Seize the day
Tuesday, 23 October 2007
Last Updated: Wednesday, 24 October 2007
Guy Sigston of recruitment company Lloyd Morgan tells Amanda Gome how he survived a cash crisis in 2002 and sold the company recently for $13 million. He explains his strategies and about his audacious new venture.
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Guy Sigston, 41, is about to receive a cheque for $9 million. He has just sold his 70% shareholding in recruitment company Lloyd Morgan to listed recruitment company Candle for $13 million. He is attempting to raise multi-million dollar seed finance for his new venture Jobs Jobs Jobs, and says 30% is committed so far.
Amanda Gome: You trained as a civil engineer and accountant before spending 10 years working in recruitment. Then you started Lloyd Morgan at 33 with $20,000. How did you build up your company? What was your point of differentiation?
Guy Sigston: What differentiated us as a business from day one was a clear competitive advantage to offer our clients. The premise was that we would recruit for them, help them create a competitive advantage and we would not recruit for their competition.
Now clearly you couldn’t just do it with one client within a market sector; you’d have a hobby not a business. So our view was that within each market sector you’d have a small portfolio that, maybe, represented around 5% of that sector. You would then head hunt from, say, 95% of the market to create an advantage for your customers.
What happened when you had two accountancy firms in the one industry sector? How did you handle the competitive pressures?
We made everybody aware who was part of our portfolio, who else was in the portfolio, so they came in with their eyes wide open and there were no unpleasant surprises as the relationship developed. We actually did work with William Buck and Grant Thornton, both very strong entrepreneurial sector-tier chartered accounting firms, and direct competitors.
They knew that we worked with each other but they were very happy to do so and we never provided one with more service than the other. The cultures of William Buck and Grant Thornton were really quite different and, ultimately, when you meet candidates — when you meet people — it’s about the cultural fit that is most important. And you’ll find that, in fact, in most market sectors.
So you really had to understand the culture and market positioning of the company very clearly and make them feel comfortable that you weren’t going to muddy the waters with the competitors?
Absolutely. And on the other side are the aspirations of the candidate. Sometimes the candidate’s aspirations would not be met at Grant Thornton because there just wasn’t that career opportunity, yet it was very obvious that at William Buck the career opportunity would be there.
And what did your recruitment company specialise in?
Initially we focused in two areas. One was accounting and finance and the second was sales and marketing, and within that we had a fairly strong focus on retail — two fairly disparate areas, but we worked very well together in those two sectors.
And what were the biggest challenges growing over those years?
The biggest challenge was definitely cash flow. Cash flow. Our business grew out of sight, and 12 months after starting we had 14 staff. Our turnover was already multiple millions and the business was basically funded through retained profits, and by the time tax and provisional tax caught up, we found ourselves really, really desperate.
The bank in fact foreclosed on me in early 2002. But you learn from these things. So the first challenge really was cash. The second was really the aspirations of people that work for you and how they fit into your organisation. When we set up the business, the intention was to be a fairly small boutique organisation with only seven staff; that was our three-year business plan.
Now, as I mentioned, after 12 months there were 14 of us already. Then there were 21. Then there were 28. And the people who were your “doers” were no longer appropriate as a business group. I wanted leaders. So these people who had been so good to you and helped you grow the business were no longer appropriate for the roles that the business required. And that’s difficult. You have to re-invent the business. Unfortunately, you have to see some people out of the door and it creates a lot of heartache.
How did you spot the leaders?
Spotting leaders is one of the hardest things to do and my view is let’s not focus on our industry; let’s focus on actually trying to identify leadership talent, and leadership to me is significantly about doing — people that are decisive, that will get off their backside and are action-oriented. So I found leaders with multiple backgrounds and I taught them how to recruit and that was really using my behavioural understandings through 18 years’ recruitment experience.
OK, so where did you find one? Tell us that one you found, and why.
There was one individual who I met who had a background in the pharmaceutical industry selling pharmaceuticals to GPs, who was frustrated in their current role because they didn’t really have an opportunity to show their leadership, to show their initiative, to do things that fell outside of the square — because in that environment things were very proscribed: certain things they were and were not allowed to do.
That person’s frustrations were the very reason why they would succeed in our environment. In our environment we had a very strong ethos — a very strong set of values and a very strong direction — yet within that a broad range of things could be undertaken. So we provided people with a framework, a direction and a foundation and within that they had a great deal of autonomy to get on with doing it.
With your cash flow: after the bank foreclosed in 2002, what did you learn? Did you then set up better reporting mechanisms or were your reporting mechanisms good back before 2002?
Yeah, the reporting was good but I didn’t understand the information that was being reported to me, and frankly I was pretty cheesed off with my accounting firm because, knowing what I know now, they saw this. They knew this was going to happen and they didn’t do a great deal about it.
This is a very interesting point. And you also have an accounting background. Most people wait till the end of the year to know the real state of their business. What do you recommend now, with all your experience, that people have set up so they do understand their …
Look, don’t be afraid to spend a fair bit of time with your external accountant. I know they’re expensive. You need to sit them down and to drill them down on ‘Well, what does this actually mean?’
Why can’t they give you a report that says how the business is performing against budget and …
A lot of people don’t understand the equation or balance between growth, profitability and cash flow. An example I had: a Sydney business. I put a couple of directors in that business and they put together a business plan to grow that business very, very rapidly. It was going to make X amount of profit but in terms of cash it was going to eat a significant amount of cash over that period of time and even though it was profitable it was going to be drain on our resources.
What they didn’t understand, and what I’ve come to understand, is that sometimes a business that is far less profitable is actually going to generate a great deal more cash for you and ultimately cash is king. So get the reports from your accountant but get them to help you understand what it actually means, and while they may be costing you $300–400 an hour that’s a lot cheaper than having the bank foreclose on you.
What did that cost?
A lot of heartache. When you have to go home and tell your wife that it’s happened. Trust me, it’s not a great deal of fun.
What made you decide it was time to sell? You’ve been very successful for almost nine years in a very competitive sector. Why now?
People said to me for a long time, ‘You’ll know when it’s time to sell’ and literally one evening I got home and I decided it was time to sell the business. There had been a catalyst to that decision — a discussion I’d had with somebody that day — and I just thought, ‘I don’t want to work here any more’. Literally within a week of that I’d done some research; I identified who the prospects were and made two telephone calls, had one lunch appointment and two weeks later we had a signed heads of agreement.
What did you learn?
When you sell your business you’ve got to start looking at things from their perspective rather than your perspective. You know it’s a good business. You know that you’ve kept the books clean. You know that you’re making good profits. You know that your staff are good. They don’t know any of that and they’re going to challenge you on all of those things and you’ve got to have systems and procedures in place.
You’ve got to be able to demonstrate every last element of your business to the purchaser. It’s an exhaustive process. They said it would take me two weeks to get all the paperwork together for the due diligence process; it actually took us at least two months with two people working full-time even though our books were in excellent condition.
Really? So what was an example of something you would do differently next time?
An example might be employment contracts. Our employment contracts were very rigorous — 16 or 17 pages that had been put together by a leading firm of lawyers — and fairly onerous on the employee. When it actually came to the due diligence process we had to provide a copy of every single employment contract that would have been signed. Now it turns out that our business over the period of years had actually changed from one entity to another entity and some of those employment contracts hadn’t actually been transferred.
Now that’s not something you think about until someone starts doing due diligence because you think there’s a continuation of employment. But we had to go through a process of getting people to resign from one organisation to adopt a new employment contract; and the second thing is that, quite naturally, these contracts evolved.
The business was eight years old when we sold it and the contract had been amended a number of times. What the purchaser wanted was a consistent contract against all our employees that wasn’t just reflecting what we believed in but clearly what Candle, the listed company, believed in. So there was a fairly exhaustive process and of course you have do all of this without the employee knowing that you’re selling the business.
What advice can you give entrepreneurs and other business owners about selling the business? What else did you learn?
The preparation to selling the business in fact goes back many years. To sell a business you really want to have a strong succession plan in place and I sold the business really in November 2005. I put in place a director to run the business for me in 2004. I hired that individual in 2003 and I started looking for that individual in about 2000, so it’s not a quick process. It took a number of years to find the right individual and to get the business into a state where I don’t need to be there any more. I can sell the business and it can retain its value without me. That’s the way you’re going to be able to maximise the value of the business, as clearly we’ve done.
One of the things that a lot of people don’t think about until it’s too late is, once again, the structure of your business. There are a number of ways to working with accountants. Quite legitimately, you can minimise the capital gains tax that you will pay. I’m not an expert in this area so I shouldn’t say too much, but I would strongly advise people to once again leverage off their accountants. Make sure they understand structures and put in place a structure that means you will pay maybe 25% capital gains rather than 50% capital gains.
Who are your accountants?
I use William Buck. They’ve been excellent, not just as accountants but as business advisers and we have an interesting relationship where initially they were my client.
You’re about to get your cheque. Did you get a good price? The business had revenue of $13 million and you received $13 million …
That’s right. I’d rather not go into the profit margin at this stage, that’s not public information and clearly it’s not my business any more, but at the time we sold the business the turnover was in that sort of $13–15 million range — it had a very healthy profit figure, certainly seven figures plus.
However, my perception of the value of the business at the time was significantly less than what we achieved. We were able to achieve higher value by agreeing with the purchaser that the purchase price would be based on forward profits. It’s not historical. We’d share the risk by getting a multiple of forward profits. Fortunately, our business has almost tripled in size in the last 18 months, which has meant it’s been a very lucrative exercise for us.
Big risk though …
Yes clearly a big risk but, you know, if you believe in something then put your money where your mouth is.
OK, now you’ve started a new company. When did you start that and what’s that about?
My new company (Jobs Jobs Jobs) is something that initially I didn’t want to do. The idea was that I’d get a big cheque from Candle and I’d go and rest on a beach somewhere in the south of France.
All entrepreneurs say that for five minutes …
Well I promised myself I wasn’t going to get sucked into the vortex of business, but you’re right, it didn’t take much more than five minutes. When you’ve got a good idea, like most entrepreneurs out there, you can’t let it rest, and you’ve got to test your idea. And my idea was, well, seek.com.au has been a tremendous success; they have revolutionised the way that we go about recruitment. Eighty-five per cent of their revenue comes from recruitment companies, probably only about 1500 recruitment companies, and I thought, ‘Well, I think I can do this better’.
Now the foundation is exactly the same as the foundation to Lloyd Morgan, and that is creating a value proposition for customers. Our customers in this case are predominantly recruiters. Clearly, I understand the way recruiters think. I understand the way to run a recruitment business and I understand how to make recruiters more profitable. So if I can build that into a value proposition from my job board then we will get the support of recruiters.
And what’s your value proposition?
There’s only a certain amount I can say at this stage. The business, or the website, won’t launch until May 1.
Our value proposition for recruiters, in fact any advertiser including SMEs, is centred on branding their organisation and driving quality candidates to them. It’s predominantly about SMEs and about recruiters.
We’re taking on Seek and in the same breath we’re taking on MyCareer and CareerOne, so three substantial publishers there — PBL, News Limited and Fairfax — so we don’t do this light-heartedly. Once again you’ve got to have a very clear value proposition for your customer. We know we’ve got a very clear value proposition for our advertiser. We’ve also got a very clear value proposition for the job hunter. You then have to create a sustainable business model. You then have to get around you a brilliant team of executive and non-executive staff, and that’s what we’ve been able to do.
So how many staff have you got now?
Today we have 20 staff and a board of five. My chairman is Stuart Simson, who used to be the managing director of The Age newspaper and BRW. He was more recently the chairman of Emitch, and under his stewardship it had an amazing amount of success. So he’s got online publishing experience. We are today an online publisher; we’re not a recruitment business but clearly our customer’s a recruiter and that’s really where the relationship with my background comes.
And what are your ambitions?
We think that we can create the number-two job board in Australia within 12 months, which really means knocking off MyCareer and CareerOne, and we think that we can be a third of the size of Seek within three years.
And they’ve got a market cap of $1.6 billion.
Yeah, that’s all — $1.6 billion. So we think we can be a third of their size within three years. It’s ambitious but we think we can do it.
OK. And what is one of the prime lessons that you’re going to take into this new business from your business life so far?
I’d say to any entrepreneur out there, whose natural instinct is to chase down every dollar that they see or smell — don’t. Focus on really what it is that you’re about. Do it very, very well and you’ll be amazed at how it creates even greater profits for you.
The second thing is that if people want to work with you and they don’t want to subscribe to your set of values, don’t tolerate it. I’ve done that too many times. Each and every time it comes back to haunt you. There may be someone that’s generating a great deal of revenue for you but the old adage that it only takes one bad apple is absolutely true. So if you believe in something, if you believe in a set of values, don’t compromise. Live it each and every day.
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Is the drought the death-knell for regional businesses or an opportunity to buy in at the bottom?
By Andrew KentA millstone or a marvellous opportunity? Well, that depends on your views on the drought. The drought and climate change have brought uncertainty to the regional business marketplace, particularly the agricultural sector.
Some business owners in regional areas see the drought as the start of a longer term trend and want to sell their business. Others, who consider this to be the one-in-one-thousand year event, see this as an opportunity to buy businesses at the bottom of a cycle. Contrasting views of the future like these will always bring volatility to the market.
Farmers are not the only businesses feeling the effects of the drought. Many shearers, contract harvesters, crop spraying contractors, artificial insemination specialists and transport and storage companies are feeling the downturn in agricultural activity and output caused by the drought.
There are also businesses based in rural towns and cities that are experiencing some downturn in demand, such as transport and equipment manufacturers and resellers, fuel outlets, mechanics and local retail outlets.
With the majority of farms for sale being broken up as part of the sale process (land, stock and equipment), the impact of the drought on the value of rural businesses is more easily seen elsewhere.
One example is plant nurseries, where both wholesale and retail are struggling to sell. Depending on your long-term view of climate, this might be an ideal time to buy into the nursery trade — particularly as there will also be plenty of keen gardeners looking to revitalise their gardens with new plants once the drought breaks.
Tip: If you are looking for an eventual tree change, now is the time to buy that business in the country.
Business for sale:
Long-established South Australian wholesale farm produce and supplies business.
Price: More than $1 million.
Annual net profit: $300,000 plus proprietor’s wages.
More information: www.BizExchange.com.au
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By Tom McKaskill
Cashed up entrepreneurs don’t make very successful employees. In fact, most smart acquirers realise this and so look for a solid succession plan knowing that they are unlikely to want to keep the former owner or that the owner won’t want to stay.
When transitioning ownership of a business, the logic is actually quite simple. Your entrepreneur is now cashed up and no longer has the motivation to put in the same level of energy and long hours.
Furthermore, this is also an individual who is used to making decisions quickly, often from gut feel, and probably dislikes having to justify what they do.
At the same time, they probably want to use their new-found wealth to take some time out, pursue another venture or become an angel investor. Basically they don’t fit in, and smart acquirers recognise that.
Using this logic, it is not unreasonable to imply that the same conclusion may well apply to most of the senior management team. It is unlikely that the vendor CFO will want to give up dealing with bankers, auditors and being part of the strategic decision-making team. The sales and marketing director is unlikely to want to go back to being an account manager or branch sales manager.
It is also entirely possible that the senior management team will share in the sale proceeds and may wish to pursue other opportunities. While some may transition across to the new owner, the acquirer is probably best to assume they will leave at the date of sale or shortly after. Certainly all the research on mergers and acquisitions would support this conclusion.
Given this scenario, the best preparation for selling a business is for the vendor to put in place a succession plan for the senior management team with employees who are likely to transition to the new ownership.
However, it would not be unreasonable for the buyer to foresee risks in keeping these newly acquired staff, so even though there is a succession plan in place, additional incentives are needed to reduce buyer risk.
The buyer needs to have time to transition the inherent business knowledge to employees who are likely to be employed longer term with the acquirer.
Since most resignations of newly acquired staff are likely to occur during the first year of the acquisition, putting in place incentives for key acquired employees to stay during the transition period can significantly reduce buyer concerns.
Where the vendor has arranged this before the sale discussions, the buyer has some assurance that a major risk can be averted. This not only places the vendor in a more positive light but can positively influence the value of the business being sold.
The vendor needs to anticipate buyer concerns and address those proactively. By understanding the motivations and intentions of his senior management and key employees, the vendor can construct a succession plan and a retention plan that ensures that the knowledge in the business can transition across to the buyer.
This greatly enhances the likelihood of the buyer achieving their own acquisition objectives and thus should be reflected in a lower risk profile for the acquisition. Lower risk should itself be translated into a higher valuation for the business.
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By Tom McKaskill
The best deals are done quickly, where the buyer recognises that they face few risks in the acquisition and where they have confidence that they can realise their acquisition objectives.
The worst deals are those that collapse due to risks uncovered in the vendor business or where the buyer wants compensation for all the investigative work undertaken to uncover risks in the deal.
As the costs increase and as risks are uncovered, the buyer will want to reduce the price to compensate for the additional costs and risks. If the investigative process goes on too long, the mere passage of time might result in the buyer deciding not to consummate the deal. They might have other acquisitions to pursue or simply consider that there might be further risks yet uncovered that would result in an acquisition failure.
While most business brokers will tell the vendor to clean up their company before the sale, they often fail to explain the psychology of the buyer and why such an exercise not only improves the probability of sale but actually can increase the sale value.
We often forget that experienced acquirers have accumulated corporate memory of all the problems they have experienced in the past. They come into the acquisition negotiation assuming that they will have to spend considerable time and effort looking for risks, and then expend money and time cleaning up the business after they buy it.
The buyer’s objective is to put the business in a state where the potential in the business can be exploited, so delays and costs incurred after the acquisition simply delay the time until the acquisition objectives can be achieved.
Any anticipated future revenue and profit that is delayed simply reduces the current value of the business, and thus directly affects what the acquirer is willing to pay for the business.
The objective of the vendor should be to turn this process on its head and create a business that can be readily evaluated and quickly put into a state where the acquirer can exploit its potential. Both these objectives can be considerably advanced if the vendor undertakes a vendor due diligence with the aim of preparing the business for the buyer due diligence investigation.
In essence, what the vendor is doing is undertaking a practice run at a buyer due diligence. The vendor engages the services of accountants and lawyers who are able to carry out a due diligence investigation of the type the target buyer is expected to undertake.
The results of the vendor due diligence are then used to ensure that any problems are uncovered and fixed and the business made ready for the buyer due diligence.
The advantages of such are process are several. You get to find out problems within your own business and can get honest advice on how to fix them. This alone should make your business more efficient and effective.
Then of course you do end up assembling all the information necessary for a buyer due diligence thus greatly decreasing the time and effort you would have to incur during the buyer activity.
This also allows you the luxury of continuing to operate your business without the disruption of the buyer investigation. Of course you will have greatly reduced the time and cost of the buyer due diligence and, hopefully, greatly decreased the risks confronting the buyer. Any unresolved items can be tabled early in the discussion so that the negotiated sale price already reflects known issues.
A well prepared business will be positively received by an experienced acquirer, who in many cases will be willing to pay more for the business because of the absence of problems or because it enables the buyer to move quickly to integrate and exploit the new acquisition.
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