Photo by Антон Дмитриев on Unsplash
Most of us know that there are great businesses in areas we don’t even know exist. Did you know, for example, that electrical conduits need a type of connecting device to get them around corners, or to go up or down, left or right? Murray Kent did, because his business had to buy some of those devices for the products and services he delivered. At one point, he decided to buy that business, CON-X, himself for $40,000, and ten years later turned it into a very handsome exit.
Scaling
One of the first things Murray tried to get a handle on was automation. There are many variations in these connectors; for example, it may take up to 5 separate connectors to turn an 8-meter conduit around a corner. By the time the company was sold, there were 1000s of SKUs. That said, Murray was able to optimize and automate around the most frequently ordered ones.
Realizing a great deal of the business would resist automation due to segmentation, he made sure to invest in the right sorts of people. Murray frequently says he gets great joy from helping people go beyond the limits they set for themselves. Not only did he elevate people within production, but he also ensured they could manage and lead without him. At the time of the sale, the company had 35 employees across 3 locations
Interestingly, Murray had also read John Warrilow’s Built to Sell (which we have covered in our Book Club series) and so kept the principles enunciated in that book about driving value in the business and made a lot of strategic decisions around how CON-X could grow in its business, but also gain in value for a buyer, should he ever decide to sell.
One of those important principles was not having any one customer account for too large a share of your revenue. The oversized customer in question? Murray’s own firm, which he continued to own after buying CON-X. Murray and his team deliberately reduced the revenue percentage from 50% of overall billings to 20-25% by expanding the business into other geographies.
Offer
Someone in the industry reached out unsolicited to begin discussions about an acquisition. Interestingly, not long before that, Murray had thought through what the company had accomplished so far and knew that they had done well for ten years in the business, but what was necessary to get to the next level was going to be more machines, more automation, and more customers outside their home market of Australia. Having this “Plan A” before he got an offer put him into a stronger position throughout the transaction: if it didn’t work out, he would continue to grow and scale the business.
While he’s under an agreement not to disclose exact numbers, he can say he got 6.23 times EBITDA, and that the company was doing eight figures in topline revenue at the time of the sale. He got 95% of the funds on the day of closing, with an additional 5% held back for any warranty related issues that might come up. The remainder of those funds was paid out 12 months later.
FAQ
What are the questions Murray often gets asked about this transaction?
- Were you happy with the price? Murray says that he was, but if he had to do it all over again, he would have seen if he could have gotten more. He was limited by his own beliefs that the company was only worth about 4X EBITDA, so an offer of 6X seemed “too good to be true.” He never explored the deal’s potential higher ceiling.
- Did you consider shopping the deal? This answer is related to the last question. Again, Murray was happy with the valuation and felt the buyer would be a good fit, so he didn’t think to shop the business. In retrospect, he felt he could have created more competition and a higher value if he did.
- How did you break the news to your team? Some of his senior people, particularly in the financials department, knew early on, as they had to help generate reports and assist with due diligence, but the remainder of the team were told department by department, right after each other. Murray didn’t want to give a big all-hands speech and wanted to make himself available to hear any concerns or feedback in a more intimate environment. Murray kept the all-important rule of confidentiality throughout the period leading up to the deal’s close.
If you’re interested in buying or selling your business, we’d love to help.