In this episode of the Owner to Owner podcast, entrepreneur, builder, and former M&A lawyer Tony Simmons joins Michael to discuss his transition from corporate law to tech entrepreneurship, navigating business exits, and the hidden traps of earnouts and deal structures.
Master M&A, Earnouts, and Small Business Growth with Tony Simmons | Owner to Owner Podcast Ep #184
In Episode 184 of the Owner to Owner podcast, host Michael Kerr sits down with entrepreneur, builder, and former M&A lawyer Tony Simmons to explore the hidden realities of business exits, negotiation traps, and structural deal risks.
Listen to the full episode to master the mechanics of business exits and protect your enterprise value.
Connect with Tony Simmons at tonysimmons.com.au or via LinkedIn.
Michael (01:20):
The price agreed when you sell your business isn't necessarily the cash you're going to ultimately collect. Tony Simmons joins me today on the Owner to Owner podcast. Tony's built and sold businesses. He's worked through earnouts, which have enabled him to see transactions from both sides. And today we're going to explore Tony's pathway from M&A lawyer through to entrepreneur, a builder, and an exitor of businesses. We're going to really dig into the hidden risks in earnouts. They're a big part of a lot of deals. And what owners should really understand before they sign a deal that they may later regret. So a big welcome Tony to the Owner to Owner podcast.
Tony Simmons (02:00):
Thank you for having me, Michael. Nice to be here.
Michael (02:02):
You started life as a corporate M&A lawyer. Why...
Tony Simmons (02:07):
Fortunately.
Michael (02:08):
...why did you leave the law to become a—if you want to style it as an entrepreneur, a builder and successful exitor of businesses?
Tony Simmons (02:17):
Yeah, so I mean, there's probably a moment I can pinpoint. I'd moved from Australia working in one of the big law firms around the time of the dot-com boom—so showing my age—but moved to London with my then girlfriend, who's now my wife of 20 plus years, and took a job at British Telecom at a time when there was a huge amount of deal making going on. There was a demerger of O2, their mobile arm from BT. There was the rollout of broadband across not just the United Kingdom, but all across Europe. BT was central to that. And, you know, as a young man getting the opportunity to work on these deals flying around the world, you know, the front end of the plane with perks and teams and money and, you know, deals that no one had ever conceived, was, you know, should have been the best time of your life as a young professional. And I remember coming home after this incredible deal and we'd had drinks and celebrations. And I said to my wife—or she wasn't my wife, my girlfriend—you know, it's just, it just doesn't do it for me. She was like, why? And I was like, because I'm just papering over everything that's happened. I'm just the sort of, you know, the last piece in the chain. What I really want to be is doing deals. I want to be the commercial front end of deal making rather than the person who gets past everything that's already happened and says, just write it up. And that's your role in it. That was when I realised that I didn't want to be on that side of the fence. I wanted to be on the other side of the fence, building the value, doing the deals and... From there on, I was like, okay, this is as good as it gets as an M&A lawyer, and it's not gonna get any better. I think I need to do something to get out of it.
Michael (04:02):
Did you suppress that entrepreneurial spirit to go into the law in the first place? Was it there?
Tony Simmons (04:11):
100%. 100%. Yeah, I remember again, I can pinpoint as a young lad, probably, you know, year eight or nine growing up in Adelaide, reading the Advertiser business section. And, you know, there were a couple of guys who called themselves business doctors. They'd go in, they'd fix businesses. It was probably some form of, you know, private equity and helping distressed businesses or really fixing them to flip them again. I didn't even know what it was, but I thought that's what I want to do. So as a young person, I did suppress that natural instinct. I came from a family of doctors and lawyers, and there was always a real sort of more implied push down into professionalism rather than business. And so that was just the path that I figured I'd take to go down the legal path. My sister was a doctor, my uncle was a lawyer, my cousin was a lawyer, my other sister's a lawyer, so that's where I grew up, that's what I knew. But in the back of my mind, I always had that entrepreneurial itch and eventually, a couple of days before my 30th birthday, quit the law in a fit of frustration with the law and said, if I'm ever gonna roll the dice, now's the time. So I did.
Michael (05:21):
Yeah. Good on you. There's added pressure there, with expectations of everybody else—you've got this fabulous career, you're working, why would you give that up? But when it's deep down to have a crack at something, it's pretty hard. I think at some point you're gonna regret not having a crack later.
Tony Simmons (05:40):
Yeah, absolutely. And I've seen, you know, through my forties when, you know, a lot of my mates had these ideas—you know, they've done a few years on the corporate treadmill or lost jobs or, you know, got sick of answering to people—is, you know, 10 or a dozen years ago, they'd come to me and say, you know, I've got this idea. I want to do this. And I was like, well, you know, you've got to go from earning a salary and being able to pay for everything to probably earning nothing, living off savings and the sniff of an oily rag to do it. And you see the sort of drain away from their face when they have this realisation that that, you know, that horse has probably bolted. And I was, you know, maybe looking back gutsy enough to sort of have a crack, but I realised that time was going to slip away. And if I didn't do something before the financial commitments, the children's commitments and those sorts of things really ramped up, that was going to be my existence too. So I did make a break for it. Yeah.
Michael (06:41):
Yeah, there are these moments, aren't they? Gaps where, you know, if you look at it top down and maybe with the assistance of some people with perhaps a bit more experience, you say, well, those couple of years are when you should absolutely do that because the next five are primary school or the next ten are whatever, and mortgage and so forth.
Tony Simmons (07:01):
It's the hardest thing as well because timing-wise, it's the time in a corporate environment where you're really starting to come into your own and move into management positions and getting more responsibility and bigger salaries. So there's a real tension between, I'm legal, I'm on the path to making associate or partner here. And there's this great tension between throwing all that in and starting from zero, thinking, maybe I can do it when I'm 40, but yeah, they don't paint the picture that when you're 40, no one's gonna pay you your salary at 40 staying in a law firm to go do a startup when you've got no business experience at all. Yeah, maybe we should write a playbook for life on this, Michael.
Michael (07:47):
Well why not? I've had a few interviews in the recent past where people have broken away—Burleigh Brewing comes to mind, like that broke away from a legal career actually—and they're twenty years in as an independent business. But it takes a lot of bravery and takes a lot of self-confidence, I think, because around there is a lot of noise and it's loving and caring and concerned from family and friends as to what you would do. But yeah, thinking about asking someone who's maybe thirty or forty years older and saying, what would you do given what you've been through?
Tony Simmons (08:27):
And look, I think the other thing is back in those days, you were talking about the early 2000s, entrepreneurship was, I wouldn't say it was a dirty word, but it came with different baggage back then. You know, people would think of your Alan Bonds and your Christopher Skases. It was kind of a dirty word. And these days entrepreneurship, now, entrepreneurs are the new rock stars, your Elon Musks and your Jeff Bezoses, Zuckerbergs—these guys walk out to rock star receptions and really back in those days, you know, no one wanted to be lumped in the same pool as Christopher Skase. And you seemed to be putting yourself really out there back then. Different world now.
Michael (09:10):
Yeah. But that was then—that dot-com boom, like that was where you referenced that earlier, I think '99 to 2001 with the first wave of internet-fuelled startups. I had three years in one, and it was the biggest trip I've ever taken in terms of totally, completely and utterly absorbed by making this thing a success at the expense of just about everything else. And by the end, totally fried, and that's where I just went off and did my own thing 'cause I learnt as much as I'm ever gonna learn—it was incredible, but it was totally absorbing. But it was the beginning of that, and we had that whole boom-bust, and a lot of people filtered out and started to do many other things as a result of that experience and that tech and the underpinning technology as well.
Tony Simmons (10:01):
I mean, yeah, there was so much and for mine, merger and acquisition law to sort of tie it back, you know, we were working on the rollout of broadband as a monopoly, essentially monopoly telecoms. So putting in equipment and fiber across the United Kingdom and Europe, enabling the backbone of what's become the internet, which has powered software and transactions and everything kind of started with these cables in the ground and technology at the local exchange. So for me, we felt like we were doing frontier work and money was no object. The objective of every government around the world was to build this capability. And, you know, it was a great collaborative time. There was a lot of money floating around. There was a lot of urgency. There were a lot of deals, a lot of parties and a lot of work. I feel looking back that we did sort of build the backbone for what was to come.
Michael (11:01):
Yeah, indeed. So, your businesses, can you just talk a little bit about the businesses since leaving the law, and then we'll come back to the most recent one for an in-depth discussion on earnouts? What are the businesses and what was the history of each of them?
Tony Simmons (11:19):
So when I left the law, the Full Circle Group was basically a telecommunications benchmarking company or broking company, if you like. I knew from being inside telecoms that the contracts we deliberately wrote were opaque, impossible to compare one telco to another and what the plans were. There were different kinds of services. And back in the early days, you paid per megabit, you know, even on a mobile phone, you didn't get an all-you-can-eat plan. You paid for every second of a phone call and every megabyte consumed of data. So my first business, the Full Circle Group, was to be able to compare offerings and reduce the opacity between different providers to be able to say, if this is what you are using now, this is an equivalent service from someone else. But moreover, we can track your usage of how you're using it and determine whether you're buying too much or too little. And then once you've bought it, we can take all the billing data, check it, and then pump it directly into your accounting system. So, if you're Coca-Cola, for example, and got 1200 mobiles and they sit in different business units or P&Ls, back in the day, someone was writing all that in manually, trying to configure this or putting it in a Visual Basic spreadsheet. And the Full Circle Group built an engine to take the raw data from the billing system, normalize all that data and pump it directly into accounting software so you could get rid of full-time equivalents doing that work manually. So nothing's really changed in how I look at problem solving and software to do these things. That was the first one, and well before you could vibe code a solution, you had to build the code from the ground up.
Michael (13:02):
Yeah. So you sold that?
Tony Simmons (13:04):
Yep. Listed that. That went in through the backdoor of a company called J-Curve Solutions onto the ASX, small cap, but you managed to create some liquidity in that business by putting it on the ASX, which was good. And then after that, that provided me a little bit of time to sort of think about what I was gonna do next and tech was now emerging. I started a technology incubator and accelerator, Marketplace Ventures. We got a lot of startups coming through, going into cohorts. It was a 12-week program. I suppose it's sort of like a poor man's Y Combinator, if you like, based down in South Melbourne. And one of the companies that came through that was using early stage virtual reality, we got investment for that and I ended up becoming the CEO of that. That was called Lithodomus. It's still around as a business, but that enabled me to transact in Europe, in all different countries throughout the EU, because what it was doing was creating ancient Roman and Greek cityscapes in virtual reality and augmented reality. So rather than going around with a tour guide, looking at a book and trying to look at the Colosseum and appreciate what it was, you could look through some goggles or hold up your phone and be recreated back in the days of the Romans. So that was good business. It was actually also a data play, and that had a few problems with my exit there. I'm not going to go into it, but let's just say I was ignominiously exited from that one. Wasn't the founder, wasn't a director and, you know, it was a bit of maybe a bit of et tu, Brute, a bit of Roman backstabbing going on there as well, now that I think about it.
Michael (14:50):
Right. Yeah.
Tony Simmons (14:53):
So that was a good life lesson. Then after that was Sonant. I'd done some advisory stuff and helped businesses raise capital and list and a lot of due diligence work. So you can take the law out of the boy, you can't take the boy out of the lawyer or the other way around.
Michael (15:08):
Yeah, they stay with you and they help, they're helpful. They're both parts of your personal or professional being that are helpful in different situations.
Tony Simmons (15:17):
Yeah, definitely has been. And as an advisor, I think it's a really incredible skill set to have because you can see a lot of risks that someone who hasn't got the law background doesn't necessarily see. Then Sonant was the first wave of AI. So the other companies had been data and frontier technologies and virtual and augmented reality. And then Sonant was AI before, years before ChatGPT came along, building our own large language models and moving into audio to contextualize conversations so that the right ad could be placed at the right time for the right person, depending on what they were listening to and who they were. So that's exciting—sorry, go ahead.
Michael (16:03):
Sonnet was dropping—so podcasts were on the rise at that time, infancy or early days of podcasting. So being able to drop in ads to a podcast that was tuned to the podcast conversation.
Tony Simmons (16:17):
And even, you know, if you and I are listening to the same podcast, there might be different points in the podcast where what we intend to buy or purchase might be very different. You might have been looking at buying a brand new car and they might have talked about automotive and the best place to run an ad for you might be during that part of the conversation. I might've been looking at insurance or something a bit more prosaic and I should hear a different ad in that part of the conversation. So that was the sort of extent of the technology. Most of what it was used for was around contextualization, but leading into advertising. So we were talking about music beforehand. If there were a lot of conversations around Radiohead and that was sort of going off the charts across the whole network, so radio and podcasting, the advertising or sales team and the network could go, you know what? There's a lot of talk about Radiohead and music—talking to someone else about live music and putting in some ads for something adjacent or to the actual promoters of Radiohead. So look, you're getting all this free coverage here. This is the perfect place for your ads to go. So really being able to show the advertisers there's value in their advertising dollar, it's sitting conversationally in the right place and really helping advertisers understand that they're getting bang for their buck for their audio spend.
Michael (17:44):
Yeah. So I'll come back to Sonant, but to start the next part of the conversation, that's three businesses there that you've been involved in—two you've founded, I think, and one you co-founded. As a philosophy, there's a spectrum between "this is my business, it's my baby, it's hard to let go," and then there's businesses that are built to exit for financial and/or benefit. Where are you on that spectrum?
Tony Simmons (18:20):
Yeah, I think the underlying philosophy now would be that part of it's still the same. If you build value for customers and create value, then exit will take care of itself. So, look after a customer, solve a problem, have them come back as repeat customers and create real stickiness and value for the customer. That's the primary philosophy of going into business, doing something that helps someone else because in business, I don't think there's anything better than when you've created something and someone comes along and says, "I'll buy that." I think that's an incredible feeling where you've gestated something from nothing and someone says, "I'll pay you for that." That, to me, is the essence of business. And if you do a lot of that, people will come and knock on your door and say, "Are you doing something interesting here? I'd like to have a look and see where that fits." The second part of the philosophy is exactly that: I believe that other companies, larger companies, particularly corporates, exist to purchase smaller companies. I don't want to build really large companies and I definitely don't want to run really large companies. But I like to engage with larger companies to buy businesses that I've built either for value, a creativeness that they might call it to add more revenue, to add more customers, to build on-ramps, whatever it is. If you've got value, you can make that case, you can tell that story.
Michael (19:50):
Yeah, so going in it's about seeing a problem and seeing a solution as the principal reason for starting the business, and if you do that well, the exit takes care of itself. There's a lot of stuff around building to exit, and we should all—anybody in business—have a mind to their exit, but I find some of that stuff hollow when it comes to just building "build it to exit" 'cause you gotta go through a whole lot to get to some point. I think there are examples of people that've done it, but in the main you gotta enjoy the ride and get something out of the ride along the way, and the "it's my baby" kind of mentality is not lame. You feel like you're actually achieving something whilst creating value for those customers.
Tony Simmons (20:42):
Yeah, for me, I think the business is an extension of me. It sort of lives in my image, which is again, a wonderful thing about being an entrepreneur. You get to create something that not only closely aligns with your values, it's a manifestation of your values. So for me, that is the primary reason. Exit is constantly part of the makeup, but I really didn't think about exit on day one. I'm thinking about how to get a client and how to get profitable before I'm thinking about exit. And then how to continue to innovate when you've got 10 clients and all of a sudden you're managing 10 clients rather than building new stuff. There's so many challenges to overcome and that's before you start to throw staff into the mix and having to manage people. So if you're looking for an exit, I think you're probably—it's like footy teams or sporting teams that go into protective mode when they've got a lead, they're thinking about the final siren. That's when you're most vulnerable, when you're sort of thinking about what will be rather than keeping your eye on the ball, playing the next point on its merits. So I got better at that as I got older. And it's very hard to say no when someone comes along and says, "We'd really like to look at your business," but it's very distracting. And the smaller you are, the more distracting it is as a business. You've got to keep running it while you're trying to run a process. It's an all-encompassing thing, as is running a business. So if you're doing both at the same time, something's got to give.
Michael (22:22):
Yeah, because the business value just can fall away whilst you're trapped in discussions about selling the business and staff notice and customers eventually notice and it really can unravel. So with Sonant, you made an interesting point about big companies existing to buy small companies. There's not that many businesses listed for sale in Australia at any one time. What happens a lot is that within industries, supply chains, the bigger players are constantly monitoring what's happening with smaller businesses that they're already working with or are adjacent to or are seeing them as a disruptor. But what happened at Sonant? How did a big company make an approach to you and get you engaged? Is that where it started?
Tony Simmons (23:16):
I think if I look at the two businesses I mentioned, the Full Circle Group (the telco business) and Sonant, there were completely different reasons for the approach. The first one was because they were a legacy sort of provider and they were being smashed by new technology. You know, I talked about running thousands of pages of telecommunications bills through Visual Basic to get it into a spreadsheet; we were unpacking it from the source via API, and where they were charging sort of 60 grand to do it, our competitor was charging 60 grand and taking sort of three months to do the process, we were charging eight grand and taking 48 hours to do a process, which was even better. We were making seven grand on it; they were charging 60 and making about three. So the writing on the wall for them was that if we don't build or buy something similar, then we are going to be stuffed because we're winning all their customers. That gave us a very strong negotiating hand, and a buy decision was made by them and we slid into the backdoor of this ASX shell. So that was one reason. Sonant was a different reason altogether, because we shared a mutual client with the final acquirer and we had to make our systems interoperable in the meantime. So what that meant was we were dealing with them quite a bit and they were getting a pretty good line of sight on our tech and the use cases and our team. And eventually there was a discussion around what if we bought your team and your tech into our business? What does that look like? And so that became a logical kind of capability acqui-hire discussion where they saw other on-ramps and other revenues and a couple of intros to some other customers—a completely different reason that those discussions sort of metastasize rather than "we're trying to flog it, let's go look for a buyer." Having said that, I've been involved in businesses where that's been the exact mandate: we've had enough, or we think we've plateaued, or the founders checked out after 15 years, help us find a buyer, don't wanna put it on a broken website. We wanna run a competitive process with multiple counterparties and we wanna extract a very targeted result.
Michael (25:42):
And targeted to—I mean, you don't just assume it's still going to be most likely inside of the industry somewhere that you can narrow. Putting it on a "for sale" website for whoever—you just can't rely on somebody stumbling across a business for sale website. So you've really got to work harder to say who should buy your business if you haven't been approached already. And that's within the industry. Maybe it's private equity, but even then you can tell which private equity groups are focused on which sectors or industries anyway. So you can advance it even if it's a cold start and no one's knocked on your door.
Tony Simmons (26:29):
Yeah, very, as you say, targeted, methodical, strategy-led and ultimately becomes a sales process like selling a product. You're trying to get someone on the hook to buy a business, which back to my point about big corporates existing for the reason to buy smaller businesses, quite often that is an easier sell because the people writing the checks aren't spending their own money. Most of these people aren't fools, but when it's not your money and a corporation sees an acquisition through the prism of someone else's money—shareholder money, owner's money—and they're not financially on the line for making the decision, they become pretty good targets for exit.
Michael (27:14):
So with Sonant, you've only recently finished up a period working with them post-acquisition. How distracting was it for you as the owner-entrepreneur? Did you manage that process well? They knew you already, your business, and your team—was that a bit of a head start, and were you happy with the way you managed that process given you'd done a couple earlier?
Tony Simmons (27:44):
Yeah, so this is the first time I did all of it. Previously I'd appointed bankers or advisors to work with me to run the exit process or M&A whilst I was continuing to focus on the business. For this business, it was built in a very different manner: the team could actually run the business. I was still needed for sales meetings and customer meetings and strategy, but in terms of running a parallel process to exit, I was able to do that by myself. And when I say the company was built more for exit, the due diligence (DD) was started from day one of building the business—shared folders, corporate documents all kept centrally, centralized CRM, better record keeping. So the process of going "someone's approached us, we need to prepare a data room" didn't exist because the data room was a living, breathing extension of the business. Previously building a data room and getting ready for that discussion is a massive undertaking. But in this case...
Michael (28:50):
It's months and months of work.
Tony Simmons (28:53):
Huge amount. But in this case, we could easily just give them the password. We could track their access, what they looked at, what they were dwelling on, and follow them up with precision. So anytime someone said they were interested in the business, we could ringfence what they looked at and engage at a sensible level. The other reason for doing it is, previously with exits, bankers or advisors are going to take a couple of points off the table at the end of the transaction. And in marginal businesses or small business, you don't want to lose five or seven points for a transaction. To me, it's almost like real estate agents taking a couple of percent for being an advertising company.
Michael (29:59):
There's a big chasm between real estate—I think that's now one and a half percent or higher for commercial property—but in business broking, it is significant enough for a lot of everyday small businesses that at eight or ten percent they're actually more like a venture partner, right? For that, if you're gonna get that much of the equity at the end for that fee, you would happily consider paying it if the behavior and incentives were all about getting the best price we can and working overtime. Unfortunately, what happens is it's largely an advertising play where they wait for the phone to ring in a lot of cases, and that's not a venture partner.
Tony Simmons (30:45):
I think so. And I think there's a bit of overlap with business broking as well. Where the real numbers are important is if the process is going to take the operator or the founder out of the equation from running and growing the business in parallel, and the upside that you potentially are losing by running the process rather than appointing someone is greater than the cost of appointing them, then it's a no-brainer. But most people overestimate in my view—and I certainly have been guilty of this—overestimating how easy it is to run an exit and thinking, "I'll still be able to keep the business running, no problem, I can do anything." And then all of a sudden you start to see sales numbers drifting or staff satisfaction drifting or customer problems increasing. As soon as the acquirer gets a sniff of that, they look at the monthly numbers and start to see it going down, they're going to want to renegotiate the price or they're going to say, "We've got a key man risk, the business relies on you." So these are really important things that, with the benefit of hindsight, you learn, that enabled me to run the Sonant process by myself.
Michael (33:53):
I get to advise owners regularly when they've been approached, and what you did—you brought a lot of experience, your legal experience, your business building and exiting experience, the capacity and expertise to run that process. So the question is why would you pay X points or percentage? But there's often owners for whom it's the first time and they really do need some advice. They don't necessarily need someone to come in and say "we're gonna set up a wholesale process and we're gonna charge you eight percent or five percent," because really the advice they need is just particular to that approach—it's already started. It's not reasonable to pay eight percent when the buyer's already kind of made some advances and you just need some tailored advice.
Tony Simmons (32:45):
I agree as well that for some founders getting someone in at that 8% rate to run a process which is completely foreign to them is again money well spent because there is a skill in doing it. There is an art in selling a business. Even though I'd been in M&A on the other side of the table, selling my first business was the most stressful thing I've ever done—exponential learning curve. We had lawyers and accountants all on conference calls constantly around what are the legal risks, what's the legal structure, how do we get money out to shareholders, do we frank dividends? These are not things that anyone can answer by themselves. You're going to have to bring in someone who knows what they can do, how all the pieces are sequenced. And more importantly, if it is starting from scratch and trying to build a book of people who could potentially buy, then paying 8% for someone who can do that end to end is going to be money well spent.
Michael (35:11):
I've done the math plenty of times, and if you make some assumptions about if you don't sell or you sell at a really bargain basement price versus getting a 20% premium on the price, it completely and well and truly covers the additional cost. But that's where you're going from a standing start and it's an absolute grind. But there are those cases where it's off-market and it's already started and sometimes you just want to talk to someone for a little while and say, "Well, what information should I or shouldn't I give? What should I say? How would I go about working out a price, do we sign an NDA or an MOU?" So if it's new ground it's really helpful to get that advice. What traps should owners watch out for?
Tony Simmons (35:34):
There's a couple of things that are really interesting traps as well. In my first business, we were put in a standstill period. And once you're in a standstill period, you can only talk to one party. Now that's a real risk.
Michael (35:50):
That's exclusivity, right? Where you've signed something to say we're giving this buyer 90 days or something to look at it without you going and talking to anybody else?
Tony Simmons (35:59):
Yeah, so you're effectively exclusive with this particular party. They're calling the shots then and you're sort of in their hands. And the one thing about M&A, which I think is consistent, is time kills deals. The longer from start to finish, the less likely the deal is to transact. So if you've got 90 days, you want to complete it in 90 days. If you're still not at completion after the standstill period, where are you then—having to go into another standstill period and agree to another set of terms and conditions and a new MOU and another look at numbers? These types of things around timing and sequencing—I've made a lot of bad decisions in my life and seen a lot of stuff.
Michael (36:45):
Can that be by design? Like, could that be by design by an experienced acquirer?
Tony Simmons (36:52):
Totally. Yeah, they want to screw you. Someone once told me that they saw a transaction where the acquirer threw so much stuff at them during that 90-day period with the only purpose of distracting them to negotiate down price. And I think that's smart. If I'm an acquirer and I can get a bargain basement and I'm a bottom feeder—which some of these people are, not all of them, but some would definitely fit into that category—then that's my strategy, that's my modus operandi: let's buy this business, it's a great business, let's get it as cheap as possible, which means deflection, distraction, obfuscation. I've seen all of this sort of stuff and probably participated in a lot of it while I was a lawyer—create a problem that doesn't exist and say, "Well, you're under standstill, you can't do anything anyway, you can't talk to anyone, you can only talk to us, and we're the only party in town," so it puts you in a good position as the acquirer.
Michael (37:53):
So would you advise against signing for exclusivity, or what would the preconditions be for an everyday business owner? There's a lot of danger there, but if it's the right buyer, the natural buyer, where would you say it's worth signing and what would you do beforehand to mitigate those terrible risks?
Tony Simmons (38:17):
A 5% non-refundable deposit in escrow. Let's see if you're really serious about acquiring or you're kicking tires. Now most businesses are gonna laugh you out of the room when you suggest that, but that is a stake in the ground that says, "We're committed; how committed are you? What's the downside risk for us if the transaction doesn't happen?" We've dropped the ball on clients and growth and have wasted three months, plus potentially armed a competitor with a huge amount of information about our operations and tech. If at the end of the day they walk away, but I get 5% of the buy price in my bank account, maybe that can smooth over a bit of pain. So that's a discussion worth having. In the absence of doing that, go for a shorter period of time, or say the deal has to happen in 30 days and we're not being exclusive, or we give you exclusivity for 30 days and that's it—move quickly. But that means your due diligence room has to be right there and they can walk in. So if the start of the exclusivity period includes assembling the DD room, which as you said takes weeks and months potentially, then it could be a recipe for disaster.
Michael (39:29):
I think having a view that if you get an approach—and people get approached, they get really excited and there's a non-binding indicative offer: "we're gonna pay six to eight times," high level—if you had a sense that that acquirer had a legitimate and good reason to acquire your business, that might give you some more confidence, and you can look around at how they've acquired other businesses to see what their MO is. Are they real stringer-outers?
Tony Simmons (39:59):
Yeah, and it depends on the business. Like if it's a corporation, if it's a listed entity, then they would need to pass resolutions that would say that they're doing this. So to actually cite the resolution—now again, depends on the ownership structure of the corporate entity as to how easy or hard it is to pass a resolution—if someone shows you they've passed a resolution on the basis that they're going to make an offer to you, which they would have to do, then that would probably show some bona fides that these guys are not wasting board time to put together a fake resolution to kick tires. Maybe, but less likely as opposed to someone giving you nothing: "I'm interested in buying your business, I want to have a look under the hood," no relationship, cold start—I'd be deeply suspicious would be my initial view. And I'd really want to build out a relationship and understanding, and again, I'd probably want to see even if it's a private company, some kind of director resolution that this is what they were doing, that it was fair dinkum rather than signing an MOU, NDA, me sharing a whole lot of stuff and wasting four months of my life.
Michael (41:10):
It's incredibly stressful—the emotional ups and downs that you go through. Because if it happens at a time when you've been thinking, "I really oughta move on from this business, I don't know how I'm gonna do that," it can be very welcoming to get an approach and there's this enormous lift. But all the dangers, let alone actually getting to what I wanna chat about, which is the earnout piece... going through the gears and realizing, "I'm gonna rush around, pull the data room together and financials," and then talking to your accountant, then talking to your lawyer who may or may not have the experience you need in the battle that's about to unfold.
Tony Simmons (42:01):
It is a battle. It's a real orchestration of knowledge and resources. It is one of the most complicated things to do. And when you're emotionally invested as a founder—something you've built from the ground up, it's every essence of your being—there's no question it's the most stressful thing you can do. It has similar elements to the emotional engagement you have with a child. What does corporation law consider as a person? A business. So in that sense, it is a person.
Michael (42:33):
Well there you go. That's something I didn't know. This is one of the things that's most fascinating about the work I love to do with owners, which is beyond the number or the dollars, it's been a big part of their life for a long time. Without that business, things dramatically change, even if they've got enough money. Things just change, and sometimes the changes are good and sometimes they're really negative. It's going from working in a business being the owner, the founder, to not having that, not having a team coming at you, and as much as they say it's stressful, some people need that. To go from that building over 20-30 years and then to have nothing—it can be really dramatically negative.
Michael (43:43):
With the structure of the deal and earnouts, earnouts are a big part of a lot of deals. What is an earnout, and what are the pros and cons?
Tony Simmons (43:43):
Yeah, I think the earnout is really an insurance policy for the acquirer to ensure that they're extracting maximum value from the acquisition and making sure that the corporate IP (the intellectual property that's in the founder's head) and relationships that exist with the founder are given enough time to pass effectively to the acquirer. So an earnout is really: I've bought the orange, now I'm going to make sure that I get every ounce of juice out of it over whatever that earnout period is. And for an acquirer, that's a necessary thing to make sure that if there are things like key relationships or key-person risks or workflows or knowledge that sits predominantly in people's heads, they have the opportunity to extract it and assimilate it into their business as part of the process. It's really up to the acquirer how they do it, whether they do it well or not, but usually an owner or founder on exit who's part of an earnout gives warranties to the effect that they will provide all this information, and then there's an agreement to ensure that that happens. So it's a protection for the acquirer. And what it means is that the founder gets a large proportion generally of their capital upfront and takes it off the table, and the rest of it's held back or paid out over an earnout period in a proportion for 12 months or 24 months, however long it is. So that's really what an earnout is.
Michael (45:10):
So a large proportion—by large, are we talking 60, 70, 80 percent you'd like to think upfront, or 50?
Tony Simmons (45:20):
I suppose it really depends on the mechanics of the deal and the negotiating power. If it's a fire sale of a business, you might get nothing upfront; you might only get a proportion of it paid out over a period of time based on some metrics and KPIs. If it's a really good business like my first business, I got 100% of it on completion and the earnout was at my discretion as the seller. So again, these are the polar opposite extremes of earnouts. Most businesses will say, you know, 40% on completion I would have thought is a good number, maybe up to 60 if it's a really good deal, and the rest paid out to shareholders over a period of time, usually somewhere between six to 24 months. In my experience of M&A, a founder is redundant after 90 days, mainly after two months, but the paying of the money is quite often necessary from a balance sheet perspective of the acquirer because they may not have all the cash flow sitting in the bank account to pay it out in one fell swoop. So there's reasons for that deal structure as well, and they can write off the acquisition costs. Whenever there's something that doesn't appear immediately in a transaction, you can probably bet that taxation is the reason why deals are structured the way they are.
Michael (46:47):
The earnout formula—let's say it was 50 upfront and 25 and 25—what sort of commercial measures did you base the earnout on? KPIs or workflows?
Tony Simmons (47:05):
Yeah, I think retention of customers, maintaining relationships and revenues—usually a pretty important thing, that the business gets sold and the founder leaves and all the customers don't walk out the door with them. So that's usually one measure. And that probably comes with another earnout clause: a non-compete. You can't walk out from a software audio business and walk straight back into a new one tomorrow; you probably—I can't remember what my own was, but it'd be three or four years before I could re-enter that market. The earnout metrics for a founder who wants to participate in the upside of the acquisition—you do the deal believing that your business is going to grow even quicker or have better margins in the hands of the new owner, and you want to say, "If I'm here for 12 months and you extract an extra $2 million over and above what you would have, I want to get some of that as part of my earnout, my shareholders deserve to participate in that as well." So that's the other side of the earnout: you get to stick around as the founder close to the acquiring business to help them extract maximum value, and you're able to take some of that extra money off the table as part of the deal. So that's what a good earnout looks like: a win-win where both the founder and acquirer are getting what they want. And then when you walk away, you take a bet on whether you're going to see more money by staying there for 12 months or 24 months and really helping that business grow. And a lot of founders who aren't serial entrepreneurs may end up staying in that business much longer than the earnout and become a GM or a partner or associate or even the CEO of that acquiring business. None of that's unheard of.
Michael (48:51):
The really awful cases of earnouts that I've seen are where the founder doesn't stay and they're in the share sale agreement or business sale agreement: "We're gonna give you, if we make a profit of this much, we'll give you 20% of that," and the founder's gone, has no control over the numbers or access to the numbers, and nothing happens. Some people have been philosophical: "I'm gonna get 80% upfront and if I get it, great," but they've largely moved on, structured that way. Both sides are going, "Well, if we need that person for something unexpectedly we'll be nice and if not we won't."
Tony Simmons (49:39):
And that all comes down to the mechanics of good deal-making and your position of leverage in the negotiations for acquisition. I'll tell you a quick anecdote—won't gabber anyone in—but one of my acquisitions, the morning after it completed, and it's fair to say that I was coming into work straight from the completion party, the spreadsheets came out in that first meeting at sort of nine o'clock the next morning, and the acquirer had bought a really profitable business that had incredible customers, good operating, and I said, "Well, we've decided we're going to cut some staff from the new entity." I'm like, "Great." And they said, "Well, here's the spreadsheet, which two are you cutting?" And I said, "I'm not cutting any." And they said, "Well, you can't walk in here like..." I said, "You bought us, we bought you." I said, "Great. Well, in that case, you choose," and passed the spreadsheet back to them. That was off to a pretty hairy start! And in that situation, I was reminded of this anecdote because I got the bulk of my money upfront and I didn't really care after that what happened; anything else was a bonus. I was happy with 80% off the table. If I was to participate, then fantastic; if not, so what? I could walk in and sort of say, "Well, yeah, you did buy it, good luck to you." But there are situations where if the shoe was on the other foot and it was only 20% upfront, I'd have to suck that shit sandwich right down and go, "Well, it's these two people that are going." And that's really hard because this is—back to this is like your baby that you've birthed and created. It's not only the business that you love and you nurture, it's the people within that business. And as soon as that's sold, they're no longer under your protection, under your auspices. You can't do anything to protect them anymore and to help grow them. That's actually more confronting for me than losing control of an entity was: not being able to help the people that had helped me build this wealth and this journey over a period of time.
Michael (51:45):
For some owners it's a real issue at a practical level because the sale may not happen if the staff kind of at or near settlement say, "We want a 20% pay rise or we're not gonna sign, we don't like that acquirer." You really do have to manage your team, which leads to—they've got some incentive on transition of the business from current to new ownership, that can help sometimes as well.
Tony Simmons (52:16):
Yeah, it's a tough balancing act sometimes. You can't predict the future. You go to your staff and say, "Hey, you got to sign this new employment contract. We've maintained all your leave rights and got continuity of service and all these terrific things, and we think these people are going to be incredible." And the next day they're made redundant, and they say, "Well, you told me this." It's a lose-lose. There's a lot of stuff in the exit that kind of goes unsaid. Most people think that's a great step-change in wealth and money. But if you listen to some of the podcasts I've done with people, most of them say the day after exit is one of the most depressing days of their life. They get lost. They lose power. They lose authority. They lose direction. They lose meaning. There's a litany of middle-aged men that end up getting into drugs of dependence and all sorts of nasty things that come out of it. Most people would say, "Woe is me, you made a shitload of money." But it is like losing a limb or a dog or something like that. There's definitely a loss that comes with an exit that is not really talked about.
Michael (53:34):
If it's not really talked about, and it's at the start of any process that starts because someone approaches you or you start to plan your own exit, you have to think about: okay, assume it goes ahead, what am I gonna do with my life? I'm a creative, an energetic doer, I like to be doing. Playing golf three days a week sounds fun, or going surfing or travelling, but if an owner's wired in a particular way, some of them just do not adapt to not having that in their life. They can replace it with something else—they might go and buy another business or get involved in advisory boards—but there's gotta be something that is gonna more than fill your time, create purpose and give you something to go to and something to do.
Tony Simmons (54:30):
There is a very large element of M&A post-M&A where you're used to being the person and everything coming to you at the tip of the pyramid. When that falls away, you lose your purpose. The other thing is during M&A, as a founder, owner, operator, you sometimes tend to overvalue your own work. If someone says, "I'll only give you $10 for this," or "this part of the business is not worth anything," you've got a personal connection to that and why you built it and the whole backstory. Someone else seeing it and saying, "We don't value that at all," that can be an affront to your ego. So back to having an advisor—someone who can be dispassionate and say, "Well, yeah, it's great and it does have some value, but it's not part of the equation for them, here's why"—that kind of dispassionate approach is very good for placating one's ego in M&A because ego for a founder is one of the big drivers and it manifests itself in dollar signs. And when those two are not in alignment, then the process becomes really jarring.
Michael (55:47):
What was your podcast called where you've interviewed a lot of founders?
Tony Simmons (55:50):
Discipline.
Michael (55:51):
The 10X and listing and IPO to the personal level—that's the stuff that interests me. It gets not much attention in the zeitgeist about startups and wealth creation and business building, but it goes to the heart of what you know: there's more to it than just the dollar.
Tony Simmons (56:20):
There's a lot more to it, I agree.
Michael (56:23):
Tony, just wanted to finish up—we've had a ripping chat here, really getting to the nub of what it's like to be in a transaction. Two more questions. You stayed with your last acquirer for more than a couple of years. Was that tied into the earnout, or was it at least in part about seeing the vision of the business and the success of the business sustained at a personal level?
Tony Simmons (56:50):
Yeah, I think so. The earnout was for 12 months and I probably did 16. I stayed on because I wanted to. I felt there was a bit of unfinished business that we could tie over. And the acquirers were an amazing group of people. When you do this, you can sell to someone who looks great and then the next day they completely change their tune and there's nothing you can do about it. But these guys are an amazing group of people, incredibly lucky to get the opportunity to work inside the new business and be trusted with some really big strategic initiatives. From my business's perspective, there were some things I wanted to white-glove through to the end, and they were good enough to give me the opportunity to do that. I stayed on until they found a replacement for me to look after my business and wanted to make sure that handover was seamless because there's still some unfinished business and I'd like to see it grow into what we always wanted it to be. So I was more than happy to do that. There was good alignment. Moreover, these were incredible founders and a great team, and I was very lucky to have an M&A where I got to work with an incredible acquirer rather than some of the other ones where it's been a little bit more guns at 10 paces.
Michael (58:13):
Well, I think the lesson there for anybody is that at the beginning of something like what you've gone through, have a look—it's a two-way process. There are good acquirers and bad acquirers. Know who you're dealing with, and if they've done it a lot, you can find out what they're like to sell to, work with, or earn out with. So that's a practical thing; don't get overwhelmed and excited and sign everything. Understand who you're dealing with and why they're buying and how they've done it in other circumstances. If the Federal Government appointed you as Australia's head of small business and you flew into Canberra on Monday morning, sat at the cabinet table and put some coffee down, what's the most important thing you would start working on to help more owners build more enduring and valuable businesses?
Tony Simmons (59:16):
After I'd left the Chairman's Club to take my flight and then given $6 million to my local golf course—no cynicism there at all—it's a really good question. Why do people go into small business? There's a lot of reasons. Trying to understand and appreciate why people do that is something that the government really doesn't get, mainly because a lot of them haven't worked in small business. A small business can be anything from as complicated as building microchips to frying chips at the other end of the spectrum. And what they don't appreciate, whether you're building microchips or frying chips, is it's all-encompassing, and the administrative overheads after the lights go out on the office floor or in the shop are huge. So I would start with: how can we cut red tape? How can you simplify it? How do you make it easier to work with government—the ATO, the ACCC, whatever entities that you touch and concern as a business—to reduce that overhead so there can be more time spent on the business, improving margins, and not pissing money against the wall throwing it to council red tape, state red tape, federal red tape, bureaucracy? It's just layer upon layer of stuff. So what I would do is probably start with a simplification process and ensure that anyone who's in the portfolio has actually worked in a small business. If you look at the cabinet, I don't think you'll find anyone who's worked outside the party, the apparatchiks, the legal services that support them, trade houses, union houses. That's great, but they are not small businesses, and you need to understand the walls that people have to climb over, dig under, run through to succeed to help them. And if you don't know that, you're in no position to help. In fact, you're part of the problem. There's gotta be a philosophical thing here, right? We're in a supposedly capitalist democracy: give us the rails and then let us run as quickly as possible within those rails. Don't keep changing the gauge or the lights or the rules. That's what it used to be—a much less intrusive government that enabled business to flourish. And the more you constrain it, the more you constrain capital, the more you constrain taxation. And I think we're in that cycle now.
Michael (102:54):
Alright Tony, ripper chat, thank you so much. If someone wants to talk to you about that, are you happy for them to reach out on LinkedIn?
Tony Simmons (103:12):
Yeah, absolutely. tonysimmons.com.au is the website, there's all the buttons you can press, there's tools on there, but please get in touch or just connect on LinkedIn, that'd be terrific.
Michael (103:22):
Tony, thanks so much, really appreciate your time and interest.
Tony Simmons (103:24):
Thanks Michael. I enjoyed talking to you.