0:00:04 - Thomas
You ready, yep?
0:00:08 - Alex
Welcome, friends, to a very special episode of experience focused leaders. I have Thomas Smale, who is the founder and CEO of F E international. F E is a tech focused M&A advisory firm that specializes in one to 100 million a dollar exit sector. His team closed over 1500 deals with a combined value of over $50 billion throughout their careers and they worked with investors and founders all over the globe. Their experience goes back to early 2000s and they specialize in businesses and SaaS, e-commerce and digital media content categories.
So, thomas, welcome to the pod. Excited to hear your story. Alex, thanks so much for inviting me on Great. Well, thomas, you know obviously many folks myself. I would say don't.
Start was a business. The business was an idea. To sell it immediately, right, we want to. You know, we want to build a legacy, but some businesses have constraints. Right, they operate in certain markets.
Things happen to the owners that you know their financial situation changes and they need to exit the business. Describe to me what's kind of the like for small business owners. What are the biggest reasons that they're choosing to engage with you and to pursue the M&A exit strategy for their business? Or maybe you're doing recapitalization in other areas? And just for the context for everybody. Thomas and I met through a shared customer. He was, you know, has raving reviews from that shared customer and so you know, I'm actually here like super fired up to learn from Thomas, because while we are building a business for 100 years, I think actually a lot of our customers are built, you know, have a different focus and we love that and respect that and we want to make sure that they have access to ideas from Thomas and I think we'll go over to you on kind of how this could help entrepreneurs.
0:02:18 - Thomas
Yeah, so I think the first thing to consider is that every single person has to exit their business at some stage. That does not necessarily mean the business cannot continue, but as an individual you are, some stage will exit the business.
0:02:31 - Alex
Unless we're doing the potion of infinite life. Is that like yeah?
0:02:36 - Thomas
unless we're assuming that that could happen. It means that everyone should have some form of exit strategy, even if it's not right now. And also a lot of people have the plan of itself, which is fine, and often the best businesses are ones where the owner has not been doing things to get it ready, like just been running it as they want to run it for 100 years. That period might be, and often when people do decide to sell is because there's been a change in personal circumstances, financial circumstances, opportunity. But it might be how I've actually got a better idea. I have this new business which is doing, and it's growing, more than I thought, so I'm going to sell my current business. She says she's one of those three things.
A lot of people we work with and I always believe that every entrepreneur should have a specific financial exit goal in mind and if it's your first business, it makes sense to sell when you hit that level and hopefully that level is what I would describe as financial freedom or ideally, the level above that would be generational wealth. So you and your kids, if you have kids and your kids kids never have to work again if they don't want to be generational. I think financial freedom is probably a bit more simple than that. It's do you want to buy a? Buy a house to give some debt to pay off? Maybe it's an existing mortgage, maybe it's college loans or credit cards or whatever it might be. I'm being in a position where you and your spouse or your family, if you're married and have kids Also don't have to work again and just have that baseline level of financial security and then, with your next business and every entrepreneur, can build a new business.
There's not. I've never met anyone who has built a successful business, who's only ever been able to do it once. Then, once you sell your first business, you then create to the kind of financial platform where you can go do it again. I think a lot of people run businesses too long and never. I'm all for delayed gratification, so not taking every cent out of business as you go along, but I think it's important to get out, get some cash out when you can and offer an exit as best they do it. So usually the people we work to just very long answer your short question, but the short answer is people sell when they want to get some cash out of the business and often an exit is the best way to do that, and there could be many cash lists for that. It might be they've been approached by buyer, it might be family members, sick, it might be they have a new opportunity.
0:05:28 - Alex
There's lots of different things that cause that, but that's ultimately why people decide to sell Well, and you know we know the Sassi ecosystem really well and we support digital content folks as well. So obviously, in the world that we live in right now at the end of 2023, there's a little bit of a bubble bursting effect in in some of the kind of inflated valuations and the sort of the VC game that is the more popularly covered game in the press. So tell us, you know, how is that impacting your business? You've been like growing tremendously and the deal volume that you've been doing was an FV international. So what are you seeing now? That sort of the trends and you know in your lovely report that you produce that's emerging, that's changing the dynamics and making more businesses think about the exits or not think about the exits in this new environment.
0:06:26 - Thomas
Yeah. So I think again, the caveat is where a lot of the slowdowns been. This deals in in the, say, 100 million to multi billion dollar range. If you have a small business and it's profitable or has a path to profitability, there's always been demand for acquiring those companies and that has not gone away. In the US alone there's around $4 trillion in try powder with quite a few firms right now and while that's not necessarily all going into tech emanate, that's $4 trillion that needs to be deployed either investing into businesses or acquiring businesses. That right. So your 10 million dollar business or your $50 million business you built does not make a scratch on that that total amount. So context Big deals may have slowed down.
Smaller transactions really have not. Assuming you've built a good business when M&A has gone away at the lower level, this company's previously might have been losing money every month and a speculative acquirer might have come in. Maybe they were strategic or maybe they were borrowing money very cheaply and could make the deal work. So those deals aren't happening anymore. So if you're burning cash, it's very difficult to sell at the moment.
0:07:45 - Alex
Because, basically, the buyers are themselves under pressure to deliver profitability. They may not have as many resources right now as the funding environment has constrained. So also just.
0:08:00 - Thomas
Interest rates in most countries in the world are now higher, so it's more expensive to borrow money if you use debt to buy a business, which means that your required returns are higher. If you had $10 million in cash a couple of years ago in the US and you wanted to just keep it in, say, T-bills like Treasury bonds, your yield would essentially be nothing. If you do that right now so November 2023, your yield is somewhere around 5.5% and you don't have to do anything, so at the very least, you need to be able to beat that.
0:08:36 - Alex
The threshold rate is much yeah.
0:08:38 - Thomas
Yeah. So why would you buy a business for, say, 50 times multiple if the return isn't that? So a lot of people literally look at that simply. I call it, I describe it as spreadsheet negotiation. A lot of people just look at the numbers. Obviously there's more to it than that. If you can quadruple a business, it's irrelevant what you pay for it, because you're going to grow it and it doesn't really matter. So I'm of the bleacher.
0:09:02 - Alex
So strategic is still strategic, strategic is still strategic, but the opportunistic math is becoming much harder. It's exactly what I'm hearing.
0:09:11 - Thomas
And particularly the financial math is becoming a lot harder if you have a business that's not that profitable. If you're profitable and making money, those deals are still happening Exactly the same as they were two years ago. It's been essentially no change in demand for those, nor have we seen any slowdown at all. Buyers are just getting a little bit more disciplined. But buyers are also getting a little bit more creative, which means some of their billion dollar private equity fund. If we turned up with a $50 million deal that I put in front of them two years ago, they were going to laugh us out.
The Romans said, no, we're not looking at this, it's too small. But now a lot of these funds will be looking at. At the moment we have a deal. We're representing around $125 million valuation. They'll happily look at a deal at that level. Now, years gone by, they wouldn't say, oh, it's too small. We have to be deploying at least $250 million per transaction or whatever that might be. So a lot of these funds are coming down, which means if you have a relatively small business, say below 100 million valuation, there's a lot of demand out there for companies like yours.
0:10:16 - Alex
Got it. So this is really helpful. My take as an entrepreneur and maybe you could help me interpret this is that I get I'm thinking like four types of inbound outbound directed to me spam. So one is like people want to give me leads of competitive, competitive users. There is like offshore development shops that are going to me, there are lead gen services. And the fourth one is PE shops that look at our growth on some sort of whether it's G2 or another kind of parameters that they're identifying and they're kind of reaching out aggressively, trying to connect to the entrepreneurs.
So what's your take on what should entrepreneurs do when they get that sort of inbound interest? And some of it could be maybe we're a little bit on the more venture backed, but still kind of scrappy project kind of version of that. So it's attractive to PE shops. Some businesses could be smaller. They may get brokers coming in, guide an entrepreneur to what to do. Do you invest your time in building these relationships, taking an analyst or associate or VP meeting. You ignore it and wait until they engage you in around the time of a transaction coming closer. What have you seen the most successful entrepreneurs do? Was that level of inbound interest from PE shops.
0:11:53 - Thomas
I think overall it always makes sense to have a conversation with someone who's credible. I mean, as an entrepreneur, I probably get 500 cold emails a day, literally emails, linkedin, all sorts of different mediums of reach, and calls, whatever. So it does not necessarily mean replies all 500, but credible approaches are usually quite obvious when they're credible. So maybe off the 500 emails a day, I would say. It always amazes me, having been an entrepreneur for 15 years now, how bad outreach is. 99% of outreach is terrible, so you can tell very quickly what's good outreach, particularly when that same thing applies to investors or potential acquirers of your business. If it's like hey, alex, I'm John, I'm an associate at X Capital and we're looking to buy SaaS businesses, are you interested in a conversation? That's probably going to be a waste of time. If it's, hey, alex, I'm I'm Jonah, x Capital. I've been following your relay to journey for a while. I really like how you've built the product out and the integrations you have with XYZ. We recently closed the deal in the space with a company that specializes in XYZ. Typically the odd average deal size is kind of five to $10 million and we're looking for companies to generate at least $10 million in ARR. Are you interested in the conversation? If you meet that criteria, then that probably makes sense to have a conversation. Just replying to anyone who cold emails in it's probably going to be a waste of time. It's always worth having those conversations.
Generally speaking, private entity firms that are cold emails like that are not going to be the best buy of your business. You need to run a competitive process and get multiple offers on the table. I think where you do hear about some success there is if you have a true strategic acquirer and they come along and acquire you. That might make sense. I don't know your business that well, but that might be. Domesh at HubSpot emails you and says hey, alex, love what you're doing at relay two. This would be a great fit for the HubSpot platform. I think I use to find good use of it. Are you interested in a conversation about acquisition? Here's some recent deals we did in the space. You've probably heard of them and then cite some of the deals they've done. That kind of approach would make sense and you should have that conversation.
Strategic buyers often have the ability to pay more. That said, 99.9% of entrepreneurs will never be lucky enough to sell their business to someone who cold emails them. If you are ever thinking about selling, you actually probably need to hire an M&A firm to run a process for you and reach out to hundreds of thousands of buyers and get multiple conversations on the table. If you do get lucky and you get that true about interest, which is willing to pay more than market value for your business, I am very much unashamedly a capitalist. I always think you should take money and go build something else. There's no A, there's no shame in that and there's no limit to good ideas out there. Also, what I think a lot of people don't think about when they say they're not going to sell second time round. It's a lot easier because you already have a bit of reputation If you're doing some sort of cold email or contact, you're more credible.
If you want to build your business by going to speaker conferences, almost any conference will have you on stage. If you've exited your business for eight or nine figures. If you want to get investment, it's much, much easier if you've done it before. There's just so many things that are easier if you've done it before. Just that financial element. If you do not have the stress of how do I pay my mortgage, how do I pay my rent, how do I put food on the table for my kids, then I think that makes decision making easier as well. Sometimes taking a deal makes sense. If a good one comes long, it's always worth having the conversation. As a business owner, I think it's your kind of fiduciary responsibility to your company to have those conversations, but at the same time it's also your responsibility to run the business. If you're not planning on selling, you don't want to get distracted, spending 25 hours a week speaking to quite honestly, like random kids sat in a New York office calling companies trying to buy them.
0:16:32 - Alex
Well, actually.
So let's help entrepreneurs who are listening to this and folks on those entrepreneurial teams think about what can they do to increase their optionality, because obviously, like what Business School 101 will teach you is that if you don't have to sell your business, it's much easier to have a lot of attractive options that get available for sale right If the business is doing well, if you have a strategic, like you mentioned, that may increase your multiples from compared to what financial acquires may be interested in because of the potential synergies of the two businesses.
And so guide us a little bit about what do you see as the best entrepreneurs and the best entrepreneurial teams that are doing to create maximum optionality, and especially in this environment where venture funding may not be as easily available, especially at these later stages, and there seems to be a lot more premium on, obviously, profitability and tangibility versus, hey, I have a lot of potential, I have a big vision. I haven't delivered on it yet but, believe me, I will write type of stories which we've been kind of inundated with a little bit in the ecosystem.
0:17:52 - Thomas
Yeah, maybe this sounds low, but the simplistic but ultimately just needs focus on building a good business.
I think the worst thing you can do is come watch me speak at a conference on stage talking about valuation drivers which I'll often talk about and say, oh, Thomas said, here are five things to increase the value of my business. I'm going to go spend all my time just working on these specific metrics, but every business is different. Yes, there are certainly things that I can present and we have some of our data that says these specific things will make your business worth more. That doesn't necessarily apply to every business and they are not necessarily relevant to what you're doing or what your skill set is. So if you have the option of the, one of the things I talk about is reducing revenue churn or increasing net revenue retention. Yes, if you own a SaaS business or a software business, that's probably always a metric you should be focused on. But if you have also the opportunity to grow your revenue by 100% instead by focusing on a new marketing channel that's working really well, it's much better to just double your revenue of your business than increase your net revenue retention.
Yeah, exactly so. Making those margin approvals is great, but ultimately, to build a business that's sellable, revenue growth and just the absolute size of your business is important. It's much better to have a $10 million talking hypothetical $10 million ARR business with 10% revenue churn than it is to have a $2 million ARR business with zero revenue churn Because, yes, technically your business has lower revenue churns. That's great, that's the check in clocks, but the other business is five times bigger. So it's important to think about what drives valuation but at the same time, also focus on what builds a good business. The bigger business is, faster it's growing and more it's going to be worth. It really is as simple as that, and if you can do it a profitable way, that's even better. So, yes, there are definitely some metrics.
I could talk offline to any of your listeners and say, hey, here are some things specific to your business you need to focus on, but day to day, you focus on building a good business. That's ultimately something that someone wants to buy. No one wants to buy a business that's been purpose built, purpose planned to sell Like, hey, I built this, I launched this business two years ago, my plan was always just to sell it. Does that work? If you are selling a 50k valuation product on a marketplace that's kind of pre-built, you're making $500 a month. Will someone come along and buy your project? Yes, absolutely. Does that work? If you're selling $5 million or $50 million? Absolutely not. So you very much need to change the mindset and focus on building a good business. So that's, I think, my general philosophy there.
0:20:59 - Alex
This is really helpful, because I think one of the things that I found annoying in business school classes is they put a bunch of MBAs and they all start thinking about well, let's plan for the exit.
And I think there's almost how would I put it?
First, you need to have a suspension of disbelief a little bit and kind of just take that leap and believe that you can do something, create something out of nothing, redefine your space. Ideally, as you know, the businesses that are shaping and creating new categories tend to capture more of the value in that overall category, whether they go IPO or exit or whatever is the strategy. But I think those folks that are kind of writing the exit slides before they started the business that would worry me right, because it's sort of like kind of says well, when you have troubles, when you have challenges, you're going to take your eyes off the ball, you're going to sell quickly and it's not like to your point. It's not that you don't want to have the optionality and you don't want to keep it in the back of your mind that it may be not the perfect opportunity, but if you start with that at the very beginning, it sounds like you'll make a bunch of suboptimal decisions that will destroy your M&A opportunity or growth opportunities. Is that what I'm hearing, thomas?
0:22:24 - Thomas
Yeah, I'd say that's a pretty fair reflection. So it's definitely important to think about. You definitely should not go into a business and say I'm never going to sell it, so I don't care. You also shouldn't go in and say all I'm thinking about is how do I make a million dollars as fast as possible? That doesn't work.
But so the reason you should definitely not build your business without any plan is then you're essentially just relying on luck. You're relying on a buyer coming along and being like hey, Alex, I'm going to buy your business, Love what you've built. It's just I've just raised a billion dollars from my company. It just so happens. We need to make an acquisition like yours. We have cash burning a whole new bucket. We want to buy your business.
Does that happen to some people? Yes, does that make you kind of famous in the world as successful entrepreneurs? Yes, because you can go and talk about how you sold your business for a bunch of money. But will that happen for the majority? Absolutely not. So you shouldn't go out there with no plan at all. But also, I think if your entire focus is just building a business you can sell, it's not necessarily make some optimal decisions. I think you just build a bad product and you cut corners. You're like, oh, maybe we shouldn't hire this extra person because that adds expense and then that will reduce our multiple when we sell. So whether we just not hire them, or whether we not pay bonuses this year, or let's not go to that conference, all of those kind of things, I think there's a fine balance between not thinking about it at all and thinking a little bit.
0:23:54 - Alex
Yeah, and Tom is like one of the things that's your on your radar screen is that you probably have one of the largest deal flows in this sort of SMB kind of segment, like broadly speaking, and some of those are not that small, right, like the exit value that you work was, but it's sort of you started was a small or you're doing much larger opportunities now. So what do you see? We've talked about some of the flaws in thinking that could lead you a little bit astray. What are other things that you see that are like deal killers or kind of opportunity killers for entrepreneurs? Right, like, if you just planned a little bit more in advance or kind of just had some advice from a person was pattern matching over your caliber, they could potentially avoid.
0:24:47 - Thomas
Let's say the number one thing we see where someone has built a unsellable business is they had a sellable business, they had a great business and then, for whatever reason, the business has started declining and they said, oh, we're never going to sell it, it's fine, it's doing great. And a lot of businesses particularly on not necessarily luck. I'm not really a big believer in luck. I think you may grow in luck, but some businesses will just do well early on. Don't need much marketing, don't need much investment, but that's just fine. You find a good marketing channel, no one's really competing with you and you can grow quite quickly to say, a couple of million dollars in a row. I've seen many, many, many companies that have done that. Then what happens is to say, well, this is great, I'm making a bunch of money. I don't really want to ban your team, so I'm not going to bother hiring anyone. I assume the business will just keep going. And then what often happens is the business starts declining.
When the business starts declining, it's much harder. My personal experience is it's much harder than people think to turn a declining business around. Even if you're declining 1% year on year, that can often be really hard to turn around and could be a disproportionate amount of effort, particularly where the business owner has fundamentally underinvested. So they've not invested into marketing, so their site hasn't no organic traffic or no social media following, no paid ad campaigns at work or whatever it might be. They don't want to manage any people. So there's no team, there's no developer. It's entirely reliant on the founder to do the development work. They just have one marketing channel because it worked for a while and now it stopped working.
Those businesses are really difficult to sell and it's just because it's been left too late. So once it starts declining, that's the hardest type of business to sell Not necessarily impossible, but you get a significantly worse valuation, significantly less by demand for businesses declining versus growing. And that's the number one thing we see time and time again. We still offer free valuations to anyone that comes to us. So if you have a company that's a fit for us, we'll put together a valuation for you. Today we then spend years and years often following up, checking in, see how the business is doing. The number one reason why businesses end up not selling or the founder never comes around is because the business has started declining and they don't really know how to get it back on track. So say that is not the only reason we see, but probably the primary reason we see the businesses that don't sell or aren't sellable ultimately, so this is really interesting.
0:27:38 - Alex
So what you're describing is really it's like plateau that kind of starts like even over time declining as maybe competition enters or things get saturated and, if I hear you, the plateau may happen. But it may happen. It depends on which size of the business you're in. If you're used up your network or one channel, that could be one of the reasons. Maybe you haven't adjusted your ideal customer profile to expand and grow Could be another reason for some businesses. But I think what I'm hearing is, if you have, if plan A is working, you should be thinking what's the plan B for the next phase of growth, not wait and just milk that plan A that's working right. Always have the next level of growth that you expect for your business to avoid that type of situation. Is that an accurate kind of thing that people could start doing?
0:28:39 - Thomas
Yeah, exactly right. I think it's easy to get complacent, particularly early on. I'd say most people I see that happen on their way to their first million. I'm not saying the first million is definitely the hardest, but in other ways it can be the easiest because you don't necessarily need a team or you can get away with a very small team. You don't necessarily need multiple marketing channels. You don't necessarily need particularly good metrics like churn, whether that's customer churn or revenue churn. You don't necessarily need to optimize pricing, you don't have to be selling enterprise plans. So you can get to a million. And a lot of people say get not necessarily cocky, but they get a bit complacent. Well, this is great. It's just going to continue growing to 10 million ARR and I'm not really going to need much, much more. But the reality is almost no businesses get 10 million ARR with that same profile.
0:29:34 - Alex
So they need to change their strategy, change their team. You have to invest.
0:29:38 - Thomas
And then where a lot of people fall down and this is what happens is you get lifestyle creep or like spend creep. So hey, I'm now making 30,000 dollars a month personally. You find a way to spend 30,000 a month personally, buy a new car, you go on a nice vacation, you buy a nice house that goes away. And then they're like, well, for me to grow I need to hire someone. But then I only have 20,000 a month personally, so I can't afford my mortgage. So actually maybe I'm just not going to invest in that person. Or if they decide they want to, your business then gets.
This economy is a scale. So people think, oh, it gets kind of cheaper to run your business relatively as you grow. But my experience is actually the opposite because, speaking from FE perspective, for example, when we were five people, you don't need HR, you probably don't need an office, and if you have an office, you don't need an office manager, you don't need a full-time accountant. There's a lot of roles that administratively have to exist at eight figures revenue, that definitely do not have to exist at seven figures revenue. So there's a lot of new expenses and a lot of founders we see are reluctant to invest what's needed into growing their business. They hit this plateau and they don't get past the plateau because they've got comfortable with their lifestyle. Usually the thing it's not necessarily costs, it's the idea of managing people. If you can learn how to manage it Because it's a technical founder.
0:31:11 - Alex
They're kind of a little bit like they want to stay in their comfort zone. Exactly, that's really common.
0:31:16 - Thomas
It's not even necessarily technical founders. Lots of founders don't like the idea of managing people and I'd say if you speak to, if I go to a peer event of entrepreneurs in the tens of hundred million revenue range and we share our biggest challenges, I'd say almost 100% of people or founders of that level or CEOs of that level they're challenging people. So hiring, recruitment, retention, training, all of those kind of things, it's not oh, how do I do marketing or how do I build product or how does pricing work? You probably nailed it at that level and if you haven't, you're constantly developing it. It's always people, whereas if you are someone at million dollars kind of a hundred thousand to a million dollar revenue what's your biggest problem? Almost always marketing.
0:32:09 - Alex
Yeah, that's fascinating.
It's interesting to align with that data point.
I think there's been one class at the business school that was kind of jokingly called a touch of feely, but it was kind of about, you know, interpersonal dynamics and focused a lot on the people issues, whether it's hiring or building a team, and it was not seen as a class that you would celebrate in your kind of thinking the most about in your five year reunion, but it would be the one that you would think the most in your 10 year reunion and 15 year reunion and 20 year reunion.
Because as you're growing, whether it's an entrepreneurial business or a larger business at some scale, the people issues are, like become more and more prominent and so the more skillful you are at selecting and motivating your team, the bigger it is and so that's. But that's a skill right, Like in a lot of like at some point, like some people that are kind of entrepreneurial by nature are a little bit contrarian and maybe you know, have not exercised that muscle in some contexts as well and kind of have thrived by their contrarian nature to a degree. And so here you have to kind of how do you build a community? How do you build kind of a larger, scalable organization becomes a challenge. Is that something that you see as well?
0:33:36 - Thomas
It also just takes a long time because you have to build EQ. You have to learn how to deal with people and manage people and they will have a personality to you because you're the one that owns the business. I say it's for me personally. It's one of the hardest things Not never been able to like master it. If you said someone I need you to learn how to be the best manager in the world, you have six months. That's basically impossible Because you have to learn EQ. If I said you need to be the best person in the world at Facebook ads, you have six months. That's it almost objectively possible because it's kind of like technical. You can learn that as a skill.
But management just has so many different things and there's also and obviously there are paydads as well, but there's variables outside of control. Sometimes the best person that worked for you, you could be the best manager in the world, but they could just quit because a competitor comes among an officer's doubles of salary and people say it's not all about money and money it's not the only motivator. Particularly, if you study business at school, they'll tell you money is not the sole motivator, but often with employees that's where people leave. It's like well, I got paid more by a much bigger company, I'm going there. So sometimes a lot of these things outside of your control, so you can never really perfect it. It just takes a long time. So I always think it's a challenge. But it's one of those things that think that early you start for hire people and manage people and figure it out, the better.
0:35:14 - Alex
If you never do it, then you're never gonna build a 10-minute programming business and it's a query skill and I think I want to throw it in and you could probably have more pattern matching that I do. But I certainly think one of the things that happens when you become a parent is that, for example, it forces you to grow up because you can. A lot of entrepreneurs are impatient. That's why they want to change things, move things, but being impatient with a kid is pretty, is pretty inefficient a parenting strategy, and so it forces you to look inside yourself, see what's triggering you, what's going on, because you can't blame the kid and that's like some maturing process, right Like. It takes kids to help parents grow up as adults, to become less address their own childish hang out from their childhoods, and maybe that's an ongoing life process.
It does feel like a little bit of the journey of entrepreneurship forces you to address these sort of things inside yourself, right, like, how do you deal with certain fears, certain preconceptions? How do you overcome challenges? Are you finding that this varies by some factors? So like, do you see differences between entrepreneurs who are parents and not? Do you see differences, maybe, between venture backed businesses and how they approach things versus the ones that are bootstrapped? Well, you know, have you still like? Because, again, I think you have the probably the most fascinating prism of working closely with founders of so many businesses at different sizes. You know, have you seen these things that don't make it in the report, right, that are a little bit more kind of personality connectors.
0:37:02 - Thomas
It's a good question. I don't know if you've ever thought about correlation between being a parent and being a good manager. My immediate reaction is I don't think there's much correlation. And I don't have kids I'm not really one to talk about. I think a lot of people are just bad parents. So just because you are a parent doesn't necessarily make you a good one.
Translate to being a good manager, and I'm sure also that all of these things could be true. You could be a bad parent, a good manager, and so I think a lot of CEOs, for example, like stereotypically a bad parents, not really around that much, but also there's some CEOs and business owners who are fantastic managers and probably also great parents, so I don't necessarily think that you haven't found that connection.
My immediate answer would be no, I think, between venture founded and self-funded. I would say somewhat anecdotally, if you have outside funding, I'd say you're more likely to take objective decisions when it comes to your team because you're accountable to your investors. In your board it can be a little bit less emotional. So if you've got that person who you know you need to let go in your bootstrap self-funded business, maybe you won't do it or you'll procrastinate a little bit because you don't want to make that decision, because it's like oh, it's your baby, it's your business. But in the venture funded company you know you have a board meeting with your investors and you have to explain why someone is underperforming. If you don't fire them, the board are gonna fire them for you and they're probably gonna fire you as well in a lot of cases. So I think people tend to be a little bit more objective and also, if you've raised money, generally that means your growth expectations are higher than in a self-funded business. So often you need to be a little bit more, not necessarily ruthless, but you just need to hire more people.
It might be that the equivalent self-funded business owner is planning to hire 20 people next year to hit their goals and the VC funded company needs to hire 200 people. It's impossible to hire 200 people if you're planning or managing all of them yourself and you're gonna into all of them yourself, you're gonna do all the recruiting. That's physically impossible. You need a HR or like people function within your organization. 20 people, that's a lot bit different. So I'd say, anecdotal at least, vc funded founders do tend to approach it a little bit more objectively, but I don't necessarily have any data to back that up, though. Just be my immediate thought.
0:39:31 - Alex
And so generally, when you're VC backed, you'd some degree like this accountability that you mentioned, right, whether it's to board or expectations to return the money to the investors.
What do you think it kind of does when it comes to exits, right, like, because obviously right now a lot of companies have raised at attractive market valuations? Your reality may be setting in, like you said, the life changes, entrepreneurial journey changes, and are you seeing patterns where investors are preventing certain deals from happening? People don't like to talk about that typically, so, without naming names, what are you seeing and what would be kind of the warnings for entrepreneurs who maybe don't have a VC scale billion dollar exit business right, but have a good business or passionate about it? Is that is getting VC's you're finding, helping them, hurting them in this particular environment and any sort of types of VC arrangements you see are particularly damaging to entrepreneurs and, frankly, like the scalability of the company, the survival of the company or the kind of finding a home for a company and its customers, because a lot of entrepreneurs want to find a good home for their customers as well.
0:41:01 - Thomas
Yeah, I'd say on average, the VC involvement will hinder a company and the current environment we see a lot of businesses where. So we talk about like how the exit environment has changed over the last couple of years and good businesses quantity like valuations have been quite stable hasn't really changed a huge amount VC funded value. So the valuation you raise funding at has completely changed. So it might be I don't have a huge amount of experience in this space but it might be on the same terms. A couple of years ago to exit your business it would have been worth 40 million and today it's still worth 40 million, but raising money. You might have raised money at 100 million, but today you're raising money for that same business at 30 million valuation. So it's a drastic difference in valuations. And where VC's and her businesses is, they've invested at a high valuation or valuation more than the business is worth. The business itself is great. So if it's self-funded, 100% control from owner they can have a shell exit that business, it would be great.
Then the VC funded. Let's say you've raised at a 100 million dollar valuation your business is only worth 50 million. So objectively you still have a great business, still a 50 million dollar business. You can't sell it because often the terms you have with the VC's means that the founders in those companies are walking away with nothing. So they generally might as well stay around, get paid there salary, find other ways to make money and then that company just won't exit. So there's a lot of great businesses at the moment that can't exit because of the valuation to raise. That that's not necessarily the fault of the VCs, but it's kind of just the model, it's just the model.
It's the VC model, it's your point, and it's difficult. We see a lot of companies at the moment coming through that we would love to represent, we would love to sell, but they're just not viable. So something needs to change. I don't know what that is, but seems like the new generation of companies raising money in the current market so say 2023, where valuations are let's say the word is more realistic. Valuations are a bit more reasonable, a bit more realistic. I think those companies are actually going to do a lot better over the next five to 10 years because they're going to have more exit options, because that company worth 50 million, instead of raising it 100, they raise it 20. So if you exit a company 50 and you raise it 20, in almost all cases that's going to be a profitable exit for everyone involved. But the challenge, obviously with VCs is often the scale of exit they're looking for is significantly larger. They invested 20 million valuation.
They need at least 200 to be worth it. So your 50 million dollar exit. I would say that's a fantastic outcome. I think a lot of people involved with it, but the VCs sat there like, well, essentially, essentially, this is not returning my funds right. And so what?
0:44:09 - Alex
does this do for companies? Because I think one of the things that we've noticed, we started with enterprise customers and we bootstrapped the business and it was really interesting that some companies they said, well, no, you need to go and get validation from these VCs, right, so we could do business with you, right. And eventually we found ways around it and they kind of believed in the model or they had the pain big enough to overcome that. But it was a really interesting surprise for me because I could sort of see what you're describing, which is, once you get on the VC model, you're a lot more dependent on the VC as a customer, almost because a customer of capital, and you may do things that are not necessarily optimal for that customer and you may kind of go hypergrowth. You may get away from enterprise customers and serve the whole market trying to go for a much bigger market right. You will do all sorts of things to fit into the VC growth model. That may not be the same motivation, may not be the same pace elsewhere and again, sometimes it aligns perfectly right and sometimes what's great for the VC is great for the customer, great for the business. It does work well if you have a product market fit and that you could scale and grow.
But there's all these buzzwords about hyperscaling, that a bunch of businesses that didn't have good economics started hyperscaling, spending $10 to get $1 in revenue and just kind of like that was rah, rah, rah and everybody was celebrating it. Obviously it's not in fashion now, and so guide us a little bit of like, what is an entrepreneur right, like you're kind of a steward of your mission. You really have, in my view, your premise. You should be to the customers who place their trust in you, and then investors are kind of there to support that and grows for that and ideally it's aligned. How do you maximize your ability to kind of maintain that longevity, so to speak, for the customers, even after the business gets an exit?
Right, because you're seeing these right Like in, probably. I wonder, you know, like what happens to some of these businesses? Do they go on, you know, is there better home for the customers inside the new company or it's just kind of like a factory hire or some sort of a tuck in, you know, and I think for me like it would be non-starter to put our customers in a situation where they get worse off from some kind of exit and I wonder if a lot of entrepreneurs feel like that at the beginning but end up making suboptimal decisions that lead to that down the road.
0:46:52 - Thomas
Yeah, I think, firstly, you never know the best plan, that acquisition in the world could be a terrible outcome for customers and the team. Or the most chaotic acquisition that should never close and manages to get over the line could be a fantastic outcome for everyone. So over the year our team was closed over 1500 deals. I've given up trying to guess which ones are going to do best in the future post acquisition the ones I thought would be oh, I'm not sure about that one. And now the biggest businesses and the ones where, like I thought they would do really well, maybe they're not doing so well. So, firstly, you never know.
Secondly, fundamentally, if you're the founder of business and you're selling, you think, yes, it's important to do right by your customers and your team, but the responsibility is also to yourself and your own family. I don't think you can be. Think, where founders go wrong is if they're making preconceptions around the decisions the acquirer is going to make and preempting whether or not they agree with that. So maybe the acquirer is going to come in and increase prices and the founder says, oh well, I don't agree with increasing prices because my target market is small business owners and they haven't got any money. So I think preempting what the buyer is going to do is not a good idea. Secondly, if you are going to sell your business, you need to accept the fact you are selling your business. It's no longer yours anymore.
Can you do things to protect your team? Definitely. So all the time we will negotiate agreements where the acquirer has to keep the existing team for X months post sale. Maybe they get bonus on exit, maybe they get severance if they let go quite quickly, we can always make sure the team stay around. Often there'll be covenants around existing customers as well. So if there's a performance element of the deal, so any sort of future payment from the buyer to the seller, often the buyer will have certain conditions they have to stick to. So if there's like a revenue share agreement between buyer and seller, then the buyer can't just increase prices overnight on all the customers in case that doesn't work out. So a lot of this stuff can be negotiated upfront. I always think and this would be an entire new conversation negotiation is a balance, as a founder.
I think you have to decide what matters to you the most. And if you say everything matters to me, I care about these 150 things, then yes, in your textbook world of running a business at business school maybe that works you can have all of these demands. But if you're selling a business you need to be really, if you actually want to sell, you have to be realistic and be somewhat balanced in the negotiation to get a deal done. And that might mean there are certain things to care about, certain things you don't. If it being super practical and kind of cut through it about it Got it, yeah, but I mean post out, you never really know what to make.
0:49:50 - Alex
Got it Well, thomas, you mentioned if you're selling a business. So if somebody's thinking about selling a business at some point down the road, how can they find you? You know, you know I love your content. You know where can they find your thought leadership or connect with your team.
0:50:05 - Thomas
Yeah, well.
I mean it's the next time you're at an event, which I know is where you found me and we're obviously now both on other sides of the world that we've gotten into each other, in Harris a couple of months ago. Go to the FEScom website. Like I said, we offer free evaluations to anyone thinking about potentially selling a business. That doesn't have to be today sometime in the future. If you want to buy a business, you can do exactly the same. You can sign up for buy lists. See the businesses we're representing. Follow us on social media, like. We're active on most of the channels. Same with conferences and events. We travel a lot, so you can usually find our team out and events somewhere in the world. So but yeah, feel free to reach out. Happy to answer any questions, particularly if you mentioned the podcast specifically. I'll know to get back.
0:50:51 - Alex
Amazing, Thomas. Thank you so much. It's been great to have you on everybody. I learned a ton from this conversation. I hope you've benefited as well. Whether you're planning to sell your business or not, this is like essential business 101 class that we just received from Thomas on the world of M&A and founder thinking about that. So thank you so much, Thomas.
0:51:12 - Thomas
We wish you a lot of success with your business Thank you so much.