Stephen Brogan – The challenge of buying owner-operated businesses

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Julie Wilkinson  00:03

Hi, I’m Judy Wilkinson, and I’m a chartered management accountant. And I’m excited to be launching the build and exit podcast. This podcast is for business owners and entrepreneurs who are looking to expand their business portfolio by acquisition or at some point in the future, when to exit their business. We’re going to bring real life stories and experiences of people who have grown by acquisition, who have exited their businesses, and other areas of business such as funding and cash flows. So there’ll be lots of opportunity to learn different areas of business and how you can in the end, transition your business from a lifestyle to an asset to look forward to seeing you soon. Hi, and welcome to the building exit Podcast. I’m Judy will concern and I’m the owner and founder of orcas in accounting solutions. We specialise in business acquisitions and Exit Planning. And we started the podcast to give tips top tips and guidance to people who are looking to sell their business or people who are looking to grow by acquisition. So I’m really excited today to have Steve Brogan as our next guest. Hi, Steve. Hi, Julie, Steve as be running his own entities for about 15 years. And he is the owner and founder of Ascot group, which he’s been part of for three and a half years. And through that entity has transacted in acquisitions. So I’m really excited to have you Steve, I think you’re gonna give great tips for our listeners today. So first of all, let me hand over to you to give a little bit of a background about yourself.

 

Stephen Brogan  01:34

Okay, so Steve Brogan, I left corporate 15 years ago to start my own business or drinks wholesale group called drinks 21 group, about 10 years later, I wanted to get back to a passion of mine is something that I’ve done professionally before, which is mergers and acquisitions, and co founded Ascot capital with Steve Pratt, three and a half years later, we’ve bought five businesses, we have well over 100 staff and a thriving group. But that has come with some some very interesting learnings and challenges that we’ve come across along the way.

 

Julie Wilkinson  02:12

Yeah, so with that, I think a key topic we’re going to talk about today is team structures. Because I know you’ve mentioned to me before about some of the acquisitions you’ve taken all have had good management teams in place, and others maybe didn’t have quite as good. So something I see quite a lot of acquisitions when we work with people is, you know, who are the teams going to run the business? Because like, we always say investors want to buy an asset, they don’t want to buy a job. So I suppose if they’re looking at businesses, how, how are these people in their due diligence process gonna work out? Do we think it’s got a good team structure? And what money might they need afterwards? So let’s start with good. So I know you’ve said you’ve bought a couple of businesses that you think did have a good team structure, what what do you think made up that foundation?

 

Stephen Brogan  03:01

I think, I think on the best experience we’ve had is where the where the vendor, or the principal shareholder, you know, created a structure where he was already relatively hands off in the business. Yes, he controlled the finances to a degree, and then the investments, but the day to day management was already delegated to, you know, really capable person. And that person had some equity in the business as well. So we’re very motivated. And so when we came to take over effectively, we stood in the majority shareholder shoes. And there was very little or no uplift for for the staff. You know, the, the minority general manager was very motivated to come as part of our group, we made sure that he got the right incentives to stay with us. And he’s, you know, he’s used the fact that we’re a bigger scale player to, to grow his business and, and really motivate his staff. So I suspect, and I hope that the vendor thinks he’s got a good deal. We’ve got an excellent deal, because you know, the business is performing exactly as we thought it was. And I think we’ve invested nicely behind the staff, because we had a very motivated General Manager to, you know, to deliver the plan that we wanted to. Yeah.

 

Julie Wilkinson  04:23

And do you think I mean, I don’t know if he ever talked to a seller about it. Do you think he had planned to exit? So do you think he had set it up like that? So it would make it easier excerpt.

 

Stephen Brogan  04:36

I think, I think that was probably, yeah, he was planning for at least a couple of years. I would suggest that, you know, with COVID and the in the industry that we’re in, in a COVID was very positive period. So he had a he had a COVID bounce and probably took that opportunity to to accelerate his exit. But yeah, it was definitely clear plan on his part to to make sure that You know, he wasn’t required in the business post sale. And, you know, for acquisition vehicles like Ascot capital, that’s, you know, that’s probably the better way for us to work, we want to get in there with our own teams, and our own people to, you know, to invest in our asset. And often, you know, vendors, you know, see see changes as an undoing of their lifetime work. And that’s not what it’s about, really whether to grow the business. So the fact that he was ready to exit and exit quite cleanly made it a really, really easy acquisition for us,

 

Julie Wilkinson  05:34

as sort of founders and CEOs. I know, you’ve got a few other people as well, did you have to do much work yourself in that business? Or did it actually run? Well, from the day one of acquisition, whether that be you or another, someone you put in that you paid on top of the current staff level?

 

Stephen Brogan  05:53

No, I mean, you know, we we, as directors managed manage that business directly. Strategic input only, you know, operational input, very, very limited. I think the GMs be motivated by that we’ve invested in, you know, some, some quite quick wins around, upgrading it, some cosmetic infrastructure investments in making sure the retail stores were modernised, but fundamentally, you know, it’s been a, it’s been a super investment for for us, and very little operational stress. And that’s, if you’re, if you’re looking for that kind of investment, then make sure that you’ve got that management team ready to go in there. Already in there, if you if you’re looking for that kind of relatively passive investment. Yeah,

 

Julie Wilkinson  06:44

how often? Are you reviewing the finances, then in that business? Are you doing it sort of weekly or monthly?

 

Stephen Brogan  06:51

So we have a monthly monthly financial review. All the businesses have certain KPIs that they’re measured, there’s a budget, here, we have a group F D, that, you know, obviously sets those targets and budgets, and manages the, the financial reporting side, and then we sit with this GM on a monthly basis. You know, subsequently, now we have a group MD in place. So, you know, he reports to her. And, you know, so my, our role as founders is even more hands off than it than it was. So, yeah, we’re obviously monitoring it, but we’re trusting the right guy to run the business and do and do a great job and continue the growth that he’s already put in there for us. Yeah.

 

Julie Wilkinson  07:40

So So that sounds really good. So that if we reverse flip it and look at one that you’ve bought, that maybe didn’t have as good team structure in place? What do you think the differences have been?

 

Stephen Brogan  07:53

I think you could probably list two or three, is that is the vendor really ready to sell? Or does the vendor still want to play an active role? And if if they do want to play an active role, how receptive are they to, to change? Because if we’re, we’re building a group, we were trying to harmonise processes, policies, procedures, strategy, culture, if you’re buying up a number of businesses in the same field, clearly, they’re going to have different cultures. And in order to achieve those objectives, you’ve got to get beyond one vision. And so is that vendor who is staying in prepared to buy into the new vision, genuinely, and potentially have to compromise on some of the things that in the past, you know, they, you know, they wanted to do, but they’ve sold their business so they can no longer do it? And if And invariably, my experience is that’s quite challenging for vendors. They don’t like to see somebody else coming in and changing, changing the light bulbs, so to speak. And you know, that in that way that can upset morale with staff when they see that point, you know, an owner is no longer happy, despite selling their business. And so we’ve had an you know, we’ve had experience where, you know, an owner was particularly unhappy, wanted to leave, we allowed him to leave but still wanted to talk to the staff. And we’d write to us periodically, saying, I think you should be doing this, but he sold his business so so in that regard, I think it’s important that you’re very clear what your your expectations are of that vendor and going into the negotiation, not at the end. So if you want to run the business in your own way, and you don’t want any input from the vendor, then I think it’s important that you clear from the get go that there is a very quick exit Wait for that person.

 

Julie Wilkinson  10:02

And so in that scenario, then this is more where the owners still quite heavily involved in the day to day pre sale. More than like the scenario where the general manager has already. Yeah, they

 

Stephen Brogan  10:15

were running the business, they were the glue that held a lot of that business together in some regards. And although they wanted to leave, because they didn’t feel like they could contribute to the new group, when they did leave, there wasn’t the management structure in place that we talked about earlier, to pick up the slack. So performance, you know, dipped in the short term. And, you know, staff was still heavily influenced by that, by that vendor in the background. So yeah, it became a, it became a combination, where in the end, we’ve been, we’ve had to change all the management in that, in that particular business, because no one could move on.

 

Julie Wilkinson  11:06

So you still managed to do it, but I’m presuming you’ve had to have a bit more investment in it, because you’ve had to replace and maybe more retreatment V, the

 

Stephen Brogan  11:15

time in, in resolving that for myself and the other the other shareholders has been significant return on that investment, therefore, lower, slowed us down in terms of further acquisitions. But at the same time, you know, learns, learn some lessons in terms of not every acquisition is the same. And if you’ve got, you know, if you if you, as a buyer, have got a particular goal in mind, you know, how you how you plan your people needs to be a key part of that due diligence. Yeah,

 

Julie Wilkinson  11:53

so if someone is looking to buy, and they’re trying to identify as part of the due diligence process, you know, how active is the owner? Operator? What, you know, is this, a key question that you think they could delve into to try and get that information?

 

Stephen Brogan  12:10

I think, I think with effort, effort, SMEs, even just looking, let’s see, let’s walk through the org chart, let’s walk through your key people. At some point, the key people need to be aware that there’s a sale, it’s very difficult to do this all clandestine. And you would interview as part of your due diligence, you know, the two or three key people are going to run that business, I suspect. And where we’ve done that, it’s worked really well. And in the example where we didn’t because it was a sale that was done through COVID. Because we expected, perhaps optimistically, the vendor to stay longer. It didn’t work out for us well, so a deal is not just about the balance sheet, p&l, the deal structure, making it a bit more three dimensional and get underneath, particularly when you’re buying family businesses that have been run for a generation potentially by one person or or a family. Understanding that culture, understanding, is there any key people that can be promoted, or already actively in a senior management position that can be embraced in the new in the new post sale team? I think he’s critical.

 

Julie Wilkinson  13:29

Yeah, yeah. Cuz my last podcast, I had Rachel caller who does his own house of HR. I was we were talking about people there and the contract side of things, because I see so many acquisitions where even the seller has promoted the guy that’s been there 15 years, which is great, because they’re committed to the business. But sometimes it’s do those people have the skills to run it. And also, often, they haven’t even got the right contracts in place. And the and the, and the law legislation being followed. So they’re when the buyers habit can cause them problems post acquisition as well, especially when they transfer and to pee and things like that. Do you do HR due diligence as part of your deals?

 

Stephen Brogan  14:09

We do. But it’s not at the level that you would want for, you know, the scale of business that we are. And so you’re going into a lot of these acquisitions, accepting that, you know, what’s good for 5 million businesses isn’t necessarily good for 30 million pound business. And so you have to accept that there is going to be some work around that that area, potentially. The you know, if I was if I was advising people selling their business, then, you know, getting getting all your employment contracts up to speed and having clear roles and responsibilities for your staff. Even if you have to invest in an HR consultant to get you there. We’ll make that post sale process a lot easier. I mean, often a lot of these deals are involved deferred consideration or urn out where the vendor will want to maximise the ongoing profitability of the business, or the way that’s going to be achieved without the vendor being there is through the people. So invest in getting the team to the best possible point, in terms of motivation in terms of clear goals and responsibilities, and a clear structure chart. So that post sale new vendor in people can carry on doing their job in the way that they were doing it before. Yeah, because I

 

Julie Wilkinson  15:36

know I mean, we we help with financial results DD. And the reason we do both is, so like, one of the questions I mean, often the seller will always say, Oh, I don’t do that much in the business. That’s what 10 They’ll say a lot of times top level, but when you actually delve into what they do, they do a lot. So like, as an example, one of the things we see a lot is who prices product, you know, services or products. And often it ends up being, it’s in the in the seller’s head, there isn’t a quotation form. So things like that. I mean, if you don’t have a actual quotation form that other people can use to price, then the seller is actually having quite a large impact in the business because they’re basically the decision on the margins. And so we then think about what impact does that have to Financials? Because there is, well, will someone quote correctly after acquisition? Because if it’s in someone’s head, how do you know it’s right in the first place, but also who will do it? So you can’t always fix everything? Preact? To be honest, because you the business you buy in is where it is, you have to make that you know, sometimes you have to make the call, but I think it’s important to know, the potential cash impact of that. And also how, look, how long will it take to implement your own strategies? I mean, did you find that in yours? Did it take longer to implement strategies, and the one that had a poor management team than the one that was running more without the vendor after acquisition?

 

Stephen Brogan  16:53

Yeah, 100%. I mean, we, you know, we spent the best part of 18 months, you know, making sure that we just had the right people in there, the right structures, the right basic processes, business contracted quite significantly. So yeah, whereas we’ve actually done what we should have done in in a successful business, which is brought our buying power, our marketing skills to grow that top line. And so then we have we’ve grown double digits in that business year on year with in a recession. So, you know, outstanding effort by that team. And we’ve contracted significantly in the other one. Because, you know, we’ve been firefighting on the HR front. Almost since since we bought it. Yeah, as

 

Julie Wilkinson  17:47

interested isn’t him. So? Well, thanks for your insight, Steve, it’s been really interesting. So, I mean, what’s the long term goal for you now view, have you got a future plan for the acquisitions and what you want to achieve personally.

 

Stephen Brogan  18:03

So first got capital, we’ve got at least one further acquisition lined up for this year, we’ve been very interested in this theme we’ve been very clear with with our expectations of the vendor, in terms of their role post deal. And when they’re happy with that, so everything has been very clear and transparent upfront in terms of their role, and time that they will stay in the business thereafter. And then we’re probably looking to, you know, to do at least two a year, for the next couple of years. Our target is to we’re currently 12 to three counters in our in our pallet or division called total group. And our target is to get to 25 in the next two and a half years. And, you know, see where this journey takes us from there.

 

Julie Wilkinson  18:52

Okay, so are you so if anyone, are you looking for off market deals, if anyone needs to contact you and the best to come through LinkedIn or?

 

Stephen Brogan  19:00

Yeah, so LinkedIn or Ascot, capital.co.uk, you’ve got all our acquisitions on there. You can contact either myself or the co founder, Steve Pratt, Steve is responsible for the, you know, the acquisition side of the business. So yeah, if there’s off market deals, or people even looking, thinking about selling, you know, potentially just wants a little bit of help, then, you know, I’m sure we can we can give some help to somebody looking to sell or, or even someone looking to buy if that’s, that’s what we can do. But definitely looking to keep buying in this space. I think it’s potentially very lucrative and it’s a great sector to work in. So you know, really enjoying diverting from drinks into into the construction industry has been good fun.

 

Julie Wilkinson  19:49

Good. Well, thanks so much. And thanks to all our listeners, I hope you’re enjoying our podcasts. If you really liked them, hit the subscribe button or rate and review us on Apple. So more A listeners can find our show. And I hope to see you again soon. So, once again, thank you so much for taking the time to listen to our podcast. I hope you found it useful. If you think there’s anyone else in your network that might benefit from our podcast and please share it with them even just click the link and send it to them, or send it in a Facebook group or other social media channel. Don’t forget to subscribe. So other podcasts come to you directly as of when we launch them. So I’m really looking forward to seeing you next time. We’ve got some really exciting things coming up. And we’ll see you again soon.