9 Levers To Pull To Increase Value in Business: Corporate Finance Expert Carl Swansbury

Unlock the secrets to elevating the value of your business with corporate finance maestro Carl Swansbury from Ryecroft Glenton. Our conversation takes you through the critical strategies of crafting robust exit plans, fortifying senior management teams, and distinguishing your business in the market. Carl's sharp insights guide you through the maze of maximizing your company's worth, with a particular focus on the manufacturing and engineering spheres. If you're contemplating a sale or preparing for a management buy-out, this episode is your roadmap to a lucrative exit.

As Carl delves into the art of business valuation, you'll learn about the nuts and bolts of developing a business plan that not only sets your vision on a measurable trajectory but also primes your enterprise for a future sale. We dissect the importance of reverse engineering your business plan based on the desired exit value, highlighting the levers you can pull to amplify your business's appeal to potential buyers. This episode is a masterclass in aligning your company's trajectory with your long-term goals, whether you're aiming to create a lifestyle business or position it for a blockbuster sale.

Rounding off our in-depth chat, we tackle the human element of succession planning and the strategic intricacies of selling a business. Get to grips with the psychological tug-of-war that many business founders experience and learn how to craft a seamless transition that secures the legacy of your hard work. Plus, we share growth and leadership insights that are the cornerstones of success in the manufacturing world. Join us for a fascinating episode that could be the catalyst for the next big leap in your business journey.

Please subscribe to the channel for more content! Theo James are a Manufacturing & Engineering Recruiter based in the North East, helping Manufacturing and Engineering firms grow across the UK. Please call us on 0191 5111 298

Transcript

Speaker 1: 0:00

Hello and welcome to another episode of the manufacturing leaves podcast with me, mark Bracknell, managing director of the James recruitment. Today we had a very special guest, a good friend of mine, carl Swansbury, the head of corporate finance partner at Rykoff Glenton. Carl specializes in helping companies to sell and go through MBOs. This was a real specific one which can help people either part of a senior management team looking to get into that space or indeed owner looking to sell the business. We talked in general about the process, but quite specific as well within the manufacturing and engineering space. So really, really fascinating chart. We talked about the importance of having a clear vision and goal and exit strategy. Mine Carl gave a fantastic talk about specifically what to look for when you're looking to sell a business in the future and actually specifically how to increase the value of that business and some real tangible black and white things you can take away and start doing today. We talked about share schemes, how to get the buy-in from your management team, the psychology of an owner and how you need to change your role if you're looking to sell and exit the business. We talked about how to maximize the tax efficiency possible.

Speaker 1: 1:20

So many tips and takeaways from this one. You're going to absolutely love it. So please sit back, grab a coffee, watch, listen, whatever you want to do, but please, please, please, like and subscribe to the channel. That will be honored if you do so. Thank you very much. Hope you enjoy the episode Right. Well, a warm, warm welcome to Carl Swan's re on to the manufacturing news podcast. How are we, carl?

Speaker 2: 1:44

Yeah, great, mark, and thank you so much for having me on your podcast. Buddy Delighted to be here Looking forward to it.

Speaker 1: 1:50

We'll learn a bit more about you after this first question. It's the same question I ask everyone what does it mean to you to be a leader? What do you say?

Speaker 2: 1:59

Good question, mark. I think that, for me, being a leader is all about not only setting the standard and therefore supporting those around you to perhaps look to do the same, but also actually trying to break boundaries and do things that perhaps people before you haven't done. So for me, being a leader is all about trying to think about how things can be done in a more effective, more efficient way and encouraging those people around you to effectively see your perspective so they, in turn, perhaps follow suit like that.

Speaker 1: 2:40

So for you, it's more about leading from the front and inspiring the team to get the best out of them. It is you've got it. Yeah, love that, excellent. So, but if a different podcast today is the first podcast I've done with someone I know very well which is a different medium, looking forward to it.

Speaker 1: 2:57

So Carl and I have known each other for well, probably 11, 12 years now introduced by my brother-in-law, mark Granger, who would have been devastated if he didn't get mentioned on this podcast. So, looking forward to it and I know from speaking to you for many years you've got a lot of value to give. This podcast is designed mainly around the manufacturing engineering world, and I think a lot of the stuff we're going to talk about today is going to help that specifically, but also help anyone really who is in a senior level in any form of business, and actually it's topics that I don't know much about. So I'm looking forward to learning as well as we go on, so I can't wait. Just before we dig into those really meaty questions, I think it'd be good for people to understand a bit about you, carl, if that's okay. So if you want to mind give us a quick bit of rundown about what you do now the role, the business that would be superb, that's okay.

Speaker 2: 3:50

Yeah, of course, mark. So my business is RG, which is the largest independent accounting, tax advisory corporate finance advisory business, mark, based in the Northeast but advising shareholders predominantly of private business, nationally and further afield. In terms of my own background, so I'm a qualified chartered accountant. I qualified with PWC a long, long time ago and I've effectively spent the last sort of 18, 19 years practicing as a corporate finance professional.

Speaker 2: 4:24

So what that means is me and my business now spend all of our time helping shareholders, our employed management teams and investors of businesses when they are looking to not only try and scale the business that they run or own shares in, but in fact with one eye on how they can notably move the dial on value in anticipation of a transaction that will return that value to the shareholders, whether that be the sale of a business to a trade buyer, some sort of internal management transaction, so an MBO, an EOT, it might even be perhaps just trying to have a very successful, very profitable business that can generate a really good yield for shareholders who don't want to operationally run the business and perhaps they put in place a management team to run it on their behalf. So that's what I do, mark, and in terms of RG, my firm, we're a sort of 130 head business all based in the Northeast but yeah, advising nationally Excellent stuff.

Speaker 1: 5:30

And I know from knowing you for many years that you're an extremely hard worker. I won't dig too much into your personal stuff and even a very enjoyable podcast recently, which we do a lot into that but just for you, for people listening, you're a motivated person. It's clear to see that. Was it apparent to you very early on that this was going to be the industry review to get into finance? What was the sort of the main motivating factor for you to start the journey?

Speaker 2: 5:58

Yeah, that's a really, really interesting question, mark. I think there's two parts to that. So why do I find myself getting up every day at 5am? Why do I find myself never logging off before midnight? Where does my inner motivation come from?

Speaker 2: 6:16

And I think actually that comes from having perhaps been brought up in a very humbled environment. My two parents, when me and my brother Mark were growing up, were both in a working class individuals my dad a bricklayer, my mum a carer, and they were working 24 seven just to put food on the table. So as a young kid I would observe that and as a consequence, I guess my brother and I have always been just very hard workers, because it's all we know and for us it was the only way to give your family the luxuries in life. So I think that's where the sort of the work ethic fundamentally comes from. I just me observing what my parents did and appreciating that you really only get out of life what you put in In terms of, I guess, how that's refined over the years. I think that you know, as you become perhaps a more experienced, more rounded individual, you start to realize that actually it's important in life to have balance.

Speaker 2: 7:25

So yet you know, we all want to have a great career that delivers great financial independence. We all want to have a nice car, a nice house, et cetera, but actually we want to spend quality time with our friends, our family, our kids. So I think that my motivation now comes from wanting to make sure that I can be the best person within every environment that I put myself in. So when I'm in business, I want to be the best person in business. When I'm at home, I want to be a great dad to Esme. You know, when I'm spending time with Wendy, my wife, I want to be the best version of me for my wife. So that's what motivates me to try and always be ever present and be the best person I can be within each of the settings I put myself into.

Speaker 1: 8:14

I love that and I think that's important to know, because the job we do is a difficult one.

Speaker 1: 8:20

It's a one that adds a hell of a lot of value, and actually it's interesting because I think a lot of people start a business. Some people start a business with a very clear goal, vision, purpose, and they're exactly what they want to be in 10 years time and what their exit strategy is. Other people, and probably the bulk of people, start a business because it's an opportunity that they can't. You know that something was done, but they don't really think about the end game, and I include myself in that. You know it was an opportunity I needed to take, but even now, nine years in, I don't really know what the end goal is, and that's something I need to probably will definitely work on. Do you find that when you're speaking to people and I guess I appreciate it's different for you, because so people will bring you in when they're at that stage but the businesses you're speaking to typically do they have a very clear vision and sort of exit in mind? What do you say?

Speaker 2: 9:08

I think vision, yes, mark. So I think you know if you think about yourself, you know, as a founder of Theo James, you know you've got a vision for your business, which is to evidently be one of the most known, highest performing talent solution partners to the clients you work with in and around the manufacturing and engineering sector. Right? So most founders set up a business with a vision because it's the vision that inspired them to set up the business. Where most founders perhaps Mark could do more is to have a much clearer appreciation of how they will quantify whether they've achieved the vision. Yeah, so by that I mean for you, mark, it might be Theo James will be the leading staffing business focusing in on the manufacturing and engineering sector when we are a business with either 50 consultants and or turning over X million and or we have X number of branches in the Northeast of England as examples only because then you can not only plan what you need to do to achieve your overarching ambition for the business, but of course you can then actually perhaps make more informed decisions which will take you more toward achieving that vision.

Speaker 2: 10:38

And that's where people fall down. So very few owner managers of smaller privately owned businesses will have a business plan. Most people make instinctive, often emotive decisions and often these decisions, when made, can actually achieve the absolute opposite to what it is you're trying to achieve. So that's where I think there is more to do and that's where, mark, we can help, because actually a lot of my time is spent helping owners of businesses put in place plans which are executable, which will mean they will achieve the overall vision or mission statement or ambition they have for their business and themselves.

Speaker 1: 11:21

Yeah, that's a good point If you were. If you were the owner of a manufacturing business, for example, when do you think when's a good time to think about an exit strategy for some?

Speaker 2: 11:32

someone in that capacity would you say yeah, it's a really interesting question because actually I think the answer is the right time to start thinking about an exit is actually the day you set up your business. And by that I mean the day you set up your business, mark. You should ask yourself am I setting up this business to scale a business, to sell? Because the answer might be no. And if the answer is no, knowing that early is really important, because actually what it means is you don't perhaps have to run the business in the way in which you perhaps should. If you do have quite a clear intention when it comes to realising value for it within a particular period of time, and if it's a lifestyle business, you know, if you're setting up a business because you want to really enjoy what you do, you want to work with a collection of people you enjoy working with and you want to do it on an open-ended basis, then actually you know what that's fine. But if you are setting up a business with a clear intention to sell the business at some point, for picking number 10 million and that might be the case, mark let's say, if there are two shareholders and each wants to be able to take £5 million of equity value off the table when the business is sold.

Speaker 2: 12:51

Knowing that really early is vital because actually it's really easy to therefore build a business plan with that end goal in mind.

Speaker 2: 12:58

So you know, if you were to say to me and I know that this is not the case, mark, but if you were to say to me, right, I want to your James, to be a business that I can sell at some point for £5 million, I can say, well, if you assume that your business will be a business that will be valued at a multiple of circa five times adjusted earnings or adjusted EBITDA, then actually what you can work back that's what you can then actually what you can work back with is a multiple.

Speaker 2: 13:25

So you know, if you're going to want to sell a business for £5 million and the multiples likely to be a five times earnings multiple, then actually at the point of exit, you'll need to be able to demonstrate in the last 12 months prior to exit, the business achieved an adjusted EBITDA of circa a million, which is really good because you can then start preparing a forecast which shows what level of performance you need to achieve over a period of time to get to a position where you're a one million EBITDA business and therefore can afford to enter into a transactional phase.

Speaker 1: 14:01

So I like that. So the important is initially understanding exactly what the goal is trying to project, I guess a number of normal reverse engineer, which makes perfect sense. If you were speaking to a company of any you know that we could take manufacturing example Koteca and Jim Firm, or even McCrew what would you say are the key things? If you were looked to value your business and to almost try and prove that, the value of business that you'll be looking for and you'll be advising on to say, look, these are things we need to look at and these things we need to improve or change, would you say? So I think that's quite important for people who are in that space.

Speaker 2: 14:41

Yeah, yeah, of course, and that's effectively Mark where I spend all of my time, because most of the businesses I'm working with Mark, whether they be a manufacturing business or a business in another sector, will be businesses that have scale, will be established and perhaps are now starting to think about what levers to pull to improve the attractiveness and, in turn, value of their business, for whatever reason. So, in terms of key things that can impact value, or the nine value levers that you can pull to improve value, which is what we refer to them as. So the first is senior management team. So use your business, have an experienced, longstanding senior management team who run the business and whom will, of course, be able to demonstrate to a potential buyer that they have the ability to continue to run the business post completion of a transaction, because no buyer will buy a business if there was a real risk that Paul's purchase the management team are a flight risk and of course, that might be such an obvious thing to say. But the challenge, mark, certainly in a small private business, is often the founder, is the ND, is the person who has the client relationships, is often the most knowledgeable and therefore actually is quite separable not easily from the business and therefore succession planning is really important. You know you almost need, if you want to sell your business, to make sure that you have an understudy of you in your business so that when you exit the business that person can be elevated and continues to run the business In the absence of the owner, founder shareholder who sold their business and likely to be exiting. And the other point around, sort of an SMT is making sure the SMT is aligned with the shareholders.

Speaker 2: 16:42

So often in privately owned businesses, mark, you'll find that perhaps certain members of a senior management team will have share options, whether they be EMI approved or unapproved share options. Often you'll find that perhaps management have hard equity. So you know, if you've got an employed MD running a business sitting under the shareholders, perhaps it's right for that MD to have actual shares or some other form of L-tip long term incentive plan. So that's value level one Does the business have an SMT who are experienced and able and will succeed the seller group once the business has been sold? The second area which is really important is does the business have clear USPs which will mean a buyer will see value in acquiring the business for those reasons? So you know, is the business the largest business in its sector, which would be a USP? Does the business have contracts with customers which are three-year contracts, which are difficult contracts to get onto? That would be a USP. Does the business have certain accreditation? So ISO investor in people as examples, which again might make the business a business that's attractive as examples, versus being another Me Too business in a market with low barriers to end ring, which naturally makes the business less attractive and valuable.

Speaker 2: 18:16

And the third area is around financial metrics. So is the business a business that generates high GP and EBITDA margins versus its PIA group? And as the business is growing, is it growing but maintaining its gross and net margin? And what you often see, mark, is when businesses are growing to grow or margin becomes diluted. Ie, businesses buy growth and that's actually not only, perhaps not, something that buyers will view favorably, because it's not difficult to win a contract if you are going to be willing to give on margin and your margin is less than the other people pitching for the same contracts, you've just bought the opportunity. But of course, if your margin is going backwards as you continue to scale, is there a risk that margin erosion continues and therefore the earnings profile of the business goes backward as it scales.

Speaker 2: 19:18

The next value level, which is really important, is all around making sure your revenues are sticky or predictable, because the more sticky your revenue, the higher the multiple you'll attract. So in some businesses there might be contracts or frameworks. Is your business in a framework with its end customer base? Are you contracted, so do you have good visibility of a future revenue or not? Similarly, within contracts, often you'll find there's a change in ownership provision which might say if a business has a change in ownership, the contracts are immediately capable of being terminated by the customer. Of course, negotiating those change in ownership contract provisions out free sale of a business is really important because imagine selling your business where there is a risk that every single one of your contracts could be terminated on sale of your business. That will have a huge bearing on the risk attaching to your business from the perspective of your buyer.

Speaker 2: 20:15

The other sort of lever mark that often we are going to be focusing in on is working capital and how much cash a business needs to operate. Often probably on, businesses perhaps won't be as focused on working capital as perhaps there could be, especially those that have a significant amount of cash on balance sheet. Having too much cash can actually make you quite inefficient as a business. So making sure your debtor days are kept low by making sure you've got good credit control policies and procedures. Not choosing to pay suppliers early is also something that's important, because if you choose to pay your suppliers early effectively, you need more cash in the business to do that, which means on sale, you need to demonstrate to a buyer that you have more work in capital than perhaps the business truly needs if you were more sufficient and efficient when it comes to how long you choose to take to pay your suppliers.

Speaker 2: 21:18

The other value levers which I'm not going to detail on March because of time, but the other value levers that are really important when thinking about how to improve the value of a business are scalable traits. So does the business have systems, processes and procedures in place which allow a business to scale, or is the business quite unsophisticated, maybe manual, and, as a consequence, couldn't scale? Because, don't forget, a buyer buys a business to scale it, not just to maintain it. And the other really important value lever is all about how a buyer could ultimately look to cross-sell into the client base of the target or indeed look to cross-sell services of the target into the buyer's client base, because all of these things can have a meaningful impact on attractiveness and value. So these are the types of things that will impact on the value of a business and indeed it's attractiveness.

Speaker 1: 22:15

Love that. Excellent Apology. There's some background noise there. This is the plug, seamus plug, but when we play somewhere a job, it's like this going here and the music comes on. So just someone has got a new job somewhere. Congratulations to that.

Speaker 1: 22:30

That's a really interesting and useful, tangible list there, and that's exactly what I wanted out of this, because I think it is a checklist, isn't it? It's a checklist of things, literally, where people can start to do today, and I think that's great. I think it's fascinating what you talk about there regarding the owner being, if you are the most important person, you are a business, because I think when you start a business if any, not necessarily an ego thing, but you are everything you are, the hatch you wear, or endless, and to try and get out of that feeling of being the most important person of business is quite you know, psychology wise, is quite difficult. I had a chap called Liam Hunt on the podcast recently. He was MD of one business called Ambic Manufacturing and he's MD of quite a few others as well. A young lad, but just very inspirational, and he was talking about he's ethos. He wants to make himself redundant in every role and it was a new concept.

Speaker 1: 23:33

I love it because it goes back to exactly what you're saying there. If you are the most important person in the room, then that's a problem in that scene world, because if you take you out of that, then you can't take away like you do. So, yeah, I love that.

Speaker 2: 23:52

Just to reflect on what you said, because it is an important area and it's something that's relevant to any entrepreneur or any owner or any individual who has a meaningful role within a business. I mean, fundamentally, it is important, isn't it, that we all have within a business succession, because, from a risk management perspective, you know, no one is invincible and we're all on a treadmill and at some point we're going to fall off the end of it. So, actually, from a succession and risk perspective, it's important that we've always got people around us who can consume what we do, were we not there. And, of course, that's absolutely the case for owners who are considering a transaction at some point, because there's no buyer who's going to buy a business. If, once they've bought it, the person who's pocketed millions is not as motivated and, as a consequence, not as likely to work as hard as they have done before, if there's no understudy or succession in place for that person.

Speaker 2: 24:57

The other thing that's really relevant is the imposter syndrome that that brings about, because, even though so I'll use myself as an example, even though I might, on certain days, perhaps say that it would be great if there was another head of corporate finance in my firm doing the job that I do. The reality is, you know, I love what I do. I set up the business so I'm very passionate, very knowledgeable about what I do and, as a consequence, actually I'd like to be needed.

Speaker 1: 25:29

Yeah, yeah, that psychology is difficult, isn't it?

Speaker 2: 25:31

So it's really difficult to deal with that and what is required is a degree of honesty and actually, as long as you do what's right for your business, bearing in mind we as directors or as employees in our businesses, I hear to serve our businesses, then it's what you've got to do and therefore, actually, I do have succession within my business and therefore, if I died a day, my business will continue on and that's what's right for the business.

Speaker 1: 25:57

Apologies for interrupting this podcast for a very quick 30 second pitch of my business. Theo James are a specialist in manufacturing and engineering recruitment search firm based in Seam in the Northeast. If you're looking for any staff or new opportunity yourself from a semi-skilled level, write the way up to C-suite executive and please get in touch. We have a specialist consultant in each discipline ready to help. I'm extremely proud of what we've built over the years and I'd love to extend that service out to you.

Speaker 2: 26:26

Thank you, enjoy the podcast, regardless of whether that's right for my ego or not.

Speaker 1: 26:31

Yeah, and I guess that is perfectly linked in to what we're talking about. For If you have a goal, if you have a vision, specifically goal, in mind, everything ties to that. It's probably easier to say to yourself I can't be the most important person in the room because that means I won't reach my goal. If I have someone to succeed what I do, then I can reach my goal. So I think it's just a place how important that is. It's interesting on the senior management team because, let's say, a lot of business owners don't get to a stage where some of you are looking at an exit in the future. Is it right to start hiring people with the appetite to want to take your business on, or is it a better approach to just be more organic and bring people in the business who understand the culture and broom them into it? But what's the best way to do that, would you say?

Speaker 2: 27:27

Yeah, I mean that's an interesting thing to give thought to, actually, because I think clearly the thing that's most important is that you want to have in your business people who are very experienced, very knowledgeable and loyal and therefore, clearly, having people who have been in the business for tens of years, who are part of the furniture, is really important. And, of course, again, buyers will clearly place more value on a business that has a little staff turnover than a business who evidently can't retain its people, because there will be reasons for that In terms of working environment, culture, renovation, etc. But, that said, if you are a small business, there's probably not a business need to have an MD employee sitting underneath the MD who is the sole shareholder, because that business wouldn't have a need, nor could it probably financially support two full-time MDs. So in that type of instance, what sometimes you see is a business that doesn't have a natural successor for the MD shareholder. There might be really good mid managers who are really loyal and excellent at the job they do, but they don't have the risk appetite, the experience to run a business and therefore, in that instance, what you might find is either the shareholder who's thinking about stepping back might then look to a point in MD from outwith of the business as a senior hire to parachute in to sit above the mid managers, so that, as the shareholder exits, the MD effectively becomes the shareholder's successor.

Speaker 2: 29:21

What's more likely to happen, though, mark, because actually the risk of that person not being the right hire, not gelling and therefore actually perhaps having to be exited is high.

Speaker 2: 29:32

What's more likely to happen is actually a buyer will say right, we want to buy your business. We know you're the ND shareholder and we know that there's no succession. So what we'll do is we'll buy the business, we'll give you a big chunk of value now and a big chunk of value over the next two years, and we want you to stay with us to help us recruit your successor, so he or she can shadow you over a period of time before you effectively do hang up your boots and retire. On the second anniversary of you selling your shares in your business, and because the deferred value will be contingent on future performance, the vendor is aligned with the buyer in making sure the performance of the business is maintained and that the successor is hired. That's more likely to be what happens, but it depends on the scale and size of the business, mark, and that makes perfect sense and unless you use manufacturing as an example, say, it's a 350 head capacity.

Speaker 1: 30:26

in terms of it's all relatively small, but it's all a lot of people to think of. How do you get the buying? I guess, because there's a lot of uncertainty and scaring around a business which is up for sale because it could be investments which could be great for everyone, but actually it could mean they're going to lean down and they're going to move from the work. If you are in that sort of role or capacity, what do you think is the right communication to give, and who to give it to, would you say, in that sort of role, Because there's a lot of companies that go through that.

Speaker 2: 31:01

Yeah, no, well, that's right. And I was just down in Leeds yesterday meeting the shareholders of a business which I've just been engaged to advise on the sale of. And this is a sort of 220 million turn of a business in the manufacturing space and actually it's a really important area is the communications of the anticipated transaction, because what you never want to do is create anxiety and unnerve anyone, because that will only negatively impact them and, in turn, the business. But you also don't want to be disrespectful and keep people in the dark, because that can have a real detrimental impact when people become aware.

Speaker 2: 31:40

So what is normally the most appropriate approach to take, mark is that when we are engaged to advise on the sale of a business, we'll often only involve the shareholders and the C suite.

Speaker 2: 31:54

If they are not the shareholders, we wouldn't involve middle management or employees at an early stage. And that's because actually at that early stage we don't want to distract the 340 employees of the business from doing the job that they do so wonderfully, but actually we don't have anything to tell them, because they would ask who is the buyer, what's their intention? Will my job be safe? And the answer is well, it depends on who the buyer is, and right now we don't know who that is and therefore we can't actually give you any more certainty. So actually it's not healthy for us to create anxiety. So normally a full process would run and we'd only actually communicate the transaction to all of the employees outside of the C suite mark either the day of or the day after the deal is done, because only then actually have you got the ability to talk knowledgeably about what the buyer's plans and intentions are for the business and indeed said individuals.

Speaker 1: 32:58

Yeah, that makes perfect sense. Is that the time you might look to? I mean, I think share options is quite a complicated process you mentioned before in terms of which shares to give people and what's right for them and what's right for the business. Would you have any advice around that? If you're a business owner looking to help wrap your staff up and you mentioned one of the key drivers there is retention and bringing people in what would you say for, again, a business of a two fifty, three hundred strong with a quite a fair size management team? What would be the right way to go there to try to get some buy-in for sort of the future? What do you say?

Speaker 2: 33:36

Yeah, yeah. So if what you're trying to do, mark, is to get your SMT or your C suite aligned with the shareholders and that is because you want your C suite to help you, as a shareholder group, say, double the profitability of the business over a three a term if that's the aspiration, then of course what you want to make sure is that they have a way of benefiting from achieving the growth that the shareholders want the employee management team to achieve, and that can be achieved in a few ways. So first of all, it could be hard equity, which, of course, is probably the one that demonstrates most meaningful commitment to those individuals. But of course, there's a huge tax risk with giving equity if the equity that you are giving has value, because if you were to gift to an employee shares and those shares have value, you are gifting those shares to those employees as a consequence of their employment and therefore actually the value of the shares will be ultimately taxed as if it was employment income, attracting income tax and employee nicks, so a significant amount of tax leakage. So you wouldn't really do that. Instead, you could give that person groceries, which is a way of avoiding the tax leakage, because the grocery is effectively only ever return value to the individual based on the growth in the value of the share from when the share is given to a point in time in the future. So if the shares today were 10 million but the idea is to double the size of the business and it turn its value to 20 million, then actually that person would only get a proportionate share of the growth of the 10 million. That's a really good way of giving someone equity, elevating their seniority because they are a shareholder, but without creating tax leakage and a tax news for their net.

Speaker 2: 35:42

So that's one option. You've then got the share options category and that can be HMRC approved, which is the most tax efficient way of allocating options. So these are EMI share options and this is a really neat way of saying to an employee right, we're going to give you an option. You're not a shareholder now and the option ultimately will be exercised at a future point in time, often an exit event and in that instance the good thing is the person is not becoming a shareholder, you're not giving them shares, so there's no tax leakage and the only ever become a shareholder when the exercise they option on sale of the business If the employee sees to be employed along the way, the option lapses, so there's no issues around getting the equity back, but they do participate in the exit event which, of course, in the illustration that I gave, is the objective.

Speaker 2: 36:35

So that's a really tax efficient way of creating alignment with employees. And there's also an approved share options, but they operate in a very similar way but the tax breaks are less so advantageous. The third and final way, which can sometimes be the most appropriate in a situation where perhaps the value of the business is so significant that you can't gift shares and perhaps EMI share options might not be relevant and that would simply be some sort of exit bonus whereby an employee receives X tens of thousands of pounds when the business is successfully sold. And we often see exit bonuses in businesses where, perhaps because share options and gross shares weren't thought about initially, time has run out and therefore often an exit bonus can be a way of creating alignment in a very straightforward way, acknowledging it's still going to be quite tax and efficient mark because the employee will receive a bonus through payroll and therefore paying income tax at whatever rate is prevailing to that person.

Speaker 1: 37:47

Yeah great, that's fascinating because it's getting a balance right between incentivising but protecting the business and protecting them. So nice segue at that as well into, I guess, fast forward into a business which is at sale stage. I don't presume it's as simple as 10 million sale, 10 million in your bank. I'm sure there's lots of tax implications and what advice should you give to sort of free up, I guess, as much cash as possible?

Speaker 2: 38:16

Yeah. So the deal structure is largely about risk apportionment. So let's just create an example mark. So if there's a buyer buying a business for 10 million and let's say it's a business doing 2 million of pre-tax profit and the buyer has valued the business at five times their own, and if that's a small, privately owned business whereby the sole shareholder is also the MD, in that type of instance, especially if there's no succession beneath that MD, the buyer will naturally want to make sure the value is delivered to the seller not all on day one, because let's be skeptical if the seller gets 10 million in their back pocket on day one, then of course there is a lack of alignment between the buyer and the seller as far as the seller continuing to work with the buyer to scale the business and, of course, as far as the seller working with the buyer to effectively look to recruit an MD to succeed the seller. So to create alignment what the buyer is going to always want to do in that type of situation to say, right, we'll give you, seller, 60% of the 10 million cash on close 6 million, but the other 40% we're going to pay to you end of year one, end of year two, as an earn out, and that earn out will be linked to the business achieving at least a two mil level of adjustability bit In year one and year two, which means, of course, the seller is aligned with the buyer, because the seller will want to make sure the earnings profile is maintained, at least during the two years following completion.

Speaker 2: 40:00

The challenge, though, mark, with that is the buyer will be buying a business for a reason. That might be to try and take out cost, because they'll integrate the target with the business of the buyer. It might be to actually do the opposite. It might be to invest heavily in headcounts, scale the business they've bought, but all of those things will impact the earnings profile of the business that's been acquired. Therefore, if a buyer buys a business, doubles the headcount, the profitability of the target goes through the floor. Therefore, the vendor doesn't get the earn out.

Speaker 2: 40:36

So actually, what you then find yourself doing is having to negotiate vendor protections, which can often span 20, 30, 40 pages, which will set out all of the things the buyer can't do with the business they've bought without the seller's consent during the two-year earn out period.

Speaker 2: 40:57

So my job is all about negotiating those types of provisions. So it might say, during the two-year earn out period, the buyer cannot, without the vendor's consent, rebrand the target, because a rebrand might mean certain customers of the target are spooked and, as a consequence, that might negatively impact the profitability of the target. The buyer can't divert trade-away from the target, so the buyer can't divert customers from the target to the buyer group, which would negatively impact the profitability of the target. The buyer can't increase the remuneration of any employee within the target, save for in-law with inflation, etc. Etc. Etc. But of course you can imagine how contested these types of points are and how heavily negotiated, because the buyer is buying a business because they want to grow the business and the buyer doesn't want to have their hands tied. So these are the things that can often dictate the type of deal structure that's relevant and, in turn, when a seller mark can expect to receive the £10M that they're going to receive on sale of their shares.

Speaker 1: 42:08

It's fascinating, isn't it? Because I guess a lot of sales are competition by another competition. So those points.

Speaker 2: 42:15

I imagine they are contested quite a bit, but it's correct Because why deals typically take sort of six months to complete? Because the shared purchase agreement, which is the document the sellers and the purchasers sign, are 250-page documents, and I talked about vendor protections there. That's just one area. These legal documents are very complex, lots of moving parts and take a lot of time to negotiate for the mutual satisfaction and agreement of the buyer and seller group.

Speaker 1: 42:49

Just finally on this one. It's been fascinating Manufacturing specifically, would you say. Have you seen any? Is it a different world? Any specific advice you give to a manufacturing organisation, which perhaps are different challenges than it would be, to say, a recruitment firm, for example?

Speaker 2: 43:08

Yes, obviously, the operational running of a manufacturing business is the absolute polar opposite to the operational running of a service-based business. And I guess the most obvious is within a recruitment business, your asset is your people and actually the barriers to entry are low and the cost of capital and the capital you need to set up a recruitment business is low. Of course, in manufacturing the opposite is in part true, ie often the capital needed to set up a manufacturing business is high, certainly if it's a very plant and machinery-oriented manufacturing business. Obviously talent is still as important in a manufacturing business, but the barriers to entry can be higher. So I think, other than the obvious operational differences between those two, everything that I've said stands, I guess, if you look at transactions that I've advised on in the manufacturing sector so selling businesses like SAS to Swedish Lyft Co.

Speaker 2: 44:13

You know RHI Irving, which we sold to Mighty last year. Only a few weeks ago did we sell a business called Ground Tracks to Origin PLC, irish Listed Company. All of those businesses are so different, they're all manufacturing businesses, but the thing that they all have in common is they are businesses that were attractive to an acquirer as a consequence of them being best in class, then manufacturing a product which can be sold into a much greater addressable market. The businesses in mention were all scalable. They all had scale to them, I must add. So they were all businesses doing, you know, millions of pounds of annual pre-tax profit, rather than subscale businesses. And there were all businesses that, by his thought, with more capital they could continue to scale. Love that, excellent, fascinating. Look.

Speaker 1: 45:10

I'm going to finish with some quickfire questions to ask everyone, and then we'll summarize. So this is a bit different now. Can I test you? I'm nervous, Mark. Who was the best manager you've ever had, and why? All better. Who was the best manager you've ever had and why?

Speaker 2: 45:32

Paul Bevan. So Paul was the partner that I worked for when I was at RSM, which is a global accounting firm, slash corporate finance practice mark, which is where I worked before I set up RG corporate finance. Why was Paul the best person I've worked for? I think he got the balance right between support, help, mentoring, with giving me the autonomy to make mistakes in a controlled environment. Love that, Excellent.

Speaker 1: 46:08

Biggest influence from either business, entertainment, sport, anyone that springs to mind, which has been a bit of an influence on. Yet what do you say?

Speaker 2: 46:15

Well, I mean other than you, mark. Yeah, thanks, mark, exactly Other than you. I think the person who probably has had the most influence on my outlook and my thinking, which, of course, has had a massive impact on every aspect of my life, would be Ronald Bern, who is the author of the Secret. Okay, I have, without doubt, lived a very different life to the life I would have led if I hadn't read the Secret about 15 years ago. Powerful book, powerful book. It isn't I'm all about paying it forward, I'm all about the law of attraction, I'm all about manifestation, and that has transformed my life.

Speaker 1: 46:58

I have to say you are the most positive man I've ever met. I often joke and we've been on stag doos together and been hung over and you still wake up exactly how you are now a positive man. So yeah, it's testament to the work you're putting there.

Speaker 2: 47:13

We're all born the same and we're all brought up in perhaps similar ways. So for me it's all about you choosing how you think, and do I sometimes wake up and think? I'd rather just stay under the duvet, of course. Do I always feel as if things are going my way? No, because they're hurdles all of the time in and out of business. But actually I can control how I choose to think and therefore I do have a positive disposition, because it actually seems to not only perhaps be helpful to those around me, but indirectly I benefit. Yeah, I love that.

Speaker 1: 47:52

And it is infectious.

Speaker 2: 47:52

Without doubt, positivity brings positive to the case, no one likes to spend time with mood hoovers, and we've all got friends and family members who are always whinging, always complaining, and, quite frankly, I've removed myself from those people and last year I went through a shedding process. Mark, this sounds pretty brutal, but I'll share it with you. So that process was all about me shedding people from my life who were taking from me, who were only ever wanting to leverage me for what I could give and do for them. Those people no longer are in my life and I am better for it. Yeah, I love that.

Speaker 1: 48:31

It's powerful, isn't it? It is Brilliant. Just finally, three things, or three words that make up a good leader. What do you say? Versus come to mind.

Speaker 2: 48:43

I think, approachable understanding, because there's always a reason, there's always a story, there's always more to know, and asking the right questions allows you to find out those things. And, I think, inspiring, because if you're not inspiring, no one's going to follow suit and therefore you can't lead anyone or anything, can you? Yeah?

Speaker 1: 49:08

love that. And just to end it, carl plans next 12, 18 months for RG. What's happening? I know they're always extremely busy. You're the busiest man, though. What's on the agenda?

Speaker 2: 49:19

Yeah. So I guess this year for us is all about continuing scale of our business, mark. So in March we opened our next office in York, which is really exciting because that's there to allow us, mark, to continue to advise our clients in Leeds, yorkshire and Humberside. We are continuing to make some really senior hires into the firm. So only in January did we welcome a new tax partner into the firm, a lady called Emma Riley, who joined us from PWC. We've got two CF directors joining us in March as examples. So we're continuing to make some notable hires into the business because we as an advisory firm are a collection of individuals and we want top flight, best in class talent in our firm because our clients benefit from that.

Speaker 2: 50:07

Mark, and it's actually to continue to support our clients, whether that be large corporates, shareholders of private and businesses, employed management teams or private equity houses who are looking to deploy capital into businesses. Because, actually, whilst this year I think we'll be buoyant, there are some challenges. We are technically in recession, even though I don't think that many businesses are actually reporting short-term economic challenges, but if you look at sectors like hospitality and retail, I think that perhaps those sectors will have some hurdles to overcome this year. So we've got to be in the trenches supporting our clients. But I think, what with inflation starting to hopefully soften, interest rates have plateaued and perhaps might drop by 0.5 or a percentage point this year. There are opportunities. So our job this year will be to continue to positively support our clients that are looking to continue to make notable decisions as they look to grow their businesses and, in turn, improve the value of their businesses so that at some point in the future Mark they will be afforded options, whatever those options might be the best way to contact you LinkedIn email.

Speaker 1: 51:28

what was the best way?

Speaker 2: 51:29

Yeah, exactly so. Linkedin is definitely one way. Email, telephone, as you know, mark, I am genuinely contactable 247. So if anyone wants to reach out, talk about their business. Maybe they are a management team looking to buy the business that they run. Or, in fact, perhaps it's someone just wanting to understand how they can take money from their business more pack sufficiently, with no intention to ever see their business sold. For sure, mark, they can just reach out.

Speaker 1: 51:59

Excellent Look. Thank you so much for this. It's been amazing. Actually, I think it's been definitely exactly what I hoped it would be. Regarding the information, I've learnt loads, and I'm hoping, if I've learnt loads, other people have as well, because it is a complicated process. It isn't something you can just go into without any thought, and it's something you've got to think about for many years before it happens, and I think that's the important part. So thank you so much for this, carl. It's been great. Appreciate it A pleasure.

Speaker 2: 52:27

Mark, Massive thanks for having me on your podcast. I must admit I was expecting more of a grilling, so I can't help but feel I've been letting off lightly.