Uncovering the success of a good deal

Transcript

SPEAKER_02 0:06

This week I have the pleasure of sitting down with Michelle Malay, out of deal origination of MHA. Although Michelle is surprisingly not an accountant, she writes the CFOs and founders as they come to the deal making table. And there's not a lot she doesn't know about that process. Having assisted on many deals, Michelle takes us through what got put into her role, a passion for entrepreneurs, before she steps us through the do's and don'ts of any good deal, whatever that may look like. So if you're a CFO about to embark on a fundraise or a founder who is looking at an exit, this is a podcast not to be missed. So let's get started. So how did you find yourself in the role that you have today?

SPEAKER_00 0:49

A very long winding road. So I think if I cast my mind back, goodness, it probably is 25 years ago now.

SPEAKER_01 0:55

Wow.

SPEAKER_00 0:55

I had just an admin role basically at EY, so one of the big four firms down in London, but it was in the transaction services team. So you were surrounded by people doing deals all of the time. So I think whilst I was busy in the role, the the actual work I didn't find that motivating. It was the learning about the transactions and the deals. Met my husband on holiday as you do. Oh, nice. Uh decided to move to Manchester. And so there was a role, an opening for a more of a research role. Okay. Um, and so that kind of just pivoted me, moved me more into kind of doing a bit of a deep dive into businesses, helping the partners' directors prep for their meetings. But really, it was I got the chance, they ran an awards programme, and you got to sit with entrepreneurs, and because it was an awards programme, they give you the life story. Okay. And I just found them completely and utterly fascinating. So to take an idea, a thought, to risk everything, you know, so many of them had kind of put the house on the line, not tell their other half that they'd done that. And I think that was completely my light bulb moment where I kind of knew I want to work with entrepreneurs.

SPEAKER_02 2:12

Okay.

SPEAKER_00 2:12

And then it being a winding road, really, there from being very behind the scenes to then meeting clients, being in front of them, being immersed in understanding what business challenges and their opportunities and how they navigate that, what's the role of consultants, advisors, accountants as part of that? So it's yeah, I'd say it's been a 25 journey to where 25-year journey to where I am now.

SPEAKER_02 2:37

Yeah, because I think people will be surprised that you're not actually an accountant, are you, Michelle? And that surprised me actually. So, how you know, how do you kind of get involved in that? Because, you know, you come across as someone who understands finance across the board.

SPEAKER_00 2:53

Oh, I'm glad I've blagged my way into that. I think some of it is because I've worked within that accountancy profession for 25 years, by osmosis, you probably pick some of it up. Sure. And I think very much for me, once you start meeting a lot of clients, that's where you you sort of drink it in, I think. And and some of it you need to have a bit of now see yourself to go, actually, I'm really interested in this. When they're talking about, you know, eBit DAR multiples and valuations and leverage debt and stuff, what what do they mean? So I've had to take myself away and listen to things, read things as well, because I've had an interest. So I could have sat there and and really not took an interest, but I was genuinely, genuinely interested. So I've supplemented listening, learning on the job with a bit of self-teaching.

SPEAKER_02 3:49

Okay, great. You mentioned that it was your fascination with entrepreneurs that really kind of kick-started this whole kind of career. What is it about entrepreneurs that kind of you really resonate with and what really excites you?

SPEAKER_00 4:03

I think they have this sort of they don't see barriers, they just see opportunities. They don't see any reason why you wouldn't do something, so they just see, well, there's this issue and I can do this, and and they just go for it. And it's infectious. I just find when you're around entrepreneurs, it's I kind of come out a bit more bouncy. I just, yeah, I just find the whole environment of their zeal, their rigour to keep going, doesn't matter what seems to be thrown at them. And, you know, most businesses have had to cope with a hell of a lot, particularly over the last sort of five or six years, but it doesn't seem to dampen them down. They just pick themselves up, dust themselves off, and just charge on.

SPEAKER_02 4:47

Isn't that challenging in some ways? You know, I I sit here as a CFO and and you know, absolutely resonate that founders are a completely different kettle of fish. But there are some challenging things in that too, right?

SPEAKER_00 4:58

Without a doubt. And I haven't worked in an entrepreneur business, have I? I've I've worked in corporate. So actually, I suppose living and breeding that day-to-day, I can only imagine as a CFO, you need to be a certain type of person to want to be in that environment. It's definitely not for everybody. I I imagine that as a CFO, what you've got to try and do is how do you bridge that gap from that not seeing barriers, only seeing opportunity to having to have that layer of you know, governance and sure and and looking at things through the lens of right, well, actually, this is what you want to do, and this is the cost of doing that, and how are we going to achieve that? So I I definitely can see it's it's horses for courses, and it absolutely doesn't suit everyone to be in that environment.

SPEAKER_02 5:49

How do you do how do you deal with that from a client relations point of view? Because there must be instances where you have come across a founder or you're trying to do a certain type of thing, and they are characters, really passionate and driven. You know, have you ever come across that in that consultancy place where you've had to really think about how you manage them?

SPEAKER_00 6:08

I think you've got you've got to be a person that's that you're not a woolflower. I would say it's not for you to work with entrepreneurs if you're a shy woolflower. Yes, you need to be professional in your approach, but but sometimes it may be, especially in the environment we work in now, it's it's a deals environment. You are talking about someone's pride and joy that they've often, it's the culmination of decades' worth of work, whether they're looking to raise money or exit. You know, you might be talking about valuation, you know, everyone thinks their baby's beautiful, you've got to be very careful. So it's just about, I think, tackling things in a professional way, in the way that you might kind of go, like, right, you know, let's look at X and your valuation expectations. Actually, let's look at the evidence. And is there evidence of those multiples, for example? So you don't need to smash someone around that, you know, your baby's ugly, sort of thing. But but yeah, it's doing things in the right way in a professional way. Okay.

SPEAKER_02 7:07

What do you think makes a great entrepreneur? You know, you've you've met so many, you know, across your career. What you know, what are the standouts for you? What do you need to have if you're gonna go on that journey? Gosh.

SPEAKER_00 7:19

Sometimes I I think you can't quite put your finger on it. Some some of it is it that it's a bit of an it factor. Okay. I think there's a definite a resilience piece. Like I say, I talked about that environment we've had, whether it's you know, Brexit or COVID or constant geopolitical instability, that you can look at whether that's your business model and do I need to change, do I need to pivot? How do I cope with that? You know, actually, I'm now growing and scaling. I need to hire and bring in the right team to surround myself with. I think that's some of the thing we see is that growing up of a business and professionalising for some entrepreneurs, they will see their own limitations and they'll kind of go, actually, I love the dirty scale up bit. Okay. I don't want to be in that business that takes on private equity and take doubles the size of growth or a list of business. So I think it's entrepreneurs understanding themselves what they want. Uh and and they'd be they're very driven, they're very passionate, able to pivot in difficult environments.

SPEAKER_02 8:27

Yeah, and it's interesting actually, because you you touched on before around kind of, you know, we're in a tra transaction-led environment, actually. So a lot of the times, you know, founders are looking for that exit, they are looking for the next three-year horizon. What is it that you know we need to be thinking about when we're looking at those exits and planning for those in that time horizon?

SPEAKER_00 8:50

So I suppose it's that what what's your end? What's your end goal? Is it that actually I want to make the get the biggest check, the most money I can get, which probably might lead that to be trade or private equity? Some are very legacy-based. Yeah. Actually, you know, I'm I'm a purpose-driven entrepreneur, and I really want to know that in 50 years' time this business is still going to be here. So it may be that they need to be thinking about well, actually, if I want to position for an MBO, have I got that strength of leadership team the next tier down that's got the appetite to take that on, has got the the skill set needed, or it may be they consider employee ownership because of the legacy piece. So I I think it's very much they need to think first, what's my end goal, okay, and then work backwards from the from there.

SPEAKER_02 9:43

Okay. And in your experience, what kind of support is out there for founders to help with that? You know, is you know, is that something that you guys support with?

SPEAKER_00 9:53

I think so. When you say that word corporate finance, and that's effectively what we do, corporate finance advisors, a lot of people don't even know what that word even means. A good corporate finance advisor, and they are different to brokers, but they they for no fee should be able to happily sit with you and talk you through what are the pros and cons of those options, what you know, and debate that with you in an in an open environment. And that's often a good two or three years before you're thinking of doing something, is a really good time horizon to do that and be trying to help you think that through. So I I would say that some people, and I understand it, they're reticent and hesitant as to open up to. So it might be that they want to ask somebody in their network for a recommendation to feel comfortable because you're opening up about really quite private things. So yeah, it I I would say then that CFO lens, how can you support? Well, for me, it's very much about you know, are they good solid management accounts in place that you're doing on a monthly basis? Okay. Do they tell the story of the business? So, for example, if you want to try and maximise that valuation on exit through trade or private equity, the due diligence that they will do on your business before then is it it's got greater and greater and much more deeper than it maybe was three to five years ago. So, do your numbers tell that story? So if you've built out forecasts where you've maybe the last however many years you've grown by 10%, but you're all of a sudden forecasting 20 and 30% growth. Well, what what's the proof points behind that? Can you break down by, you know, your margins? Do you know what key KPIs that buyers care about for your sectors? And are you monitoring those key KPIs on a monthly basis? Can you, you know, it is your house tidy? So from a tax point of view, for example. So for various reasons, you might have a messy corporate structure, so it's getting those things clean and tidy. Have you made sure that you've kept on top of tax compliance because there will be due diligence done on the business from a tax perspective? It it's all of those things making sure it if that's cleaned up, done, and ready before you even think about pressing the button, you've got less risk of a deal falling over, buyers getting nervous, pulling out, trying to chip on price. Sometimes what we do that the we will do what we call it a vendor assist. So it may be a business actually. We we help you to do that. Okay. We help you to get ready way before you ever press the button. But some people might have the experience and resources in-house for the CFO and the finance team to try and manage all of that well in advance.

SPEAKER_02 12:47

Okay. You mentioned there actually about kind of you've noticed that due diligence actually is going a lot further and a lot deeper than it has done in the last four or five years. What does that look like and why do you think that's happening?

SPEAKER_00 13:02

I think probably a trigger was COVID. So, so obviously, for some businesses benefited due to COVID environments, so that might be, for example, you know, tech and e-commerce, for example. So they obviously saw that spike, and we did see valuations that uh for some of the businesses in those types of sectors really spiked, but then have really sort of dropped off. So it it that's caused some of the the rigour. So private equity may have invested in some of those businesses in some of those sectors at its height, and so they've held on and retained their investment much longer than that typical three to five year role period before they want to exit a business. So that's then meant that you know, if they're gonna look at new investment, well, there's a lot a lot more rigour done. Should we really be paying that? Is that really the true valuation? Okay. So it's it's just dry the whole market at the moment, I would say, is it's a tougher market from a due diligence perspective, without a doubt. So that's the granularity that they might hone in on. So if you've maybe been, I don't know whether it's you know, that, for example, you've not treated that in the right way. If you've you've not got the granularity of data on your revenue streams, then it they start going, Well, is that story really believable? Actually, let's really dig in on those forecasts because there's no evidence to back up the story that you're trying to tell. So there's a lot more just digging on certain areas. So the more you can be prepared, the less stress there is on the whole of the finance team to during a stressful period of trying to close a transaction or a fundraise.

SPEAKER_02 14:51

Okay. You've probably seen quite a few transactions in your career. What does good look like?

SPEAKER_00 14:58

Well prepared, without a doubt. So all of those things that I talked about from a financial point of view, if you've done that and got into all of that rigour, so you've got that, you know, handle on working capital and cash and you know, your stat accounts align up with your management accounts. If you've got all of that all sewn up, there's good governance in place, it just makes a buyer or an investor just feel much more confident for a deal to go ahead. Okay. The other thing I've seen more recently is so often a lot of entrepreneur businesses are very entrepreneur-led.

SPEAKER_01 15:37

Yeah.

SPEAKER_00 15:37

So if for a trade buyer, for example, their their risk and their concern will be, well, actually, if that founder leaves, so they might have a six to 12 month turnout period, but actually, are they absolutely integral to the success of that business continuing post-acquisition? So sometimes what we'll see is over a period of two or three years, the CEO kind of moves more to a chair role. Okay. So they might bring in a new CEO, might have a tiny shareholding to incentivize them to a close a deal, but it's means that that owner can demonstrate they're not integral to that business at a point that they would then want to exit. So when they're not deemed as a as as much of a risk either.

SPEAKER_02 16:24

That must be really tough for a founder, actually. You know, going back to our previous point, you know, they've this is their baby, they have lived and breathed this, them trying to make that move and do that step away. That must be really tough.

SPEAKER_00 16:35

Without a doubt. And I I think sometimes we probably don't think enough about the there's a human side to all of these transactions. For many of them, they're their whole being has been wrapped up in their business because they've had to live and breathe it 24-7 for such a long time that that sometimes what you find, and I've done this with a couple of other founders that are thinking about selling in two or three years' time. So, actually, one of them I know is thinking, well, actually, I'd like to start doing some tech investing, but he's not got a network because he's been so that busy with his own business. Of course. So I've made a load of introductions for him and got it, so he's starting to put the feelers out. What could life look like post-deal so that I'm not lost and and rudderless without you know, my whole being's been based around the business.

SPEAKER_02 17:28

Okay, okay. What does bad look like? So, you know, we you've we've talked about what a good transaction looks like and how that should work. Have you ever come across one that's not been great and and what you know what things have people have to learn from that?

SPEAKER_00 17:43

I think some businesses have probably and sometimes it can be as a result of growing extremely quickly, that sometimes the growth really quickly has meant that maybe eyes haven't been on things such as having any governance in place, maybe the hiring as quickly as pe they're losing people, there's no policies, procedures in place. It's you know the the quality of the data's extremely poor, but for whatever reason it might be health or something that's driving the reason that the deal needs to happen sooner than later, they can't really delay it. So it it's it's an unpreparedness that they kind of just call us and say, Yeah, I'm ready to sell my business, thanks. Uh can we start now?

SPEAKER_02 18:31

Yeah, but can we complete it in three months, please?

SPEAKER_00 18:33

Yeah, exactly. So it's and they I think then it it it can then end up meaning we've we will wrap our arms around a business as much as we can to kind of go, right, okay, let's get your data, let's get everything ready. But it it is a stress and a pressure, it can be a distraction because obviously what you don't want to do is it that in itself, a transaction can distract the the the leaders of a business away from actually doing their day-to-day. So what you the last thing you want is you see a dip in trading because they've been distracted on the transaction, and that can happen, and then obviously that can make a buyer nervous. Well, hang on a minute, what's going on? Because you know if they can see that happening, it just creates a nervousness.

SPEAKER_02 19:21

Okay. You talked earlier about kind of some of the in you know, the the factors that FDs need to be thinking about, CFOs need to be thinking about in terms of keeping their house in order, etc. Is there anything else that you know CFOs and FDs can do to prepare themselves around um some soft skills perhaps or some you know some other areas?

SPEAKER_00 19:42

So it it may be that the business is considering private equity investment. It may be as CFO, actually, that's the first time that you have looked at that. Well, you may need to go and present to investors, you know, it may be that you're considering a listing, and again, you need to present to the market. Being able to do that in a clear, concise, convincing way, without a doubt, is a real skill. There's a there's a couple of wonderful sort of they would probably call themselves storytellers for business that that I know that are fantastic and would help to hone those skills. So it's I would say that is particularly important. You might be technically excellent at what you do, and you've bought in the trust over a number of years of the management team and the owners who absolutely want you to be on that next period of growth, but you've then got to get the immediate buy-in super quick if you're placed in front of pea houses, because particularly if it's a private equity investment, whilst they need to see that the business is solid, they're buying into you or the management team, and the CFO is integral to that, that's going to drive the growth, and they're buying into that team. So it's absolutely imperative for you as the CFO to convince that investor that actually, yes, you are a key part of that management team to take forward.

SPEAKER_02 21:11

Yeah, because it's an interesting thing, you know. I've been in the market myself, and actually trying to get into PE is probably one of the most difficult things if you've not already been in and proven. Do you think uh that PE is significantly different to anything else in your experience? Have you seen, you know, when you look and work and consult and and advise these businesses, are there significant differences?

SPEAKER_00 21:36

Uh yes, I would say that that there is a difference. It's absolutely not for everybody. I think it really only suits a certain type of business. So I often if we if we will meet a business and they say, you know, well, we we think we want to get private equity investment, we'll always try to understand why. Why do you think you need that? You know. If it's to fund growth, well, actually, is debt a better proposition? Are you able to look at that? So we'll we'll always really try to get under the nub of what's driving it, because it does it it does only suit a certain type of business. For most private equity firms, they're looking at that three to five year turn. So can they make drive exponential growth within within that business? Whether it's, you know, they'll help support with a buy and build strategy. But again, you know, so you so you uh do you want to be part of a business and a growth story that's going to go on a real hockey stick growth and often, you know, integrating businesses that you might acquire, whilst you will get support, and that's part of most private equity houses offering, is they're not leaving you alone to sort of say, here's the money, good luck, deliver us, you know, three times growth. Sure. That that the idea is they work alongside you, okay, but it absolutely isn't for everyone due to the nature of they need to see returns.

SPEAKER_02 23:06

Okay. Okay. Coming away slightly then, what are how important are kind of systems and controls and you know, one of the things I talk about a lot actually is impact of AI. How important is all those things in a deal process, but also how is it going to impact kind of how you deliver services going forward?

SPEAKER_00 23:28

It'll be really interesting, I think, to see over the next three to five years how our industry is impacted. At the moment, I think there's a very positive sense that the the feeling is hopefully it's like any role. There's a lot of stuff that's not as much value add that needs to be done as part of a deal. If there can be a level of automation to that, that then means the human can analyse that data to ask the right questions to support more and do less of the I can't think of a better word for grunt work, but you know what you know what I mean.

SPEAKER_02 24:05

Less of the transactional type of activity.

SPEAKER_00 24:08

Exactly. So I think we the moment what we're trying to make sure is that if we were to to look to go more into that, it's got to drive quality. So there's got to be trust built that that that there's quality there that is we know we get when it's a human doing 100% of it. So that we I think we're very much on a journey as a business as to how we can utilise it. The other thing we've got to look at is more and more businesses are using it within their business. Of course. So actually, if they're using it for their own numbers and their own reports, we've got to make sure that we feel confident and comfortable that what their business, the AI that they've used and what they've generated from a numbers perspective, can be trusted. So we'd have to stress test that ourselves. Okay. To make yeah, to make sure that it it is doing the right things, it's doing what what they think it's doing.

SPEAKER_02 25:08

And how do you think it's going to impact, you know, your role specifically in that client relationship side of things?

SPEAKER_00 25:15

Well, I I'm exploring it right now. So I'm what I'm hoping, it's like anything, isn't it? So everything takes time, and that's you I've never got enough hours in a day. So, for example, we might we've just finished a deal in the uh wealth management sector. Okay. So because we've done that, well, actually, I'd love to go and speak to more wealth management businesses because we we got 22 offers for that business. We we got them a hell of a lot bigger number than they originally got offered on the table because we managed that whole deal. So we've got a good story to tell. But at the moment, me pulling together, you know, a target list of other companies that have got the hallmarks of what we know we're buyers looking for, outreaching to them, then keeping in touch for a long period of time. Often, if someone's prepared to come and have a chat with you, it's because they're thinking about doing something in three to five years. Okay. So I will try to find ways to keep in touch, I'll keep my eye on the market, what's happening with multiples, who's buying what, to keep in touch over a long period of time. But it's all manual.

SPEAKER_02 26:26

Okay.

SPEAKER_00 26:26

Uh my hope is how can I work alongside AI so that that can just make make me better, quicker, smarter, so that I can pick the phone up to clients and chat to them rather than spending a lot of time on stuff that doesn't add value. Okay. So I I'm I feel quite excited about the potential of it. So I'm hoping I'm hoping.

SPEAKER_02 26:54

If you had one piece of advice for kind of CFOs and FDs who are listening to this and working with founders and working with consultants and stuff, what's one piece of advice you'd give them?

SPEAKER_01 27:06

Goodness.

SPEAKER_00 27:07

Try try to get the the basics right. So making sure governance is not forgotten, making sure you've got, you know, have you got a good handle on the numbers so that at any one time, if you got an approach tomorrow with a, you know, a great buyer that was the the right person that you could they uh there was no holes that you would you would get the right valuation at the right price, no chips because you've just got the basics right.

SPEAKER_02 27:41

Okay, so basics right. Yeah, that's the sum total that we need to do.

SPEAKER_00 27:46

Is there anything else about hopefully what's come across is I I think for many CFOs and and entrepreneurs, there's a nervousness to talk to somebody that's a corporate finance advisor. You know, I think there's a probably uh a preconception about what we're like, and I'm sure some people fit those stereotypes, I'm sure they do. But as a general rule, I would genuinely say, you know, whether that's MHA or or another firm, they uh they will happily come and talk to you about what are the deals happening in your sector, what are the multiples, what are the KPIs that you need to track so that if you ever decided to do something, then you know you're ready. So all of them will all do that, and that that is not something that that they'll charge for because their view is well, um how can they ever have a chance of possibly working with you years down the road if they've never had the chance to meet you? So utilise that opportunity to to understand to find out, even if it's much more medium term and not off on the horizon.

SPEAKER_02 28:56

Thanks for your time today, Michelle. Much appreciated. For our listeners, please look forward to some more episodes that are due to launch very soon. Please check us out wherever you get your podcasts.