the seller.

Yeah, look, absolutely. And I think they’re tough. And again, having a very coordinated approach around that. And like, I think it’s the CEO’s job and have, if you’ve got heads of department, depending on the business, is actually recognizing the [00:32:00] value in each of your employees. And this is maybe something that we didn’t talk about, but in that three year transition, thinking about the quality of your people, we talked about, Operational efficiencies and building up your management team, actually working out if there’s, if there is dead wood or there could be a sacred cow, how do you navigate the sacred cow?

And there’s lots of things that can be in relation, it’s like, chairman to, executive chairman to, emeritus chairman, you know, there’s lots [00:32:30] of different roles. It’s like CEO to, or joint CEOs, whatever it is you need to do to navigate to an outcome that’s going to look good from the outside and work well on the inside, uh, is important.

Yeah. we could spend all day talking about what the potential complexities are in that transition.

Yeah. So make some really good points there, and I think one of the most important ones is that issue of, okay, so. When it comes to the sale [00:33:00] date, not everything is going to be nailed down and so there’s going to be some things that are outstanding that we’re going to either have to make some concessions for, or we’re going to have to allow for some retentions around.

and, because it, it, it just can’t be perfect. I mean, if you’re waiting for the EPA or the ACCC or the FIRB, to make a decision or give her a judgment,in your timeframe, whatever that timeframe is, good luck. it just isn’t going to happen. because the world’s not [00:33:30] perfect, and it doesn’t revolve just around you, even though this is the most important transaction you’ll ever do in your entire life.

they’re just not that, they’re pretty busy, with a lot of other people’s most important transactions. So. When it started to look like you were, you had a real sale on the table, and you were going to unconditional offers, then starts the process of drafting the agreement. How did that process go?

Was that fairly smooth? [00:34:00] Knock it out in a week?

Well, what’s your experience with lawyers, John?

Well, it might be a week or two to just define what the scope is.

I think that the lawyers did an amazing job, but I would suggest that that is harder than pulling teeth.

Yeah.

So, that’s just about getting it right. And I think the more layers in your business, you just, the complexity was there, absolutely. I think that was probably the most time consuming. And I think that the M& A guys or the transaction guys got frustrated by that part of the [00:34:30] process, even though.

it was kind of streamlined, but you think of every, like I was, thinking about often when you’re driving a business, you maybe don’t think of occupational health and safety. There’s just another one of these, um, pieces of hygiene in a business that needs to be, needs to be up to scratch.

And so. On that journey, and we talk about that last three years or five years or ten years, is actually making sure that we had a really good process around occupational health and safety and [00:35:00] making sure that things were monitored, systems were put in place, we had great record keeping. you know, all of that anyway, that’s just another part of navigating what are the heritage items that, or legacy items that the business has got, because actually the flip side of all this is the insurances that you need to maintain once the business is gone.

So as a family shareholder, what are you responsible for once the business has been sold?

Yeah. Yeah.

And that’s awful in [00:35:30] everything, you know, from whether it’s the board, the PI insurance, but right through to, work safety, in relation to contracts, like there’s a myriad, so you can, the context of the legal drafting and who the warranty process, like who takes what, it’s, it’s huge and that is, that is definitely a, probably where you have a tussle.

What we are taking and what we’re not, what makes sense, what you know. Yeah. And then there’s just some things required by law that you can’t escape.

Yeah. [00:36:00] And the reality is any, any, buyer who is looking after their own, shareholders,interests, is going to want to have warranties pretty well for everything. and by the same token, any seller is going to want to actually minimise those warranties to the maximum extent

Mm-hmm

because, you know, they’ve, they’ve gone through the heart wrenching decision to actually sell their business.

I’ve gone through the process of getting it groomed for [00:36:30] sale. they’ve just spent, um,three, six, 12 months, more likely in due diligence where you’ve told them everything there is to know about the business, as far as you’re concerned and they’re there to make a damn decision. and then the seller is saying, well, look, we want you to warrant that, you know, someone’s not going to trip over that doorstep.

Or we want you to warrant that there’s no, that the Australian Taxation Office isn’t going to come back and change its ruling that you had done five years ago, and therefore there’ll be a liability [00:37:00] popped up or whatever. and so, you know, often that’s dealt with in a couple of ways. One is there’s a discount on the price, which is what the buyer, the seller is thinking, yeah, that’s the only thing they’re worried about.

or they may well be have some sort of a retention.of the sale proceeds for a certain amount of time, which might be around, performing to meet its expected,financial performance or whatever. Did you see that that they had to make some major concessions? With regard to warranties?

[00:37:30] No, I, I wouldn’t consider them to be major. I just felt that it was a. pretty heavy part of the negotiation and there was a lot to think through because interestingly if you’re a ceo and you’re not a shareholder in this case and you’re balancing an outcome for a family but also an exit for a family it’s interesting um path to negotiate through.

Because navigating all the different, it’s like stakeholder management, lots of [00:38:00] different interests there, including the buyer. So, I just feel like that was a very complex part of it. People were very aware of what we had to deal with, but it took time. I don’t, I feel like everybody gave a little bit,

Look, I think everybody ends up always giving a little bit. and, and that’s, that’s a necessary part of the deal. Coming back to the point about the, the M& A guys, getting a bit frustrated with the legal process or the, the legal drafting. I don’t think I’ve ever seen, M& A guys feeling delighted [00:38:30] about how.

Long or little time it took to do the legal drafting. I don’t think that’s just ever happened, but I also. I look at it from the point of view of both legal teams, and they usually are teams, you know, their job is to look after the interests of whoever their client is, and also be seen, to be looking after those interests that can actually make them,perhaps overly protective.

[00:39:00] Some might even use the word pedantic. And I think it’s essential that, that the The key parties of both sides often, part of their role is to filter through, okay, so how important is this issue really or not to us? And, and they need to provide good guidance or step in and beat them around the head with their own legal teams.

to get practical. and that’s not a criticism of the legal industry. It’s just simply that, that they [00:39:30] are doing their best by us. But sometimes we need to say, look, I’m prepared to concede on this. Let’s get to a practical outcome. Otherwise we’ll be drafting this thing for another couple hundred thousand.

Yeah, no, absolutely. Right. And I do recall conversations or meetings where you could say that the, particularly like the lead deal advisor was like, okay, now we need to call this. Like he’s often trying to find a practical way through things.

Yes. [00:40:00] Yeah.

yeah, definitely a challenging time. Definitely where the time went was in that legal stage. Nothing wrong with the lawyers, just the complexity in the nature of the deals and everybody’s bit. Yeah.

And everybody’s got, got a perspective on it too. Sometimes you can have that too many cooks, in the kitchen experience going on, which can be frustrating.

Yeah. Yeah, that,

Yeah. So we got to a point where [00:40:30] we were able to sign the papers. Well, no, actually we’ve now signed the papers and we’re proceeding. to, formal completion.

Can you tell me a bit about the transition for the family and for, for those people who still were involved in the business in the family? Because, know, that must have been a fairly important part of their identity. How did they handle that process?

yeah, I’d say that was difficult, John. So I think that the [00:41:00] reality of it being part of their soul almost, and that that would be in someone else’s hands going forward. So some family members. came right in looking at lots of detail, whether it was the desk or the, sign or the piece of equipment, whatever it might’ve been that maybe should stay in the family stands or how we do that to maybe pulling back a little bit and saying, I don’t need to be a part of this.

This is in the past a little bit for me, so, but probably more focus on [00:41:30] the, how do we navigate this? So how do we then, and actually it’s little things like. if the family sponsored, something. So would that sponsorship continue in the new owner’s hands? And these are things that probably sitting in the CEO shoes, you wouldn’t necessarily think is important.

But then at the family level, it’s like, well, now, now, how do we navigate that? Yeah. So look, I think that was a difficult time. It was a, and the other thing is until the thing’s signed and the money’s in the bank, [00:42:00] You wouldn’t necessarily believe it. I’m sure over the years there were times when they might have exited.

There was tire kicking experiences over, I do remember probably 15 years ago. So, you know, until it’s done, you won’t believe it either. So there’s a bit of that.

yeah. And

a tough time and a realisation of what life might be like after. And then there’s just, like I say, there’s just things you don’t realise that the business looks after that you now need to take on yourself.

[00:42:30] Including having a great finance team who does everything, which is very typical of any businesses with family in them, that they, they become a quasi family office inside the CFO team, and then that role will disappear in time as well.

And so did that then pave the way for them formally establishing a family office function well, did they just distribute all the funds equally amongst the family or by some,given formula, or did it then turn [00:43:00] into a family investment portfolio that they were going to manage using a family office to have, intergenerational transfer potentially for generations?

How did that, that

Yeah. That’s absolutely right. In fact, parallel, John, that’s a really big transition. So actually navigating that introduction of the family office and actually explaining the perks, if you like, or what makes sense around investing, whether you do, co invest with all your family [00:43:30] members or just with your, bloodline side of the family.

Yeah. Uh, going through that process, do you develop your own constitution? Do you have an investment committee? All those fun things are going along really in parallel in the context of when that money comes in the bank. Because as I said, your, your quasi finance function family office is actually inside the business and you haven’t had to make decisions about this stuff before.

Not in, not to this scale I would say. So, yeah that’s been a really big part actually in [00:44:00] making sure that There’s other advisors then introduced to help family work out how to invest their money. you need lots of tax advice on understanding what the consequences of that money coming to you are.

So yeah, there’s a, a lot going on. It’s a whole nother work stream, if you like, a very specific work stream, which would naturally not be something that’s on an advisor’s mind and definitely not on the CEO’s mind. Is that how do we sort of navigate it?

Creates a whole different decision [00:44:30] stream, from the point of view of, okay, well, are we as a family across three generations, possibly five individual families going to, co invest, together, or are we going to actually split the funds into, their,family units, and let them figure it out for themselves?

And how do we deal with the fact that some families may be more or less competent to do so, but they’ll also have necessarily quite [00:45:00] different personal financial needs, both immediately and long term. So,

Yeah,

so how did that get managed? Or, or did they, decentralise it?

it’s a great question because one of the things to recognise is that you, you still need a pool of funds set aside to navigate the tail and things that we’re talking about, those insurances. So there actually needs to be some funds centrally managed, which is where. We together as [00:45:30] family members will do that.

I, the decisions then though to invest separately were quite clear. Again, because if you’re dealing with, cousins or distant relatives, it’s a lot easier to go on your own. I think if it was a brother and a sister, then, you would generally, I would be recommending co investing because it’s the power of the greater the volume of cash, the better chance you have, I think, of making more money, but certainly balancing your decisions nicely.

in this case. Family setting up individual family offices, but [00:46:00] having that quorum, if you like, at the top, I’m sort of.

holding it now, you’re going to need that for quite a period of time after the sale or transaction. There’s such a tail of costs that need to be dealt with. So there’s decisions there that you have to come together on.

Yeah. So that’s a, that’s quite a big part. And I don’t know that everyone does this particularly well. Probably just, with our experience, it’s something that we know, but I often say this bit missed, which is kind of like, they’ll get the money and then buy. But in [00:46:30] this case, having the right experience around the table made sure that we were able to do that sort of parallel stream of work, if you like, which is working at how do we, we’re exiting a business, but how do we enter our family members to a,a structure where they can invest their money.

So introducing them to advisors across all levels, whether it’s, tax, transaction related investment advice, you name it, you know, and you develop a new structure then where’s the money going to land after it goes through the shareholding. Yeah. So there’s a lot to think about there. And then [00:47:00] of course, it’d be remiss of me not to say, cause I’m banging on about this all the time, is then making sure.

at the family level that things like their own estate planning and their wills are in place, making sure that we are clear on what happens, at the other end of life.

Yeah. Yeah. Well, and, and there may be a requirement for them to learn financial responsibility, which we’ll get to in just a minute.

Yeah.

but I’m just sort of thinking about it from Jacqui, if I’m leading an organisation [00:47:30] now. How do I get exit ready? What’s going to help me be successful? If you now reflect on what you’ve learned from this transaction.

Look. I can’t, emphasise enough having a strategic plan and I think of it in the sort of context of long term, medium term and near or short term. So setting those goals, I don’t think there’s any other way, to focus on that. So you have a clear roadmap of the initiatives you’re going to follow. You might develop more near term initiatives because that’s what makes sense to you, but with a [00:48:00] bigger goal in mind.

Again, coming back to, I think what we said, which was, this is not, not about exit ready, or maybe it is, doesn’t matter. I think it’s about improving your performance. Being able to genuinely demonstrate profitability. So lifting your EBITDA, for example, and then a continued investment systems processes, whether it’s your equipment, whatever it might be, and your people, you can’t, you know, they’re all things that you have to do.

You can’t do them all at once.

yeah. So I guess the other thing that, that what you mentioned [00:48:30] before about, you know, distribution of wealth to families and, whether they co invest or individually invest in it. I’m sure it’s not as simple as okay, all the money just goes into a pool and then we just continue on.

There will be, I suspect some, subsidiary distribution,to each of the family units anyway, and it comes back to that question I raised before about their financial competence. You know, there’s a lot ofpeople, regardless of how wealthy the family is, their personal financial [00:49:00] competence is, underdeveloped.

I think that’s a nice way to put it. and this has been a, a real focus of, a lot of your thinking over the last five years, so much so that you wrote a fantastic book about it. Can you tell me a little bit more about, you know, developing that financial competence?

Oh, look, I think it’s, absolutely. It’s a great point, John, cause I find a lot of, it’s a classic thing. You know, you’re an expert in a particular area. It doesn’t mean that your financial competence is high, which is why we say play to your [00:49:30] strengths as a CEO, for example, in a business getting exit ready or trying to grow your business.

Make sure you’ve got the right people around you. I think the difference with. developing your financial literacy is actually a, everyone has to do it. You can’t be a business owner and ignore the numbers and it’s no different personally that what happens a lot in relationships and equally in businesses, some, it’s someone else’s job.

Yeah.

And so yes, I wrote a book called Stop Worrying About Money, which was [00:50:00] Encouraging people to A, build their financial literacy, but B, hold themselves financially accountable. And you know, the easiest way to do that is actually looking at, or I talk about what it costs to open your front door at home.

Usually a frightening exercise for people. In fact, I got a great email the other day from an old colleague of mine who I ran into and said, they asked if I could help them a little bit. And I said, start with this and let’s have a chat. And. They start and it’s like that overwhelming feeling where you realise that you’re [00:50:30] outgoings.

Equal to your revenue or your salary or whatever it is coming in. And so that starts the process of understanding the cost of living clearly, not just in the

Really. Living.

and the price of milk, but actually saying, what are we actually spending money on? And whether it’s the subscriptions in your household, whether it’s, life insurance, whether it’s, the cost of the groceries, the mix of groceries you’re getting.

It’s actually about understanding what those things are first. And so that’s where I start because I think not [00:51:00] unlike the business, I love people to focus on financial goals. And again, rather than focusing on an exit with financial goals, it’s thinking more about improving where you’re at now, what that might look like in the future, or if I want to go on a holiday or take a sabbatical or build a home or renovate or downsise, setting those goals.

Do that, but what underpins them, you’ll naturally find is a level of, a financial goal. This is not as [00:51:30] sexy for some people. So sometimes I just talk about the other things and we come back to the financial aspect of it. Yeah,

where people typically spend between five and 10 percent more than they earn, this is something that is absolutely essential. And also, sadly, I’d also say that, if, if around about 50 percent of,marriages or marriage like relationships,end in separation,and quite often, at least one of the parties is [00:52:00] financially ill equipped or illiterate also, you know, this, this, it’s essential that people take responsibility for understanding the numbers.

Well, I

as boring or as non essential as it feels at the time, the reality is it’s going to be essential and immediate at some point.

Yeah, because I think the reality, John, is like, I’ve got a whole chapter on divorce in my book, a whole chapter on death. These things happen. Yes, you’re right, marriages break down, everyone dies. So, you could be the one in the hot seat, [00:52:30] and I recently, lost both my parents in the last year, and I had always looked after things for them, but it’s a big job.

like, getting across somebody else’s financial affairs, absolutely, which I’m kind of accustomed to doing. A lot of people aren’t. It’s a good look in to see how conflicts can be if you don’t know it yourself. But often I have people come to me who are contemplating, divorce and they don’t know who owns the house or whose name the car’s in or if there’s an investment [00:53:00] property.

They’re the, they’re the, you know, you need to know where the bank accounts are.

Yeah. Yeah.

it’s anyway, it makes sense to pay attention and I say be financially accountable to yourself. You don’t have to be, not to anybody else.

Are you looking to pinpoint the areas that will make the biggest impact on your business? Check out the Organisation Performance and Value Diagnostic. This powerful tool lets you evaluate your business on multiple facets and provides email reminders to [00:53:30] keep you on track. Head over to #CriticalFewActions™.

com. au and get started now.

You need to take responsibility for yourself and your situation, whether you’re in a partnership or not. And, um, you know, I’ll put in the show notes, links to where we can actually access your book. because I think it’s going to be an essential read as part of this conversation. Yeah. So thank you for that.

So finally, I guess, Jacqui, if a, a CEO or a [00:54:00] family running a business is looking to get ready to exit their business based on your experiences, what #CriticalFewActions™, you know, those things that if I did nothing else, should they do tomorrow to get started?

Well, well, I could rattle off so many, but maybe the first one is when you recognise what playing to your strengths looks like.

Hmm.

workout who you need around you and I think that’s the whole answer [00:54:30] because the reality is, if I was contemplating this, I’d need to, who do I need to know, or what skill do I need to develop to take me on that journey?

Yeah.

And so we’ve talked about strategic goal setting and plans and all sorts of things. but actually at the end of the day, isn’t it about.

I’ve got these skills and be very clear what your skills are and be very clear and honest with yourself about where the gap is and go find those people or do some learning if, if it’s that, [00:55:00] if it’s something that’s adjacent, do some learning, go to a course locally, globally, that might actually help you develop those skills, which I’ve found throughout my career has been really helpful, but that, that would be my response, John.

absolutely. And I think that then paves the way for, helping the business become independent of you. because the business is not going to be exit ready until it’s fully independent of you. And of course, as you mentioned before, you know, having that [00:55:30] strategic plan, whether it’s to exit, and therefore be ready for sale on a particular date or whether it’s ready to be the best investment in your portfolio on a particular date doesn’t really matter.

But if you haven’t got a plan, you got nothing much.

Now, and I think having those people around you is about, you know, we always talk about being able to replace ourselves. So you and I have both worked in a stewardship model. The reality is, if the only way I can replace myself is actually working at how to build a [00:56:00] group of people, if you like. I talk about the finance village, you know, the personal finance village, having that group of people around you.

I think in the context of business, much more strategic in, in who you need around you as well. Yeah.

for spending the time together, but also to, to share in detail this, case study, because I think it’s really brought out some, some really crucial matters around being exit ready, being cognizant of the family heritage and [00:56:30] family legacy, uh, having a decision making framework.

Perhaps bound up in a family constitution or a,a shareholder’s agreement that actually facilitates,making strategic decisions about do we stay in these assets or not? and if we decide to exit, how do we go through that process? It’s been a fascinating conversation. I’ve loved every minute of it.

Thank you.

Thanks, John. I have too. So thank you. It’s been a real, pleasure actually, unpacking this case study with you.[00:57:00]

Thanks, Jacqui.

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