Speaker 1Welcome to the Owner to Owner podcast. I'm Michael Kerr, your host, and I'm also the founder of Kerr Capital, where for 22 years now I've worked alongside business owners. Owner to Owner is a business podcast to empower the owners of Australia's small and medium enterprises. Forget the slick stories of tech titans and unicorns. At Owner to Owner, we get raw and we get real. Every Owner to Owner episode is a personal conversation with another business owner just like you. We explore the everyday struggles they face and the different pathways they tread to success. Practical advice and plenty of one percenters for better returns, less stress, and more enjoyment. You'll find grit, laughs, maybe a few tears, and some hard-won lessons only available from others who've been where you are whatever your stage of ownership. Every owner has a compelling story to share, so join us to listen and to learn. Welcome in, Gabe Villareal. You scaled a liquor business from nothing to about a million dollars in monthly revenue. You did it in the first place. You did it in the inside of two years. You sold it successfully. There's a lot of hype around about how to scale and exit, so it's really great to have in someone who's done it a couple of times. Looking forward to this chat, Gabe.
Speaker 2Welcome in. Thanks a lot, Michael. Thanks a lot for having me on. I've actually, yes, exactly that. I've done it. What I actually like a lot about your show or your podcast is having those genuine conversations and how do you get product? How do you get product? Behind probably or beyond a little bit that glossy, the glossy headlines and you get more into the nitty gritty. So I really like about that. And hopefully today I can add some value and actually share a little bit of my story of how it all started, what happens in the middle, some lessons, what went well, what didn't go so well and what I would do better next time or I
Speaker 1would have done better. Well, I know there's already a next time because you're continuing to do that. Absolutely. What relation to the liquor business was? To get us started, I just want to get a little bit about this particular business, a little bit about yourself, and then we'll go into the how-tos and the lessons learned. But when you started the liquor business, did you start it to scale it and exit? Yes. The
Speaker 2short answer to that would be yes. The reason for that being is this wasn't the first business I had. I had a lot of experience in the liquor business. So I guess you get your lessons along the lines. But yeah, the short answer would be I started the business thinking three, four, maybe five years down the line exiting. I did have a fear in mind. I wanted to exit that for eight figures. I already knew a bit more about how the experience of growing businesses, but I knew a bit more about merchant acquisitions as well and how that works. So I was quite confident what I was doing when I started. But yeah, I did have a. And in saying that, at the same time, talking about exit, it's probably not about the exit itself. It's also, or more importantly, talking about options, having the option, because if it is going great and you want to keep it, you can keep it as well. But yeah, I started that business in particular with that goal in mind.
Speaker 1Yeah. So it was a very, very much out of the textbook, if you like, to I'm going to build this. I'm going to scale this. It was based out of Brisbane in Australia when you're doing this. Just briefly, what was the business and what sparked the idea?
Speaker 2Yeah. It's interesting because I've been around a couple of different industries and a couple of different countries as well. I've been in healthcare, in mining, in software, and a couple of different things. And liquor never came across my mind, to be 100% honest. This was more about spotting a shifting behavior, a behavioral change. And I think that's what I was trying to do. And I think during COVID, as you probably, you will remember, everything was shut down, bars, cafes, restaurants. And it was a little bit about bringing that experience or the concept of bring the pub home. So people couldn't go out to the pub, but people were spending a lot of time and money as well in renovations, renovating the outdoor or entertaining area, putting good barbecues, the pool and everything else. And good bar fridges around the pool area. And the thought was, well, we don't bring the experience of having that pub experience at home. So there was a shift in behavior. And I think that was what sort of sparked the main idea or the concept of that. Of course, there were a couple of gaps in the markets that also identified back then. So a couple of things was, you probably heard or seen cake fridges or cake arredos before, which is essentially it's a fridge with a tap and you can dispense beer straight from a keg or have beer on tap. So, and that was well known in the US, in Europe, in Australia as well, but mainly by the homebrewers. It wasn't so well known by just the day-to-day person. So it was more like homebrewing people that was more into that sort of thing. It was the idea of like- Also the beer nerds. Yeah, that's exactly right. But then the regular drinker that wants to entertain is like, well, A, or they don't know about that or they didn't know about that. Now it's a lot more popular. And B, how do I get a keg? It's like, if I'm not doing homebrewing, what do I get a keg? What do I get my carton draft or my VV or my Forex Gold here in Queensland or the Great Northern? All of those great commercial brands. And then on top of that, you have all of the small breweries and all of those brands. So it was like, how do I get that? It was like putting the two of them together. Whatever it was, it was like, how do I get that? And then on top of that, actually, what was a little bit the main challenge, even, I guess, from the licensing point of view, yeah, there wasn't a straightforward license to actually start being able to supply kegs off-premise. So kegs were sold originally only, or the concept was more operational efficiency for pubs and bars. So rather than being changing bottles and cans, they can actually have kegs, so it's a lot more efficiently operational. So it wasn't the purpose wasn't for that to be sitting at home, but that's why we started with that concept of bring the pub home.
Speaker 1Yeah. So, I mean, it sounds like there was a timing thing as well with COVID because people were at home. If you want to have that draft beer on tap. So that's exactly right. Yes. Yeah. But before we get too far into that, and this goes to what must be an innate ability for you to spot opportunities outside of your own industry or, you know, professional experience, because this was, liquor for you was a new market. So let's talk about Gabe and arriving in Australia with, I think your definition, two suitcases and a big dream. Tell us about that. Yeah, absolutely. What set you up to land in Australia for an entrepreneurial career?
Speaker 2Yeah, I guess it's been a long journey. So exactly as you said, I'm, well, I'm originally from Argentina. So I was born in Argentina. So I grew up there. I studied there, did my bachelor's there, had my first few jobs, first few businesses as well around there. I always had sort of that sort of entrepreneurial mindset. So I always had a side hustle. I've been doing different things when I was young. Eventually I ended up moving to Brazil where I kept continuing my career. And at the same time, I continued a little bit of my entrepreneurial journey around there. And simultaneously, I was doing my MBA down there, another language. So it wasn't the first starting from scratch sort of situation. So it was facing a completely new culture, new language, new set of things, how business get done down there was completely different than from Argentina as well. So it was learning everything. And again, you don't know anyone, you don't have contacts, you don't know people, you don't have friends. It's like, yeah, you go literally to a place that you don't know, you don't speak the language. And you guys just start from scratch. So that takes quite a bit of, it takes you at very least out of your comfort zone. And then I've done the same thing when I came over to Australia. So that was back in 2016. So a bit over nine years now. Exactly as you just said, I just came with two suitcases and a big dream. And I knew that I wanted to make it and take all of the opportunities. And again, it was starting from scratch again, because it was like a different stage of my life. Because, okay, yeah, I got to make it professionally. I got to start again. New language. Yeah, I didn't speak a lot of English. I had some, I guess you learned that at school and you do a couple of tests and lessons and all those sort of bits and pieces, the basics, but you never, until you're there and you're not immersed into a new culture and languages. It's always a challenge. It's quite challenging. And it's probably more challenging of what people think. And it goes beyond of, one thing has been on a holiday, on a plane. it is or even for six months and it's not the same thing that's settling into a place it's a complete different yeah complete different game and doing that once it takes a lot of courage but the second time actually it really builds character it really does
Speaker 1your character resilience yeah i mean you know the whatever your personal drivers were to to make that move it brave comes to mind was there anything about coming here because you thought the entrepreneurial opportunities were greater or was it a lifestyle led thing or you know a family thing actually a
Speaker 2good question i was back just just before going to brazil i had a bit of a dilemma there were two places that i wanted to at least live for a year and one was australia and one was brazil and i was in that situation i was i think it was like 23 years old and i was like i'm not sure if i'm and originally i was going to come to australia and i was going to come on as some of those uh what do you call it it's like a work and holiday visa or something like that and and that was the idea and always sort of i wanted to get immersed into the language and learn properly english as well and also the lifestyle and what you see always so the beaches and all that also always attracted me but then i had an opportunity to go and work in brazil and it was like well do i go on the work and holiday path to australia and then or to work in brazil professionally i ended up going to brazil so and that was always like on my um pending list um and one thing leads to the other eventually yeah eventually i had a job opportunity here in australia and that's why i ended up making the the move and it was uh okay i'm going to do this once again but uh always yeah you always take a risk things might not work out with the job with the company with the culture you might not like it they might not like you as well so many different variables and at the same time it's like well you gotta think about yeah how do you move and you gotta literally well gotta get rid of my car i'm not going to have a car just sitting here for two years or whatever so you start getting rid of literally everything and it's literally just okay well we're making the move grabbing two suitcases and it's like okay well we gotta make it works and my wife back then she was my my fiance so it was that moving us together here and having the full support i think that was actually really important but yeah and the first couple of years were really challenging for the two of us she was a lawyer so she's got a bachelor degree in law obviously she couldn't work as a lawyer here she didn't have the language i had a bit of a language but not not that much so it was always really challenging and you're always as well in that process of the visas process that changes so it was the first couple of years was really challenging for the two of us and i think that's was uh adapting learning and trying to um yeah probably for us was like well we really like it here we want to make it work the goal was um make it all of the steps to actually settle in here permanently yeah that took a couple of years you put
Speaker 1yourself in a scenario where there's really no other choices it's up to you and and your partner to to make things happen you want to be here so maybe that's part of the you know the secret source of when there's not a when there's not all these choices you you've got to make you've got to make the choices yourself so that's probably a good opportunity to um to parlay into some more specifics on on this liquor business which i think you said was it an eight an eight figure exit was that no
Speaker 2that's what i wanted to do eventually didn't didn't happen yeah it was a bit of a timing issue uh we were probably about 12 to 12 months to get there but i figured i had a bit of a dysfunctional partnership at the time i prefer to probably step back and i i probably value more progress and friction so i was okay and because i already had that sort of mindset from the very beginning i established a business from day one that could literally be sold even on year one if i wanted to so the mandate was yeah it was very prepared for me and i was very prepared for it and i was very prepared for it for that so from cash flow profits thinking about the operation even if it was more than probably the value wasn't there from very early stages it was always thought about and that's i think something that everyone will should that owns a business even if they don't want to sell you need to be ready because you need to you actually need to have options otherwise you will you'll be caught off guard and yeah you don't want to put all
Speaker 1your eggs in one basket when it comes to crystallizing the value of your business that's the second i mean that's it we um we were chatting on friday just before you know as a bit of a precursor to this and the way uh you talked about early in the interview having the option to keep it having the option to sell it if you if you have have a business that has both of those options as real options you're in a you're naturally or it doesn't happen easily you've got to you've really got to put some some work into it so let's get into that a little bit more you go about find an opportunity you start to think about building it for exit what what's the framework for you from the point of view of starting and and building a business around or within a framework that it's ready to sell at a time in the future that you you know you it's a target timeline but what what are the things that you some of the things are the the really important component pieces of that framework from an exit perspective okay so
Speaker 2there are a couple of different parts to that i guess so and there are businesses and businesses as you know and sizes and so if we talk about oh let me ask you a question so you want me to talk a little bit more about how do you start and get it ready for an exit or or how do you get it from an exit when it's already
Speaker 1working i guess i think think in the discussion today it's it's really firstly you've started a couple of businesses from scratch so i think the it is important to to talk about how you you pick a business that can scale how do you scale it what are the pains before you get to the juicy
Speaker 2part of yes having the
Speaker 1option to exit yes i
Speaker 2guess there are a couple of different things um what one is i always like to say person of imperfect that takes imperfect action it always will be ahead of someone that is just way too cautious and i'm not saying for people to make irresponsible or making irresponsible decisions that's probably not the message but people of action they usually end up significantly ahead and if you have a problem you'll find it a lot quicker rather than just sitting on the sideline and trying to yeah think about the risk and this and that so i'm a person of action and saying that i'm also quite extremely analytical as well and there are two different things about the word or probably there is a way that i started businesses before and that would be completely different of how i see businesses today as well and you learn with your errors so i think one part is if you want to start a business usually to me the easier way these days is probably services and services usually that don't involve a lot of equipment ideally something that you know how to do that you know that you excel about and that you can actually your cost is your time literally or sometimes if you there is some equipment involved you can hire that just to do a proof of concept so i always say don't go and start a business and try to blow 50 grand or 100 grand just so you don't know whether that concept that you have in mind it will work or no so do a cheap quick proof of concept gain a couple of customers i say it's always about the first sale then once you make the first one make the first 10 and then sit down for a minute and assess what went well what didn't go well how do you model the offer is there a real is there a real problem that you can solve or no or demand for that is there product fit market fit how does that work so start thinking about all of these bits and pieces
Speaker 1and you're so sorry yeah was that you mentioned i think the term imperfect action was that yes
Speaker 2imperfect so that's exactly right yeah
Speaker 1so that's a methodology of not waiting not waiting till it's perfect to find out absolutely
Speaker 2it'll never be perfect don't wait for the perfect moment don't wait for a perfect situation don't wait until you have the money don't like you can make things happen more this time in the year i think there's never been a great time that right now to start a business and do a proof of concept quite cheaply and quickly as well and
Speaker 1like and also was that you you talked specifically about service service businesses yeah because it's a business it's a business it's a business it's a low low capital but is that also is that also about doing something in a domain that you're familiar with as opposed to stepping across and and and trying to be in some industry or some market where you've got no experience no contacts is that is that a part of like pick pick the right
Speaker 2if you're starting absolutely if you're starting services yeah absolutely i agree with you pick the right game so you're starting services yeah absolutely i agree with you pick the right game so do something that you already know about or that is or you know that you don't need to be an expert to actually go and execute it it so it can be this these days it can be or something that you're an expert on or something that you really know about it or you can go into services like easy services these days like literally all sort of services it's quite incredible that the lack of of people around because you start asking for quotes and all sort of services and and and you don't have them so if they are easy to do or or or get started or learn or get the equipment and that's the other way that you could do it but i guess if i had to start something from zero i didn't have any money i'll go probably in something that i actually know of how to do it very well get the first customer understand where the value is for them get the first 10 even because your your cost is your time literally you could actually do a first couple for free just to get a few yeah a bit of
Speaker 1word of mouth yeah exactly be focusing on the second one rather than the first one focus more
Speaker 2on creating value for someone else than just oh i want money on the first on the first deal or the first thing that i'm doing i think a little bit more longer term than than just next week or tomorrow so that's probably something that how will get started if i had to start a business with no money and no capital experience in business today that'll be the way to go at least
Speaker 1for me yeah it's it's interesting the um mindset needed here you've got to be brave not not be afraid of mistakes you've got to go fast i think was it the um mvp methodology you know get out there and trial it uh absolutely rather than sitting back and and and um you're smoothing it over and and and and refining it and you know never actually getting any feedback about whether it's any good or not
Speaker 2yeah i can't remember where where it was but i heard it recently somewhere it was like a talking about the thing is not doing the thing thinking about the thing it's not doing the thing uh yeah planning about the thing it's not doing the thing so the only thing that actually moves the needle is going and make it make it happen and again it's not about doing it responsibly but sometimes the concepts are so simple that it's just gotta get get get on and get it done
Speaker 1and that's yeah i think and it's also if you if you aspire to be a creator and a seller of businesses for whatever your motivations are the the process it is a process absolutely this term but and you get comfortable just you can have your business and you can have your product or your service and it may or may not fail but a step back from that or up from that is that you've gone from sort of gone from the beginning of something to kind of the end so the next time you do that you'll be better at the process piece of it and it might be picking a better service of product or going faster at this stage or whatever but there's a there's a process thing which is called building to exit and there's this this is the other
Speaker 2thing that can be really interesting and my add-on might not have any value but i actually think that we should start we all talk about the successes but we should start talking and normalizing more failures because every overnight success that you see out there it has probably a lot of repetitions and failures before it's like going to the gym so no one turns up and all of a sudden is bench pressing 140 kilos the guy probably started with 10 kilos 15 kilos and going up and up and and you fail at the at the 20 kilos and then you step back and then you get an injury and then start going up again it's it's no different in business so you get and probably business is worse actually i generally think that we should start talking about a you gotta accrue those as quickly as possible because they are the ones that teach you what what is next and why you shouldn't be doing next and and so that that's i think it's it's part part of the game is failing like we make out of this big thing like um we make this big horror story and then there are big horror stories as well because there are big failures about failure but you should be thinking about which we shouldn't be going out there thinking i'll turn this into 20 million tomorrow maybe think about if i fail what do i learn out of this and how do i protect the downside of failing at this thing and in the worst case scenario i learned something new and i won't do it next time so i think accruing failure is something that is really really important in that entrepreneurial journey for sure and there's
Speaker 1too much of a culture of you know chasing and mimicking who's been successful and just and focusing on the bit that they probably got right where there's all these other things from a personal point of view having having capacity for resilience at a practical level having some resources to to pay some form of basic living right so everyone's at different stages of that but it's yeah the the idea that there is a silver bullet magic solution that works every time i mean you hear about it all the time on linkedin and various other places about guaranteed successes and there are seminars and whatever run on foolproof way to do whatever so yeah i i agree 100 and it's it's
Speaker 2interesting as well because i'm tired of coming back to your original question about how do you scale up or start a business i think it's one um maybe linked to that as well i get all the time questions from professionals usually people that oh i want to be my own boss and they are probably earning good money good salary stable lives as i don't like this life i want to be an entrepreneur how do i do it or they come to me with like give me the magic solution and there is no magic solution something that i always try to recommend which i've done it myself and i'll talk to you a little bit more about that if it is interesting but it is the fact that i always say don't put all of the eggs in one basket and try to go and quit your job put all of your money or your savings in one basket and try to go and quit your job and try to go and quit your job into this new business venture and then you don't even know whether you have market fit or not like don't don't do that i think that's actually not the way to do it it might have worked sometimes and you hear a lot of these success stories but you don't hear a lot of the failures as well i have my failures and that's why with this particular business if i can one step back i started i was making progress in my corporate jobs and corporate war and making my name out there in that part and i was working my full-time hours and usually it's never 40 hours you usually end up stretching it out to 50 or more so i was working my 50 plus hours but at the same time i started this business from literally not nothing and it went quickly but there was there was a point that i was like i was doing that double life so full-time hours in my job full-time hours outside my job and working until whenever i could and until eventually i had a team of six people working in the business some of them full-time and they were needing me full-time as well because they were calling me throughout the day and i couldn't even pick up a call so it got a little bit messy but eventually i had to back myself 100 but i was like okay i can pay everyone i can survive on this now i can make the move and that's when the business took off really when i made 100 of the move as well but it took yes so that was
Speaker 1yeah because the opportunity if you're earning 200 300 400 grand a year as a an executive it's a big trade-off a big opportunity cost yeah to to give up that and you gotta
Speaker 2measure the risk as well yes there is a big potential but you just can't go only on the potential only you need to understand that you gotta pay your bills you might or might not have a mortgage as well you might have kids so you need to understand what's your cost of living i always say it is very wise to at least try to keep 12 months of funds if you are going to business venture and just putting all your time into that and ideally the business needs to have some sort of traction and that's why probably i like more buying businesses than starting businesses today because you already have customers you already have it's working it has a brand it already has cash flow sales etc etc so you can play a little more with that it's a lot better than actually starting from scratch yeah
Speaker 1you skip you skip a few steps ahead of it um and there are so many of those out there that um you can do so much with absolutely i'd like to come to that but just just to kind of round out the scaling to exit thing i'm i'm kind of just fascinated with each day you were building that business did you think about the exit sometime down the future did that guide you as to what you did day to day and did you have targets kpis that were linked to an exit in the future that kind of gave you that extra incentive tomorrow when you're getting sluggish and if you were just there forever in the business you might go i'll give myself a bit of time off or a bit of a break but did you kind of drive yourself because no we need to be here at this quarter or this month yeah
Speaker 2it's actually a really good question and i'm trying to think a little bit back yes definitely a target driven person so i everything has frameworks targets strategy behind i don't move one one finger without thinking about it about the long-term goal or the bigger picture. from day one he structured this business put a lot of the structure of that business with five or ten years usually they don't have and by that i mean not not structured in terms of putting a lot of money was more putting about systems kpis the people the frameworks the culture how we were going to be growing and be dealing with that growth as well so yes so the short answer would be yes i had the kpis from day one so there was a target this is what we got a hit on man one when we're opening month three by here we're going to have this type of employees we'll need this type of people i actually knew from day one that and we can talk i think that a lot of businesses they don't die because they lack growth or capacity to grow it's actually they don't have a good handle on their finances and cash flow and a lot of them they die in the first five years you hear a lot of this stuff about 95 of businesses they die in the first five years and usually it's because of cash the main problem that's why they die and actually as soon as i had we didn't even have the capacity but i invested in having someone to be looking at our weekly cash flow because it becomes really complicated as well so it wasn't even monthly it was like we need to be looking at this weekly there was a point that we were looking at that daily just to make sure that we could make sure that we meet all of our obligations where we could grow as well so it was all linked to yes so that we got to be hearing this this point where this this type of sales this type of profit on year one and year two these were going to be on year three which were yeah actually year three was even exceeding a little bit where we were thinking that we would be so it was yeah it was about having those targets those kp and everything and everyone was linked to coming back to that how we're going towards this but it wasn't just thinking about a big valuation and but it was about yeah that at that time was about more the growth the process and and making it work for everyone involved or around that business as well so but yeah it was uh there there's nothing like knowing where you're going or not yeah it's a good
Speaker 1it's a good thing right it's like we're talking about celebrating failures if if you don't know where you're going you probably won't
Speaker 2get there absolutely
Speaker 1yeah that discipline of you know think about cash flow think about the day-to-day in a business um i've written quite a bit of money articles about using your financial reporting not just for compliance rear view mirror how am i going day-to-day and and how am i going against a view of where i'd like to go absolutely there's there's a lot of and i understand you get caught up in a very busy day-to-day business and you're not sure what you want to do you're not sure where you're going you can you can if you're not sure where you're going you can you can do a lot of things but you can easily just bumble along and kind of go get to the end of the week and go oh god you know i can't wait to but the thing i'm you know with with exit plan or scaling to exit being a future target in mind is it is why it's so powerful is that there you can make better decisions today or tomorrow about using those using that um forecast projections how you're actually going and you can see where where it's going to affect your your pathway to where you really want to get to and if you're not you're not sure where you really want to get to go back and before you do too much more just work on on you know what do you want out of your business do you do you want to just have a business that just ticks along do you want an exit do you want to grow it 500 be clear on that because everything's fuzzy but incredible numbers that you've really put time and energy into thinking about are impossible to ignore the power of them when when they're thoughtfully constructed hi there just a short interruption and a message from kerr capital kerr capital specialize in advising business owners who want to get sale ready or as is increasingly common get approached out of the blue by a potential buyer if this is you i know there'll be plenty of big questions and a lot of uncertainty we're expert at supporting owners in making significant personal and business decisions and then helping create a really strong plan of action if you want to find out more contact us at the kerr capital website and then we can book a 45 minute no obligation discovery call now let's head back to the podcast i think you should
Speaker 2on the right key there it's impossible to ignore but it's it's um quite fascinating how many businesses they just ignore it and i'd say yeah i'd say probably 90 95 they just ignore it mainly these small and medium-sized sort of businesses and probably like you i am convinced how i run business i run that from two places which is one is targets and goals and that comes also from a budget and i do that weekly and monthly i know my numbers literally everywhere so and everything has kpis so from the financial kpi around i usually run the monthly pnls we reconcile that monthly we talk about that monthly where is where are the sales where where is the cost the cost of goods for instance was that better do you need more margins you don't need the more margin where are your other costs where are your other costs where are your other costs going are you spending too much in marketing you're spending too little what is your return on investment what is the the return that that's bringing people as well is that getting out of control your cash flows this and that energy fuel as well why yes this is not matching what we need really so look at all of the numbers and you start looking and say well this is fat that can be trimmed this is fat that can be trimmed and start looking and tweaking things like well start working on your pricing start working on your offering and then it has so many different pieces that if you don't run it from there the thing is very difficult to get where you want to get and if you talk a little bit more down the path about talking about an exit it's almost impossible because your numbers are never going to be telling a good story yeah and they are not telling a good story is is because you just haven't planned for that and that's why why you don't get there and and it's a lot easier i'm a huge believer of discipline in life in business as well similarly and everything starts breaking down from there so i say well i want to be this year we made two million dollars in sale next year i want to grow to five million how do we bridge the gap what does it mean let's look at the month to month let's look at week by week what do we need to be doing differently do we need to expand to new sectors we need to do new offer new services so five five million dollar a year that means that we gotta be making a significantly harder effort in this type of this time of the year and we need to be making a significantly harder effort in this time of the year what do we gotta be making monthly in terms of sales weekly daily so and then that that's what the sales targets come from it's like well daily you're gonna be making this and uh and if you get there everyone gets
Speaker 1rewarded and and also i think the you know the uh the the line from there is that if if you're at two million dollars in that scenario we don't want to like spend too much time on this but you know if you're at two million dollars and you target getting to five do i understand what drives the value of your business what it looks like at two million dollars then if you get it to five what does that do to change the value of your business and that value that you could reasonably expect to get at two million dollars and you can reasonably expect to five million dollars it doesn't have to be about exit planning it's it's another maybe it's almost the most important metric of all of them as to how you how you value today and how it changes the value of your business absolutely over time if you meet certain targets but
Speaker 2absolutely and and one question sorry sorry to interrupt you there but i think this is the other trick tricky part that you don't hear a lot about to think uh what took you to well i don't think i know that what it takes you to make your first hundred two hundred thousand dollars is not the same thing that would take you to one million definitely not the same that would take you to five millions and definitely a different set of skills to get to ten million a lot of people say make your first hundred two hundred thousand dollars your first million is the hardest i actually probably well it's not probably i disagree with that i think the hardest part of an entrepreneur is when you are trapped anywhere between that two three million marks or probably closer to 10 million because it yeah you're still on the line you need a lot of capital for growth and you need a complete different mindset to operate that and grow it to that scale yeah but once you make it it's it's a completely different yeah you actually probably will own a proper business and the valuation of that thing scales up significantly quick and not just in a linear way but in an exponential way as you probably
Speaker 1know so yeah that's cool yeah i want to continue we just started to talk about scaling and exiting but buying an existing business and and cutting out the first couple of steps of that process you've started to yes acquire businesses with the same logic is that right absolutely acquiring something that's already got a customer a base or some relationships or market position, a brand, whatever it might be, but are you seeing that as a smarter, quicker, more efficient way to get a hold of an opportunity and grow it and then exit, or is it keeping them? You said having optionality, so I'm kind of answering my own question. You're skipping the first few parts of the process, growing it, and then having the option to do either. That's exactly right.
Speaker 2That's with that view. What I think, thinking in this way, your chances of success are significantly higher. I've seen different stats all over the place, and there are some American stats and Australia as well, of the chances of you succeeding compared if you, let's say that you spend, just give you a number, X, Y, Z, it could be half a million. If you spend half a million just starting your business or half a million buying a business, the chances of success will be significantly higher if you are buying something that is already there. So if you compare pears with pears or apples with apples, at the end of the day, the chances of succeeding is a lot better. I don't think that people understand what actually it takes to start a business. It can be, it looks fun. It looks sexy. Behind the scene, it can be quite brutal, to be 100% honest, and it takes, yeah, it takes a lot out of you and not just of you, of your family, everyone that is around you, because it just takes literally everything that you've got, you've got to put it in there to make it work, from your finances to your emotional energy to everything else into that to make it work. So starting a business is not easy. Of course, starting a business with experience and knowing what you're doing, it's significantly better, but if you can skip the first couple of years and then get a business that is already working, as you said, customers are their cash flow. There are problems. There are profits. So then you start thinking about, okay, if I acquired this recently, which is the tricky part, and it's a proper business, then how do I actually, what are the things or the bottlenecks here? What are the few things that I can turn around and quickly scale and grow this business? And it's a lot easier to fix some processes and systems in that business rather than trying to do it all from scratch. You already have market fit as well.
Speaker 1Yeah. Well, like, you know, if a business, if a business has got a million dollars of turnover or half a million or whatever, it may be about to get disintermediated or disrupted, but even that, you can do the disrupting, right? You can come in and disrupt that business. But capacity of the past or the existing ownership is always a constraint on just about every business I've looked at. And it's not a criticism. It's just, you said it, you know, there are different challenges at different stages. So a lot of small businesses get to. There's a stage of turnover and complexity and size where they, it'll do. But the exciting thing is that there are somebody else, and I always ask owners, what would they do with the business if they were 20 years younger? What would they be doing to triple it or something? And mostly people will go, well, yeah, I'd do this and I'd do that. And because there are just so many small businesses, the opportunities to really take on an industry, a geography, a segment, it's pretty strong.
Speaker 2Yeah, usually. This is the interesting part about that. Number one, there is a massive. Well, the Australian economy is founded in small businesses, which I think the second part is there is a massive population of baby boomers that now they want to retire. And a lot of them, they are business owners. And they have this. They're small businesses. And sometimes they are small shops. Sometimes they are not so small. But at the end of the day, they build something for 15, 20, 30 years, some of them. And I come across and I talk to these business owners every day. And some of them, they don't have where to pass that on. It's like, have you got a son or a daughter, someone that wants to take that on? And yeah, I do have my son, but at the end of the day, he's interested in tech or he's not interested at all. He doesn't want to do anything to do with business, likes more art. Or this or that. So today's probably preferences are completely different. And they are not interested in being a mom-and-pop shop. And then. So you have this situation where then they start trying to sell it. And it's not in a situation that could sell. And probably they left that until it is too late and the numbers are showing already that that probably is on a decline or they are probably not so engaged in the business. So they don't have the option or a good option to get out of that. So you see a lot of these businesses are really. They're really well-established. They have market fit. They probably wouldn't go anywhere other than maybe they want to retire. And then, yeah, you have this gap in the market where all these businesses are going. And a lot of them, they actually end up not selling for numbers of different reasons. And they close. And it's so sad to see that go. And employment goes as well together. There are always one, two, or even 10 employees in that business. And that shuts down.
Speaker 1I mean, it's really, you know, a lot of them do. And many also just kind of dribble on for a lot longer than they should. So they think, now's the time I want to sell. So off I'll go to see a business broken up. You know, I'll try and get it sold in six months for a price. But the damage is done. And so a lot of those just doing that. Closing. But it extends the life of the business under that ownership unnecessarily longer. I agree. They really would have been happier and more fulfilled being out three years ago or five years ago. Because they could have done what they really wanted to do, which was it's outside the business. It's without all the day-to-day stress. And it's go off and travel or play. Whatever you want to do. But it's definitely, for many, not being in the business when they don't want to be in the business. And it's really awful. And I'm sure the flow on is that a lot of those just peter out and close it. But it's the opportunity for entrepreneurs like you.
Speaker 2Exactly. But it shows in the numbers. And it's really sad to see those businesses go as well. Unfortunately, it just creates unrealistic expectations of what they're going to be selling for. And I think that's something. Whether that is relevant or not for today. But, yeah, I think that's something that brokers industry, it's a little bit broken, if you want to call it. We were sort of touching base on that the other day. But, yeah, I think it's.
Speaker 1Yeah, I'd love to talk about this. Go on and talk about your experience of selling businesses and business broking. Yeah, look. Or advisory.
Speaker 2At a high level, I think it's, in short, it's broken. And I think it's for a number of different reasons. But I think the more. The model itself is broken because the way that it's incentivized, it is broken. And let me explain what I mean by that. I think that what happens is usually the broker is just looking at a short-term transaction and is trying to sell something way more complex than property or a house. It's not a straightforward value. They try to do it that way. They try to look at it that way and make a very quick transaction as quick as they can. And what happens is what is the disconnect is they sell to the seller or to the business owner. Usually they sell them the dream and they come with this magic numbers, which they never make sense to me. And they have generally very little to do with the reality of what the valuation of that business will be. So they sell them the dream just to get them hooked. And they sign that agreement. And so they'll be the listing agent and to list that data particular business itself. And. And what happens in that is they sell them the dream and then they sell to the buyer spreadsheets. And they usually, yeah, they come with all of these claimers saying, like, we try to represent this in the best way possible. But, yeah, the reality is that they already know that the spreadsheets, they have a lot of fat redundancy and a lot of things that they probably are not completely aligned with the reality of how the business works or will work. So, and the problem as well, the other problem that I see in that industry is. Because they need to see the incentive into when they sell and they don't usually comprehend the complexity of selling a business or, or a business itself. The, then they end up killing anything that can be outside the scope of, I want to sell this for a million dollars. And if it is anything outside this, and this will be cash and this will be a settlement and anything that is outside what I consider to be a good deal for me is not even for the seller. It's a good deal for me. So, I'm, I'm going, I'm shutting this down basically. So, and that kills a lot of, a lot of businesses that actually, because of the complexity, you're not selling a house. It's not a house in a, a location or a blue chip suburb where you know that the square meter is this around there for a house and blah, blah, blah. So, you have a straightforward valuation.
Speaker 1And you can look up a comparable sale from last week or last month for 10 properties and you get, you're going to be within. a pretty small.
Speaker 2range that's exactly right and it's back by a tangible asset as well so let's say you bought something for a million dollar maybe you pay you might maybe you pay an extra 25 grand but you know that it's still nearly a million back of worth of something yeah into that asset backing it up now if you just trust one of those spreadsheets and that valuation that is overly inflated and you bought something for a million dollar and then the next day what happens think about this what happens if customers they go with the new owner the new owner say oh i'm not here and then customers start saying ah i was only loyal to this company because of the owner or for this and that reason so the customers are gone then the people or staff that know how the business runs they leave they don't like the new management or whatever so they leave and and then all of a sudden you don't have customers you don't have income you don't have a staff so all of them know how how to operate the business is not there so and then all of a sudden you rather rather than saying well this business was making i don't know three or four hundred k in profit now it's making a loss yeah and is that worth a million dollars all stuff that sorry is that worth a million dollar now like a couple of miles it's on the track so so i think the cause is what
Speaker 1caused that that turnaround in profit that's stuff that you can risk manage but you don't you can't risk manage it when you're on the market for sale and you want to sell you yeah look at it you review it a couple of years out from when you're ready to sell and no question you're going to look at how sustainable or how it's transferable are the key clients of the business and you start to think about what can i do to mitigate that so it's a it is a it's a time-based thing unfortunately and you've you've just outlined it the some owners will it's all too hard it's all too late i want to sell that sounds like enough money to retire on let's have a crack at that a million bucks two million dollars and the only lever generally the only lever is to reduce the price because there's no the process isn't about finding it's about getting a result which is that's that's what that's the model that's it's a black box you you put a price up and you try and get that and get a get a commission but really yeah you only leave leave yourself a lever to go okay we've been on the market for six months hasn't worked let's drop it by 200 000 and and it it you can probably drop the price by another 200 or another 300 if there's no you haven't kind of really scoured the market and researched who should buy this business other than just general business buyers you're not even tapping into the right kind of buyer right kind of strategic bias yeah it's a pro absolutely i agree with you
Speaker 2it's a tricky and challenging and makes things challenging for everyone as well including the the people that is trying to sell because they create this big expectation that is more likely it's not going to happen unless the business is rock solid and it's a genuine investment and and then start exactly as you say i've seen businesses that they went from a four million dollar valuation i've been tracking them for a while and now they're they're selling them for a million dollar like well that what what does that do to the owner that that owner was selling them for a expecting four and now it's down to one and and probably the one maybe it could have gotten a little bit more because now it might be demoralized and the price is going down and the performance going down so he's putting less and less time as well into that so at the end of the day it's creating their own expectations um into business owners as well and they don't get the full value when there are more better ways to actually do that and they say well yes it is risky i like your business uh there might be a way to do that but i don't think there's a way to do that i don't think there's a way to do that i don't think there's a way to do that i don't think there's a way to do that there might be a way like if the business does what you're saying that is doing why we don't split the risk and uh and there is a way for me to actually take that of you and maybe there might be through a reasonable earn out or a vendor's finance and in the right terms that are clear transparent it's not not not the type of earn outs that become a pray out pray to see if you get your value
Speaker 1i just i just i want to just close out that last piece of conversation yes yes a lot there's a lot of off-market sales go on because within markets and industries and locations there's somebody bigger player or or even a a similar size player and and those some of those businesses get picked off they don't need to go to market so what's left on the market is in in many cases it might be a really obscure niche or there's certainly a lot of hospitality businesses that are out there that are out there that are out there that are out there that are and the and it's an efficient marketplace to clear hospitality retail because you don't know who's you know going to buy them but if you're a you know a b2b business or a industrial business or services specialized to put all your hope in finding a buyer on one of the business for sale websites it's really it's really the probabilities are just so low but i agree with some earn outs um you can you just give us your take on their house because that it comes up it does seem like a rational logical way to bridge the gap if you've got a genuine buyer and a genuine seller yes tell me give me your take on
Speaker 2earn outs yes in terms of earn outs uh there there are different ways that you can structure or put a deal stack i guess at the end of the day and exactly as you say is usually a good way or can be a good way to actually bridge that gap because again we're not selling a house here this is more complex and essentially you have so many dynamics and parts of the business to actually give the and the most part of that comes from an intangible is not a tangible asset mostly sometimes it is tangible but uh or tangible assets inside the business but usually a good business valuation comes or a good business value will come from that good will or that intangible part and essentially it's what a buyer is doing is buying trying to buy a predictable income or an asset that is going to generate income over time and as you know the markets are so dynamic so essentially you got to look at the history of the business and say well this is what business been doing and based on this i believe that i can do this for the next three five or ten years and then usually the seller will of course try to promote it and say well my business is doing this it's doing great it's growing it's doing such and such and then usually the one that is taking all the risk is the buyer and that's where the friction comes and where most buyers or transactions they end up not happening or going ahead because it's like okay i'd be happy if you michael tell me that you'll send me your business for a value and i think that the value is there it's pretty clear and transparent straightforward but usually the risk again will be all on me and i say hey michael i think that potentially the business can do that let's see if that it will make that in in the future and the earn out is like it's probably performance not probably it's usually a performance based type of a way to bridge that gap and essentially you'll get the last call it 10 or 20 percent of the value through that earn out if the business is essentially is let's split the risk um i trust you but also i gotta be cautious with this so if the business is doing what you michael is are telling me that the business is doing then i'm happy to pay you the full value but if not then yeah i'm happy to pay you up to this and i think that's a good way to bridge that gap so everyone is happy there's a big big however there there's a big big however there and that's why i was joking about the pray out because that can be also excessive as well in the way that if the the seller doesn't have any control on the outcome of that either or there is no clarity around how the mechanics of those can work that can be quite tricky so it needs to be a balanced way as well and the right way to do it but yeah i agree and it can be really productive and i think that should be more normalized and talk more about that but again coming back to your point i don't think it's a good way to do it but i think it's a good way to do it something that that's never going to happen with the broker involved so it's more unlikely you're going to get the full value of your business with the broker involved if you are trying to do that
Speaker 1yeah yeah um with with the earnouts there's a there's a straight up fear and trust factor but you've really if if more if more of these small businesses are going to transition it's really hard to fund them through a bank so so the the the the the the the the the the the the outgoing owner should at least understand and consider an earn out or vendor support for lending the business because it in in both those cases you you are saying and if you don't trust the buyer it's not it's not going to work yeah i'm not talking about a level of commercial trust where in the process of getting to a point where you've got a potential deal on the tail you on the table you need to be looking at a level of commercial trust where you've got a potential and understanding how they work and who they are what they've done before and you can develop a sense that fly-by-nighters have never done this or they are pretty seasoned savvy i don't want to go and have dinner with them but i i think they genuinely like the business and i think i at some commercial level i think this is a reasonable decision to consider how to and then you get so you put aside all the the fear and the and the distrust and say well how can we make it work and and part of making it work is you're going to have to have a business that's going to be work is having some good advice if it's just we're going to pay you percent of profit over 500 grand next year and the year after that's no that you've got you don't control the books or the finances anymore but if if you said um it really simply is the example i'll consider that but what you have to do is give me a look at your business plan how you're going to run the business let's template this so there's a pro forma version of the of the profit and loss you can't introduce new costs that weren't there that from head office or something i mean there is that's a kind of detail but there are ways to map how you would measure it so how you would measure that earn out and then if if you have a disagreement you have a process where you get someone independent so at least you can progress from this is just uh i don't trust anybody i'm not going to do that too you make a considered risk assessment and if it means getting a deal done or not it's really vital and that
Speaker 2could be maybe you're talking about well i'm just giving an example here it's like well i'm selling my business for four million the full value is five million the five million will be with the earn out or getting nothing at all well i think that getting the four million with the potential earn out when well structured it's a lot better than than nothing and that's where a lot of business end up and believe me it is it takes time it's not like selling a house it's not like you engage that immediately overnight you spend a lot of time with a lot of time and money with lawyers legals due diligence and they were sharing the contracts and the accountants as well and it might take another three or six months before you find the next potential buyer if you find one as well so it's
Speaker 1not easy this is right yeah i think like from the point of view of how can i make this work it get the right advice understand who you're dealing with but yeah it's um yeah it's kind of i think it's one of the things that's going to make it a little bit easier and i think one of the things that's going to make it a little bit easier and i think one of the things that's going to make it a little bit easier and i think one of the things that's going to make it a little bit easier owners if they want to sell to make it easier quicker offering either finance vendor loan or or some kind of earn out or it could be some other measure it doesn't have to be a complicated profit share it could be a revenue share or absolutely you can do all that you know you can do that so just on your work now and now you're focusing on uh velaro which is your your own firm and you're focusing on your own firm and you're focusing on your own firm and you're your own practice in uh acquiring businesses right
Speaker 2yeah a couple of things that i do this day so number one i usually get usually involved with businesses i want to scale up and and then the other ones is people that want to get ready for exits as well so put more expertise into those areas simultaneously at the same time i'm also doing investment yeah buying small businesses exactly in this type of situations in particular in particular i usually look at businesses that they are easy to turn around they're boring predictable they've been around for a while i'm not looking for a latest tech technology a business that is out there or the latest innovation you can put innovation to very simple businesses these days yeah and without with being the latest disruptor i guess out there and make it a lot more profitable i think so i do a little bit of that work so number one i help entrepreneurs that are already in business and they want to grow and scale or exit and be i acquire businesses myself as well so i do but you continue to look at
Speaker 1opportunities yeah absolutely yeah
Speaker 2and i'm in contact with yeah uh with a lot of different business owners continuously i love having a chat having a coffee so uh yeah it's always it's always good having having a bit of a chat about that so yeah that's what i enjoy this is
Speaker 1that's the um that's the off market right there being being done the right way which is if you scan all the business for sale sites you don't see too much that you're interested in go knock on doors build build relationships with yeah owners and understand that they're very suspicious rightfully so if someone knocks on the door you know looking for a business to buy you're doing it you've got more of a chance for learning more about the business and securing a deal over the medium to longer term by by approaching this like a relationship building exercise and
Speaker 2yeah exactly right
Speaker 1something can happen to them they can be perfectly set on going to be here for five years got this plan that plan and if something happens and maybe they just go and try and sell it with a broker on the website for sale website or maybe if you're been you've had a coffee with them once a year for three years you're pretty well placed for them to pick up the phones i had things have changed and and you've uh you've built that relationship but you've also you've developed a pretty good you know a decent understanding of what that business is all about and it's an excellent way to but it's a it's a more time consuming and considered way but it's it's less um be highly effective it's
Speaker 2less transactional which i think yeah i think it's a good way to do it i guess um it's it's more about i'm generally these days i'm generally interested on helping others i think that's that's what i like it's like if i could help someone that i already been in that situation and i could tell them don't don't do that it will save you a year if you don't do that or if you do this it will save you another three years and it will save you a lot of money um i think that that's what i'm about and i always enjoy having there is no harm on catching up for a coffee and having a coffee and and and see what they're what they're doing and also good things flow from there as well the other day someone yeah just sent me a message saying hey i'm still investing in businesses we had a chat about two years ago about this and i'm thinking about selling now situations have changed blah blah and that was only just a casual coffee that has someone a while ago and that those sort of things
Speaker 1happen but yeah of course and they happen all the time because with all the best intentions in the world running a small business is is challenging and emotional and up and down so yeah that's where that's where those off-market come uh opportunities come absolutely yeah now given that you're uh of that mindset to make it make owners more successful and and investors more successful and and generally uh help out what if you were landed the job of running australia's small business department what what would you your priorities be if you landed in canberra next week put your feet under the cabinet table and had to put down a couple of policies to to build a more vibrant and resilient sme economy what would your yeah
Speaker 2i'm not i'm not a politician or someone that usually is involved in that but i guess from my perspective as an from my humble position of what i've seen two things i think it's um number one simple it is small businesses as i said before they usually don't lack growth or customers they lack cash flow and that's where that's the big bottleneck for a lot of them and puts them out of business i'm not saying it's every situation and i think that there is a lot more that can be done and specifically for startups or businesses that are trying to get established and and get started and give it a go it's interesting i remember talking about this particular business which was my first business in australia and i was like okay i finished my first financial year there was a little bit of profit and then the next thing that i got is like the payg bill and it's like okay so i just got started i'm putting everything that i got here and on the table i'm working like crazy and i haven't i haven't taken one penny out of the business yet but i still gotta pay tax in advance for it if if you make tax taxes or if you make profit this is your payg bill and things like that or even bus yes of course you should be setting aside your 10 or whatever it is the the the bus or the gst you gotta be putting that aside but it's so good in practice but when you're a small business owner the reality is that you gotta pay your suppliers your staff and and they inspect the things and then you had an accident with the vehicle and all of a sudden you gotta go and repair that immediately because otherwise you can't operate or whatever it is and then i don't know if it's a good idea to do that but i think unless you're a cash flow yeah and so i really would like to see something that is going to give some relief or more incentives in that space for at least startups until for and the numbers are clear like 95 of startups they just died and mostly because of cash flow so i think somewhere around there i think that that'd be essential the second part it will be credits it's interesting how do you fund your growth one is of course you gotta be running the business by from the budget and the numbers but the reality is growth also it's usually expensive it requires uh requires structure require funds and it's like well how do you do that or you hustle your way through it and you're doing three or four jobs at the same time trying to save which is what most business owners do trying to save i'm trying to find that growth and make it happen but at the same time you you can only do so much and you need the funds and it's like well if i need a line of credit usually the bank straight away say okay put your um put your uh your houses a collateral how does that go for people taking risk most people want and and and that it's uh yes working somewhere along the lines of how the government can back back that up the we need to be backing more of the small business owners
Speaker 1it ties into it we talked a lot about it selling a business is not like selling a house there's a there's a a well understood value for houses it's much easier to lend for a house than it is for a business so yes it goes to the you know goes to the heart of i guess of financing and notwithstanding there's some really you know innovative fintechs and um who are really starting to cut through and and some and some better business banks like like judo who look at cash flow business fantastic yeah for more established ones but you're right it's um at a national level we've got a fascination with property when we need more of a fascination with creation and funding good small businesses and good small business operators i
Speaker 2agree and maybe if you look even to the u.s as well in the united states you have the sba loans not sure whether you're familiar
Speaker 1with i don't know which yeah no very familiar it's government backing government backing in entrepreneurs it is fantastic that'd be
Speaker 2fantastic way to do it i think you don't need to recreate the way always thinking about where some of these things are being successful and how what is the
Speaker 1way to get them out of that it's um it certainly it says that it says that there's value in small businesses they're going to go through a lot of hoops in that program but in the end you can borrow money and and the bank will be covered or guaranteed by the government yeah okay gonna have to uh exit this conversation absolutely scale it we need to exit now yes absolutely thanks so much for your time the uh you you contributed a lot of really excellent on the ground experience um congratulations on what you've achieved and look forward to staying in touch and hearing more about what you what you do with velaro and if people want to what's the easiest way for people to reach out to you
Speaker 2yeah um so the easiest way is uh linkedin okay or otherwise they can just get in touch through the uh the contact form in on the website velaro.com but i think the
Speaker 1message from you was you like connecting and talking to people investors or scale as business skills so um all right thanks thanks very much for your time gabe you take care and i look forward to your touch thanks a
Speaker 2lot for having me and uh and it's been a pleasure it's been a great chat so thank you very much for
Speaker 1listening i hope you enjoyed this episode of owner to owner and got some helpful advice and maybe some more clarity on how to make your business work better for you to subscribe or to listen back or to access any of the resources or information we or you can search up owner to own a podcast on your favorite pod player if this episode or the podcast generally is really helpful i'd love it if you could leave me a like a rating or review but even more than that i'd love it if you could share it with another business owner there's a new episode out every couple of weeks i'll catch you then
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